Earnings visibility is the ability of management to accurately forecast demand for their product, assess their capability to address that demand, and have a good understanding of the cost structure underlying the pursuit of those revenues. In an ideal world, a company has so much demand for their product, or it takes such a long period of time to manufacture the product, that they build a backlog. Sales and earnings at the beginning of a quarter can be determined fairly accurately by looking at the backlog number.
For a software company, there is no manufacturing, so a customer can decide on the last day of the quarter they need the application for the first day of the next quarter, and the software vendor can deliver - simply download the code from a web site. This make backlog difficult, and generally causes a "hockey stick" at the end of a quarter, and far less earnings visibility than most investors are comfortable with. For software companies, generally, earnings visibility comes from an accurate description of the order pipeline by the sales team. What increases earnings visibility for software companies is the service component of revenue. This is usually negotiated annually, and recognized over four quarters. The jump in ODIS service revenue last quarter helps earnings visibility.
Hope this helps,
-Mark K. |
