Software modeling: change in deferred
A lot of software businesses will add the change in deferred revenue balance to their Adjusted EBITDA number. For those of you that cover software names, do you generally give credit for this?
For me, it has always been more intuitive to not include that in the ebitda number and just keep it embedded in the free cash flow bridge, but I’m wondering if I am thinking about this the wrong way.
Some of the main issues that I take with adding it to EBITDA is that it (a) creates some potential lumpiness in what I view as ideally a more normalized metric, and (b) counts that revenue as 100% margin.
Very interested in hearing how other people view this and treat it in their modeling. Thanks in advance for any thoughts
As someone doing Software public equities for multiple years I usually 1) don’t give credit to EBITDA in general at all 2) don’t adjust out deferred in EBITDA if I cared. You just look at how it flows in cash flow.
I think one of the tops guys at Tiger used to just take the change, multiply it by 69, added a few billion and called it EBITDAhhhh F it
At the fund I work for we give no credit to EBITDA at all, usually evaluate EBITDA - CapEx, as many companies are capitalizing R&D instead of expensing. That said, deferred should not impact EBITDA in my view and I treat it as an important CF item if recurrent
As long as you’re looking at every company like-for-like it doesn’t really matter if you like to look at EBITDA or “cash” EBITDA. Higher growth companies with upfront billings increasingly outpacing accounting revenue on a $ basis will see larger spreads of change in deferred. Some people just like to look at “cash” EBITDA because it’s a bit closer to cash flow for SaaS companies where there are a lot of annual upfront billings.
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