ARR stands for Annual Recurring Revenue. It is a key financial metric used primarily by subscription-based businesses, especially in the software-as-a- service (SaaS) industry, to measure the predictable and recurring revenue expected from customers over a one-year period. Key points about ARR:
- ARR normalizes the recurring revenue from subscriptions or contracts to an annual basis, providing a clear view of a company’s revenue stream for the year.
- It excludes non-recurring revenues such as one-time fees or irregular income.
- ARR helps companies forecast future revenue, assess financial health, track growth, and make informed operational decisions.
- Investors use ARR to evaluate a company’s financial stability and growth potential.
- The formula to calculate ARR typically includes the total revenue from yearly subscriptions plus add-ons and upgrades, minus revenue lost from cancellations or downgrades.
- ARR is often calculated by multiplying Monthly Recurring Revenue (MRR) by 12 when monthly data is available.
- It reflects long-term customer retention and helps businesses allocate resources efficiently.
In summary, ARR provides a stable and predictable revenue measurement that is essential for managing and valuing subscription-based companies. It is widely used for growth tracking, financial planning, and investor communications.
