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Ann: Q2 FY18 Market Update - Update to Cash Revenue Guidance, page-249

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kobbie

552 Posts.

44

11/12/17

10:14

Post #: 29528090
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Originally posted by One Up ↑

The accounting vs cash treatment of deferred revenue was cleared up months ago. For the benefit of those new to BIG, deferred revenue = revenue received in advance.

The revenue will be recognised in the income statement ("profit and loss") over the life of the contract, typically 12 months. Importantly, so too will the direct costs ("cost of sales") of producing the video be recognised pro-rata with when the revenue is recognised. This is the "matching" principle that is fundamental to accounting. To claim that deferred revenue is "pure profit" is nonsense - cost of producing the videos will be recognised when the revenue is. BIG's gross margins were in the 20-25% range in 2H17 and, while the company has tipped an improvement in FY18, at best guess they might be 30-35%. Given how quickly BIG is growing, the pre-payments / deferred revenue BIG has been collecting from its Australian SME client base has been a significant driver of current operating cash surpluses. The issue one finds with SaaS companies is that once the rate of growth starts to slow, the deferred revenue balance relative to total revenue will fall, and cashflow growth will moderate. Don't forget also that once BIG starts declaring profits it will also need to start paying corporate tax.

None of this is a problem per se. As I've said before, cashflows are the most important metric to follow, especially for a start up like BIG. BIG is generating strong cash and is well funded. However the punters on this forum should not confuse cashflow with "profit" as per the income statement, as they are liable to be disappointed come February (as many seemed to be in August).

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I can't believe deferred revenue is still being discussed obviously by people who have no idea how some businesses work, we have been running a deferred income business for the past 17 years, its just an accounting term to accommodate for the fact that there is no tax due on income that has been paid in advance of the service - simple makes no difference to how the business runs!!!!

BIG Price at posting: $3.43 Sentiment: None Disclosure: Held
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