SaaS CFO: Basics of Subscription Revenue Model Transition

From Booking a Deal to Converting it into Annual Recurring Revenue (ARR)

You book $900K deal for a 3-year period on July 1st, 2020

• Under a license model, you’d book $900K of revenue on July 1st
• Under a license model, you’d book $900K of revenue on July 1st: $900K/ 3yrs = $300K/2 = $150K 6-months of recognized rev. You may also choose to recognize revenue daily.

When you recognize the $900K deal under a subscription model, you ‘depress’ revenue optically speaking; it’ll somewhat normalize for this negative effect after you shift to an ARR model

• The $900K contract will be signed July 1st, again though you’d post an annual recurring revenue increase of $300K on July 1st. The remaining $600K makes it to your backlog (this also depends on how you calculate the backlog).

Even though your ARR increases by $300K, you recognize revenue ratably through the year

• You recognize $75K in the third quarter and another $75K in forth, for a complete of $150K in 2020/Yr1.