Subscription models are good investments

Recurring revenues were up 25.7 per cent, which helped increased the subscription element of the business to 62 per cent of total revenue.

New products like Aveva Flex, within its monitoring and control division, has found early success, including contract wins with two blue-chip North American food and beverage companies.

Aveva believes the move to subscription improves the quality of earnings and drives a more sustainable future. It helps them trial and utilise new products, improve greater lifetime value and allows for further innovation investment.

Crucially, securing these multi-year deals has a positive impact on both revenues and free cash flow. For a customer, it represents an opportunity to flex usage and offers a low risk way of trying new products that pay for themselves in efficiency savings.

Further, it allows for flexibility in challenging economic times, where they can use tokens on what they need, as opposed to having committed to specific products on mass volume.

Value-add business models prove attractive

Accountancy software business Sage Group continues to press on its with its pursuit of becoming a leading software-as-a-service company.

Sage targets the professional user in small and medium-sized businesses, so it needs to be flexible at all times given the customer base. Recurring revenues take several forms, most notably support and product bundling within subscription contracts.

This represents a key attraction of the Sage business model, in our view. Subscription revenues have more than doubled as a percentage of group revenues over the past few years, with Sage Business Cloud subscription revenues now twice the size of on-premise subscriptions.

Combined with cloud technology, this allows Sage to offer more value from product investment, which boosts retention rates of existing customers and is crucial for new customer acquisition.

Outside of software, specialist retail is another industry where subscription models are being adopted in the move towards digital. One example that is exposed to a fast growth category is Pets at Home.

As part of its multi-channel strategy, management considers subscription to be a value creator and enabler in their bid to cover the total pet care ecosystem.

This brings additional incremental opportunities from online customisation, in addition to the potential for 100 per cent lifetime order capture for each household pet.

In doing so, it can also be utilised to drive footfall traffic in stores through cross-sell and other offers.

This versatile business model offers significant economic value, in our view. It brings scale and agility, delivers a steady stream of income and helps manage operating costs.

We expect to see a continuation of attractive growth rates from subscription services, as it offers both defensiveness and earnings quality to a business, particularly during times of economic turbulence.