How top tech companies define ARR
How top tech companies define ARR
Annual recurring revenue isn't as straight forward as you'd think
I interviewed Tony Kim, head of tech investments at BlackRock, for the pod this week (links below!) and the topic of ARR came up.
Well, came up would be an understatement. It kind of blew up…
“I was deceived! We were all deceived! What is ARR? ARR is quarterly revenue times four…
ARR is you are doing my math for me.
You are juicing your number.
He elaborated…
“You have $25M or quarterly revenue, now the ARR is $100M, the companies look a lot bigger!”
And then he brought up the 800 pound gorilla in the room…
And definitions?… you could take the difference on a daily basis from January 1st to March 31st and multiply by 365…. You could take the “exiting ARR”… There are lots of ways to skin the cat. And it’s basically a reflection of let’s just inflate the number to make ourselves look bigger.
You notice that public software companies trade on GAAP revenue. But for private companies it’s multiples of ARR. But somehow that whole thing has to translate into GAAP revenue when you go public. When you are private, they just take the best possible approximation and juice it.
I look at that and say, “Guys, come on, it’s nonsensical!”
A man after my own heart. I always like to say - “If you want to trick your investors, tell them about your CARR.”
Regardless of whatever you think about ARR, it’s important to know how the top companies are defining it. And it’s your responsibility to to know if you look better or worse compared to your peers.
Don’t hate the player, hate the game definition of ARR.
Alteryx
((Total committed contracts)/ (number of months in the subscription term) * 12)
ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period and excludes the value of non-recurring revenue streams that are recognized at a point in time, such as certain professional services. Both multi-year contracts and contracts with terms less than one year are annualized by dividing the total committed contract value by the number of months in the subscription term and then multiplying by twelve. Annualizing contracts with terms less than one year results in amounts being included in our ARR calculation that are in excess of the total contract value for those contracts at the end of the reporting period
Big Commerce
ARR = Monthly Contractual or Subscription revenue * 12
Annual revenue run-rate (“ARR”) is calculated as the sum of: (1) contractual monthly recurring revenue at the end of the period, which includes platform subscription fees, invoiced growth adjustments, feed management subscription fees, recurring professional services revenue, and other recurring revenue, multiplied by twelve to prospectively annualize recurring revenue, and
Crowdstrike
ARR = Contracts subscription revenue monthly * 12
ARR is calculated as the annualized value of our customer subscription contracts as of the measurement date, assuming any contract that expires during the next 12 months is renewed on its existing terms. To the extent that we are negotiating a renewal with a customer after the expiration of the subscription, we continue to include that revenue in ARR if we are actively in discussion with such an organization for a new subscription or renewal, or until such organization notifies us that it is not renewing its subscription.
Commvault
ARR = (Total contract value / Number of days in the contract term) x (365 days)
Annualized Recurring Revenue (ARR) is defined as the annualized recurring value of all active contracts at the end of a reporting period. It includes the following contract types: subscription (including term licenses, SaaS and utility software), maintenance contracts related to perpetual licenses, other extended maintenance contracts (enterprise support), and managed services. It excludes any element of the arrangement that is not expected to recur, primarily perpetual licenses and most professional services.
DataDog
ARR = Monthly Recurring Revenue x 12
We define ARR as the annualized revenue run-rate of subscription agreements from all customers at a point in time. We calculate ARR by taking the monthly recurring 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. ARR and MRR should be viewed independently of revenue, and do not represent our revenue under GAAP on a monthly or annualized basis, as they are operating metrics that can be impacted by contract start and end dates and renewal rates. ARR and MRR are not intended to be replacements or forecasts of revenue.
Dropbox
ARR = Subscription revenue *12
Total ARR represents the amount of revenue that we expect to recur annually, enables measurement of the progress of our business initiatives, and serves as an indicator of future growth.
Dynatrace
ARR = Subscription Revenue per day * 365
We define ARR as the daily revenue of all subscription agreements that are actively generating revenue as of the last day of the reporting period multiplied by 365. We exclude from our calculation of ARR any revenues derived from month-to-month agreements and/or product usage overage billings, where customers are billed in arrears based on product usage.
Everbridge
ARR = NTM Recurring revenue from active customers
We define ARR – Annualized Recurring Revenue – as the expected recurring revenue in the next twelve months from active customer contracts, assuming no increases or reductions in the subscriptions from that cohort of customers.
ForgeRock
ARR = (Total dollar amount of the customer’s contract / Total contract term stated in months) * 12
We perform this calculation on an individual customer basis by dividing the total dollar amount of the customer’s contract by the total contract term stated in months and multiplying this amount by 12 to annualize. Calculated ARR for each individual customer is then aggregated to arrive at total ARR.
