Email from Dave (financials)

This forum is generally pretty good for sharing info while at the same time proving some light entertainment, but one thing that really bugs me is when people spread blatantly false information.  One such instance was in the "fail" thread where a poster basically accused the company of shady accounting practices.  Illegal accounting practices.  This is a dangerous accusation since the ASX has been all over Bud and we don't want to see a bunch of readers believing the garbage being preached and writing off to the ASX suggesting they look again.  Not that they would find anything, but aware letters cost the company (and investors) money, not to mention they are a huge distraction.

So anyway, a couple days ago I wrote off to Dave and asked him to comment on a couple of the posts made in regards to the company's accounting method.  First, my email to Dave:  

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Hey Dave.  If you have a minute, quick question for you about how Buddy recognizes revenue, as there is a debate on Hot Copper I’m hoping you can settle.  

This is in regards to the last quarterly report, and the revenue that was recognized while there was still receivables.  It’s my understanding that this is the method Buddy has always used, while others believe that Buddy does not recognize revenue until the cash hits the bank.  The specific claim made on the forum was this:

"DM precisely said he would only recognise income when it landed in the bank account - his exact words in one spin release - back last year when it was all about sugaring the st upside while mitigating actual delivery risk. go back and look at the announcements from when cfo was appointed and then into early this year. dont fall for the trap of reading the most recent announcements - as they all contain pivots.  im very literal in what i say. if he didnt make the commitment i wouldnt have marked them down for failing it”

And:

"BUD's example was to recognise only a given qtrs billing - despite receiving 3 yrs of cash. The principle was to get most conservative match up of cash received vs costs and so investors were cautioned revenues would be understated

in June they instead booked the qtr payments receivable but not paid. i dont see that as the most conservative approach.

let's accept for sake of sane discussion the policy as written allows for the approach used in june 18 qtr - and the example given simply led me to misunderstand the policy.

it doesnt change the point i was making - in that for eg it is the opposite to last June qtr when the company deferred recognition of BUD revenues from the qtr to the Sept qtr."

Can you clarify Buddy’s accounting policy?  If you don’t mind, can you email me a response for Hot Copper which I will post there to settle this argument?  Thanks,

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And Dave's response:

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Hi there XXXX:

Thanks for reaching out. This is a completely misleading set of commentary on HotCopper, so I appreciate you contacting me to clarify. If you would like to post this response to the forum, you may do so.

First of all, the poster needs to be aware that income (earnings), cash receipts and revenues are all different things. To quote from the Q4FY17 Appendix 4C Commentary:

“The Company’s policy will be to begin recognising revenues only after any evaluation period has expired and the customer has transitioned to a paid contract. At that point, revenue will be recognised ratably over the contracted period. For example if a client signs a 3-year contract for $54k, we will recognise only $1,500 per month – even if the client pays 100% of the total contract value up front. While this means that revenues will layer on more slowly, we consider this a more prudent and appropriate approach, and one that is in line with other software as a service (SaaS) companies.”

We’ve never said we’d “recognise income when it landed in the bank account” (which is what your Hot Copper poster claimed, entirely incorrectly) – in fact, the exact opposite is what we’ve said, and that is that we’ll recognise revenue ratably as it is earned, not as it is received.

Now, there may be some confusion around when we earn revenue. For Buddy Ohm sales – even if a three year contract is paid upfront, we only “earn” the revenue on a monthly basis as we provide the ongoing service. However, Buddy Cloud revenue is usually billed and paid month by month, in arrears, for services rendered in that month. In the case of those revenues, because the service has been provided – we recognise the revenue as it is billed. Each quarter there is a blended mix of deferred revenue and recognised revenue from both sides of the business. There is absolutely nothing inconsistent between that approach and what we said we’d do. Let me repeat that – there’s zero inconsistency here.

Your poster points out that we deferred June quarter Buddy Ohm revenues to the September quarter last year. Yes, this is correct; this was right at the very beginning of Buddy Ohm sales and the revenues attached to those sales couldn’t be recognised in the June quarter because the earnings process wasn’t complete (ie: the customer hadn’t taken delivery of the product yet and thus revenue was not yet earned). This again, is entirely consistent with our guidance that we’ll only recognise revenue once it is earned. If we’ve sold product but it isn’t delivered to the customer and their contract hasn’t commenced, it isn’t earned.

Finally – and I think this is important because the post you’ve sent me could needlessly mislead people – Buddy’s financials are all fully and carefully audited (as all ASX-listed companies are), and both our accounting and accrual methodology are 100% in line with accepted practices and entirely beyond reproach. This is something that both our CFO and I obsess about. And our auditors too, although (of course) that’s their job.

So… thanks for bringing this debate to my attention and I hope that clears everything up. Don’t hesitate to reach out again if I missed anything.

Cheers, Dave.