>They ARE recognizing the present value as revenue!!<
Hi Mark,
I don't understand why you are viewing the use of present value as aggressive accounting. Given their business model, I don't see how else you would expect them to report. Let's take two examples.
Case 1. Customer A licenses software on a perpetual basis, agrees to pay $200K on installation. If it is a product which has been installed several times previously and there are no performance or product customization issues, many companies will book $200K in revenue on the day the contract is signed. All of them will have booked $200K by the time of customer acceptance.
Case 2. Customer B licenses the same software for 5 years, agreeing to pay $50K per year beginning on the installation date. There are no contingencies, performance clauses, future obligations or other "outs" in the contract, and the credit risk of Customer B is negligible. I would argue that the software company has to book the present value of those 5 payments as revenue, either on signing or, at the latest by customer acceptance (at 8% pa the present value is...$200K). You may fault their choice of discount rates (I would choose a higher rate than the marginal borrowing rate to reflect the cost of all of the capital, for example), and you may question if their credit reserves are adequate, but given their business model (i.e., leasing instead of licensing) their revenue recognition model seems appropriate. If they were trying to present value future payments for which they had unfulfilled obligations (maintenance contracts, for example), I would agree with you. But as far as I know, that is not the case here.
We could have a separate discussion on whether their business model is better or worse than the traditional one. I think in their niche it makes sense, since the product life is long and as a result they get to charge a new fee in 5 years. I imagine it also helps reduce the sales cycle, since $50K may be under the radar screen but $200K wouldn't be. I expect that the reason more companies don't adopt it as a business model is that they can't afford to (couldn't do without the cash). One company which seems to be moving toward this model is TSA (the old Transaction Systems Architects), and the analysts are applauding them for doing so. |
