Defining and calculating ARR is a hot topic. I have been talking to a lot of SaaS founders and finance leaders about how to properly calculate annual recurring revenue. Not too easy with today’s pricing and business models.
The shift in pricing models (usage, consumption, outcome-based) has made the lives of tech CFO’s more difficult. Not only is defining ARR harder, but calculating customer retention has also become much harder.
Why do we care? This is such a hot topic because SaaS companies have been traditionally valued on their topline ARR number. And as a CFO, it’s my job to present a supportable ARR number to our Board, investors, and potential acquirors.
I researched over 160 public tech company SEC filings to find the latest trends in ARR definitions and calculations. ChatGPT could not handle this, so my research assistant and I manually reviewed every single tech SEC filing. And we continue to expand this database by scanning press releases.
Is ARR Really Dead? No, It’s Just Abused
Check out the picture below. Everyone is saying ARR is dead. SaaS metrics are broken. I don’t think that’s the case.
New business models are created that don’t fit into existing frameworks. For example, if you are pure usage-based revenue and your retention and revenue is unpredictable, you may say ARR is dead and SaaS metrics are broken.
Are we saying that because we won’t be valued like pure-play SaaS companies? Maybe. Pure-play SaaS companies WITH predictable revenue and great retention receive higher ARR multiples. I did not determine this. The market did.
We could be trying to fit a different business model (AI first, for example) into the traditional SaaS financial framework. Yes, the framework will break. We need to do a “save as” of the SaaS framework and create one for AI. Different but same metrics. Different benchmarks. Different valuations.
How to Define ARR – 4 Themes
Four themes emerged after reviewing the SEC filings. I created these ARR definition buckets to organize the definitions. However, there was still a lot of subjective analysis on my part. The company may have offered a definition but their use of specific terms or words were often vague or could be interpreted multiple ways.
- Pure Subscription
- Subscription + Variable
- Subscription + Managed Services
- Variable Revenue Only
Big footnote here! Often, their ARR definition differed from their ARR calculation. Their ARR calculation methodology was much more insightful.
Pure Subscription ARR
Let’s start with the “easiest” bucket and the most defined ARR theme. Of course, not everyone disclosed ARR numbers or definitions. I’m providing a clean (or as clean as I can find) example from each theme.
📖 General Definition: ARR is based solely on annualized recurring subscription fees. It excludes usage-based, transactional, and service revenue.
✅ Themes:
- Based on MRR × 12 or annual contract value
- Includes term-based licenses and SaaS subscriptions
- No usage, services, or metered charges
📌 Example – Rubrik, Inc.:
“Subscription ARR is calculated as the annualized value of our active subscription contracts… assuming any contract that expires during the next 12 months is renewed…”
Subscription + Variable ARR Definition
📖 General Definition: ARR includes both subscription fees and usage-, consumption-, or transaction-based revenue, often annualized based on trailing 30–90 day activity.
✅ Themes:
- Blends subscription with variable fees
- Often excludes professional services
- Trailing usage used as basis for annualization
⁉️Nuances:
- Overages were excluded from two definitions of ARR
- ARR will differ from reported revenue by using contractual amounts
- Several definitions threw in the wrench of “expected” revenue based on current contracts
📌 Example – MongoDB:
“ARR includes the revenue we expect to receive… by annualizing the prior 90 days of their actual usage… ARR and annualized MRR exclude professional services.”
Subscription + Managed Services
📖 General Definition: ARR includes both subscription revenue and recurring services such as support or implementation—if these services are contracted and renewable.
✅ Themes:
- Renewable support or onboarding services or subscription services included
- Revenue is recognized over the service term
- Most common in enterprise/SaaS infrastructure firms
⁉️Nuances:
- Some included expected implementation services revenue
- I’m not a fan of this when we mix in people-powered revenue
📌 Example – Alkami Technology, Inc:
“We calculate ARR by aggregating annualized recurring revenue related to SaaS subscription services… and expected implementation services…”
Pure Variable ARR
📖 General Definition: ARR is based entirely on variable usage-, consumption-, or transaction-based revenue, with no underlying subscription contracts.
✅ Themes:
- Only usage/consumption is counted
- No mention of fixed recurring contracts
- Calculated from trailing activity
📌 Example – N/A:
Despite the many public companies on a usage-based models (Snowflake, for example), I could not find one that formally defines ARR. If you find one, please let me know.
