Investing Glossary

Recurring Income

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Recurring revenue is the portion of a company’s revenue that is expected to continue in the future. Unlike one-off sales, these revenues are predictable, stable and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty. Businesses, investors and analysts pay particular attention to a company’s revenue, also known as its top line, recorded on the income statement. The top line determines the bottom line, or profit, since all expenses and taxes are subtracted from revenues to get net income. Revenue can consist of one-time sales or a stream of expected periodic sales. The latter, known as recurring revenue, is very important to businesses that are concerned with maintaining a constant and consistent stream of revenue. Recurring revenue can appear in different forms across various industries. Recurring revenue is considered a highly desirable quality for a company to have.

However, there are no guarantees that recurring revenues will last indefinitely. Examples can range from companies who receive monthly payments from customers locked into long-term contracts extending beyond the current accounting period to big name brands that can reasonably expect their popular, market-leading products to continue being at the top of consumer shopping lists for years to come. In many industries, it is normal for companies to tie their customers into long-term obligations in exchange for regular, active use of a service. Evergreen subscriptions, including auto-renewal policies such as Microsoft Corp.’s (MSFT) Office 365, Norton/McAfee antivirus registrations, cloud services, music streaming, internet domain registrations, print or digital news publications, etc. are other examples of sources of revenue that are recurring for a firm. Companies are sure to collect on these payments until customers terminate their subscriptions. Monthly recurring revenue, an important metric for subscription-based businesses, is calculated by multiplying the total number of paying users by the average revenue per user (ARPU). Companies that sell products that can only be used with other accessories produced by the same firm can often count on receiving predictable revenue in the future.

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