There was nothing micro about MicroStrategy’s recent fall from grace. The software maker saw its stock price plunge in March, when its questionable revenue-recognition practices led to a restatement of earnings, and a 15-cent- per-share profit metamorphosed into a 51-cent loss.
Better software might have saved the day. Not its own, but a product from diCarta (www.dicarta.com), a small firm in Redwood, Calif., that helps software companies track and report the various revenue streams that typify the industry.
“There are more esoteric rules than you can ever imagine” governing how software revenue should be reported, says Chris Russell, CFO at Persistence Software, in San Mateo, Calif., a diCarta customer. The license fee, for example, can be booked in the quarter a sale was finalized, or may need to be handled on a cash basis if a customer’s creditworthiness is in question. Professional services, such as the consulting fees that are often a software vendor’s bread and butter, must be recognized as the services are performed–even if paid for up front. Support, maintenance, and exclusivity arrangements all have different guidelines. Sign up a customer for the whole package, allow for the fact that ambiguous SEC guidelines allow for a fair amount of latitude, add a substantial dash of pressure from Wall Street, and the situation is ripe for everything from honest mistakes to outright chicanery.
Enter diCarta, which in 1998 began developing a product simply intended to help software firms manage license registration and renewals, but which quickly expanded to include revenue recognition when that thorny topic began making headlines last year. Its diCarta Contracts software is sold via an ASP model in which clients pay about $75,000 to access it via the Web (although new options, including per-transaction fees via Web exchanges, are in the offing). Scott Martin, president and CEO, says the software helps companies navigate revenue recognition by providing a “sort of dashboard for risk analysis.”
Companies can use the software for what-if analysis; for example, says Martin, “if pushing 30 percent of licensing fees into the previous quarter boosts revenue by only 3 percent, would you want to do it?” The software provides an easy way to see the effects of various approaches to revenue recognition, but, as CFO Russell notes, “At the end of the day, professional judgment is always the issue.”
While Martin says that the revenue-recognition features of Contracts are driving about 75 percent of sales, diCarta is not resting on those laurels. Russell says she was more attracted by the product’s ability to create an Internet portal where customers can renew their licenses automatically, sparing Persistence the 3 to 6 percent commission it had been paying to telemarketers and salespeople. “And those people can now focus on lead generation and follow-up, bringing us more business, which makes it very easy to justify the cost of the software,” she says. A cost that, presumably, diCarta will report in a timely fashion.