Annual Recurring Revenue

ARR, or Annual Recurring Revenue, is the normalized value of a subscription business's contracted revenue over a twelve-month period. It is calculated by annualizing recurring subscription value — monthly recurring revenue multiplied by twelve, or the yearly value of active contracts — and deliberately excludes one-time items such as setup fees, professional services, and usage overages that are not committed. The point is comparability: ARR strips out billing timing so a company invoicing annually and one invoicing monthly can be measured on the same basis, which is why investors treat it as the headline number for SaaS. It is most useful alongside its components. Net revenue retention shows whether existing customers expand or shrink, gross margin shows what the revenue costs to deliver, and growth rate places the number in context, since the same ARR means very different things at different growth rates. AI companies have complicated the metric because much of their revenue is consumption-based rather than committed, and usage that can stop next month is not truly recurring. That is the pitfall: inflating ARR by counting pilots, trials, non-renewing contracts, or volatile usage produces a figure that does not survive scrutiny.