Remaining Performance Obligation (RPO)

Live from Schenectady, New York, it's SaaS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, EIR at Balderton Capital, independent consultant, and the author of Kellogg.

And together we are the Metrix Brothers.

And we go together like clam chowder and lobster rolls.

Sounds like you were back in Boston again there, CAC.

I was, Ray. You know, both my daughters live there.

Well, I have to ask you because I love lobster rolls, but I'm a Connecticut lobster roll guy. I like warm lobster with butter versus all that mayonnaise. How about you?

Um, you know, this is not going to shock you, Ray. I'm the opposite. I, I literally— my last trip, they— I ordered a cold one, they served me a warm one straight back to the kitchen. I will not eat that stuff. Uh, to me, a lobster roll has to have that light mayonnaise, a little bit of celery, um, of course on a hot dog bun. Can we agree on that? A top opening hot dog bun.

I agree with that because hot dogs actually is my favorite.

Well, there we go. That's something we can agree on. Okay. So what are we doing today, Ray? What's our, what's our topic?

Well, today we're talking about something that's remaining, and that is remaining performance obligation, Dave.

Okay, well, this is a tough-to-interpret metric that, uh, I think virtually all public SaaS companies disclose and talk about, but very few private SaaS companies talk about. So I think this will be a fun one for our audience, particularly the private companies, Who may not have heard of this one.

I agree. But before we crack the claw on this topic, let's hear a word from our sponsor.

Ouch.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Grootewright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave @kellogg and Ray on LinkedIn @rayreich. Thank you so much for listening to the Metrics Brothers podcast.

So before we jump in here, Ray, since this is a metric that gets talked about in the context of public SaaS companies as a financial metric, I'll remind listeners to hear our disclaimer. And remind them that we don't give investment advice, and if we did, it'd probably be wrong. Listen to the trailer for more. Okay, ready to jump in?

I'm ready, let's go.

Okay, so RPO is today's metric, another single metric episode. I love those, right? Wonder if we're ever going to run out of metrics. Uh, it stands for remaining performance obligation, and remaining for what? I might say we're remaining, in my opinion, to fulfill the contract. So it's the work yet to do when you sign a contract. Why is this metric needed? The answer is, you know, doesn't ARR get that? No, ARR gets the annual subscription value. Ah, but TCV must get that-ish. So, so first, TCV is kind of a— total contract value, TCV— is kind of a beleaguered SaaS metric because a lot of people abused it in the early days. They'd say, we just signed a $300K deal. It was actually $100K of ARR and $300K of TCV. So TCV got kind of abused young. and therefore people kind of moved away from it because investors are like, I'm tired of hearing about TCV because it's, you know, it's like eyeballs, you know, we'll count 2 for every 1. But TCV, even if you like it and use it, it still doesn't capture what RPO does because TCV is kind of an attribute of the deal. When we signed the deal, it was 5 years at 100 units, so it's a 500-unit TCV deal. Um, RPO is what I'll just call a burndown metric, which is as you go through the life of the contract, you're going to start on day 1 with 500 units of RPO, and by day 5 times 365 Whatever that is. I won't do it. 2010. Um, at the end of year 5, you'll have zero in RPO, but it'll still have been a 500-unit TCV deal. So ARR doesn't capture RPO, TCV doesn't really capture RPO. Ah, but deferred revenue, you think it might capture RPO, but it doesn't. By the way, if a deal is fully prepaid, then RPO will equal deferred revenue on day 1. But say you sign a 5-year deal where 2 years are prepaid. Well, only the 2 years are going to end up as deferred revenue. So this does measure something unique. It's not the same thing as TCV. It's not the same thing as deferred revenue. And sometimes people will refer to this as backlog. And I'd love to hear your thoughts on that because that's kind of an old informal dark metric that you'll hear about. So, so you can tell me, Ray, what you think about RPO and/or what you think about backlog. Okay.

Well, I'll also add a little bit of color to why I think RPO is there. I think the primary reason why it's in our lexicon is it became a required standard from ASC 606. So to me, that's why it really started to be more common.

You killed all the fun, Ray. Okay. So we have to do it.

We have to do it. Let me answer your question. And that is, as an old school guy, I used to love the concept of backlog. Now backlog, I used it more in professional service than I did for enterprise perpetual license software. And it was really, if I closed a $100K deal and $50K was professional services, I could not recognize that professional services revenue until it was delivered. Depending on, I won't even get into vendor-specific objective evidence.

