Analysis Highlights Growing Divergence in How Tech Companies Calculate Important Financial KPI
WASHINGTON, September 21, 2022 – Ordway, the finance platform for innovative business models, announced today the results of a research study on how publicly traded companies calculate and report on ARR (Annual Recurring Revenue). The analysis was conducted by the Ordway research team and reviewed investor filings for 125 SaaS and cloud companies listed on US capital markets. The study found that ARR is a key business metric for many public companies, but that there is a growing divergence in the approach SaaS and cloud companies are taking to define and calculate ARR.
- ARR References – Only half (53%) of the public SaaS and cloud companies referenced ARR in annual reports. ARR was mentioned in a variety of contexts including measuring financial performance, sizing total addressable market, and defining executive compensation plans.
- ARR Results Reported – More than a quarter (28%) reported their current and prior period ARR results, usually as a key business metric in the Management’s Disclosure & Analysis section of their annual report. Another quarter (26%) did not report on ARR, but defined it and used it as an input to other KPIs such as Net Dollar Retention.
- Products Included in ARR – Many companies outlined policy elections to include/exclude certain customer segments or product lines. Consistent approaches were observed for subscription pricing, on-premise products, and professional services. Approaches varied for monthly plans, usage-based pricing, and other variable fees.
- ARR Contract Alignment – Reporting on ARR does not always align with the customer contract lifecycle. Start dates for reporting ARR can be aligned with booking, implementation, or activation of the customer service. End dates for reporting can be aligned with contract expiration or renewal deadlines.
- ARR Calculation Approaches – Three primary approaches to calculating ARR were identified, each involve annualizing a monthly recurring revenue metric such as the 1) current monthly price in the contract, 2) average monthly price across the contract term, and 3) last month’s actual GAAP revenue.
Annual Recurring Revenue (ARR) is one of the most important metrics used by SaaS and cloud providers to measure the health, success, and growth of their business. Investors often use ARR to value companies during venture capital fundraising rounds . Post-IPO, ARR is a KPI monitored by many institutional investors and research analysts to understand the health and growth potential of a SaaS or cloud business. Additionally, ARR is a key metric used by strategic and financial buyers to value acquisition targets during mergers.
ARR is typically a straightforward calculation for early stage SaaS and cloud providers with a single product and single pricing model. However, as companies grow to $100M in ARR and beyond and launch new products, close bigger deals, and execute mergers and acquisitions they encounter a more diverse range of contract structures, pricing strategies, and deployment models. The broader range of revenue streams can create challenges for finance leaders to define which customer contracts and product lines should be included in ARR and how the calculation should be performed.
“As technology providers continue to disrupt more and more industries, we are seeing a more diverse range of business models. Ten years ago, most SaaS and cloud providers had simple fixed fee subscriptions, but recurring revenue is evolving. Today we see technology providers generating revenue through interchange fees from payment transactions, commissions on affiliate marketing programs, and interest income from payroll processing,” said Steve Keifer, vice president of marketing. “As SaaS providers continue to develop more creative and diverse product offerings, the industry will be challenged to maintain standardized operating metrics such as ARR that investors can use to simply compare the performance of different providers.”
To download the research study visit the Ordway website – https://ordwaylabs.com/resources/white-papers/arr-public-companies-research-study/