What does the term "Annual Recurring Revenue" encompass?

Annual Recurring Revenue (ARR) is a crucial metric used primarily by subscription-based businesses to assess their predictable revenue stream over a year. It encompasses all recurring revenue generated from customers, expressed on an annual basis. This includes revenue from ongoing subscriptions, service contracts, and any other sources of predictable income that recur annually.

Focusing on the definition, ARR captures the essence of a company’s revenue model by providing insights into the health and sustainability of the revenue generated over time. It is important for businesses to track this metric as it reflects long-term customer relationships and provides a reliable forecast for financial planning and growth.

In contrast, revenue from one-off sales does not qualify as recurring because it is not predictable or sustained over time. Only new contracts signed in the year and revenue generated from upsells only represent a portion of the overall revenue picture, rather than the complete, ongoing revenue from established customer relationships. Such narrow focuses would not provide a holistic view of a company’s annual recurring income, which is why those alternatives do not accurately define ARR.