Slack mentions calculated billings in its earnings releases. What is it, and how is it different from revenue?
Calculated billings consists of revenue plus the change in deferred revenue in a given period. The calculated billings metric is intended to reflect sales to new paying customers plus renewals and additional sales to existing paying customers.
As a reminder, Slack mainly generates substantially all its revenue through sales of subscriptions to organizations. For large contracts, these subscriptions may span many months or years, and some customers pay upfront, depending on the terms of the contract. Slack will recognize subscription revenue on a straight-line basis over the term of the contract. The portion of the contract that is not yet recognized is called deferred revenue.
It is important to note here that calculated billings is also affected by contract length and seasonality. For example, large enterprises usually make big investment decisions in Q4. This will affect calculated billings unproportionately compared to the rest of the year. Other examples would be the cases in which the contract terms are lengthened or shortened. If the contract term is shortened, calculated billings will decrease even if the customer retention rate is 100%. The opposite is true if the term is lengthened.
Keep this in mind during an economic expansion or contraction. During a contraction, organizations tend to ask for shorter contract terms, out of caution. This will decrease calculated billings, ignoring the fact that the customer may still renew the contract, so the economic contraction may not actually affect revenues. During an economic expansion, contract terms may lengthen, increasing calculated billings while having no direct effect on revenues.