What it means
The measure exists because absolute revenue figures are hard to interpret on their own. Knowing that a company billed $9,600,000 last quarter says little until you know what it billed in the comparable period.
There are two standard versions. Sequential growth compares the quarter with the one immediately before it and reacts quickly to change, while year over year growth compares the quarter with the same quarter twelve months earlier and automatically strips out seasonal effects.
Investors and boards care about the figure because revenue growth is usually the first thing to move when a business gains or loses ground. Costs and profit tend to lag, so a slowdown in quarterly revenue often shows up a quarter or two before it appears in the bottom line.
Quality of growth matters as much as the headline rate. Growth from raising prices, from acquiring another business or from a single large one-off contract has very different implications from growth in the number of customers buying at a steady price.
The common trap is treating a single quarter as a trend. Contract timing, an extra trading day, a customer bringing an order forward or a currency movement can all swing one quarter by several percentage points without saying anything about the business.
In practice
Real-world examples.
Example
A meal-kit business reports 4% sequential revenue growth and 31% year over year growth. The board focuses on the annual figure because the sequential number is depressed by a predictable summer dip in subscriptions.
Example
A commercial cleaning company shows 18% quarterly revenue growth, but a review reveals that 15 percentage points came from acquiring a competitor. Organic growth was only about 3%, which changes how the management team talks to its lenders.
Example
A hardware retailer posts negative quarterly revenue growth of -6% while unit sales are flat. Deflation in timber prices explains the whole gap, so the company reports volume growth alongside revenue growth in future updates.
Formula
Calculation
Quarterly Revenue Growth = (Current Quarter Revenue - Comparison Quarter Revenue) / Comparison Quarter Revenue x 100
A specialist components supplier reports revenue of $9,600,000 in Q3. Revenue in Q2 was $8,000,000, and revenue in Q3 of the previous year was $6,400,000.
Sequential growth = ($9,600,000 - $8,000,000) / $8,000,000 = $1,600,000 / $8,000,000 = 0.20, which is 20%
Year over year growth = ($9,600,000 - $6,400,000) / $6,400,000 = $3,200,000 / $6,400,000 = 0.50, which is 50%
If the 20% sequential rate were repeated for four consecutive quarters, revenue would compound to 1.20 x 1.20 x 1.20 x 1.20 = 2.0736 times its starting level, an annual increase of about 107.4%. The company's own guidance assumes the rate will slow, because $1,600,000 of the quarter's growth came from a single infrastructure contract that will not repeat.Case study
Seen in the real world.
Talbot Fieldworks is an invented environmental surveying firm used for this illustrative case study. It grew quarterly revenue by between 14% and 22% for eight consecutive quarters and used that record to raise a funding round.
The following quarter growth came in at 2%. Investigation showed that a single government framework contract had accounted for roughly 40% of revenue in each of the previous four quarters, and it had simply come up for renewal on a smaller scope. Underlying growth from the rest of the client base had been running at closer to 5% a quarter throughout.
For the illustrative purposes of this example, Talbot responded by reporting revenue growth split three ways: growth from existing clients, growth from new clients and growth from a single largest client. It made the headline rate look less impressive and made the business considerably easier to value, because investors could finally see which part of the growth was repeatable.
Watch out
Common mistakes.
- Quoting a growth rate without saying what it is measured against. A 20% figure means something very different sequentially than it does year over year.
- Ignoring acquisitions when reporting growth. Revenue bought through a deal should be separated from organic growth or the number describes deal-making rather than trading.
- Assuming revenue growth means the business is healthier. Growth funded by discounting or by taking on unprofitable customers can reduce profit and consume cash at the same time.
Questions
People also ask.
Which comparison should I use, sequential or year over year?
Use year over year for seasonal businesses and for board-level reporting, and use sequential growth when the business has little seasonality and you need early warning of a change in trend.
What counts as good quarterly revenue growth?
It depends entirely on the industry and stage, with mature businesses often growing low single digits per quarter while early-stage software companies may target 10% or more, so the useful benchmark is the company's own history and its direct competitors.
How does currency affect the figure?
For companies selling across borders, exchange rate movements can add or remove several percentage points, which is why many report both reported growth and constant-currency growth.
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