FX in quarterly models Global businesses generate revenues in many currencies as exchange rates fluctuate. This will impact on the revenues at a company generates. If a US company generates half its revenues in Europe and the Euro depreciates against the US dollar then the revenues generated Europe will reduce in value when converted into US dollars, even if the business is selling the same amount of goods at the same price in Europe as in previous years.

Unless typically forecast revenues on a constant exchange rate or constant currency basis using current FX rates. Constant exchange rates are often abbreviated to CER. By using constantfx rates in our model. We're essentially treating recent FX rate changes as a non-recurring price change. Although in theory and analysts could forecast FX rate changes if the company operates in stable currencies the effort involved in doing so usually outweighs the benefits. Here we can see the analyst is calculated historic Revenue growth using reported Revenue numbers, but then adjust sat FX to show Revenue growth excluding FX. Reported Revenue growth in Q4 was only 2.6% But FX rates moved against the company in this quarter reducing the value of the revenues by 1.4% excluding FX from this gives Revenue growth of 4% This is revenue growth at constant exchange rates constant currency Revenue growth gives a more meaningful trend for forecasting next year's Revenue growth, which would likely be around 4% one issue that arises when we're building quarterly models. Is that our quarterly year on year Revenue growth assumptions need to be updated to reflect latest quarter FX rates versus the same quarter in the prior year. For example, let's say that with forecasted q1 revenues for a company in the current year, and we know that FX rates today have moved against the company since q1 in the previous year, but the company hasn't yet reported its q1 results. Even though the company hasn't yet reported the FX impact we can and should estimate this based on our knowledge of the business and FX rate movements. How can we do this? Let's say that a US company generates 50% of its revenues in Europe and an analyst has forecasted year-on-year Revenue growth of 5% for q1. However for q1 in the previous year the US dollar to euro exchange rate was 0.85 whilst for q1 in the current year. The US dollar to euro exchange rate was 0.9. This means that one US dollar can buy 6% more Euros in the current year and the Euro has weakened by 6% on a year on year basis. The company generates half its revenues in Euros. Therefore FX will reduce revenues in q1 by 3% by half of six percent. If the analyst had previously forecast Revenue growth of 5% then we can deduct the 3% FX loss from this to give total revenue growth for q1 of 2% Although this deals with q1 Revenue growth. We also need to consider the impact on Q2 Q3 and Q4 Revenue growth forecasts. Since if we're using year-on-year Revenue growth assumptions, we need to consider how current FX rates compare with the FX rate used in the previous year for each of the other three quarters. If the FX rate was 0.85 throughout the whole of the prior year, then the current FX rates has also weakened by 6% for Q2 Q3 and Q4. We can therefore use the same methodology to estimate the FX loss that needs to be reflected in our Q2 Q3 and Q4 Revenue growth assumption forecast in the second year and Beyond don't need to be adjusted as these are based on our first year forecast numbers which now reflect current FX rates.