Gitlab
ARR = Monthly Recurring Revenue x 12
Annual Recurring Revenue (“ARR”): We define annual recurring revenue as the annual run-rate revenue of subscription agreements, including our self-managed and SaaS offerings but excluding professional services, from all customers as measured on the last day of a given month. We calculate ARR by taking the monthly recurring revenue (“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 of subscriptions, including our self-managed license, self-managed subscription, and SaaS subscription offerings but excluding professional services.
Informatica
ARR = Monthly Recurring Revenue x 12
Annual Recurring Revenue (“ARR”) represents the expected annual billing amounts from all active maintenance and subscription agreements
Intapp
ARR = Committed Contract Value * 365
ARR represents the annualized recurring value of all active SaaS and on-premise subscription contracts at the end of a reporting period. Contracts with a term other than one year are annualized by taking the committed contract value for the current period divided by number of days in that period then multiplying by 365.
Jamf
ARR = Quarterly subscription revenue * 4
ARR represents the annualized value of all subscription and support and maintenance contracts as of the end of the period.
Nutanix
ARR = Sum of ACV for all Device contacts
We calculate ARR as the sum of ACV for all non-life-of-device contracts in effect as of the end of a specific period. For the purposes of this calculation, we assume that the contract term begins on the date a contract is booked, unless the terms of such contract prevent us from fulfilling our obligations until a later period, and irrespective of the periods in which we would recognize revenue for such contract.
UI Path
ARR = (Invoiced amounts per solution SKU under a subscription license or maintenance agreement / Invoice term) x 365 days
We define ARR as annualized invoiced amounts per solution SKU from subscription licenses and maintenance and support obligations assuming no increases or reductions in customers' subscriptions. ARR does not include the costs we may incur to obtain such subscription licenses or provide such maintenance and support, and does not reflect any actual or anticipated reductions in invoiced value due to contract non-renewals or service cancellations other than for specific reserves, for example those for credit losses or disputed amounts
RingCentral
ARR = Monthly Recurring Subscriptions * 12
We believe that our Annualized Exit Monthly Recurring Subscriptions (“ARR”) is a leading indicator of our anticipated subscriptions revenues. We believe that trends in revenue are important to understanding the overall health of our business, and we use these trends in order to formulate financial projections and make strategic business decisions. Our ARR equals our Monthly Recurring Subscriptions multiplied by 12. Our Monthly Recurring Subscriptions equals the monthly value of all customer recurring charges at the end of a given month.
SimilarWeb
Revenue Annualized = Quarterly Revenue * 4
We define ARR as the annualized subscription revenue we would contractually expect to receive from customers assuming no increases or reductions in their subscriptions.
Sprout Social
ARR = FY Value of Subscription revenue
We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period. We believe ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term.
SolarWinds
ARR = Subscription ARR + Perpetual licenses annualized value
Total ARR represents the sum of Subscription ARR and the annualized value of all maintenance contracts related to perpetual licenses active at the end of a reporting period.
Zoom
ARR = Monthly Recurring Revenue x 12
Zoom defines ARR as the annualized revenue run rate of subscription agreements from all customers at a point in time. Zoom calculates ARR by taking the monthly recurring revenue (“MRR”) and multiplying it by 12. MRR is defined as the recurring revenue run-rate of subscription agreements from all Enterprise customers for the last month of the period, including revenue from monthly subscribers who have not provided any indication that they intend to cancel their subscriptions.
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Run the Numbers
This week my guest is Tony Kim of BlackRock, one of the most prominent tech investors in the world. Tony has been running BlackRocks global technology funds since 2013, managing $20 billion in assets under management. Whew!
Tony and I break down the components of durable revenue, touch on the importance of having a strategic narrative at your company, and do some math on how many IPOs the markets can possibly digest in a year.
Tony has contrarian takes on TAM, Net Dollar Retention, and ARR. So if you’ve ever touched a pitch deck, I wouldn’t want to miss this.
BTW - Are you shocked I got this guy on the pod? Lol yea me too.
So sit back and enjoy this jam session with a titan of the tech world.
Episode with Tony Kim is live on:
Quote I’ve been pondering
“Sometimes you have etcetera, sometimes etcetera has you.”
-Matthew McConaughey, Green Lights
CJ, thoughts on how we could deal with transactional revenue? An example of this is a client pays me x$ based on the times it uses a service.
I used to work for a private tech company (not in finance) but had a view into the revenue we were doing and was constantly confused by the aggregate ARR number.