Deciphering Key Performance Indicators (KPIs) in the Software Industry

In the competitive landscape of the software industry, companies seeking to go public must convince potential investors of their long-term viability and growth potential. One of the primary means to communicate this is through the effective use of Key Performance Indicators (KPIs) in the company messaging, including in its registration statement. These carefully chosen metrics not only drive decision-making and corporate strategy, but also serve as an investor window into the company's health, progress, and future trajectory.

Connor Group performed an analysis of KPIs included in registration statements for IPOs between January 2019 and December 2022. KPIs were categorized by themes and industries to discern trends within industries and highlight crucial performance evaluation markers. With many commonalities across diverse industries, KPIs predominantly captured four key themes representing measures of:

  1.   Production
  2.   Users
  3.   Revenue
  4.   Earnings

In the software industry specifically, two categories stand out as particularly significant: users and recurring revenue, reflecting the industry's focus on user-centric evaluations and revenue generation models.

Measures of Users: Gauging the Breadth and Engagement of the User Base

Not surprisingly, nearly 40% of KPIs reported by software companies in our analysis fall under the umbrella of user metrics, making this the most popular KPI category in the industry. These metrics provide insights into the company's ability to attract, engage, and retain users, forming the foundation of a thriving and growing software business.

There is significant variability within the user metric category. Of the companies which report a measure of users, some report the metric with qualifications while others do not. Over 35% of KPIs reported in the user category measure users/customers with a size or other criteria, whereas over 33% track active users, and nearly 22% use a metric of total average users.

Types of user metrics also varied based on a company’s business model. For example, 80% of enterprise software companies reported a user KPI based on the size of the customer. Often, these B2B software companies prioritize closely tracking the number of their large clients or those customers which generate substantial revenue over a specific threshold. B2C software companies often report different measures of their users. The top examples are described be-low.

  • Total Average Subscribers: This metric is particularly relevant for subscription-based software companies, indicating the overall number of users actively paying for the ser-vice.
  • Monthly Active Users (MAUs): Primarily used by companies offering mobile applications, MAUs measure the number of unique users (paying and non-paying) engaging with the app within a given month.

Measures of Recurring Revenue: Assessing the Sustainability of Revenue Streams

Recurring revenue, often derived from subscription-based models, is a key indicator of a software company's financial stability and growth potential. 35% of KPIs reported by software companies are of the recurring revenue variety. These metrics capture a company's ability to generate consistent and predictable revenue streams, making this KPI category a powerful tool for investors to appraise a software company’s growth potential. The top KPIs in the recurring revenue category are as follows:

  • Annual Recurring Revenue (ARR) and Annual Contract Value (ACV): ARR represents the total annual revenue expected from existing subscription contracts, while ACV represents the average annual revenue generated per subscription customer. These metrics are strong indicators of a software company’s ability to acquire new subscription customers as well as expand relationships with existing customers. Nearly 40% of recurring revenue KPIs in the software industry are measures of ARR and ACV.
  • Net Retention: This metric is a measure of customer satisfaction and comprised about 50% of the recurring revenue KPIs. The Net Retention metric is especially important for SaaS companies, where the business model relies upon subscription revenue. Net Retention reflects the overall health of the customer base and the company's success in retaining users.

Tailoring KPIs to the Company's Narrative

The choice of KPIs should not be a one-size-fits-all approach. Instead, companies should carefully select metrics that effectively showcase their strengths, align with their growth strategy, and resonate with their target audience of investors.

Beyond the core user and recurring revenue metrics, software companies may choose to highlight additional KPIs that align more closely with their specific business model. For instance, enterprise software companies that specialize in processing payments typically monitor and report Total Payment Volume (TPV), which gives investors insight into the total value of transactions processed through the company’s platform. Furthermore, software companies which offer both subscriptions and professional services often find that Remaining Performance Obligations (RPO), a measure of contracted deferred revenue, represents the company’s revenue potential most effectively.

Unleash the Power of KPIs: Your Call to Action

As you embark on your IPO journey, navigating the path to a successful IPO requires a keen understanding of the metrics that shine a light on your company’s unique story.

Don’t hesitate to reach out to Connor Group for further support backed by assisting over 240 companies through their IPO.