Right.

But I view backlog more of a services orientation than a subscription revenue orientation, Dave.

Okay, well, I've heard the term used differently. I mean, certainly people use it in PS. There's no doubt that backlog is kind of a standard term in PS. And it's that work you kind of— in my mind, it's the ordered work you need to kind of burn through. So you kind of burn— same sense as RPO, you're burning down an order. Hey, somebody ordered $100,000 worth of PS. We have to send people, and every day we're going to burn that down to zero. I've also heard the term used backlog differently in software context. So this is quite some time ago, but sometimes people will use it on the sales side to mean that order that never made it out of the VP of sales' desk. So it's the 30th, the 31st day of the quarter, or 31st day of the month, last day of the quarter. We've hit plan. I got a couple of orders sitting there. I haven't got them countersigned yet. I haven't crossed the i's and dotted the t's. So maybe I should just quote unquote backlog them and not take them. So I've heard it used in that terminology. Very few people count that or measure that as a metric, but that's the usage I was familiar with.

Yeah, I guess I wasn't a good enough head of sales. I always needed to count every contract.

You never had those extra orders? Ah, see, see.

I never had pocket contracts waiting for next quarter.

That's funny. I often did. Um, so, so, um, that's, that's the way you make quarters, right? Either that or you're lucky. I'd rather want to be good than lucky, lucky than good. I'll tell you, Dave, you said a lot of things at that opening.

Would it be helpful, do you think, or is it time maybe to give an example of a deal and how it gets counted?

Sure, sure. Perfect. Yes. So let's do it. I already kind of backed our way into an example there at the start, right? I was talking effectively about a 5-year deal that was 100 units of ARR, i.e., per year, and 2 years were prepaid. So let's just stick with that example and build on it. First, that deal would be 100 units of new ARR the day I sign it. The day I sign it, it would increase our deferred revenue balance by 200 units. Why? Because we're going to issue an invoice for 200 units and we're going to offset that GL entry with increasing deferred revenue by 200 units. And very quickly, they'll do another transaction that takes the invoice and drops accounts receivable, increases cash. But at the end of the day, the net effect is cash is going to go up by 200. And deferred revenue will go up to offset that. Um, and that's basically the prepaid portion of the deal, right? That the revenue that we've been paid for, we've received cash, but that we've not yet delivered, also known as unearned revenue. Um, same exact metric as deferred revenue. So that deal will be 100 units of new ARR. Uh, after we book it, it'll be 200 units more in the deferred revenue balance for the company. And that deal will be a $500 Okay, 500-unit TCV deal. TCV meaning total contract value. And quite simply, if it's a 5-year deal, 100 units per year, and it's not breakable, right? Let's just be clear, it's not cancelable. I can't get out. So maybe I offered a discount, maybe it's supposed to be 130 units of ARR, and I said if you sign a 5-year deal, I'll do it for 100, right? So because TCV can't include optional anything, it's got to be the value of the deal. So, so thoughts on those?

Well, I just want to— one thing, if I invoice, and the key is closed and invoiced, the day I invoiced that $200K for the first 2 years, that's when logically it goes into deferred revenue. That was probably not going to show up until I closed my books for the month of January as deferred revenue, correct?

It all depends. But just, I mean, we don't want to do the accounting class here, but, but all entries need an equal and opposite entry, right? Newton's second law of accounting. So, so the The GL entries will actually be, as I issue the invoice, I will increase the accounts receivable. I can't remember if it's a debit or a credit, but accounts receivable will go up by 100. And at that exact moment, deferred revenue goes up by 100. The cash doesn't affect the deferred revenue. When the cash comes in, cash goes up by 100 and accounts receivable goes down by 100. Those are the GL entries on that. The net effect is cash— basically, if you assume you get paid instantaneously, cash goes up by 100, deferred revenue goes up by 100, 'cause deferred revenue means revenue for which we have been paid. Or not. Or invoiced, for revenue for which we have been paid and we have not yet earned or delivered.

Okay. And now the other thing in that January deal for this example, my remaining performance obligation in January is still $500,000, but there's another metric called current RPO. What's the difference, Dave?

