Contracted Annual Recurring Revenue (CARR)
Contracted Annual Recurring Revenue (CARR) Overview
Contracted Annual Recurring Revenue (CARR) is defined as contracted annual recurring revenue, whether in production or not yet in production.
Annual Recurring Revenue (ARR), is a different metric than CARR, has a different calculation formula and the two terms should not be used interchangeably.
Committed ARR is a term that is used synonymously with Contracted ARR (CARR).
Business Value and Insights
Contracted ARR is one of the top metrics for a SaaS business to monitor. Change in CARR growth provides the clearest visibility into the health of a SaaS business.
Investors for both private and public SaaS companies place a Enterprise Value:Revenue multiple premium based upon the growth rate of Contract ARR, ARR and GAAP revenue.
One important facet of CARR is that it is a measure at a point in time – much like a Balance Sheet item, as opposed to an Income Statement metric like Revenue which requires a duration of time. One can provide CARR at any particular point in time; Revenue metrics require a reference to a specific year, quarter, etc.
CARR = (MRR¹ x 12) + Contracted but not yet recognized ARR²
¹ MRR is the most recent recognized monthly recurring revenue from subscriptions
² Not yet recognized ARR is contracted but not yet in production and/or recognized as GAAP Revenue - thus not recognized in current period MRR
Data Inputs Required
Data Input #1: Monthly Recurring Revenue (MRR) associated with a subscription from last month
Data Input #2: ARR contracted but not yet in production
Contracted ARR should be calculated monthly, or at a minimum quarterly.
Evaluating CARR trends between fiscal accounting periods, including monthly, quarterly and annually is critical to calculating “period over period” CARR growth rates.
Nuances to Consider
Nuance #1: Bookings vs CARR
The use of the term, Bookings or New Bookings often include the total Contracted ARR included in multi-year agreements, professional services revenue and other non recurring commitments. Bookings do not have a common definition and should not be used interchangeably with Contracted ARR.
CARR should only consider the amount of Contracted Annual Recurring Revenue and not factor in any non recurring revenue such as professional services, or variable usage such as one time overage revenue.
Nuance #2: CARR in multi-year agreements
If multi-year agreements are used, the amount contributed to CARR should be only the contracted subscription revenue for one year forward.
When a multi-year agreement is in place with escalating annual subscription value every year, the CARR should be specific and align with the exact terms of the agreement as to the subscription value contracted for each year in a multi-year agreement.
Some multi-year agreements have subscription (price) escalation for each year - and only the amount of contracted ARR for each subscription year should be attributed to CARR.
Nuance #3 : Usage-Based Pricing impact on CARR
The revenue associated with usage based pricing that exceeds the annual contracted subscription amount should NOT be part of Contracted ARR - regardless of the overage being invoiced.
Invoiced amounts over the subscription agreement value should not be considered as part of CARR.
If there is no contracted minimum commitment (subscription) for Usage-Based pricing utilization models, no CARR is present
Companies that primarily use a Usage-Based Pricing model and not a subscription with a minimum annual commitment will not find as much value in the CARR metric.
Nuance #4 : New or Net New ARR vs Contracted ARR
Contracted ARR includes New ARR, Net New ARR and existing Contracted ARR.
New ARR only looks at the Contracted ARR from “new logos”.
Net New ARR = New Name Customer ARR + Expansion ARR - Churn ARR - Downsell ARR. Expansion and Downsell ARR is an incremental change from previous contracted ARR.
Nuance #5: When to include churned and down-sell ARR in Contracted ARR
CARR should be reduced by churned ARR in the accounting period the down-sell or churn contractually occurs. Churned ARR should not be deducted from CARR upon learning about known churn in the future. Churned ARR should be deducted in the same period the contract expires and/or agreement expires and/or is not renewed.
Sample Calculation #1: Monthly Calculation at end of September, 2022
List of Input Values:
MRR (Sep 22’): $1,500,000
Contracted ARR not in production by September 30, 2022: $400,000
($1,500,000 x 12) + $400,000 = $18,200,000 CARR
Links to related Standards
Annual Recurring Revenue Standard: Click Here