Annual Recurring Revenue
Growth
Industry:
SaaS
Short Definition
Annual Recurring Revenue (ARR) is the sum of the annualized value of all active, contracted recurring subscriptions at a point in time. It excludes one-time fees, setup charges, uncommitted/overage usage, and other non-recurring services. (For monthly plans, ARR = MRR × 12.)
Short Definition
Annual Recurring Revenue (ARR) is the sum of the annualized value of all active, contracted recurring subscriptions at a point in time. It excludes one-time fees, setup charges, uncommitted/overage usage, and other non-recurring services. (For monthly plans, ARR = MRR × 12.)
Short Definition
Annual Recurring Revenue (ARR) is the sum of the annualized value of all active, contracted recurring subscriptions at a point in time. It excludes one-time fees, setup charges, uncommitted/overage usage, and other non-recurring services. (For monthly plans, ARR = MRR × 12.)
Why it matters for Investors
Measure of scale: ARR is the clearest snapshot of durable, contractually recurring revenue.
Quality of revenue: ARR, since it excludes one-offs and other usage-without-commitment, correlates well with margin predictability and valuation.
Accurate growth signal: Revenue accrues over time, ARR adjusts instantly. For e.g. when a big contract is signed, change in revenue will take time to show, while ARR instantly gives a measure of the upside.
Why it matters for Investors
Measure of scale: ARR is the clearest snapshot of durable, contractually recurring revenue.
Quality of revenue: ARR, since it excludes one-offs and other usage-without-commitment, correlates well with margin predictability and valuation.
Accurate growth signal: Revenue accrues over time, ARR adjusts instantly. For e.g. when a big contract is signed, change in revenue will take time to show, while ARR instantly gives a measure of the upside.
Why it matters for Investors
Measure of scale: ARR is the clearest snapshot of durable, contractually recurring revenue.
Quality of revenue: ARR, since it excludes one-offs and other usage-without-commitment, correlates well with margin predictability and valuation.
Accurate growth signal: Revenue accrues over time, ARR adjusts instantly. For e.g. when a big contract is signed, change in revenue will take time to show, while ARR instantly gives a measure of the upside.
Formula
Where ACV = Annualized recurring contract value, for all active contracts (n)
Practical considerations:
For monthly plans: ARR contribution = MRR × 12
For multi-year contracts: ARR contribution = current year’s contractual annual price (committed amount)
For ramped contracts (pre-scheduled step-ups): Use this period’s committed annual amount (not total TCV ÷ years)
For usage-based pricing with minimums: Count the contracted minimum; treat excess usage as non-recurring unless under a committed schedule
Exclusions: One-time fees, Professional Services (PS), hardware pass-throughs, and one-off refunds/credits (recurring discounts reduce ARR)
Formula
Where ACV = Annualized recurring contract value, for all active contracts (n)
Practical considerations:
For monthly plans: ARR contribution = MRR × 12
For multi-year contracts: ARR contribution = current year’s contractual annual price (committed amount)
For ramped contracts (pre-scheduled step-ups): Use this period’s committed annual amount (not total TCV ÷ years)
For usage-based pricing with minimums: Count the contracted minimum; treat excess usage as non-recurring unless under a committed schedule
Exclusions: One-time fees, Professional Services (PS), hardware pass-throughs, and one-off refunds/credits (recurring discounts reduce ARR)
Formula
Where ACV = Annualized recurring contract value, for all active contracts (n)
Practical considerations:
For monthly plans: ARR contribution = MRR × 12
For multi-year contracts: ARR contribution = current year’s contractual annual price (committed amount)
For ramped contracts (pre-scheduled step-ups): Use this period’s committed annual amount (not total TCV ÷ years)
For usage-based pricing with minimums: Count the contracted minimum; treat excess usage as non-recurring unless under a committed schedule
Exclusions: One-time fees, Professional Services (PS), hardware pass-throughs, and one-off refunds/credits (recurring discounts reduce ARR)
Worked Example
Starting ARR (Feb 28): $1,200,000
Contract log (March):
Account | Event | Effective by Mar 31? | Account ARR @ Mar-31 ($) | Δ ARR in March ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | New logo, annual $24,000, starts Mar 4 | Yes | $24,000 | +$24,000 | New Logo | Live this month → included |
B | New logo, annual $36,000, starts Apr 1 | No | 0 | 0 | Booking / CARR | Signed ≠ effective → not in ARR |
C | Expansion on existing (+$18,000) eff. Mar 15 (prior $50,000) | Yes | $68,000 | +$18,000 | Expansion | Committed price increased |
D | Cancellation effective Mar 31 (prior $40,000) | Yes | 0 | −$40,000 | Churn | Not active at snapshot |
E | Year-2 ramp $20,000 → $35,000 on Mar 1 | Yes | $35,000 | +$15,000 | Expansion (ramp) | Use current-year committed amount |
ARR bridge:
New Logo ARR: +$24,000 (A)
Expansion ARR: +$18,000 (C) + $15,000 (E) = +$33,000
Churn ARR: −$40,000 (D)
Net New ARR: +$17,000
End-of-month ARR: $1,200,000 + $17,000 = $1,217,000
Notes
Signed this month, starts later (B): not ARR until the effective date (belongs to Bookings/CARR).
