Semiconductor Industry Revenue
The value chain in the Semiconductor Industry can have companies selling directly to end customers for their products, or through distribution and contract manufacturing channels to reach your end customer. When you are selling through an extended value chain the end price for the product sold may not be known at the time of sale. This can occur in distributor-based sales models where the distributors (or other parties) may expect rebates based on previous negotiations.
Historically, prior to the updated revenue standards (ASC 606 or IFRS 15) financial teams would postpone the recognition of revenue and COGS until the final sales price was known. This is no longer an accepted financial practice with the new revenue standards which require the use of estimates and the recognition of revenue at the time of shipment.
The most sales model that creates variable consideration is the ship and debit or rebate model, where one distributor may be selling to multiple customers. If they sell to some customers, they get a lower price than other customers because those customers have registered a design win or they’re a big customer that has a quote specific for your product. The distributor buys the product at a market price and then sells it to a customer that has a discounted price, so they request a rebate at a future point. There can be other scenarios like maybe you sell through distribution, or you sell through contract manufacturers, but it is the end customer that wants the rebate.
Brief Summary of the New Standards
The new revenue recognition guidance, ASC 606, is less prescriptive and more principled based. It allows for more discretion by companies to estimate things, and requires revenue to be recognized when the event creating the revenue occurs.
Variable consideration is the term used to describe a very broad bucket of types of transactions like royalties, rebates, or price discounts. To recognize revenue at the time of shipment the variable consideration needs to be estimated. A model is needed to support the estimate, often based on historic transactions or the known potential for sales based on the various discount models.
DemandOps Revenue Management
This module supports the Sales Operations or Customer Service team for Semiconductor Companies – and is part of the SemiOps Supply Chain suite. It generates bookings, backlog, and billings – and supports reporting on this data. The information related to demand, specifically to bookings, billings, and backlog, is usually critical information required by a number of executives and management positions.
Revenue Management starts with looking at shipments / invoicing to customers. It can add in scheduled backlog for the period – what you plan to ship as well. This is all data based on the order-based pricing given to the customer.
The need for communicating the estimated final price is important throughout the process. It is important for management to have a realistic view of the estimated net revenue from the time the order is received from the customer until the time the final payment and any rebates are settled in the financial ledgers.
DemandOps supports the application of the estimated net price throughout the full process. This is handled by supporting the determination of the estimated net price, applying the estimated net price model by specific customer and/or specific parts by specific customer.
So, how do you estimate the final net value? You can review the history of shipments by specific distributor. A more common model is based on the quotes registered to each distributor, the amount open on each quote by end customer for that distributor, and the estimated rebate value based on the estimated volume for the distributor for a period of time.