Revenue Diversification

Concentration — the silent risk factor

Revenue diversification is about how broad the company's revenue base is — how many customers, products, markets, and geographies contribute to revenue. A customer accounting for 60% of revenue is not a customer — it is an employer. If that customer leaves (bankruptcy, switches supplier, in-sourcing) the company dies overnight. This is concentration risk — the silent, often ignored, but potentially catastrophic risk factor. AKM1 gives score 1 (lowest) to companies with one customer >50% of revenue; score 5 (highest) to companies with no customer >5%. The difference in risk between these is astronomical. A company with customer concentration above 50% can return 30% one year and -80% the next. A company with a broad customer base can deliver a stable 12% annually over decades.

⚠️ WARNING

A company with one customer at 50%+ of revenue is not an investment case — it is a lottery. Avoid it unless you have insider information about the customer contract.

The three dimensions of diversification

Revenue diversification has three dimensions, all of which must be analyzed: 1) customer diversification — how many customers, what share do the top 5/10/20 represent? 2) product diversification — how many products, what share does the top 1/3 represent? 3) geographic diversification — which countries/regions, what share is the home market? Each dimension can hide concentration. A company can have 1000 customers (good customer diversification) but 80% of revenue from one product (poor product diversification) — if the product becomes obsolete, the company crashes. A company can have 50 products and 5000 customers (good) but 90% in Sweden (poor geographically) — a Swedish recession hits the entire company. A complete analysis covers all three dimensions. Read note 1 (segment information) in the annual report to get this.

📖 DEFINITION

Concentration = share of revenue that comes from a single customer/product/market. The higher, the higher the risk. Thresholds: >50% = critical, 30-50% = high, 10-30% = moderate, <10% = good, <5% = excellent.

Why concentration arises

⚡ KEY INSIGHTS Concentration = the silent risk factor — can give 30% one year and -80% the next Three dimensions: customer, product, and geographic diversification — all must be analyzed Thresholds: >50% critical, 30-50% high, 10-30% moderate, <10% good, <5% excellent Concentration arises naturally (anchor customer, industry structure, relational selling) — not always bad 2

Where to find customer concentration in the annual report

Three places to look: 1) The note on 'Larger customers' or 'Customer concentration' — some companies explicitly report 'Largest customer represents X% of revenue'. IFRS 7 (financial instruments) and IFRS 8 (segments) require companies with one customer >10% of revenue to disclose this. 2) Risk factors in the annual report — companies must disclose risks, including concentration. Read this section carefully. 3) The CEO's statement or investor presentation — 'our largest customer X' or 'top 10 customers represent Y%' is sometimes mentioned. If none of this exists, count it as a red flag — the company is HIDING the concentration. A company with transparent reporting mentions all customers >5% explicitly. For Swedish companies: look at note 1 (segment information) and the notes to the accounts on accounts receivable (concentration in receivables indicates concentration in revenue).

✓ TIP

IFRS rule: if a single customer represents ≥10% of revenue the company MUST disclose this. Look for 'Larger customers' or 'Concentrations' in the notes to the accounts. If no such note exists, the largest customer is probably <10% — positive.

Interpreting the concentration number

A figure of 15% for the largest customer is not automatically bad — context decides. Ask: 1) Is the customer contract multi-year (>5 years)? Yes = lower risk; No = higher risk. 2) Is the customer state-owned or blue-chip? Yes = lower risk; No = higher risk. 3) What is the customer's switching cost? High = low risk (the customer stays); Low = high risk. 4) Does the company have a history of renewing the contract? Yes = positive; No = warning. 5) Are there alternatives to the company for the customer? No = moat (low risk); Yes = higher risk. A company with a 30% largest customer but a 10-year contract with a government agency has lower risk than a company with a 15% largest customer but a 1-year contract with a startup. Always read the contract length in the notes to the accounts — it is the single most important risk-mitigating factor.

💡 INSIGHT

Many B2B companies have strong moats with large customers — deep integration, switching costs, long contracts. High concentration is not always risk; it can be a moat. The context (contract length, switching cost, customer stability) decides.

Customer churn and concentration over time

A static picture of customer concentration is interesting; a dynamic one is valuable. Look at trends: 1) Is concentration increasing over time? This can mean the company is losing small customers faster than large ones — a warning. 2) Decreasing concentration? Positive — the company is broadening its customer base. 3) Stable concentration with the same customer? Positive — a deep relationship. 4) Stable concentration but the customer changes every year? Negative — the company cannot retain large customers. A company that had the same largest customer at 25% from 2020 to 2023 has a stable relationship. A company whose largest customer varies (20% → 28% → 22% → 30%) has churn among top customers. Read the notes to the accounts over several years to see this. Finally: 'logo churn' among the top 10 customers over 5 years — if 5 of 10 are the same, strong; if only 2 are the same, a warning.

⚡ KEY INSIGHTS IFRS requires reporting of customers >10% of revenue — look for 'Larger customers' in the notes to the accounts Concentration must be interpreted with context: contract length, switching cost, customer stability The trend in concentration over time matters more than a static number Logo churn among the top 10 customers indicates deeper problems 3