Yeah. So, so Ray has decided to add something to our example. Just let's formalize it that somehow we signed this deal on January 1st, which I think has never happened. in the history of software. But, but in any case, we'll use Ray's example. We, we signed this deal on January 1st, and, uh, on January 1st there are 500 units of RPO on this deal. And there is another metric called current RPO, which Ray touched on, which is RPO that's going to happen within the first 12 months. So this deal, to hit all the metrics, this 5-year deal, 100 units of ARR, 2 years prepaid, is 100 units of ARR, 200 units of deferred revenue because that's what's prepaid, 500 units of total contract value. That's immutable. That's a property of the deal. On day 1, January 1st, in this case, it's 500 units of RPO and the current RPO is 100.

That is a mouthful.

I don't know. It is what it is, right? You're the one who brought up current RPO.

When I'm listening to Jim Cramer on CNBC and he's talking to Marc Benioff, Because, you know, he is a big fanboy there. He focuses on RPO a lot. And I was always wondering in my own mind, why is RPO so important? Is it about the predictability? Or I don't know if it's time to talk about that, but what's the real value of RPO?

Yeah, unfortunately, you're one ahead, Ray, as often happens here. Let me do one other. I want to do a twist on our example and then come back to that question. Because the twist will help answer that question. Here's the twist. Say that customer goes, I don't have a lot of cash right now. I want to do that 5-year deal, but I can only pay you every 6 months. So I want twice annual payments because I don't have good cash flow. So let's look at that deal. That's still 100 units in ARR. Deferred revenue is now 50 because they've only paid me for half a year in advance. TCV is?

50.

Still $500,000. Feel free to answer any of these, Ray, if you want to. I'm not going to do it. RPO is?

$500,000.

Bingo. And current RPO?

Ooh, I think that still needs to be for 12 months, so it's still $100,000.

Correct. So in that case, the only number that changed was the deferred revenue number because that represented the cash flow. So we could see that the same deal, depending on payment terms, switched a metric, in this case deferred revenue, Right, from 100 down to 50. RPO has the same issue. So if deferred revenue is kind of reliant on payment terms, RPO is reliant on deal duration. If I just took this same deal and said now it's a 10-year deal, what would RPO be? A million or a thousand? If it's the same deal over 10 years, it's still 500. No, no, because now it's a 10-year deal.

Oh, it's $100K ARR, so it's a million.

It's a million. Bingo. Right. So, so yes, very much so. I keep saying units. Ray keeps making that K, which is fine. You could call it a 100K deal to me. It's 100 years, so it'd be a 1,000-unit deal, or it would be a $100 million deal because Ray did the math that way. But in any case, um, yes, right? So you can see that when we mess with payment terms on the same deal, deferred revenue moves around, right? Say it was 10 years paid in advance, it would be $1 million in deferred revenue, right? So everything else is held constant, but we change payment terms. So basically deferred revenue is highly dependent— or dependent on payment terms. RPO is dependent on deal duration, not dependent at all on payment terms. RPO didn't change in that example. But if we take the deal that's 100 units of ARR and it's only a 1-year deal, then it's 100 units of RPO. If it's a 5-year deal, it's 500. It's a 10-year deal, it's 1,000. So, and this, to answer your question of a minute ago, is what makes this metric so hard to interpret. You have the exact same problem with interpreting deferred revenue. That's why I did that analogy, because some people look at deferred revenue as like, oh, like how much did they sell last quarter? Because they're kind of assuming basically if you only do 1-year deals always, deferred revenue can actually be a good proxy for bookings, right? Because I can see— but wait a minute, if some of your deals are 3-year prepay, some are 2-year prepay, some are 1-year prepay, and that mix is constantly changing, deferred revenue is very hard to interpret as a metric. RPO has the exact same problem. If your deal mix changes or you do one big outlier 10-year deal, You can really skew RPO all over the place.

Wow. So what that tells me is if you are a public SaaS company and start messing around with things like payment terms, et cetera, that could confuse the analyst community.

Yeah, it could. I want to spend more time on this, but the analysts in theory are supposed to be smart enough to understand this, but it is confusing. And by the way, the only thing they can understand is that they're confused. They can't actually know the answer. Right? Like if your RPO goes up a lot, maybe you just doubled your standard contract from 2 years to 4 years.

Right.

