Revenue Stability

Three dimensions of stability

AKM1's stability category has three variables that answer different time horizons. Debt-to-equity ratio (V10) — long-term financial structure, 5-10 year perspective. Liquidity (V11) — short-term survival, 30-90 day perspective. Cash flow stability (V12) — medium-term predictability, 1-3 year perspective. V12 answers the question: 'if you look at the company's cash flow from operations over the last 5 years — how stable is it?'. A company that generates 100 MSEK in operating cash year after year (small variation) has high cash flow stability. A company whose operating cash swings between 50 MSEK and 200 MSEK has low. This stability is fundamental for investors: it determines the security of the dividend, the opportunity to reinvest, and the company's ability to carry debt across a business cycle.

📖 DEFINITION

Cash flow stability = the degree of predictability in the company's operating cash flow over time. High = ARR-based or contract-based revenue. Low = project-, transaction-, or cycle-based revenue.

Why V12 is the hardest to measure

💡 INSIGHT

V12 is the most subjective variable in AKM1 — there is no 'simple' formula. The assessment is based on a combination of ARR share, contract lengths, customer lifetime, seasonal variation, cycle sensitivity, and industry factors.

Stability vs growth — the classic trade-off

One of the most fundamental choices in investing is stability vs growth. A company with 10% growth and 80% ARR (stable) is often more valuable than a company with 30% growth and 20% ARR (volatile). The stable company can plan, invest calmly, and grow sustainably over decades. The fast-growing one with volatile revenue can crash when the market turns — see Sinch 2022 (50%+ growth but 5-10% organic; crashed 90%). AKM1 gives V12 a weight of 5% — emphasizing that stability is an independent factor that cannot be reduced to 'low growth'. A company can have both high growth AND high stability (Adobe's subscription model, Atlas Copco's service revenue). This is the ideal combination. Cash flow stability is about the QUALITY of the revenue, not the quantity.

⚡ KEY INSIGHTS Three stability dimensions: debt (5-10 years), cash flow (1-3 years), liquidity (30-90 days) V12 is subjective — combines ARR share, contract lengths, customer lifetime, seasonal variation, cycle sensitivity Stability vs growth — 10% growth + 80% ARR > 30% growth + 20% ARR Stability = QUALITY of revenue, not quantity — can be combined with high growth 2

What is ARR?

ARR (Annual Recurring Revenue) is revenue that renews automatically, usually via subscription or service agreements. Examples: 1) SaaS subscriptions (Salesforce, Spotify Premium) — the customer pays monthly or annually, renews automatically. 2) Service contracts (Atlas Copco compressor service) — the customer pays annually for service, renews automatically. 3) Licenses with maintenance fee (Microsoft Windows, IAR Systems) — the customer pays license + 20% maintenance annually. 4) Rental income (Castellum, Fabege) — tenants pay monthly, agreements often 3-5 years. 5) Pension management (Handelsbanken, Swedbank) — customers pay a management fee based on assets under management. ARR has three properties that give stability: 1) Predictable — the company knows at the start of the year that ARR X is 'secured'. 2) Locked in — customers must actively cancel to stop paying. 3) Scalable — the company can add customers without a proportional cost increase.

📖 DEFINITION

ARR (Annual Recurring Revenue) = revenue that renews automatically via subscription, service, or license agreements. AKM1: p5 = >70% ARR, p4 = 40-70% ARR, p3 = some ARR, p2 = mostly volatile, p1 = entirely project-based.

Service revenue — the forgotten ARR source

While SaaS subscriptions are the most talked-about ARR source, service revenue in industry is at least as valuable. Atlas Copco has ~40% of revenue from service contracts — customers pay annually to ensure their compressors are maintained. SKF has a similar share of service revenue from inventory monitoring and maintenance. Volvo Construction Equipment has service agreements with large mining companies — these are 10-year with auto-renewal. Service revenue gives three advantages: 1) Stability — customers almost always renew (machines must be maintained). 2) High margin — service is labor-intensive but capital-light, margins often 25-35%. 3) Lock-in — a customer with a service agreement also buys spare parts and upgrades from the same supplier. Lesson: do not look only at SaaS companies for ARR. Industrial companies with strong service operations have similar stability — often hidden in segment reporting.

✓ TIP

Read the note on 'Segment information' — look for 'Service' or 'Aftermarket' as a business area. Atlas Copco reports ~40% service; SKF similar. This gives ARR-like stability in industry.

ARR vs one-off revenue

ARR should be contrasted with one-off revenue (transactional revenue). Examples: 1) Product sales (H&M clothing, Volvo trucks) — each sale is separate, no guarantee of the next. 2) Project revenue (NCC, Peab construction) — each project is separate, the next project must be won in competition. 3) Transaction revenue (Swedbank trading, Handelsbanken corporate finance) — varies with market activity. 4) Commodity revenue (Lundin Petroleum oil, Boliden copper) — varies with commodity prices. One-off revenue is not 'bad' — they are legitimate business models. But they give low cash flow stability. A company with 100% one-off revenue can have fantastic years (200 MSEK profit) and catastrophic years (50 MSEK loss). A company with 80% ARR has a much narrower variation — perhaps 100 MSEK to 130 MSEK over the cycle. Lesson: assess the ARR share in the context of the company's business model. H&M (retail) has low ARR but can still be a good investment if the brand and margins are strong.