Dykstra: Reading the Earnings Tea Leaves

Deferred revenue gives you a window into a company's future performance. Many software companies used to sell products outright, recognizing all the revenue up front. That gave them unpredictable sales reports -- some quarters up, others down.

Now, most software companies that provide consulting and support services are required to spread out the revenue over the course of the contract. The payments get categorized on the balance sheet as deferred revenue, usually on two lines -- short-term and long-term.

Oracle(ORCL Quote) and Microsoft(MSFT Quote) saw this requirement as a potential boon in lean years and have built huge businesses on maintenance or support contracts. At Oracle, upgrade benefits discourage users from dropping support even long after the software is paid for.

Even companies that aren't known for selling software have deferred revenue.

Google's(GOOG Quote) third-quarter 2008 deferred revenue total of $230.4 million was up 35% year over year. While that's a drop in the bucket for the Internet search site -- analysts expect $4.16 billion in revenue for the fourth quarter -- it's a sign that Google was intent on growing its annuity business in September.

While most analyses of deferred revenue compare it to the same quarter of the prior year, it's also useful to look at where it stands next to the prior quarter. For example, software firm VMware's(VMW Quote) 83% jump in deferred revenue year over year in September was only half the story. It was up just 8% from June -- showing the company's growth momentum had already peaked and was winding down.