What it means
Companies report results in quarters, which are periods of three months. Quarter-over-quarter growth compares one quarter with the one immediately before it, for example the April to June quarter against the January to March quarter.
It tells you whether the business is speeding up or slowing down. The figure is usually expressed as a percentage.
If revenue was $2,000,000 in one quarter and $2,400,000 in the next, the growth is 20% quarter-over-quarter. A negative figure means the figure fell.
QoQ is useful for spotting trends early. Annual comparisons take a year to reveal a change, while QoQ shows it within three months.
Investors and managers watch it closely for fast-growing businesses, where momentum matters. The weakness is seasonality.
Many businesses have strong and weak periods in the year, such as retail in the holiday quarter. A drop from a strong quarter to a weak one may be normal and say nothing about performance.
To handle this, analysts often compare with the same quarter of the previous year, called year-over-year or YoY. QoQ and YoY give different answers and are best read together.
Some analysts also use seasonally adjusted figures to remove the regular pattern from QoQ comparisons. A nuance is that QoQ growth rates can be annualised to show what would happen if the pace continued for a year.
A quarterly growth of 5% compounds to about 21.55% a year, not 20%. Because small quarterly numbers can swing widely, annualising can exaggerate noise, so it should be used with care.
In practice
Real-world examples.
Example
A subscription business reports revenue up 6% QoQ. Its board reads this as steady momentum, because each quarter is adding to the previous one. The finance team uses the figure in its monthly management pack, alongside the churn rate and the number of new customers added in the quarter.
Example
A toy retailer reports that sales fell 40% QoQ in the first quarter. The result is normal, because the previous quarter included the holiday season. The chief financial officer explains that year-over-year growth is the better measure, because it compares like with like and removes the holiday effect. She presents both figures to the board so that nobody reads the drop as a sign of failure.
Example
A manufacturer sees operating costs rise 8% QoQ while revenue rises only 2%. The finance director investigates and finds that a rise in energy prices is eating into margins. She raises prices at the next review and asks purchasing to renegotiate its supply contracts, so that the squeeze on margins does not continue into the following quarter.
Formula
Calculation
QoQ growth = (current quarter figure - previous quarter figure) / previous quarter figure x 100
Annualised growth = (1 + quarterly growth rate) ^ 4 - 1
Suppose a software company reports revenue of $2,000,000 in the first quarter and $2,400,000 in the second. QoQ growth = (2,400,000 - 2,000,000) / 2,000,000 x 100 = 20%. If that 20% pace continued for four quarters, annualised growth would be 1.20^4 - 1 = 2.0736 - 1 = 107.36%, which shows why annualising a single quarter can look misleadingly high.Case study
Seen in the real world.
Trellis Cloud is an illustrative, fictional software company with four quarters of revenue of $5,000,000, $5,400,000, $5,832,000 and $6,298,560. The finance team calculated the QoQ growth for each: 8% in each of the last three quarters.
The steady 8% pace told the board that growth was consistent, not erratic. Compounding it gave annual growth of 1.08^4 - 1 = 1.3605 - 1 = 36.05%. The CFO used these figures to set next year's budget, but she built in a more cautious assumption of 5% a quarter. She wanted a plan that the business could still meet if growth cooled, and she reviewed the assumption every quarter against actual results.
Then a fifth quarter came in at $6,500,000, only 3.2% above the previous one. The illustrative lesson was that QoQ highlights a slowdown immediately, and the team investigated whether it reflected seasonality or a real change in demand. They compared the quarter with the same quarter a year earlier and spoke to the sales team before drawing any conclusion.
Watch out
Common mistakes.
- Reading a QoQ fall in a seasonal business as a sign of trouble, when it may simply follow a strong quarter.
- Annualising one quarter's growth and presenting it as a forecast for the year.
- Mixing up QoQ with YoY, when the two compare against different periods and can give very different answers.
Questions
People also ask.
What does QoQ mean?
It means quarter-over-quarter, a comparison between one three-month period and the one before it, usually shown as a percentage change.
How is QoQ different from YoY?
QoQ compares with the previous quarter, while YoY compares with the same quarter a year earlier, which removes the effect of seasonality.
Why do companies report QoQ?
It gives a quick read on momentum and helps investors and managers see changes earlier than annual figures would.
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