Recurring Revenue
Categories: Company Management
It hits your credit card relentlessly. Like rain from a storm, a la Noah.
Your cable bill? Yeah, that's recurring revenue. Whether they give good service or meh service, you're gonna continue paying your 100 bucks and change a month, because you can't live without internet connectivity, you can't live without ESPN, and you can't live without, um, you know...art films.
On the seller's side, think: Comcast. They have steady, predictably reliable recurring revenues from you. Each home in America that subscribes to cable pays about $1,200 a year or more for the privilege.
Why does it matter that the revs recur? Well, if you have a business that is steady and stable, in good economic times and bad, you are likely able to borrow money and reliably pay it back. You can use that borrowed bank to then buy other cable systems, to invest in content, to build non-U.S. assets, and so on. And, in fact, that's what Comcast has done over half a century. The cable business, being so highly predictable, has been one of the largest borrowers in history, and equity investors have loved this fact. Instead of being diluted as the company wanted to grow, selling equity in itself to fund acquisitions, the company instead took on debt, bought competitors, paid off the debt, and the share count remained flat. Good work if you can get it.
See: Leveraged Buyout. See: Operating Leverage.
Related or Semi-related Video
Finance: What are Revenues?73 Views
finance a la shmoop what are revenues? well revenues are this magical thing.
they happen when you sell stuff from your business. 14 opera singing [man shrugs]
Teddy bears, forty bucks each five hundred sixty dollars. total nine custom-built
Japanese body pillows eighty bucks each seven hundred twenty dollars total. a
business so weird you can't tell your family and friends about it? [man peeks from behind a door]
priceless. revenues are what Wall Street analysts call top-line. because on an
income statement shows up right here. seems simple right? but from an
accounting perspective revenues get recognized in different ways. like let's [accounting document shown.]
say you sell a season pass to a golf course for five hundred bucks. on this
golf course happens to be somewhere in the Arctic Circle so the season is only
five months long. unless you like playing in the snow and stressing about hungry
polar bears and are basically a complete idiot. so the customer pays you five [man golfs in the snow]
hundred bucks up front to play as much as they want on your course. you made the
sale of five hundred dollars on May 1st, the first day of the season, but are
those all recognized as revenues that day? well it depends if there is no [definitions on screen]
money-back guarantee and you keep the five hundred bucks no matter what, well
then maybe yeah. you can recognize all of those revenues then upfront and you're
done. but what if there's a fine print that [man and woman exchange documents]
says if you play zero times in a month well you don't have to pay for that
month and you get a refund at the end of the season in October.
well you can't recognize the revenue upfront now, at least not all of it. [ATM machine]
instead you can recognize a hundred dollars worth of revenues each time
someone clearly plays on your course. ie even one round of golf confirms that
they have used the hundred dollar all-you-can-eat in a month deal on your
course. you can imagine then that well you have to reserve some kind of money [man drives golf cart]
back refund set of payments when the season is over and you just have to
track every single season and pass fires progress on your golf course. all right
well the key idea here is that revenues don't necessarily equal sales,
and that recognizing revenues usually entails that the revenues are [man smiles from golf course]
irrevocable. that is they have passed their money-back guarantee period and
will remain in your little piggy bank until next season. and what do you do
with all those revenues? well ever hear of polar bear repellent? yeah will do [people run from polar bear]
wonders for customer retention rates.