Annual Recurring Revenue (ARR)

Annual Recurring Revenue, or ARR, is the annualised value of regularly recurring revenue, for example from subscriptions. The metric shows how much predictable revenue a company generates per year. ARR is one of the most important metrics, especially for software companies with subscription models.

It is normally calculated as monthly recurring revenue at the reporting date multiplied by twelve, or as the sum of annualised contract values of all active subscriptions. What is included is decisive: one-off revenue from implementation, training or consulting does not belong in it, and neither does usage-based revenue that is not contractually secured. Development is shown in a bridge that rolls the opening balance forward for new customers, expansion within the existing base, downgrades and cancellations, from which net revenue retention and churn are derived. ARR is not an accounting measure or a guarantee of future annual revenue. In a growing business, year-end ARR may exceed recurring revenue recognised during the year. The difference does not equal deferred revenue, which also depends on billing and payment timing.

ARR is also distinct from the order book, which includes future contracts not yet started, and from run rate, which annualises any period regardless of recurrence. In transactions ARR is often the valuation base itself, because young software companies show no positive EBITDA. The negotiation then turns on a multiple of ARR that depends heavily on growth, gross margin, retention and customer concentration. Due diligence therefore examines contract terms, termination rights and the genuine recurrence of revenue with particular care.

For internal management the split by contract size and customer segment is essential, because a base built on a few large contracts must be judged differently from one of many small subscriptions: the first is more exposed to individual cancellations, the second incurs higher servicing costs. Remaining terms deserve equal attention, since a base whose contracts largely expire next year carries a different risk from one with multi-year commitments. Both analyses are standard requests in a diligence process.