Ramps (E): count the current committed annual amount, not term average.
Churn (D): remove from ARR.
Expansions (C): include when the new commitment takes effect.
Expansion (ramp) means: An increase in a customer’s committed annual price that was pre-agreed in the contract (a “ramp schedule”) and goes live on a set date—so ARR steps up without a new sale.
Worked Example
Starting ARR (Feb 28): $1,200,000
Contract log (March):
Account | Event | Effective by Mar 31? | Account ARR @ Mar-31 ($) | Δ ARR in March ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | New logo, annual $24,000, starts Mar 4 | Yes | $24,000 | +$24,000 | New Logo | Live this month → included |
B | New logo, annual $36,000, starts Apr 1 | No | 0 | 0 | Booking / CARR | Signed ≠ effective → not in ARR |
C | Expansion on existing (+$18,000) eff. Mar 15 (prior $50,000) | Yes | $68,000 | +$18,000 | Expansion | Committed price increased |
D | Cancellation effective Mar 31 (prior $40,000) | Yes | 0 | −$40,000 | Churn | Not active at snapshot |
E | Year-2 ramp $20,000 → $35,000 on Mar 1 | Yes | $35,000 | +$15,000 | Expansion (ramp) | Use current-year committed amount |
ARR bridge:
New Logo ARR: +$24,000 (A)
Expansion ARR: +$18,000 (C) + $15,000 (E) = +$33,000
Churn ARR: −$40,000 (D)
Net New ARR: +$17,000
End-of-month ARR: $1,200,000 + $17,000 = $1,217,000
Notes
Signed this month, starts later (B): not ARR until the effective date (belongs to Bookings/CARR).
Ramps (E): count the current committed annual amount, not term average.
Churn (D): remove from ARR.
Expansions (C): include when the new commitment takes effect.
Expansion (ramp) means: An increase in a customer’s committed annual price that was pre-agreed in the contract (a “ramp schedule”) and goes live on a set date—so ARR steps up without a new sale.
Worked Example
Starting ARR (Feb 28): $1,200,000
Contract log (March):
Account | Event | Effective by Mar 31? | Account ARR @ Mar-31 ($) | Δ ARR in March ($) | Category | Notes |
|---|---|---|---|---|---|---|
A | New logo, annual $24,000, starts Mar 4 | Yes | $24,000 | +$24,000 | New Logo | Live this month → included |
B | New logo, annual $36,000, starts Apr 1 | No | 0 | 0 | Booking / CARR | Signed ≠ effective → not in ARR |
C | Expansion on existing (+$18,000) eff. Mar 15 (prior $50,000) | Yes | $68,000 | +$18,000 | Expansion | Committed price increased |
D | Cancellation effective Mar 31 (prior $40,000) | Yes | 0 | −$40,000 | Churn | Not active at snapshot |
E | Year-2 ramp $20,000 → $35,000 on Mar 1 | Yes | $35,000 | +$15,000 | Expansion (ramp) | Use current-year committed amount |
ARR bridge:
New Logo ARR: +$24,000 (A)
Expansion ARR: +$18,000 (C) + $15,000 (E) = +$33,000
Churn ARR: −$40,000 (D)
Net New ARR: +$17,000
End-of-month ARR: $1,200,000 + $17,000 = $1,217,000
Notes
Signed this month, starts later (B): not ARR until the effective date (belongs to Bookings/CARR).
Ramps (E): count the current committed annual amount, not term average.
Churn (D): remove from ARR.
Expansions (C): include when the new commitment takes effect.
Expansion (ramp) means: An increase in a customer’s committed annual price that was pre-agreed in the contract (a “ramp schedule”) and goes live on a set date—so ARR steps up without a new sale.
Best Practices
Contract nuances
For ramped contracts, use current committed annual value; disclose CARR separately if showing future ramps.
For usage-based, separate Committed ARR (minimums/committed tiers) from Run-rate revenue (recent actuals).
Document policies for pauses, credits, and trial conversions.
Reporting & interpretation
Net New ARR split into New / Expansion / Contraction / Churn should be required reporting. These breakups significantly improve the interpretability of the ARR. ARR Waterfall is a common way to view and understand changes in ARR.
Reconcile MRR × 12 to ARR to catch inconsistencies.
Keep a clear change log for large upsells/downsells and one-time adjustments.
Best Practices
Contract nuances
For ramped contracts, use current committed annual value; disclose CARR separately if showing future ramps.
For usage-based, separate Committed ARR (minimums/committed tiers) from Run-rate revenue (recent actuals).
Document policies for pauses, credits, and trial conversions.
Reporting & interpretation
Net New ARR split into New / Expansion / Contraction / Churn should be required reporting. These breakups significantly improve the interpretability of the ARR. ARR Waterfall is a common way to view and understand changes in ARR.
Reconcile MRR × 12 to ARR to catch inconsistencies.
