Glossary · Underwriting metric
Annual Recurring Revenue (ARR)
Annual recurring revenue (ARR) is the annualised value of a company's recurring subscription contracts at a point in time, often monthly recurring revenue (MRR) times twelve; it is an operating metric, not an accounting revenue measure.
ARR is a snapshot of how much recurring revenue a company would collect over the next year if its current subscriptions simply continued unchanged. It excludes one-off fees. Because it is a run-rate and not accounting revenue, each company decides exactly what goes in, so two companies' ARR figures are rarely directly comparable.
Formulas
ARR and MRR
- MRRt
- monthly value of active recurring contracts at date t, after recurring discounts
Annual and multi-year contracts are usually counted at their annual value. Companies differ on whether to include contracts signed but not yet live (sometimes reported separately as contracted ARR), committed minimums in usage-based contracts, and recurring support fees.
ARR bridge
- New
- ARR from customers acquired in the period
- Expansion
- increases from existing customers (seats, usage tiers, upsell, price increases)
- Contraction
- decreases from customers who remain
- Churn
- ARR lost from customers who leave
The bridge separates growth from new customers and growth from the existing base; the existing-base components feed net and gross revenue retention.
What usually counts, and what does not
Included: subscription fees under active contracts, at their recurring annual value. Usually excluded: one-time implementation, onboarding and professional services fees, hardware, and usage above committed amounts. Grey areas, where companies differ and should disclose their choice: signed contracts that have not started, free or heavily discounted introductory periods, usage-based revenue (some companies annualise recent usage, which is a run-rate, not a contract), and customers in arrears or in notice periods.
ARR is not revenue
Revenue under US generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) is an accounting measure of what a company earned over a period; ARR is a forward-looking snapshot at a date. A company signing large contracts late in a year can show ARR far above that year's revenue, and a company with a high share of services revenue can show revenue above ARR. Annualising one quarter's total revenue (quarterly revenue × 4) is a revenue run-rate, which is a different measure. Diligence normally reconciles ARR to recognised revenue, billings and cash collections.
ARR is not a GAAP measure. Each company defines and calculates it, so a reported ARR figure is read with the company's own definition, and a change in how it is calculated breaks comparison with earlier periods. US public companies that present such a metric in management's discussion and analysis (MD&A) do so as a key performance indicator, the subject of interpretive guidance from the Securities and Exchange Commission (SEC) effective 25 February 2020 (Release 33-10751).
How investors and lenders use it
Venture and growth investors value software companies on multiples of ARR or forward revenue (see revenue multiple), and track the ARR bridge to separate new-customer growth from expansion and churn. Efficiency metrics such as the burn multiple use net new ARR. Lenders in recurring revenue lending size loans against recurring revenue and set covenants on it, so the loan agreement's own definition, not the company's marketing figure, governs.
Worked example
Illustrative ARR bridge ($ millions)
A company starts the year with ARR of 10.0. It adds 3.0 from new customers and 1.5 of expansion, and loses 0.4 to contraction and 0.8 to churn. Ending ARR is 10.0 + 3.0 + 1.5 − 0.4 − 0.8 = 13.3, growth of 33%. From the existing base alone, net revenue retention is (10.0 + 1.5 − 0.4 − 0.8) / 10.0 = 103% and gross revenue retention is (10.0 − 0.4 − 0.8) / 10.0 = 88%.
Examples are illustrative; figures are not market data.
Not the same as
- Net Revenue Retention (NRR): ARR is a level of recurring revenue; net revenue retention is a ratio describing how the existing customers' ARR changed over a period.
- Revenue Multiple: A revenue multiple is a valuation ratio; ARR is one of the denominators it can use.
Common mistakes
- Treating ARR as recognised revenue or as a GAAP measure.
- Annualising one strong month of usage-based revenue and calling it ARR.
- Including one-time services or implementation fees.
- Counting signed-but-not-live contracts without labelling them.
- Comparing ARR across companies without reading each definition.
Edge cases
- Multi-year contracts with escalating prices: most companies count the current year's annual value, not the average or the final year.
- Currency: ARR in foreign-currency contracts moves with exchange rates; some companies report it at constant currency.
Questions
Is ARR the same as revenue?
No. ARR is an annualised snapshot of recurring contracts at a date; revenue is recognised under accounting standards over the period.
What is the difference between ARR and MRR?
MRR is the monthly value of recurring contracts; ARR is the same figure annualised, usually MRR × 12.
Sources
- Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations (key performance indicators), Release Nos. 33-10751; 34-88094; FR-87. U.S. Securities and Exchange Commission, Dated 2020-01-30; effective 2020-02-25. Status: in force (interpretive guidance) (checked 2026-10-01). pp. 4-5 (guidance on key performance indicators and metrics) — supports: Interpretive guidance on key performance indicators and metrics in MD&A; effective 25 February 2020
Related terms
2 termsReferenced by
1 termConcept record
- Concept ID
- ALTSS-VC-035
- Classification
- Underwriting metric
- Topics
- Venture capital & startups · Private credit
- Version
- 2.0.0
- Last reviewed
- Structured data
- JSON