Cash Flow of Subscription Businesses
RHT just reported their earnings. Wall Street is starting to understand the power of their subscription business model, but not quite enough yet. When the press release was done at 4:00PM, the stock dove because earnings per share only met analyst estimates. It seems Wall Street is still watching the earnings line way too closely. Of course the stock rallied in after-after hours trading, and will probably be up today because Charlie Peters (the super-CFO) said that cash for for this coming year would be $250-260M. That is well over $1.10 per share of free cash flow on a stock that trades around 24 - a a multiple of about 22-23. On a company where annual revenue rose 44% last year! A subscription can not be counted as revenue immediately by a company. It has to be spread out over the course of the year (or however long the contract is), with the customer paying up front. This is why it is a great cash flow business. Cash flows in before the expense. In a steady-state company (...