Software Stocks: How Software Companies Make Money

Oracle reported $638 billion of Remaining Performance Obligations (RPO) on 31 May 2026, up from $138 billion a year earlier. These are signed contracts whose revenue the company has not yet recorded. Its annual report says the increase was primarily attributable to certain significant cloud contracts.

The companies behind software stocks charge in three ways: per user, by the amount used, or for a licence. This guide uses the annual reports of Atlassian, Snowflake and Oracle to show what each model does to revenue, retention, contracted revenue, margins and the cost of running the software.

A seat is one user's access to the software, so a seat subscription's revenue grows with the number of users and the price per user. Usage pricing charges for what the customer consumes, such as computing time or data stored.

A licence gives the customer the right to run the software on its own systems.

Money is in US dollars, in millions as filed, unless a filing gives only billions.

Atlassian sells collaboration software by the seat and generally records subscription revenue evenly over each contract. Subscription revenue was $6,262.2 million in the year to 30 June 2026, up 27% from $4,930.6 million. The annual report credits "paid seat expansion from our existing customers and price increases".

Atlassian also reports Subscription Annual Recurring Revenue (ARR), the yearly value of active subscriptions to its Cloud and Data Center offerings on one date. It was $6,606 million on 30 June 2026 against $5,382 million a year earlier, up 23%.

That is slower than the 27% rise in subscription revenue. The annual report says ARR should be viewed independently of revenue.

It does not represent revenue under Generally Accepted Accounting Principles (GAAP), the rules US companies report under. Contract dates, renewals and invoice timing can affect it.

Snowflake charges for the computing, storage and data transfer its customers use. Most of its revenue comes from capacity contracts, in which customers commit to a set amount of use, typically for one to four years. It typically bills annually in advance and records revenue as customers consume the service.

Net Revenue Retention follows one group of customers over two years. The group is the capacity-contract customers using the platform in the first month of the first year. Snowflake divides the group's product revenue (revenue from the platform, excluding services) in the second year by that in the first.

The result was 125% on 31 January 2026, so the group spent 25% more.

Oracle records a software licence as revenue "up front at the point in time when the software is made available to the customer". Support is priced as a percentage of the licence fee and recorded evenly over the contract.

Licences were $4,737 million of Oracle's $67,357 million revenue in the year to 31 May 2026, or 7.0%. Cloud was $33,989 million (50.5%), support $19,804 million (29.4%), services $5,743 million (8.5%) and hardware $3,084 million (4.6%).

Licence revenue fell 8.9% from $5,201 million a year earlier, while cloud revenue rose 38.7% from $24,506 million.

So Oracle is a licence example whose cloud business is now half of revenue. The backlog in the opening is linked to cloud: the annual report attributes its increase to cloud contracts, which are recorded evenly over one to five years.

Deferred revenue is money a customer has paid, or been invoiced for, ahead of the service. It sits on the balance sheet (the statement of what a company owns and owes) as a liability, an amount owed, until the service is delivered.

RPO are the contracted revenue not yet recorded, including deferred revenue and amounts not yet invoiced. So deferred revenue is the part of RPO already billed.

The chart divides each measure by a year's revenue. Oracle's RPO was 9.5 times revenue against 0.2 times for deferred revenue. Snowflake's were 2.1 and 0.7 times, Atlassian's 0.7 and 0.4 times.

Atlassian and Oracle give RPO only as rounded figures, about $4.8 billion and $638 billion, so those two multiples are good to one decimal place.

Snowflake bills annually in advance, so its deferred revenue of $3,361.4 million is what it has billed. Its contracts run up to four years, so its RPO of $9,771.5 million is larger. Oracle's deferred revenue was $15,395 million.

Oracle expects to record about 12% of its RPO within 12 months, Snowflake 46% and Atlassian 65%. Most of Atlassian's backlog is recorded within a year, while most of Oracle's comes after.

Gross margin is revenue less the direct cost of delivering the product, as a share of revenue. How to read an income statement shows how it is built.

A GAAP margin follows US accounting rules. A non-GAAP margin is one the company adjusts itself.

