Every once in a while a new financial phrase comes across my desk — one that either I’d never heard before or had heard but never considered useful.
Remaining performance obligation (RPO) is just such a phrase. It was all over the recent earnings from the hyperscalers, and the numbers are staggering.
But what is RPO? Basically, it is a part of a contract that still has to be fulfilled. In this case, it’s contracts to provide data centre capacity that have been agreed but not yet served, as many of these contracts are multiyear in nature.
And the numbers are wild.
Microsoft reported RPO of $627bn, up more than 50% in the past year. Alphabet, through Google Cloud, was $468bn — doubling since the past quarter. Amazon, through Amazon Web Services, was $364bn — up about 50% over the previous quarter. In September, at the release of its results, Oracle reported RPO of $455bn.
Collectively this amounts to nearly $2-trillion of billing committed to but still to be invoiced. Given the $112bn of capex spend in the first quarter from Microsoft, Amazon and Alphabet, this number is important: it suggests that the revenue is coming to support the spend.
So, yes, RPO looks impressive. And yes, it is a number worth tracking. But it must be considered within the wider value thesis
But a word of caution.
These companies are trumpeting RPO because it looks good and impresses investors. There will come a time, though, when those numbers will go backwards; companies will stop talking about them. So be careful of exciting data. Understand why it is being trumpeted and what it really tells us.
In other words, exercise the usual scepticism.
Remember when the telecoms companies were all about average revenue per user (Arpu)? In the first decade or so of the 2000s, every telecoms company would excitedly pronounce on the improving state of its Arpu. Then that number started moving in the wrong direction and they just stopped reporting it. More recently, Netflix stopped reporting detailed subscriber numbers and instead just reported “milestone disclosures”. No rocket science is required to work out why: it’s because growth has slowed as the business matures.
So, yes, RPO looks impressive. And yes, it is a number worth tracking. But it must be considered within the wider value thesis. For instance, over what time frame is the RPO? Alphabet said that 50% converted within the next two years. The others didn’t give details. But using Alphabet as the example, this means the almost $2-trillion may be just $500bn a year. That’s still a big number, and they will, of course, sign new contracts in the years ahead, adding to the revenue.
New metrics are fun — and they can even be useful (Arpu was a great number while it lasted). But while we all assume we know what RPO means, do the companies use it differently? Perhaps.
So, my first go-to number will always be old-school accounting data. I always know exactly what it is because it’s standardised and the companies can’t stop reporting it.
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