Annual recurring revenue (ARR)

Annual recurring revenue is the annualized value of active subscription contracts at a point in time, commonly calculated as monthly recurring revenue multiplied by twelve. It is a run-rate figure, a snapshot of what current subscriptions are worth over a year if nothing changed, not a measure of cash actually collected or revenue recognized in any past twelve-month period.

ARR excludes one-time fees, professional services, and other non-recurring revenue, which distinguishes it from total revenue reported under revenue recognition rules on the income statement; a company can have growing ARR and a very different GAAP revenue number in the same period because ARR is forward-looking and unaudited. It is usually decomposed into new, expansion, contraction, and churned ARR to explain period-over-period movement, feeding metrics like net revenue retention.

ARR matters because it is the standard measure of scale and growth rate for subscription businesses, used in the rule of 40 and in most SaaS valuation multiples. The common pitfall is inconsistent definitions across companies: some include usage-based or variable revenue in ARR and some do not, and multi-year contracts are sometimes annualized in ways that overstate the current run rate, so ARR figures are only directly comparable when the underlying methodology matches.