Recurring revenue can make a software company’s revenue base more visible, while customer-retention metrics show whether existing customers are staying, spending less, or expanding. Together, they help investors assess revenue durability—but neither metric measures share-price risk on its own, and neither guarantees future results.
What recurring revenue and ARR tell investors
Recurring revenue comes from subscriptions or other repeatable contractual services. A larger recurring share can make revenue easier to anticipate than a business reliant on one-off sales, but the label does not establish that revenue is certain, profitable, or secure. Check what the company includes: definitions may cover maintenance, term licenses, usage-linked revenue, or managed services.
Annual recurring revenue (ARR) is generally an annualized, point-in-time operating measure—not necessarily revenue recognized under GAAP during the reporting period. It can indicate the scale and direction of contracted recurring activity, but it may exclude non-recurring items and depends on the issuer’s own methodology. Commvault, for example, describes ARR variants that exclude non-recurring elements (Commvault’s filing).
ARR is not calculated uniformly. Box defines total ARR using annualized recurring revenue from active customer contracts; RingCentral annualizes monthly recurring subscriptions; Freshworks includes expected subscription, software-license, and maintenance revenue over the next 12 months under assumptions described in its filing. Compare definitions before comparing headline totals (Box; RingCentral; Freshworks).
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How retention metrics reveal customer behavior
Net revenue retention: keeping and growing a customer cohort
Net revenue retention (NRR), also called net dollar retention (NDR), compares revenue or ARR from customers in an earlier period with the revenue or ARR from those same customers later. Expansion—such as added users, products, or spending—can offset churn and contraction. Box calculates its rate by dividing current cohort ARR by that cohort’s prior-period ARR; Freshworks describes NRR as capturing expansion in users and products offset by churn and contraction (Box; Freshworks).
An NRR above 100% means the cohort grew in aggregate over the measurement period. It does not mean every customer expanded: gains from some accounts can outweigh losses from others.
Gross retention: how much existing revenue remains before expansion
Gross revenue retention (GRR) measures retained revenue before expansion is added. Vertex says its GRR accounts for customer departures and downgrades, but excludes add-ons and net expansion. That makes GRR useful beside NRR: expansion can make the net figure look resilient even when the company is losing or shrinking some existing business (Vertex’s filing).
Churn: check whether the measure counts customers or revenue
“Churn” can refer to lost customers or lost recurring revenue, and the definitions are not interchangeable. PagerDuty defines ARR churn around revenue from customers that contributed in the equivalent prior-year period but no longer contributed at the current period end. Investors should read the company’s definition and measurement period rather than assume a churn figure counts departing accounts (PagerDuty’s filing).
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What these measures can—and cannot—say about stock risk
Stable recurring revenue and retention can support a view that a company has a durable revenue base. Falling retention, rising churn, or customer contraction can raise concerns about future growth and resilience. Those are business indicators, not a direct measure of volatility, valuation, or the chance of an investment loss.
For example, Bentley Systems reported that recurring revenue represented 93% of revenue for the twelve months ended March 31, 2026, and 92% for the twelve months ended March 31, 2025, in its 2026 first-quarter filing. The company also said recurring-revenue retention helps explain revenue performance as growth from existing accounts. Those figures illustrate one issuer’s reporting, not a threshold for a low-risk software stock (Bentley Systems’ filing).
Retention can weaken for different reasons, with different implications for recovery. Vertex reported NRR of 105% as of December 31, 2025, compared with 109% a year earlier. It attributed the decline largely to slower growth in customer entitlements, slightly higher attrition, and delayed activity among some large multinational customers. Box’s prior filing cited customer budget scrutiny, pressure on seat expansion, and partial churn as factors affecting retention. A falling number merits investigation into its drivers, not an automatic conclusion that the business is deteriorating for one specific reason (Vertex; Box).
How to compare software companies
- Read the revenue definition. Identify which revenue streams count as recurring and what ARR includes. Do not assume two similarly named measures use the same inputs.
- Identify the retention measure. Confirm whether the company reports NRR, NDR, GRR, account retention, or another metric; check which customers and revenue streams are included.
- Track the trend and its stated drivers. Look for changes in expansion, churn, seat contraction, pricing, customer budgets, and usage. A single rate does not explain why it moved.
- Check concentration separately. Recurring revenue can still depend heavily on a small number of customers. PagerDuty reported that ARR churn was below 10% of beginning ARR for the fiscal year ended January 31, 2026. It also reported that its ten largest customers contributed approximately 2% of revenue, with no single customer above 10%. Churn and concentration describe distinct risks (PagerDuty’s filing).
- Compare like periods and cohorts. Determine whether the measure uses a trailing 12-month cohort, an annual point-in-time ARR comparison, or a monthly figure, and account for any stated foreign-exchange or contract treatment.
- Read the financial statements and risk factors alongside the operating metrics. Retention and ARR do not establish margins, renewal timing, contract enforceability, customer health, cash collection, valuation, or competitive strength.
Why definitions and context matter
Retention and ARR are not standardized GAAP measures across issuers. Box describes its retention rate as an operational metric with no comparable GAAP measure. Methods can differ in the customer population, period, contract types, foreign-exchange treatment, and treatment of price changes or usage. Use each company’s filings to understand its methodology before drawing comparisons.
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A high NRR can coexist with customer losses when expansion elsewhere in the cohort more than offsets them. Likewise, a high recurring-revenue share does not settle whether a stock is attractive or safe: these measures should be read with the company’s financial statements, risk factors, and valuation rather than used as a standalone stock-picking formula.
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