ARR Growth (Recurring Revenue)

ARR — Annual Recurring Revenue

ARR (Annual Recurring Revenue) is the annual value of all active subscriptions, licenses, and service agreements that renew automatically. It is revenue that 'comes back' every year without the company having to sell again. Consider the difference between selling a book (one-off revenue) and selling a subscription to a book club (recurring revenue). The book sale requires new marketing every time. The subscription is made once — and continues until the customer actively cancels. This is a fundamentally different business model. ARR growth is the growth in this base value: if ARR goes from 50 MSEK to 70 MSEK in a year, ARR growth is 40%. Companies with a high ARR share (typically SaaS, software, subscription services) have predictable cash flow, lower volatility, and often receive a premium valuation.

📖 DEFINITION

ARR = annual value of all active subscription agreements. ARR share = ARR / total revenue. ARR growth = (ARR this year − ARR last year) / ARR last year × 100.

Why ARR is 'gold' for investors

ARR companies have five properties that make them extraordinarily valuable. First: predictability — 80-95% of ARR renews annually, so you can forecast next year's revenue with high precision. This reduces risk and enables higher leverage (lower WACC). Second: lower customer acquisition cost over time — one-off sales require new CAC every time; a subscription requires CAC once and is then amortized over many years. Third: built-in growth through NRR — existing customers buy more (expansion) which can drive 110-130% retention without new customers. Fourth: higher valuation — SaaS companies often trade at P/S 8-15x while one-off sales companies trade at P/S 1-3x. Fifth: the compounding effect — because ARR renews, the company can build an inventory of recurring revenue, layer upon layer, that grows exponentially. Spotify is an example: their premium subscriptions create an ARR base that grows even if they do not acquire new customers.

💡 INSIGHT

An ARR share > 50% fundamentally changes the company's risk profile. The market values ARR companies with a 3-5x higher P/S valuation multiple than one-off revenue companies. This is called 'multiple re-rating' and is one of the most powerful value-creating mechanisms.

ARR vs one-off revenue — a comparison

Think of two companies with 100 MSEK in revenue. Company A sells licenses with a one-time fee — they must sell 100 MSEK every year from scratch. Company B sells subscriptions — they have 80 MSEK in ARR that renews automatically and only need to sell 20 MSEK of new business to maintain the level. Company B has enormously lower risk. In an economic crisis: Company A can fall to 50 MSEK overnight (customers stop buying); Company B might fall to 75 MSEK (churn rises but ARR remains the base). Company B can also invest in R&D, customer service, and product improvements with greater certainty about future revenue. This is why Salesforce (a SaaS pioneer) is valued at P/S 8x while Oracle (traditional licensing) is valued at P/S 5x, despite similar size. ARR share is the single most important factor in SaaS valuation.

⚡ KEY INSIGHTS ARR = annual value of automatically renewing agreements (subscriptions, licenses, service) ARR companies have 5 advantages: predictability, lower CAC over time, NRR, higher valuation, compounding effect An ARR share > 50% changes the risk profile and gives 'multiple re-rating' One-off revenue requires new sales every year; ARR renews automatically 2

Net Revenue Retention (NRR) — the most important SaaS metric

NRR measures how much existing customers pay next year compared to this year, including expansion (more products/capacity), contraction (less usage), and churn (leaving). NRR > 100% means existing customers pay MORE next year — even without new customers. This is the holy grail for SaaS. Snowflake has NRR 158%, MongoDB 120%, Spotify 110%, ServiceNow 117%. A company with NRR 130% and 0% new customers still grows 30% per year — that is built-in growth. NRR is driven by three things: 1) cross-sell/upsell (customers buy more modules), 2) usage-based pricing (more usage = more payment), 3) price increases. A company with NRR < 100% has a leaking bucket — no matter how many new customers they add, the base will shrink. AKM1 recommendation: look for companies with NRR ≥ 110%. This is the single strongest signal of company quality.

📖 DEFINITION

NRR = (Start ARR + Expansion − Contraction − Churn) / Start ARR × 100. NRR > 100% = existing customers pay more next year. NRR < 100% = a leaking base.

Churn — customer attrition

Churn is the share of customers (or ARR) that leave during a period. Two variants: logo churn (number of customers leaving) and revenue churn (ARR that leaves). A company can have high logo churn (small customers leave) but low revenue churn (large customers stay). Industry standard: gross churn of 5-10% annually is acceptable, >15% is problematic, <3% is exceptional. Churn is driven by: 1) product dissatisfaction, 2) price sensitivity, 3) the customer's financial situation, 4) competition. Low churn is moat — it means customers are locked in (switching costs) or genuinely satisfied. A company with 2% churn has a customer lifetime of 50 years; a company with 20% churn has a customer lifetime of 5 years. This changes the entire LTV calculation. To calculate LTV: (ARR per customer × gross margin) / churn rate. Example: ARR 100k, GM 80%, churn 5% → LTV = 100k × 0,8 / 0,05 = 1 600k. If CAC is 300k then LTV/CAC = 5,3x — excellent.

✓ TIP

Look for companies that report NRR. Swedish SaaS companies (e.g. Sinch, Truecaller, IAR Systems) often report NRR in the CEO's statement or investor presentations. NRR > 110% + churn < 5% is an excellent combination.

Expansion — the silent growth engine

When a company sells MORE to existing customers it is called expansion. Three forms: 1) seat expansion — the customer adds more users (e.g. Slack users grow from 100 to 200), 2) module expansion — the customer buys more modules (e.g. a Salesforce customer adds Marketing Cloud), 3) usage expansion — usage-based pricing where more usage = more payment (AWS, Snowflake). Expansion is the most profitable form of growth because CAC is almost zero (the customer already exists). Snowflake has NRR 158% because data usage grows exponentially among existing customers — they pay more without Snowflake having to sell. A company that drives 30% of growth from expansion and 10% from new customers is more valuable than a company that drives 40% from new customers — expansion is cheaper and more predictable. Ask the CEO: 'What is your expansion rate?' If the answer is >20% — excellent.

⚡ KEY INSIGHTS NRR > 100% = existing customers pay more next year (built-in growth) Industry standard: NRR 110%+ is excellent, churn <5% is exceptional Expansion (cross-sell/upsell/usage) is the most profitable growth — CAC almost zero LTV = (ARR × gross margin) / churn rate — low churn = enormous LTV 3