Tuesday, October 10, 2023

One of the complaints about financial statement analysis is that those statements only show you the history of what a company has already achieved, when financial analysts want to project future outcomes. 

Sure, we can always look at past trends to make predictions, but fear not! Calcbench can also help analysts examine leading indicators, too. 

As part of our occasional series looking at key performance indicators (KPIs), today we want to examine a leading indicator for revenue: remaining performance obligations, or RPO.

RPO represents revenue that a company expects to collect in future periods based on the company’s current contracts. So if a company has high RPO today, that implies it will have high revenue in the future.

The data to capture this information is available in Calcbench today. Some of the metrics that illuminate RPO include:

A subscriber may obtain values for these metrics using our tools, including our Multi-company Page, our Excel Add-In or even our API (for advanced users).

Here’s an example. We reviewed a bundle of companies in the prepackaged software sector. (SIC code 7372, for you sticklers out there.) By examining trends in reported revenue and RPO from 2018 to 2022, we could calculate the average revenue and average RPO for the sample group overall. Figure 1, below, shows that on average, revenue increased by 10.5 percent and RPO by 16.7 percent. 

Of course, what we see is just an average. When you analyze specific companies, many different tales emerge. 

Figure 2, below, charts the revenue and RPO for Activision Blizzard (ATVI), Oracle (ORCL), and Salesforce (CRM). Revenue is the solid line for each company; RPO is the dotted line.

As you can see, Salesforce seems to show a solid increase in both revenue and RPO (18.7 and 13.6 percent per year on average, respectively). Oracle shows a relatively flat trend for revenues, but a significant increase in RPO, which would likely lead to an increase in revenues in the future. Activision Blizzard has shown an average revenue increase of 0.1 percent per year, but its RPO has an average decrease of 5.4 percent per year. 

To demonstrate the value of RPO as a metric, look at Oracle circa 2020. Its RPO (the dotted line) starts to pull above the solid revenue line. Then from 2021 into 2022, revenue starts to increase along a similar slope as RPO’s line from 2020. Presumably that is the prior period’s RPO finally arriving in Oracle’s bank account. If past is prologue, then RPO’s even steeper increase in 2022 should mean brisk revenue growth in 2023. 

Will that be the case? We’ll try to revisit Oracle’s numbers when it files its next annual report in early 2024. For now, we encourage you to develop your own models for RPO and see what the data tells you.

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