Annual Recurring Revenue (ARR)

ARR includes only recurring, contracted revenue: subscription fees that renew. It excludes one-time and non-recurring items — setup fees, implementation/professional-services revenue, one-off hardware, and usage spikes that aren't contracted. The discipline matters because mixing one-time revenue into ARR overstates the company's predictable base and inflates valuation. For monthly subscriptions, ARR = MRR (monthly recurring revenue) × 12. ARR is a snapshot/run-rate at a moment in time, not an accounting figure — it differs from GAAP revenue, which recognizes revenue as it's delivered over the contract period.

Investors care less about the ARR level than about how it moves, captured in an 'ARR bridge': starting ARR + new ARR (new customers) + expansion ARR (upsells, seat growth, price increases) − contraction ARR (downgrades) − churned ARR (cancellations) = ending ARR. The relationship between expansion and churn defines a company's quality. Net Revenue Retention (NRR) = (starting ARR + expansion − contraction − churn) ÷ starting ARR. NRR above 100% means the existing customer base grows on its own even before adding new customers — the hallmark of a great SaaS business; best-in-class is ~120%+.

Subscription businesses are valued on revenue multiples (EV/ARR) rather than EBITDA multiples, because high-growth SaaS companies reinvest heavily and often aren't yet profitable — so EBITDA is small or negative and meaningless. ARR captures the predictable, high-margin, recurring nature of the revenue that makes it worth a premium. The multiple a company commands is driven by three things: growth rate (how fast ARR is compounding), retention (NRR), and gross margin. A company growing ARR 80% a year with 120% NRR earns a far higher EV/ARR multiple than one growing 20% with 90% retention, even at identical ARR today.