Remaining Performance Obligation (RPO)

Remaining Performance Obligation (RPO) is a forward-looking metric that represents the total amount of contracted revenue a company has yet to recognize from its existing customer contracts. Think of it as a company’s order backlog that is officially locked in but hasn't yet been delivered or earned. This figure, required under accounting standards like Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), gives investors a sneak peek into a company's future revenue stream. It includes both Deferred Revenue (amounts already billed but not yet earned) and unbilled amounts that are still due under the contract. For businesses that rely on long-term subscriptions or contracts, like many modern software companies, RPO has become an essential health indicator. It essentially answers the question: “How much work—and therefore, revenue—do you still have lined up from deals you've already closed?”

For a value investor, understanding a company's stability and future prospects is paramount. RPO is a fantastic tool for this, offering a much clearer view of the road ahead than many traditional metrics.

A large and growing RPO is a beautiful sight for an investor. It signals strong demand, successful sales efforts, and, most importantly, revenue visibility. When a company has a substantial backlog of contracted revenue, it reduces uncertainty about its future performance. It means that a significant portion of next year's (and possibly beyond) revenue is already secured, providing a stable foundation for growth. This predictability is a core tenet of value investing, as it allows for more confident Valuation and reduces the risk of nasty surprises.

You might hear about Bookings, which represent the value of new contracts signed in a period. While useful, bookings only tell you about recent wins. RPO, on the other hand, is the cumulative total of all contracted future revenue. Imagine a restaurant. Bookings are like the new reservations made today for the coming weeks. RPO is like the total number of reservations on the books for the entire next year. The latter gives you a far more comprehensive picture of how full the restaurant will be over the long term. RPO captures the full value of multi-year deals, providing a more stable and complete view of the company's revenue pipeline.

This is a common point of confusion, but the distinction is crucial. Both relate to future revenue, but they aren't the same.

• Deferred Revenue (also called unearned revenue) is the portion of future revenue that has already been invoiced and paid for by the customer, but the service hasn't been delivered yet. It’s a liability on the balance sheet because the company owes the customer a service.
• RPO is the total contracted revenue, whether it has been invoiced or not.

Therefore, RPO = Deferred Revenue + Unbilled Backlog. Let's use an example. A company signs a 3-year, $3,600 contract for its software, with the customer paying $1,200 at the start of each year.

1. Immediately after signing and receiving the first payment, the Deferred Revenue is $1,200.
2. However, the RPO is the full $3,600, as that's the total remaining obligation under the contract. The other $2,400 is the “unbilled backlog.”

As you can see, RPO provides a much bigger picture of the company's long-term commitments.

When you see RPO in a company's financial reports (usually in the footnotes), don't just glance at the number. Dig a little deeper.

Is the RPO figure growing quarter-over-quarter and year-over-year? Strong, consistent RPO growth is a powerful indicator that the company is successfully signing new customers and renewing or upselling to existing ones. A stagnant or shrinking RPO could be a red flag.

Companies often break down their RPO into two parts:

• Current RPO: The amount expected to be recognized as revenue in the next 12 months.
• Non-current RPO: The amount to be recognized after 12 months.

This split tells you about the company's short-term versus long-term revenue security. A healthy balance is ideal, showing both immediate stability and long-term viability.

RPO is most relevant for businesses with recurring, long-term contracts, such as Software as a Service (SaaS), engineering, construction, and aerospace companies. It's almost meaningless for a fast-food chain or a retail store. Always compare a company's RPO growth and size to its direct competitors to gauge its performance within its industry.

While RPO is a powerful metric, it isn't foolproof. It represents a promise of future revenue, not cash in the bank or guaranteed profit. Contracts can sometimes be canceled (though typically with penalties), and economic downturns can affect a customer's ability to pay. RPO is a fantastic piece of the analytical puzzle, but it should always be used alongside other fundamental metrics like Cash Flow, earnings, and balance sheet strength to form a complete investment thesis.