5 METRICS AND PERFORMANCE CHAPTER 1 MEASUREMENTS Recurring revenue As most software companies sell their products as subscriptions, one of the most common representation of their size and growth is on a recurring revenue basis. While contract lengths can vary, it is standard to normalize and present recurring revenue on a monthly or annual basis. The chosen duration most often based on of the majority of the company's customer contract lengths. Metric Description MRR Monthly Recurring Revenue (MRR) is the recurring revenue from all customers on subscription contracts normalized on a monthly basis. MRR is always equal to a month worth of ARR, and one-time revenues are not to be included. ARR Annual Recurring Revenue (ARR) is the recurring revenue from all customers on subscription contracts normalized on an annual basis. ARR is always equal to a year worth of MRR, and one- time revenues are not to be included. In practice, ARR is defined as last month’s MRR times 12. Breaking down recurring revenue into its components helps to explain the factors that contribute to its change from one period to another. Metric Description Retained ARR Recurring revenue retained from existing customers of the previous period. Expansion ARR Recurring revenue added from existing customers of the previous period. Contraction ARR Recurring revenue lost due to contract downgrades from existing customers of the previous period. Churned ARR Recurring revenue lost due to full contract cancellations from existing customers of the previous period. Resurrected ARR Recurring revenue added from former customers. New sales ARR Recurring revenue added to this period from new customers. Change ARR to MRR if you are comparing changes in recurring revenue between months instead of years. EXAMPLE OF AN ARR BRIDGE Q3 2022 Actual In $'000s Q3 2022 Q3 2021 YoY Growth Q2 2022 vs. last Qtr Q3 2022B vs. Budget ARR (BOP) 15,000 13,000 15% 14,000 7% 14,500 3% (+) New Business 5,000 4,500 11% 4,500 11% 7,500 (33%) (+) Upsell 1,500 3,000 (50%) 1,000 50% 3,000 (50%) (+) Resurrected - - - - - - - (-) Contraction 250 200 25% 200 25% 300 (17%) (-) Churn 450 900 (50%) 900 (50%) 900 (50%) ARR (EOP) 20,800 19,400 7% 18,400 13% 23,800 (13%)