Tech Companies Adopt a Mix of Different Formulas, Policy Elections, and Reporting Timeframes to Calculate Annual Recurring Revenue
WASHINGTON – October 23, 2023 – Ordway, the finance platform for innovative business models, today announced the results of a research study that analyzed how public SaaS companies define, position, and report on ARR to investors. ARR, or annual recurring revenue, is the SaaS industry’s most important operating metric. For private companies seeking venture capital, ARR is one of the key metrics driving valuation. ARR is also a key component of executive compensation plans, debt covenants, and revenue financing arrangements.
- 60% referenced ARR in investor communications
- 50% provided a formal definition of ARR
- 30% reported on ARR results in quarterly earnings
- Reporting Start and End Dates – ARR reporting can align with contract terms, implementation schedules, or GAAP revenue recognition dates.
- Included Revenue Streams – Different policy elections are made on whether to report monthly plans, usage-based pricing, and professional services in ARR.
- Calculation Methodologies – Three primary approaches are used to calculate ARR that are based on price schedules, TCV, and GAAP revenue.
The most interesting finding relates to how ARR is calculated. 55 of the 68 SaaS companies that provided a definition ARR had adapted a unique approach to calculating it. Key adaptations relate to:
- Reporting Start and End Dates – ARR reporting can align with contract terms, implementation schedules, or GAAP revenue recognition dates.
- Included Revenue Streams – Different policy elections are made on whether to report monthly plans, usage-based pricing, and professional services in ARR.
- Calculation Methodologies – Three primary approaches are used to calculate ARR that are based on price schedules, TCV, and GAAP revenue.
The unique adaptations enable individual companies to present investors with a view of recurring revenue that most accurately represents the way they think about the business. However, these variations also create challenges for Wall Street analysts seeking to compare performance between SaaS providers as well as commercial banks assessing credit risk and venture capital firms considering equity investments.
“SaaS is more complex than people realize. Software companies aren’t just selling technology these days. They are selling financial products like payments, insurance, and small business loans and marketing services like digital ads, lead referrals, and app stores,” said Steve Keifer, chief marketing officer for Ordway, whose team led the research project. “They no longer have simple monthly pricing; many have variable pricing tied to consumption or GMV with complex enterprise contracts utilizing prepaid credits, monthly minimums, or spend commitments. With such a diverse range of revenue streams, it’s unsurprising that companies are adopting new approaches to reporting ARR.”
Ordway is a billing and revenue automation platform for today’s innovative, technology-centric business models. With Ordway, you can automate billing, revenue recognition, and investor KPIs for recurring revenue from subscriptions or usage-based pricing models. Using Ordway reduces your dependency on spreadsheets and manual processes, enabling you to run a leaner finance organization. But it’s not just about cost savings, Ordway generates more accurate billing and KPI reporting that your customers and investors will love.
The full 60-page research report can be downloaded from the Ordway website at https://ordwaylabs.com/resources/research/arr-public-saas-companies-research-study/.