Keep a clear change log for large upsells/downsells and one-time adjustments.
Best Practices
Contract nuances
For ramped contracts, use current committed annual value; disclose CARR separately if showing future ramps.
For usage-based, separate Committed ARR (minimums/committed tiers) from Run-rate revenue (recent actuals).
Document policies for pauses, credits, and trial conversions.
Reporting & interpretation
Net New ARR split into New / Expansion / Contraction / Churn should be required reporting. These breakups significantly improve the interpretability of the ARR. ARR Waterfall is a common way to view and understand changes in ARR.
Reconcile MRR × 12 to ARR to catch inconsistencies.
Keep a clear change log for large upsells/downsells and one-time adjustments.
FAQs
Is ARR the same as GAAP revenue?
No. ARR is a run-rate of contracted recurring value; GAAP revenue is recognized over time per accounting rules.Should we count onboarding or implementation fees in ARR?
No—exclude one-time or non-recurring services.How do we treat ramped multi-year deals?
Use this period’s committed annual amount for ARR; disclose CARR if you include contractually committed future ramps.Can we compute ARR as last month’s revenue × 12?
Only if last month was purely recurring and reflects the end-of-month contract state. Prefer MRR × 12 from the subscription ledger, not cash revenue.What about usage-based products?
Count committed minimums in ARR. Report non-committed usage separately (or as Run-rate ARR) to avoid inflating quality.ACV vs ARR—are they the same?
ACV is the contract’s annual value for a specific customer. ARR is the sum across all customers at a point in time. ACV can feed into ARR.Should discounts and credits reduce ARR?
Yes—ARR reflects net contractual price after discounts/credits that persist beyond a billing correction.How often should we report ARR?
Monthly snapshots are standard for operators; investors typically see quarterly with month-end detail on request.
FAQs
Is ARR the same as GAAP revenue?
No. ARR is a run-rate of contracted recurring value; GAAP revenue is recognized over time per accounting rules.Should we count onboarding or implementation fees in ARR?
No—exclude one-time or non-recurring services.How do we treat ramped multi-year deals?
Use this period’s committed annual amount for ARR; disclose CARR if you include contractually committed future ramps.Can we compute ARR as last month’s revenue × 12?
Only if last month was purely recurring and reflects the end-of-month contract state. Prefer MRR × 12 from the subscription ledger, not cash revenue.What about usage-based products?
Count committed minimums in ARR. Report non-committed usage separately (or as Run-rate ARR) to avoid inflating quality.ACV vs ARR—are they the same?
ACV is the contract’s annual value for a specific customer. ARR is the sum across all customers at a point in time. ACV can feed into ARR.Should discounts and credits reduce ARR?
Yes—ARR reflects net contractual price after discounts/credits that persist beyond a billing correction.How often should we report ARR?
Monthly snapshots are standard for operators; investors typically see quarterly with month-end detail on request.
FAQs
Is ARR the same as GAAP revenue?
No. ARR is a run-rate of contracted recurring value; GAAP revenue is recognized over time per accounting rules.Should we count onboarding or implementation fees in ARR?
No—exclude one-time or non-recurring services.How do we treat ramped multi-year deals?
Use this period’s committed annual amount for ARR; disclose CARR if you include contractually committed future ramps.Can we compute ARR as last month’s revenue × 12?
Only if last month was purely recurring and reflects the end-of-month contract state. Prefer MRR × 12 from the subscription ledger, not cash revenue.What about usage-based products?
Count committed minimums in ARR. Report non-committed usage separately (or as Run-rate ARR) to avoid inflating quality.ACV vs ARR—are they the same?
ACV is the contract’s annual value for a specific customer. ARR is the sum across all customers at a point in time. ACV can feed into ARR.Should discounts and credits reduce ARR?
Yes—ARR reflects net contractual price after discounts/credits that persist beyond a billing correction.How often should we report ARR?
Monthly snapshots are standard for operators; investors typically see quarterly with month-end detail on request.
Related Metrics
Commonly mistaken for:
GAAP Revenue (recognized revenue)
Bookings (signed TCV/ACV, not necessarily live)
Billings (invoiced amounts)
TCV/ACV (contract values; ACV can map to ARR but isn’t the same as total ARR)
Revenue run-rate (may include non-recurring/usage without commitment)
GMV (for marketplaces; not revenue)
Related Metrics
Commonly mistaken for:
GAAP Revenue (recognized revenue)
Bookings (signed TCV/ACV, not necessarily live)
Billings (invoiced amounts)
TCV/ACV (contract values; ACV can map to ARR but isn’t the same as total ARR)
Revenue run-rate (may include non-recurring/usage without commitment)
GMV (for marketplaces; not revenue)
Related Metrics
Commonly mistaken for:
GAAP Revenue (recognized revenue)
Bookings (signed TCV/ACV, not necessarily live)
Billings (invoiced amounts)
TCV/ACV (contract values; ACV can map to ARR but isn’t the same as total ARR)
Revenue run-rate (may include non-recurring/usage without commitment)
GMV (for marketplaces; not revenue)
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