ARR and other SaaS metrics

What is ARR?

Annual recurring revenue is the value of recurring contracts in force at a date, expressed as a yearly amount, often monthly recurring revenue multiplied by twelve. It usually includes subscription and recurring support fees and excludes implementation, training, professional services and other one-off fees. Beyond that, definitions differ: some companies include committed usage minimums or a run rate of usage fees, some count contracts signed but not yet live, most translate at constant exchange rates, and each handles free months, ramps and discounts in its own way. Because there is no standard definition, comparing ARR across companies needs care.

How does ARR move during the year?

Companies usually explain the change in ARR with a bridge from opening to closing: new customers, expansion from existing customers through more users, modules or price increases, and churn and contraction from customers that leave or reduce their spend.

Net revenue retention above 100% means existing customers alone grow ARR, before any new customers; gross revenue retention ignores expansion and cannot exceed 100%. Companies calculate both in different ways, for example on cohorts or trailing twelve months, so the definition matters as much as the number.

How does ARR compare with IFRS revenue?

Revenue of 5.4 million is below closing ARR of 6.0 million because ARR is a run rate at the year end, while contracts added during the year earned only part of a year of revenue. Subscription revenue is also below average ARR of 5.5 million, because most new deals were signed late in the year and some contracts counted in closing ARR had not yet gone live. Services revenue is in revenue but not in ARR. Other differences can come from currency, when ARR uses constant rates, from usage fees and from IFRS 15 straight-lining of escalators and free months. Usage-heavy companies explain how usage-based pricing enters their ARR, if at all.

What are billings and remaining performance obligations?

Billings are revenue plus the change in deferred revenue. They depend on invoicing terms, so a shift from annual to monthly billing reduces them without any change in the business. Remaining performance obligations are an IFRS 15 disclosure in the audited notes: contracted revenue not yet recognised, including amounts not yet billed, with the part expected within twelve months. Because they are audited and defined by the standard, they are a useful cross-check on ARR. Bookings and annual contract value, the value of contracts signed in a period, are further unaudited metrics.

Is ARR a management-defined performance measure under IFRS 18?

From 2027, IFRS 18 requires disclosure in the notes of management-defined performance measures: subtotals of income and expenses that a company uses in public communications outside the financial statements to communicate management's view of an aspect of its financial performance, and that IFRS 18 does not list. ARR is an annualised contract value, not a subtotal of income and expenses, so it is outside the definition; so are net revenue retention and customer numbers. Adjusted operating profit excluding share-based payment is a subtotal of income and expenses and is a management-defined performance measure. See management-defined performance measures.

What does the SEC expect?

The SEC's 2020 guidance on management's discussion and analysis says that when a company discloses a key performance indicator or metric, it should give a clear definition, explain how it is calculated and why it is useful, and disclose any changes in the calculation, recasting earlier periods where appropriate. Operating metrics such as ARR are generally treated as outside the rules for non-GAAP financial measures, but measures such as adjusted EBITDA are subject to Regulation G, which requires a reconciliation to the most comparable GAAP measure. Many companies add a statement that ARR is not a forecast of revenue and should be viewed separately from it.

How should companies govern their SaaS metrics?

With a written definition approved by management and the audit committee, data drawn from the billing and contract systems that feed revenue, controls over changes and consistent application from period to period. Reconciling ARR to audited figures such as revenue and remaining performance obligations, at least internally, catches errors. Auditors read metrics in the annual report for inconsistency with the financial statements, but do not audit them. Other industries have their own headline metrics; see telecom KPIs, retail like-for-like sales and SaaS accounting.

This guide is general information. It is not tax or legal advice for your situation.