Term · Business Model & Operating KPIs
Annual Recurring Revenue (ARR)
In briefAnnual Recurring Revenue is the annualised value of recurring software or subscription revenues, excluding one-off project income. Many software small caps are measured by their ARR growth and the quality of these revenues.
Definition
Annualised value of recurring software or subscription revenues. ARR shows the ongoing revenue base without one-off project revenues.
How it is calculated
Formula. ARR = monthly recurring revenue × 12 or the sum of contractually annually recurring revenues. The metric is not standardised; the issuer's definition and delineation are decisive.
Why it matters for small caps
Many software small caps are valued on ARR growth and the quality of recurring revenues.
Common misreadings
- ARR is often equated with total revenue; one-off services, set-up fees and variable revenues must be separated out.
In the process
Frequently asked
What is Annual Recurring Revenue (ARR)?
It is the annualised base of regularly recurring revenues. One-off project or service income does not count toward it.
How is ARR determined?
You multiply the monthly recurring revenue by twelve or sum the contractual annual income. Since the metric is not standardised, the issuer's definition counts.
What mistake happens when looking at ARR?
An ARR comparison is only robust if genuinely recurring income is considered. Project business, set-up fees and fluctuating usage-based income should therefore be reported separately.
Related terms
Sources
Primary
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Methodology
U.S. SEC – Non-GAAP Financial Measures
https://www.sec.gov/rules-regulations/staff-guidance/corporation-finance-interpretations/non-gaap-financial-measures
https://www.sec.gov/rules-regulations/staff-guidance/corporation-finance-interpretations/non-gaap-financial-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.