Atlassian adjusts for share-based compensation (pay in company shares) and amortisation of acquired intangible assets (the price of bought technology spread over its life). It also adjusts for restructuring charges (the cost of reorganising the company).

Computed from the amounts Atlassian filed for the year to 30 June 2026, its GAAP gross margin was 84.8% and its non-GAAP gross margin was 87.9%. The 3.1 percentage-point gap was share-based compensation (1.1 points), amortisation (1.2 points) and restructuring charges (0.8 points).

The gap widens down the income statement. The same arithmetic on operating income gives margins of 0.2% GAAP and 30.4% non-GAAP, a 30.2-point gap. Share-based compensation of $1,605.1 million was 24.4 of those points.

Cost of revenue holds the direct cost of serving customers. A company that rents its computing pays a bill that lands there. Snowflake's cost of product revenue rose $268.3 million in the year to 31 January 2026, including $248.1 million of third-party cloud infrastructure expense.

Atlassian's third-party hosting fees rose $87.0 million in the year to 30 June 2026.

A company that buys equipment pays first. The spending is capital expenditure. It reaches the income statement later as depreciation, the cost spread over the equipment's life.

The cash flow statement (where cash came from and went) lists the spending as capital expenditures at Oracle and as purchases of property and equipment at Atlassian and Snowflake.

The chart shows capital expenditure as a share of revenue: Atlassian 0.5% ($34.1 million), Snowflake 2.2% ($101.6 million) and Oracle 82.6% ($55,663 million).

Oracle leases substantially all of the approximately 181 data centre locations it operates but holds the equipment as property, plant and equipment.

Its capital expenditure rose from $21,215 million to $55,663 million in the year to 31 May 2026, primarily due, the filing says, to the expansion of its data centre capacity.

Depreciation on all its property, plant and equipment was $7.6 billion, against $3.9 billion a year earlier. This guide has not established which expense line holds the rent on its leased sites.

Free cash flow, operating cash flow (cash from running the business) less that spending, was negative $23,686 million for Oracle in the year to 31 May 2026.

Oracle's income statement has no gross profit line, so there is no gross margin to set beside Atlassian's or Snowflake's. Its cloud and software costs sit in cloud and software expenses and in sales and marketing expenses. The first rose $6,028 million, primarily on higher infrastructure expenses.

Seats show in Subscription ARR. Usage shows in Net Revenue Retention and in how fast RPO becomes revenue. Licences show in the split between licence and support revenue.

Two differences change how these accounts line up. A margin can be GAAP or non-GAAP. Computing can be rented, with its cost in cost of revenue (Atlassian, Snowflake), or bought and leased, with its cost in capital expenditure, depreciation and leases (Oracle).

Stock market sectors covers how the market groups companies.

A software company makes money from seats recorded over the contract, usage recorded as the customer consumes it, or licences recorded when the software is made available to the customer.

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They charge in three main ways: a subscription for each user, a fee for the amount used, or a licence to run the software. Atlassian sells seats, Snowflake charges for usage and Oracle sells licences as well as cloud services. Each way records revenue at a different time.

A subscription is recorded over the contract, as Atlassian records its seats. A licence is recorded in full when the software is made available, as Oracle records its licences ($4,737 million in the year to 31 May 2026). Oracle's support, recorded over the contract, was $19,804 million.

Snowflake defines it as the product revenue from a fixed group of customers in the second year of a two-year window divided by their product revenue in the first. It was 125% on 31 January 2026, so the group spent 25% more. Atlassian's annual report gives no such rate.

A non-GAAP margin leaves out costs the company chooses to adjust for. Atlassian's GAAP gross margin was 84.8% for the year to 30 June 2026 and its non-GAAP gross margin was 87.9%. The 3.1 percentage-point gap was share-based compensation, amortisation of acquired intangible assets and restructuring charges.

Remaining Performance Obligations are the revenue under signed contracts that a company has not yet recorded, including deferred revenue and amounts not yet billed. Oracle reported $638 billion on 31 May 2026, against $15,395 million of deferred revenue. Snowflake reported $9,771.5 million on 31 January 2026.

DISCLAIMER: This article is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.