Annual recurring revenue (ARR) is the value of a company's recurring subscription contracts expressed as a yearly figure. It answers a narrow question: if every active customer renewed on current terms and nobody joined or left, how much would the business collect over the next twelve months? The metric exists because subscription software breaks traditional accounting signals. A vendor that switches from selling perpetual licences to selling monthly access sees reported revenue fall in the short term even as its customer base grows. ARR was adopted to show the size and momentum of the contracted book underneath that distortion.

ARR is not an accounting standard. Neither US generally accepted accounting principles (GAAP) nor International Financial Reporting Standards (IFRS) define it, auditors do not sign it off, and each company writes its own definition. That freedom is the source of both its usefulness and most of the arguments about it.

How the calculation works

The basic arithmetic takes recurring contract value at a point in time and annualises it. A customer on a $24,000 annual subscription contributes $24,000. A customer paying $1,000 a month contributes $12,000. ARR is therefore closely tied to monthly recurring revenue (MRR), and many companies simply multiply MRR by twelve.

A hypothetical example shows what goes in and what stays out. A martech vendor has 200 customers on annual contracts worth $24,000 each, or $4.8 million, plus 50 customers on monthly plans of $1,000, worth $600,000 a year. Its ARR is $5.4 million. In the same period it charged $300,000 in onboarding fees and $150,000 in usage overages. Neither belongs in ARR under the conventional definition, because neither recurs under contract. Professional services, hardware and one-off consulting are excluded on the same logic.

ARR then moves through four flows. New ARR comes from new customers, expansion from upgrades and extra seats, contraction from downgrades, and churn from cancellations. If the hypothetical vendor adds $800,000 of new business and $400,000 of expansion over a year, while losing $100,000 to contraction and $500,000 to churn, it ends the year at $6.0 million.

That breakdown produces the companion metric most investors read alongside ARR. Net revenue retention (NRR), also called net dollar retention, measures what the starting cohort is worth a year later, excluding new customers. In the example, $5.4 million of opening ARR became $5.2 million, an NRR of about 96%. A figure above 100% means existing customers grow faster than others leave.

Company definitions diverge on the details. Yelp, describing Hatch when it agreed to buy the startup in January 2026, defined ARR as November 2025 recurring subscription billings, less refunds and uncollectable amounts, multiplied by 12. That puts Hatch at about $25 million. Adobe, by contrast, revalues its ARR once a year at current exchange rates: at the end of fiscal 2025 the revaluation added $460 million, according to chief financial officer Dan Durn on the company's December 2025 earnings call.

Origin and evolution

ARR as a headline metric grew with software as a service (SaaS) in the 2000s and became standard in the 2010s. Adobe offers one of the clearest dated examples. On December 13, 2012, it reported 326,000 paid Creative Cloud subscriptions, "with exiting annualized recurring revenue of $153 million for the Creative business", according to its fourth-quarter results. On May 6, 2013, it announced that Creative Cloud would replace boxed Creative Suite sales, and by fiscal 2015 its quarterly filings called ARR "our key performance metric" for the Digital Media segment, adding that the figure "should be viewed independently of revenue, deferred revenue and unbilled deferred revenue". Digital Media ARR stood at $2.65 billion in the third quarter of fiscal 2015 and had reached $19.2 billion by the end of fiscal 2025, according to Adobe.

Two accounting milestones shaped how ARR sits beside audited numbers. The revenue standards ASC 606 and IFRS 15, effective for most public companies from 2018, required disclosure of remaining performance obligations (RPO), the contracted revenue not yet recognised. RPO is audited; ARR is not. Then on January 30, 2020, the Securities and Exchange Commission issued interpretive guidance (Release No. 33-10751, effective February 25, 2020) stating that companies presenting key performance indicators in management discussion should give a clear definition, explain how the metric is calculated and disclose any change in method, according to KPMG's summary. ARR falls within that guidance without being named in it.

Venture investors added variants. Bessemer Venture Partners promoted committed ARR (CARR), which adds signed contracts not yet live and removes expected churn, according to TechCrunch's April 2020 account of Bessemer's metrics.

Why it matters for marketers

Much of the marketing technology sector is sold by subscription, so ARR is the number by which martech vendors are judged and priced. Semrush reported ARR of $401 million and NRR of 107% for the third quarter of 2024. By June 30, 2025, it reported ARR of $435.3 million, up 15%, with NRR down to 105%. Adobe then agreed to buy Semrush for $12 a share, about $1.9 billion, on November 19, 2025. Consent management provider Usercentrics announced it had surpassed EUR 100 million in ARR in October 2025, a self-reported figure with no growth rate attached.

ARR also anchors deal pricing. LiveRamp reported ARR of $502 million and subscription net retention of 104% for the quarter to June 30, 2025. When Publicis agreed to buy the company on May 17, 2026, LiveRamp's fiscal 2026 ARR stood at $545 million. Against the stated enterprise value of $2.167 billion that implies roughly four times ARR, a PPC Land calculation rather than a disclosed multiple.

The metric also moves share prices. Adobe's stock fell 6.38% in the days after it reported net new Digital Media ARR of $504 million in September 2024, because its fourth-quarter ARR guidance disappointed some analysts.

Limitations and disputes

The central problem is that ARR is unaudited and self-defined. TechCrunch reported on May 22, 2026, after speaking to more than a dozen founders, investors and finance staff, that some AI startups were publishing CARR under the ARR label, counting customers not yet live, year-long free pilots and the undiscounted final year of multi-year deals. One venture capitalist told the publication that some companies showed CARR 70% higher than ARR. Jack Newton, chief executive of Clio, was quoted as saying: "We see some investors looking the other way when their own companies are inflating numbers." Ross McNairn, chief executive of Wordsmith, called the practice "super bad hygiene".

