Your Complete Guide to RPO

There’s a sleeper metric CFOs in tech are increasingly relying upon to tell their equity story - it's called Remaining Performance Obligation, or RPO for short. It's cool because it gives companies a way to show off the multi-year contracts they've landed with customers, and provide additional confidence on the company’s ability to deliver on revenue expectations.

It's particularly relevant for businesses that do a lot of long-term stuff in the form of multi year subscriptions. Instead of just looking at what's in the bank right now, RPO gives you the full picture of what's in the pipeline.

It's like seeing the whole iceberg, not just the tip.

RPO basically says,

Today we’ll dig into the crystal ball that is RPO. Here’s what you’ll learn:

RPO, or Remaining Performance Obligations, and Deferred Revenue are both important concepts in accounting, but they represent slightly different things.

Deferred Revenue represents money a company receives in advance for products or services that will be delivered in the future.

RPO includes Deferred Revenue, and then goes a step further, to also include unbilled revenue that’s contracted but not yet invoiced.

In other words, Deferred Revenue is the amount of money a company has already received from customers for goods or services that haven't been delivered yet. And it’s a liability on the company's books. On the other hand, RPO is the total value of a company's outstanding performance obligations that are to be delivered in the future.

Deferred Revenue typically extends up to twelve months from the current reporting period. RPO, however, includes the twelve-month period plus any additional timeframe for which customers have committed. In that sense, Deferred Revenue sits within RPO.

Deferred Revenue moves from the balance sheet to the income statement as the service are provided. That means that RPO must pass through Deferred Revenue on the balance sheet to turn into Revenue on the income statement.

And since we all know that revenue is commonly reflected as ARR (annual recurring revenue) in SaaS reporting here’s the relative order of magnitude:

RPO > ARR > Deferred Revenue

To calculate RPO, you take the total value of all your active customer contracts and subtract any revenue that you've already recognized. This gives you the amount of revenue that's still waiting to be earned down the line.

You can peel deferred revenue from the liabilities section of the balance sheet. This amount gets updated monthly as the company fulfills its contractual obligations. The trickier part is getting all your unbilled revenue. This has to come from the contract level, and represents revenue that hasn’t been invoiced yet as the customer contracts aren’t live. You’ll typically get this information from your CRM, like Salesforce, by taking the “total bookings” or “total contract value” (TCV) amount less any period that’s already passed.

RPO is a GAAP metric (I used to think it wasn’t!), but it’s not reported on income statements or balance sheets, and is instead disclosed as a note to a company’s financial statements.

Companies often go a step further and break RPO into current and future RPO. Current RPO represents customer commitments that are expected to be recognized as revenue within the next 12 months. Future RPO is everything further out than that.

Some companies that frequently report and reference Remaining Performance Obligation in their earnings reports and investor day presentations include Palantir, Salesforce, and ServiceNow. These tech giants often highlight RPO as a key metric to showcase their future revenue potential and contract backlog.

In the cloud computing space, RPO has become increasingly important as it gives investors a glimpse into the predictability of future revenue streams, despite being largely usage based. Companies like Microsoft and Amazon Web Services (AWS) also mention RPO, though perhaps not as prominently as some of their SaaS-focused counterparts.

It's worth noting that RPO isn't just limited to tech companies. Some construction and engineering firms, as well as defense contractors, use similar metrics to indicate their project commitments. However, they might refer to it by different names, such as "backlog" or "order book."

By knowing your future remaining performance obligations you can better staff your team as a CFO. For example, if you have a massive onsite deployment at a Fortune 500 company in two years, you’ll need to have sufficient integration resources ramped and available. This is super helpful for planning ahead and avoiding last-minute scrambles.

Plus, it's not just about having enough people – it's about having the right skills on deck. Maybe you'll need to start training your current team on new tech or even bring in some fresh talent with specific expertise.

And let's not forget about the cash flow aspect. Knowing what's coming down the pipeline helps you budget better. You can forecast revenue more accurately and plan for any big expenses that might pop up with these projects. It's also a great way to spot potential bottlenecks before they become headaches. If you see a bunch of projects all hitting at once, you might want to think about spreading them out or beefing up your resources in advance.

When RPO's going down, it could mean a few things:

But hey, it's not all bad!

Bottom line: RPO's important, but it's just one piece of the puzzle. You gotta look at everything to really get what's going on with a company.

Investors might like RPO even more than CFOs. It gives a business credibility on it’s future earnings guidance, and allows them to earn a premium valuation.

It's like a win-win situation for everyone involved. Think about it - investors get to essentially de-risk part of their underwriting. It's kinda like buying a house with good bones - you see the potential, even if it needs some work in other areas (like collections).

And let's be real, who doesn't love a good story about future earnings? It's like catnip for Wall Street. They eat that stuff up. Analysts are increasingly asking CFOs questions about RPO on earnings calls.

RPO is a powerful tool for operators and CFOs to not only explain where the puck is going, but also feel more confident in their long term planning cycles.