What is annual recurring revenue (ARR)?
Annual recurring revenue is the yearly value of recurring subscription contracts in force at a point in time, a measure used mainly by software companies. It is usually monthly recurring revenue times 12, excluding one-time fees such as setup or services. ARR is a non-GAAP measure, so definitions vary between companies; check the definition before comparing.
Why it matters to a revenue leader
In software, ARR is the headline number boards and investors use to value the company, often as a multiple. For a revenue leader in a SaaS business, new ARR is the main bookings measure, and retained ARR shows how well the base holds. Services companies have a close cousin in contracted recurring revenue from agreements, which gets attention from investors in services platforms because it repeats.
How to calculate it
ARR = monthly recurring revenue times 12, or the sum of annualized recurring contract values. A common mistake is including one-time implementation or professional services fees.
Example
Fictitious numbersA software company has 400 customers paying an average of $1,500 a month in subscriptions. Its ARR is $7.2 million. A $20,000 implementation fee signed this month adds to bookings and revenue but adds nothing to ARR.
"How do we define ARR, and would an investor's definition give the same number?"