And all of a sudden, RPO is going to shoot through the roof. So the 2 operating words here I like to use, Ray, they're Latin, is ceteris paribus, which stands for all other things being equal. So ceteris paribus, you know, if you don't ever change your billing terms, deferred revenue is actually a pretty good metric. Ceteris paribus, if all other things, in this case, deal duration, is constant, then RPO is a good metric. But when you're looking at RPO, you always have to ask yourself, did it go up a lot because they signed a lot of deals last quarter, or because they just increased— they, they made a rule that said we used to do 2-year deals and now we do 3-year deals, and all of a sudden we're going to have a lot more RPO than we did last quarter? So I call this a hard-to-interpret metric. It is literally mathematically impossible from the outside in to figure out what happened. It doesn't stop people from interpreting it anyway, though. But before we drill in, was that all clear? Do you have questions about this? I call it a dumping bucket. People just dump shit in there and then you're left to kind of try and figure out what it means.

It's all clear. But you know what I'm going to do right after this? I'm going to go and review all my public company data and see if there's any R-squared factor to RPO that's reported in the 10-Ks.

I would look at RPO growth. So, so when you're doing that math, Because RPO is just a number. It's gonna be bouncing all over the place for different companies and different size. But look at the RPO growth rate. So I want to tell you a story about deferred revenue though. We'll come back to RPO because when I worked at Salesforce, there was a downturn. And at the time, people for public companies—they still do this—they have a metric called billings, which is revenue plus change in deferred revenue. It's kind of a hack that ceteris paribus tells you what bookings were. How much did the company actually sell in the quarter? Why is that? Because new deals will show up with a year's worth. Let's just say all new deals are signed on the last day of the quarter, which is not a bad abstraction for enterprise SaaS, right? So if all new deals come in on the last day of the quarter, the entire deal value is gonna go into deferred revenue, right? Nothing gets burned down. So, so we sign everybody on December 31st, uh, just say we sign $1 million worth of deals. I'm gonna have $1 million in extra deferred revenue. So if I can look at basically every quarter, if I take the kind of start of quarter deferred revenue, assume everybody's in a 1-year deal. Basically, I deferred a quarter of deferred revenue down every quarter, right, on a 1-year pattern, right? It's always burning down. Then I look at the net change because the new sales are added on top, and I can kind of get this approximation for how much a company sold. And that's, that's why people use billings as a public SaaS company metric. It's revenue plus change in deferred revenue. It's trying to approximate this notion that, yes, we're burning down deferred revenue on one hand, but we're also signing up new customers on the other. And the new customers all come at the end of the quarter. So most of their deal value goes directly to deferred revenue. It doesn't burn down. There's very little that's signed early in the quarter and burns down, which again, would make the math really hard. Not really hard, impossible. I wouldn't know what happened. So anyway, when I was at Salesforce, we— I've told this story once before, but there was a downturn and customers went to the salespeople and said, look, I want to pay you twice a year instead of once a year. And sales went up the sales management chain and people said yes. And a lot of deals happened in that quarter. that were done on biannual billing instead of annual billing. So what do you think happened?

Stock had to go down.

Yeah, why?

Well, because they thought that the bookings or billings was down dramatically because the RP— I'm sorry, deferred revenue didn't go up as much.

That's it. And that's exactly what happened. Wall Street freaked out. Um, they said, oh my God, you didn't sell very much. You hit your revenue target, but your SaaS business, that's easy to do because you're just burning down what you started with. And when I'm looking towards the future, you didn't add enough deferred revenue, therefore you had a horrific sales quarter, therefore the stock gets hammered. So the CFO almost instantly got on the phone telling Wall Street, no, no, no, no, no, no, we had a downturn and people changed their payment terms, right? So they're kind of having to explain to people who theoretically should have maybe known better, or at least, I don't know, you could argue it was Salesforce's fault. They should have anticipated the reaction to the deferred revenue slow— slowdown in growth and explained it up front, and they didn't. So it's probably Salesforce's fault. But in any case, you think the financial analyst would have at least asked, and maybe they did, but like, hey, why is deferred revenue? Because by default, I'm going to assume that it's bad because you had a bad quarter. But, but in reality, in this case, it wasn't a bad quarter. They were all happy customers. They just had cash flow issues. RPL suffers from the same problem. That's the net. It's the exact same problem as that story, which is if we change and just say for some reason we shorten our deal terms, maybe we've got a competitor who's beating us because they're doing 2-year deals and we're asking for 3. And to win more deals, we go forget it. Let's just do two-year deals now too. We do that, and and all of a sudden our RPOs are going to be growing as fast. So in general, Wall Street, I would argue, even though they know this, they're smart people. They kind of assume ceteris paribus. I'm going to read you a quick example from a financial analyst note where it's saying, "Hey, we maintain our market outperform rating and thousand dollar price target on ServiceNow after the company posted a better than expected third quarter." With revenue of $2.8 billion versus a consensus of $2.74 billion, up 22% year over year. Subscription revenue of $2.7 billion versus consensus $2.66 billion, up 23% year over year. And most importantly, CRPO of $9.36 billion, consensus $9.11 billion, up 23.5%. So they're arguing in this research note that the most important metric was current RPO. And by the way, look at the scale of that number for ServiceNow. Almost $10 billion in contracts that are going to come in over the next— nobody knows how long— over the next kind of N years.

