Annual recurring revenue (ARR) is an operating metric that annualizes an issuer-defined base of recurring contracts or subscription revenue at a point in time.
A common simplified form is:
ARR = recurring monthly revenue × 12
But that formula is not universal. Some companies annualize active contract value, some annualize the latest month of subscription revenue, and some incorporate usage-based recurring revenue using a recent run rate.
ARR is not GAAP revenue
ARR is not a standardized GAAP measure and is not the same as revenue recognized under ASC 606.
Revenue recognition depends on when performance obligations are satisfied. ARR instead tries to describe the annualized scale of recurring business currently under contract or active at the measurement date.
That difference matters when a company signs multi-year contracts, recognizes some revenue up front, has variable usage, or bills customers on schedules that do not match revenue recognition.
ARR is not automatically a forecast
A $500 million ARR figure does not mean the company will necessarily report exactly $500 million of GAAP revenue during the next twelve months.
Renewals, churn, expansion, contraction, new sales, usage, foreign exchange, contract start dates, and accounting allocation can all change future revenue. Some issuers explicitly warn that ARR should be viewed independently of revenue and is not intended to replace it.
Definitions can differ materially
One issuer may include only active subscription contracts. Another may include maintenance. Another may annualize recent consumption revenue. A company can also differ on whether it assumes contracts expiring within twelve months renew, how it handles known cancellations, and whether short-term subscriptions are included.
That makes ARR useful within a company over time, but not automatically comparable across companies.
ARR and MRR
Some issuers calculate ARR from Monthly Recurring Revenue. Vertex, for example, defines ARR from the most recent month of MRR multiplied by twelve.
Other companies use contract-value methods instead, so investors should not assume every disclosed ARR figure can be reverse-engineered into one standardized MRR figure.
Connect ARR to customer economics
ARR growth can come from new customers, Net Revenue Retention, price increases, usage expansion, acquisitions, or changes in what management includes in the metric.
That is why ARR growth is more informative when read alongside customer counts, churn, retention, revenue growth, and the issuer's reconciliation of metric-definition changes.
Investor interpretation
Check the measurement date, contract population, recurring-revenue definition, treatment of usage and renewals, currency policy, and whether management changed the calculation. Treat analyst-created ARR as an estimate unless the issuer reports the metric or enough source data to reproduce its stated definition.
Sources
- Vertex 2025 Form 10-K, ARR and MRR definitions
- SailPoint 2025 Form 10-K, ARR definition and limitations
- Bentley Systems 2025 Form 10-K, ARR methodology
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