Joe Freda, CFO, Flexera Software
Many technology companies are preparing to go public via IPO (Initial Public Offering) as the global IPO market comes off a banner year in 2015 with a staggering 1,280 IPO listings raising $195.5 billion in capital.
In my 30+ years in finance at technology companies I've helped companies prepare to go public and I've evaluated many companies that wanted to go public. While there are many strategic reasons why a company wants to raise cash from an IPO, in my experience, companies that have leveraged software licensing and entitlement management best practices and that have a strong compliance monetization strategy make good IPO candidates. In this blog series I'll cover 4 key areas that you should focus on to ensure IPO success - first up, revenue recognition.
#1: Revenue Recognition
Revenue recognition is the cornerstone of any healthy software business. The ability to recognize revenue at the moment when a software license is delivered helps ensure that companies are appropriately stating bookings.
Why should you care? Without a bulletproof revenue recognition process the investor community may be concerned that:
- Software fulfillment issues could lead to earnings restatements
- You may miss revenue targets because of poor or failed order fulfillment processes
- You are losing revenue from unlicensed software use (customers using more than they paid for)
What you can do: With the right software licensing and entitlement management strategy and solution in place you’ll be assured that you can recognize revenue when the software license is delivered and you’ll also be able to see when the license was activated. If you are still delivering software manually through physical media or through an FTP (file transfer protocol) site you may have difficulty providing auditable license and software delivery data.
Further, revenue recognition will prove to be more difficult once ASC-606 takes effect. The new pronouncements will require yet further granularity than 605 and will require systems that can both successfully account for when revenue is recognized as well as flexibility in how those revenues are split amongst different time periods.
In my next post I’ll cover how driving recurring and predictable revenue can help ensure IPO success.