But current RPO of $9.36 billion says it's going to convert probably in the next 12 months.

Oh, Brother Ray, you caught me there. That's only current RPO. So it's even more mind-blowing. It is more comparable. It's much more kind of immediate. Like, no, no, we've got $9 billion that's going to convert in the next year. So you're correct.

That, that tells you all you need to know about the beautiful nature of a recurring revenue business. They could cut off the majority of SG&A costs, pay their 20% or so of COGS, and generate $8.5 billion of cash in one year.

Yeah, yeah, yeah. That's, that's on the books. $9.36 billion here of RPO that's going to happen within the next year. So I know we're getting kind of close on time, Ray. So I'm going to kind of just cut to the conclusions here. I'll do one more quick example, then cut to the conclusions. So Confluent, this is a note from Ollie's CFO on his blog. He called it the Confluent miss. They had a quarter where they beat revenue by 3%, slightly beat EPS. They missed free cash flow by 2 percentage points, which isn't great, but they missed RPO by $50 million, 7 percentage points. And on top of that, they dropped the— they set guidance 4% below where people thought they'd set it, and the stock fell 42% in a day. So again, there were multiple moving parts in that announcement, but there was a revenue beat, right? It wasn't a beat and raise. That was the main problem. They beat, but they missed on certain metrics. They didn't raise. And by the way, you can argue the reason they didn't raise, 'cause RPO was short, that there really was a problem that we didn't have enough business that we'd signed in order to raise guidance.

Yeah, I was gonna say, Dave, doesn't that basically say if they missed RPO expectations by $50 million, they kind of missed new bookings by $50 million?

Well, yes and no. No, because it may have been contract durations, right? They may have done 2 years versus 5 years, right? This is the exact problem. Thank you for asking me. This is the exact problem with this metric. I don't know for sure. Ceteris paribus, you'd be correct. If all other things are held constant, all the contracts are the same duration, then yes. But the issue with these metrics, with deferred revenue, with RPO, is you're not sure what's in them.

Okay. So Dave, what is better, deferred revenue or RPO? What say you?

Well, I was trying to skip that one, Ray, in the interest of time. Uh, thanks for catching it there in the script. But, uh, look, I like deferred revenue better. Mr. Cash is King. Because it's gonna become cash. I think the problem with RPO, particularly for small private SaaS companies, is to collect it, you're gonna have to sue your customer, right? To get deferred revenue back, they're gonna have to sue you. So they're gonna have to be pretty angry. But for you to convert RPO, if a customer stops using your system and says, this stuff doesn't work, I don't care, it's a 3-year deal, most private SaaS companies won't sue them. And I would— nor would I recommend that they, you know, suing customers is not— I don't think it's an officially endorsed behavior by the SaaS Talk Metrics Brothers. You tell me. Uh, but this metric's rather like that, you know, in general, don't sue your customers. Um, so that's the difference. So what do you think?

I totally agree. I think we are 100% aligned. But even though I fell through that manhole that I didn't know that you tried to cover, maybe we can wrap up here.

Yes. So look, RPO is an important metric. I wanted to put it on everyone's radar horizon here because it's not something people talk about in private companies. If you are in the zone where you're starting to think about, you know, the IPO zone, you definitely want to start tracking this because you want to watch how it behaves at your company for several years before going public, right? You want to look at your own RPO behavior to understand it. Um, it can be hard to interpret for all the reasons we've discussed about. And I just think even if you're a private SaaS company, you should know what it is. And personally, I would track it because it's a way for you to get some credit, uh, with your board for some of these, especially if you're doing bigger, longer deals that aren't going to show up in the normal SaaS metrics.

Yeah, you know, I love this session. Every 20 to 25 minutes I get to spend with you doing SaaS Stock, I always learn something new. Get new insights. So thank you so much for taking us on this journey of remaining performance obligation. Thanks, Ray. Bye-bye now.

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