Annual recurring revenue

ARR takes every active subscription contract and normalizes it to what that contract is worth over a single year, then sums that across the whole customer base. A multi-year contract gets divided down to its annual value rather than counted in full, so a three-year deal doesn't get treated as three times the revenue of a one-year deal worth the same amount annually. ARR measures the current run rate of the business, not the total value of every contract ever signed.

What counts and what doesn't

ARR only counts recurring subscription revenue. One-time implementation fees, professional services, and usage spikes that aren't expected to repeat don't belong in the number. Mixing them in inflates ARR and makes it harder to trust when comparing periods or benchmarking against another company, since the recurring and non-recurring pieces are being blended into one figure that claims to represent something purely recurring.

ARR moves for a few distinct reasons: new customers add new ARR, existing customers paying more add expansion, existing customers paying less create contraction, and customers leaving entirely remove churned ARR. Net new ARR in a period nets all four together, which means a company can report ARR growth while individual customers are still leaving, as long as expansion and new business outpace what churned.