How to Calculate ARR
Beware! How companies calculated ARR were often much different than how they defined ARR. Luckily, their ARR calculation methodology was more detailed than their ARR definitions.
I noticed three themes with subscription ARR calculations.
- MRR x 12
- Annualized Value at Measurement Date
- Annualized Contractual Value
I noticed three themes with variable ARR definitions.
- Previous 90 Days Annualized
- Previous Month Annualized
- Most Recent Period Annualized
Let’s dive into subscription ARR calculations first.
Subscription ARR = MRR x 12
We use this in private SaaS because it’s easy. Public companies also felt the same way.
📖 Run-Rate MRR
- The dominant approach with subscription revenue.
- They simply snapshot latest month of MRR.
📌 Example: Clearwater Analytics
“Annualized recurring revenue is calculated at the end of a period by dividing the recurring revenue in the last month of such period by the number of days in the month and multiplying by 365.”
Subscription ARR = Annualized Value at Measurement Date
We could still be talking revenue-based numbers here but now the measurement period or date is unclear.
📖 Annualized Value at Measurement Date
- Period used is vague. Prior month? Prior quarter?
📌Example: UiPath
“Generally speaking, our ARR calculation simply takes our invoiced amounts per solution SKU under a subscription license or maintenance agreement as of the end of an invoiced period and divides that amount by the corresponding term and multiplies by 365 days to derive the annualized renewal value.”
Subscription ARR = Annualized Contractual Value
This is where ARR and CARR may get blurry because some companies did throw in the “expected” word. In this calculation, we are sourcing contracted values rather than P&L revenue recognized values.
📖 Annualized Contractual Value
- May differ from the invoiced or recognized revenue amount
- Period used is vague
📌 Example: AvePoint
“We calculate ARR as the annualized sum of contractually obligated Annual Contract Value (“ACV”) from SaaS, term license and support, and maintenance revenue sources from all active customers at the end of a reporting period.”
Subscription ARR Nuances
If the subscription term is “month-to-month,” companies annualized by taking the most recent MRR x 12. If the subscription term is annual, companies use the contracted value in that year or TCV divided by contract term. Potential difference between recognized revenue ARR and reported ARR.
Now, let’s tackle variable ARR calculations.
Variable ARR = Previous 90 Days Annualized
📌 Example | Confluent
“…it assumes Confluent Cloud consumption trends over 12-month periods based on three months of actual consumption, which does not account for future fluctuations and unpredictability in consumption rates…”
Variable ARR = Previous Month Annualized
📌 Example | DataDog
“We calculate ARR by taking the monthly run-rate revenue, or MRR, and multiplying it by 12. MRR for each month is calculated by aggregating, for all customers during that month, monthly revenue from committed contractual amounts, additional usage, usage from subscriptions for a committed contractual amount of usage that is delivered as used and monthly subscriptions.”
Variable ARR = Most Recent Period Annualized
No definition of period of measurement.
📌 Example | SentinelOne
“ARR represents the annualized revenue run rate of our subscription, consumption, and usage-based agreements at the end of a reporting period, assuming contracts are renewed on their existing terms for customers that are under contracts with us.”
What About AI ARR?
Check out this post on AI ARR. There aren’t many examples, but Verint provides great disclosure on their usage of subscription ARR and AI ARR in their public filings.
Verint’s AI ARR definition states…
“This is a breakout of ARR specifically tied to solutions that include AI functionality. It includes both committed recurring SaaS revenue and usage-based overages, making it a full-picture metric of AI monetization.”
What About Outcome-based ARR?
Salesforce hyped up their outcome-based pricing with Agentforce. But when you read their filings, there was no mention of outcome-based pricing, only usage revenue. Stay tuned as I think disclosures will continue to improve.
Takeaways
Stay tuned! Disclosures are evolving. I continue to add to my database of ARR definitions. I’ll be updating this post frequently.
Bottom line. ARR must be supportable and disclosed. Ask yourself? Does our ARR definition and calculation make sense for our business model? Are trends consistent?
I have worked in finance and accounting for 25+ years. I’ve been a SaaS CFO for 9+ years and began my career in the FP&A function. I hold an active Tennessee CPA license and earned my undergraduate degree from the University of Colorado at Boulder and MBA from the University of Iowa. I offer coaching, fractional CFO services, and SaaS finance courses.