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Comments

Scott Pruitt

Very interesting debate Jim. This has long been an issue in the hosting, ASP, MSP, now SaaS world. Back when PeopleSoft initiated eCenter, their application hosting option, the business model out of the gate was a software rental license very similar to the SaaS model today. However, it was quickly determined that annuitizing the license revenue was a hit Wall Street was not excited about. Therefore the model was then changed to a hosting service as an alternative to in-house deployments of the software which allowed PeopleSoft to recognize all of the license revenue up front, yet the hosting service was recognized monthly "as earned". This added another GAAP kink as the early termination fees allowed for hosting services had to be under 10% or else it was considered the software was "given away" to achieve the hosting revenue; laughable considering the delta in potential revenues but it sure caused a lot of scrambling towards the end of the quarter when this interpretation was conveyed to management. To your initial topic of when revenue should begin to be recognized, I agree that once the customer "realizes the benefit" of the software is when recognition begins. This period is upon access to the software for implementation versus production and as you suggest should mirror the regulations which exist for traditional perpetual license transactions. It is difficult enough for SaaS vendors to show profitability as margins are backend loaded by default. Having to wait for a live production system, particularly in an extended complex implementation, would be an unjust reflection of a SaaS vendor's performance. That being said, I emulate your "I'm not an accountant" disclaimer; just a sales exec who's been in this business for awhile.

Al Campa

Jim, excellent points. Clearly the auditors are trying to figure out how to apply accounting principles written years ago to a new business model, SaaS. Consistency across all software and all industries is key. In on premise software, once the CD is in the mail, you can recognize the revenue. It may never reach the customer. And as you note, they certainly may never install it. I wonder how much smaller the software industry would be if "shelfware" that was never installed could not be counted as revenue? Also, I just bought some DVD's from Amazon for Xmas gifts. Do my kids have to watch Harry Potter before Amazon can recognize the revenue? Do they have to take a photo with their new digital camera before Canon can recognize that revenue? Absolutely not. Once its in the mail, its countable and SaaS revenue should not be held to a different standard. Once the customer has access to the solution, SaaS companies should be able to start to recognize the revenue (assuming not tied to services or anything else). This is how Taleo has done it since inception. Full disclosure, I am a Taleo employee and not an accountant, and these are my views, not the company's.

Kevin Grossman

I agree wholeheartedly, Jim. It should be as simple and analogous to buying a gym membership. The clock starts ticking once the transaction is complete, whether you use it or not. SaaS vendors should be able to recognize the revenue from point of online delivery, no question.

Larry Kistner

Well, its a very grey area, obviously. Given the basic principle that rev can be recognized when it has been earned, when the clock starts clicking is therefore based upon when it first becomes earned.

Actual practice with customers can impact this. For example, if a company allows a customer to return or not pay, a hard start date for rev rec becomes fluid. Depending upon their circumstances, a company may need to demonstrate a track record of practice that enforces their policy with customers.

Given how disastrous restating revenue has been for many companies, CFOs and CEOs do not want exposure to restating and will prefer to err on the conservative side.

A little pain now to save risking a lot of pain later.

Larry Kistner

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