Annual recurring revenue
In short
Annual recurring revenue (ARR) is the yearly value of a company's subscription income if every current customer kept paying at today's rate. It is a snapshot used by software and AI firms, not audited annual revenue.
- Also called
- ARR, Annualised recurring revenue, Run-rate revenue
- Topic
- The AI business
- Level
- Beginner
Subscription businesses earn money month after month, so a single year's accounts can lag behind how fast they are growing. ARR tries to show the current pace instead.
Each company defines it itself. Software firm Freshworks, for example, defines ARR as the subscription and related revenue it would contractually expect over the next 12 months from all customers at a point in time, assuming no increases, cuts or cancellations. For monthly subscribers it takes the last month's recurring revenue and multiplies it by 121.
That multiply-by-12 step is the catch. Freshworks itself warns that monthly customers may not renew, so ARR may not reflect what is actually received over the year1. US regulators have pushed companies on the details: in 2024 SEC staff asked Progress Software to explain why it counted short contracts in ARR on the assumption they would renew2.
AI companies often use a looser cousin, run-rate revenue: recent revenue scaled up to a year. Anthropic said its run-rate revenue grew from about $1 billion at the start of 2025 to over $5 billion by August 20253. Run-rate figures from private companies are not audited, and a single strong month can flatter them.
ARR is not a standard accounting measure, and it is not cash or profit. A company can have rising ARR and still lose money.
Example
If a UK start-up has 1,000 business customers each paying £50 a month, its ARR is £600,000 (1,000 × £50 × 12), even if it only launched in the spring and has booked far less revenue so far.
Why it matters
ARR is the headline number behind many AI funding rounds and valuations. Knowing that it is a projection, not money received, helps you read those headlines with care.
Questions people ask
Is ARR the same as revenue?
No. Revenue is what a company has earned in a period under accounting rules. ARR is a forward-looking snapshot of current subscription value scaled to a year, defined by each company and assuming customers do not cancel1.
What is the difference between ARR and run-rate revenue?
ARR usually counts only recurring subscription income. Run-rate revenue typically takes all recent revenue, including usage-based spending, and scales it to a year. AI labs such as Anthropic often quote run-rate figures3.
How do you calculate ARR?
Add up the yearly value of all active recurring contracts at a point in time. For monthly plans, multiply the latest month's recurring revenue by 12, which is the method Freshworks describes1. Exact rules vary by company.