How do investors view backlog?

December 01, 2020

by a searcher in New York, NY, USA

On this platform and generally in the community, folks talk a lot about recurring revenue. I'm wondering how people view a company's backlog (assuming it's verifiable and real)? Is a company that has $3m in revenue and a backlog of $15m seen in the same light as a company that has $3m in revenue with the vast majority of it being recurring?

I know that is a VERY general scenario and reality would be far more nuanced (i.e. recurring revenue takes many different forms and backlog is only worth it if the company can deliver, etc.). Just trying to assess how people view the two.

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Reply by a searcher
from Harvard University in Omaha, NE, USA

In my experience, the backlog has to be taken into account with typical project completion time, sales bookings, and sales cycle. And then, you need to compare them over time. If you see consistency over time, that should give you confidence in the strength of a backlog going forward. A backlog that you have confidence in gives you healthy project execution planning so that you can plan out your forward-looking revenue almost like it's Monthly Recurring Revenue. This scenario is quite nice. I've also lived the opposite (thanks 2020 Covid!) where the backlog is small and tougher to manage. The main thing you are looking for is consistency which aids you in modeling some predictability, which investors want to see. Hope this is helpful.

Reply by an investor
from Universidade Católica Portuguesa in Lisbon, Portugal

All about historical data. What is the conversion rate of your backlog? How have you done in the past and how does that convert into your expectation for the future. If you’ve done a 30% conversion tough to expect people to pay for a 50% one....
Also is it a backlog of recurring revenue or is it one of one off revenue. Recurring revenue with a low churn rate (this last point is very important, just because it’s recurring revenue, unlike the name says, doesn’t mean it will ever go away) is a lot more valuable than one off backlog on a like for like basis.

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