A second dispute concerns usage-based revenue. AI developers sell much of their output per token or per call, which is not contracted in advance. Many therefore quote an annualised run rate, extrapolating a recent month or week. Anthropic's run-rate revenue grew from about $1 billion at the start of 2025 to more than $5 billion by August 2025, and Bloomberg reported on August 18, 2026 that the figure had passed $65 billion, citing people familiar with the matter. OpenAI told CNBC in June 2025 that it had reached $10 billion of ARR, a figure that excluded Microsoft licensing revenue and large one-off deals. Seoul Economic Daily reported in September 2026 that OpenAI counts revenue net of partner shares while Anthropic books the gross amount paid through cloud platforms, so the two sets of figures may not be comparable. Neither company's numbers are audited public filings.

Critics question whether such figures describe a business at all. Writer Cory Doctorow put the AI sector's annual revenue at about $50 billion against roughly $1 trillion of spending, though he did not explain his calculation.

Even at listed companies, currency revaluations and reclassified products change the series. The SEC guidance asks for disclosure of such changes but prescribes no formula.

What it is not

Monthly recurring revenue. MRR is the same concept on a monthly basis, more common at smaller and consumer-facing companies with monthly plans such as channel memberships. ARR is generally MRR multiplied by twelve.

Revenue run rate. A run rate annualises any recent revenue, recurring or not. Microsoft's statement that its AI business passed a $37 billion annual revenue run rate in the quarter to March 31, 2026 is a run rate, not ARR. ChatGPT advertising's $1 billion figure was derived from about $83 million of monthly revenue reported by Digiday; advertising carries no subscription contract.

Bookings and RPO. Bookings record the total value of contracts signed in a period, including multi-year and one-off elements. RPO, disclosed under ASC 606, is the audited balance of contracted revenue not yet recognised. Sprinklr reported total RPO of $986.5 million at January 31, 2026, a different quantity from ARR.

Net revenue retention. NRR is a ratio derived from ARR movements, not a revenue total. Freemium products, which convert free users to paid tiers, and self-serve sign-up both feed ARR but are distinct go-to-market models. The initials ARR also stand for accounting rate of return in corporate finance, an unrelated measure.

Recent developments

The pressure on ARR has shifted from growth to quality. Similarweb reported for the first quarter of 2026 that NRR fell to 98% from 101% while multi-year contracts rose to 64% of ARR, from 52% a year earlier. Sprinklr said ARR from its generative AI service products grew 50% in fiscal 2026 without disclosing the base. OpenAI's David Dugan announced in August 2026 that its advertising business had surpassed "a $1B annualized run rate", and Adobe set a fiscal 2026 target of about 10.2% growth in total Adobe ARR. As AI vendors approach public listings, run-rate claims face the audited revenue tests that ARR has so far avoided.

Timeline

  • December 13, 2012: Adobe reports $153 million of exiting annualised recurring revenue for its Creative business
  • May 6, 2013: Adobe announces Creative Cloud will replace Creative Suite sales
  • 2015: Adobe filings describe ARR as its key performance metric for Digital Media; ARR reaches $2.65 billion in Q3 fiscal 2015
  • 2018: ASC 606 and IFRS 15 take effect for most public companies, requiring RPO disclosure
  • January 30, 2020: SEC issues KPI guidance in Release No. 33-10751, effective February 25, 2020
  • April 2020: Bessemer's committed ARR metric is described by TechCrunch
  • June 9, 2025: OpenAI tells CNBC it has reached $10 billion of ARR, excluding Microsoft licensing
  • September 2, 2025: Anthropic reports run-rate revenue above $5 billion
  • October 15, 2025: Usercentrics announces EUR 100 million of ARR
  • November 19, 2025: Adobe agrees to acquire Semrush for about $1.9 billion
  • December 2025: Adobe reports total ARR of $25.2 billion for fiscal 2025
  • January 21, 2026: Yelp agrees to buy Hatch, with about $25 million of ARR
  • April 29, 2026: Microsoft reports a $37 billion AI revenue run rate
  • May 17, 2026: Publicis agrees to buy LiveRamp, with $545 million of ARR
  • May 22, 2026: TechCrunch reports AI startups presenting CARR as ARR
  • August 18, 2026: Bloomberg reports Anthropic's run rate above $65 billion
  • August 31, 2026: OpenAI says ChatGPT ads passed a $1 billion annualised run rate

Summary

Who: Subscription businesses that report the metric, including Adobe, Semrush, LiveRamp, Similarweb, Sprinklr and Usercentrics in marketing technology, and AI developers such as OpenAI and Anthropic that quote ARR or run rates. Investors, acquirers such as Publicis and Yelp, and regulators including the SEC read and police it.

What: The annualised value of contracted recurring subscription revenue at a point in time, excluding one-off fees, services and usually usage overages. It is a non-GAAP, unaudited metric with company-specific definitions, paired with net revenue retention and churn.

When: Adobe was reporting annualised recurring revenue by December 2012, ASC 606 introduced audited RPO from 2018, the SEC issued KPI guidance in January 2020, and disputes over inflated AI ARR and run rates intensified through 2025 and 2026.

Where: Earnings releases, investor presentations, funding announcements and acquisition terms, mainly in SaaS, martech, ad tech data businesses and AI.

Why: Subscription revenue is recognised over time, so reported revenue lags the contracted book. ARR shows that book's size and direction, which is why valuations and deal multiples are built on it, and why companies have incentives to stretch its definition.