Glossary·Written by a CPA
Deferred revenue
Also called: Unearned revenue
Cash a company has already collected from customers for products or services it hasn't delivered yet, recorded as a liability.
Deferred revenue is money the company has been paid up front for something it still owes the customer. All that I mean is it's like a gym collecting a full year of membership fees in January... it has the cash, but it hasn't earned it yet, so it can't call it all revenue right away.
Because the company still owes the service, deferred revenue sits on the balance sheet as a liability, and it moves into revenue a little at a time as the service is delivered.
For you, growing deferred revenue at a subscription company can be a sign of healthy demand, and a sudden drop can be an early hint that new sales are slowing down before it shows up in revenue.
Example. As an example, a software company collects $1,200 from a customer on January 1 for a one-year subscription. At that moment it has $1,200 of deferred revenue. Each month it earns $1,200 divided by 12, which is $100 of revenue, so after three months it has recognized $300 and still has $900 deferred.
The catch. Changes in billing terms, like moving customers from annual to monthly payments, can make deferred revenue drop even when the business is fine.
Where I talk about it
- Fortinet Stock Crashed After Beating Earnings. Overreaction? (FTNT) at 1:57
- SMCI Stock: Why This $34 AI Stock Has a $57 Price Target at 8:14
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This is education, not tax or investment advice. I'm a CPA, but I'm not your CPA. Full disclaimer.