Everybody Hates Lumpy

Every business hates lumpy revenues. Volatility in revenues translate to volatility in profitability and a consequent increase in earnings risk. But shit happens, and so does lumpy revenues. Especially when a firm’s business model is such or its customer base is not diversified enough. Take a firm that generates company reports for investors and get’s paid by the output (terrible mechanism of compensation, but we’ll deal with this later). Outputs are invariably high during earning season. Now imagine a technology company that provides a SaaS based platform for our research company to facilitate data analysis, authoring and distribution. The revenue of this second firm will be just as lumpy – and synchronizedly so – with that of the first one. Is there a way out?

To my mind SaaS platforms will have to get multi-tenanted. This allows the platform to hedge away risks on a portfolio basis and also benefit from revenue diversification models of the individual tenants (of course so long as the activities under diversification happens on the same platform). Builders of SaaS platforms have to cautious how much non-generic functionality it builds into it. Staying with the research platform example, the vendor would want to not build asset class specific features exclusively and stick to just research (as opposed to say “Equity Research”). Client/Industry specific features and functionality will invariable tie revenue fortunes at the hip.

Lumpy there, lumpy here.

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