4 ms·

Is "cost of revenue" typically inclusive of recurring revenue? Or just new revenue (ie. cost of sales)?

ChuckMcM 11y ago
Disclaimer, I'm not an accountant, but I've been audited by one :-). In web services company its cost of providing the services, so for example a $6,000 a month bill for IP transit services to Cogent or Level 1 would be a 'cost of revenue' and depreciation of the servers, or telephone access fees. Anything which has a monthly recurring cost, and is providing the infrastructure to deliver the service. It is an analog to the cost of goods sold. And sorry I didn't answer the basic question. Recurring revenue would be revenue that you get every month, like subscription revenue, memberships etc. Cost of revenue would be expenses you pay every month. Over the month you accrue revenue and you accrue costs associated with providing that revenue, you subtract the costs from the revenue to get the gross margin on that revenue. Example if you pay 100/month to run an EC2 instance and that EC2 instance is providing a service to 300 subscribers paying $1 a month, then your recurring revenue is 300 a month, your cost of revenue is 100 a month, your gross margin is (300 - 100) / 300 or 66%.
- shostack 11y ago
  Thanks for clarifying on the terminology. I work at a SaaS company so am familiar with the dynamics, but less so on the financial terminology side of things ;) So basically, based on your estimates, they are still running negative despite that recurring revenue, and with their current COGS, there may not be an intercept point yet where they are profitable with current figures even as that recurring revenue continues to grow?
  - ChuckMcM 11y ago
    Correct, the question, which we can't answer with available data, is what is the "marginal margin" or more clearly for each million dollars of increased revenue does the cost of revenue stay the same? Or go down? If it stays the same, and their over heads don't go down, then they need basically another year and a half of growth at their current rate to break even. On the outside looking in we can't know of course, somewhere though, there is a spreadsheet :-)

Disclaimer, I'm not an accountant, but I've been audited by one :-). In web services company its cost of providing the services, so for example a $6,000 a month bill for IP transit services to Cogent or Level 1 would be a 'cost of revenue' and depreciation of the servers, or telephone access fees. Anything which has a monthly recurring cost, and is providing the infrastructure to deliver the service. It is an analog to the cost of goods sold. And sorry I didn't answer the basic question. Recurring revenue would be revenue that you get every month, like subscription revenue, memberships etc. Cost of revenue would be expenses you pay every month. Over the month you accrue revenue and you accrue costs associated with providing that revenue, you subtract the costs from the revenue to get the gross margin on that revenue. Example if you pay 100/month to run an EC2 instance and that EC2 instance is providing a service to 300 subscribers paying $1 a month, then your recurring revenue is 300 a month, your cost of revenue is 100 a month, your gross margin is (300 - 100) / 300 or 66%.

shostack 11y ago
Thanks for clarifying on the terminology. I work at a SaaS company so am familiar with the dynamics, but less so on the financial terminology side of things ;) So basically, based on your estimates, they are still running negative despite that recurring revenue, and with their current COGS, there may not be an intercept point yet where they are profitable with current figures even as that recurring revenue continues to grow?
- ChuckMcM 11y ago
  Correct, the question, which we can't answer with available data, is what is the "marginal margin" or more clearly for each million dollars of increased revenue does the cost of revenue stay the same? Or go down? If it stays the same, and their over heads don't go down, then they need basically another year and a half of growth at their current rate to break even. On the outside looking in we can't know of course, somewhere though, there is a spreadsheet :-)