Guide · Markets
Annual Recurring Revenue (ARR) Explained for Investors
Annual recurring revenue is the yearly value of a company's subscription contracts in force on a given date. Atlassian's was $6.81 billion in its latest quarter, up 22.5%.
On Thursday, November 5, 2026, Atlassian reported first-quarter revenue up 24% to $1.772 billion, above forecasts, and subscription annual recurring revenue of $6.812 billion, up 22.5%. It also said it expects that ARR growth to slow to about 18.5% by the end of its fiscal year. The shares fell 16.2% to $153.68 the next day. Investors sold a company that had just beaten estimates because of one forward-looking metric, which is a good reason to understand what ARR measures.
Annual recurring revenue is the annualised value of the subscription contracts a company has in force on a particular date. A customer paying $1,000 a month adds $12,000 of ARR. Revenue, by contrast, is what the company recognised as earned over a period. ARR is a snapshot and revenue is a flow, so ARR tells you what the next twelve months would bring if nothing changed, while revenue tells you what the past three months brought. ARR is not defined by accounting standards: each company sets its own rules, for example on whether usage-based fees, discounts or one-off services count.
The change in ARR from one quarter to the next has four parts: new customers, expansion from existing ones (more seats, more products, price rises), contraction (fewer seats) and churn (customers leaving). Companies often summarise the middle two in net revenue retention, the ARR from a group of customers today divided by their ARR a year ago. A figure above 100% means existing customers are spending more even before any new ones sign up.
Because ARR leads revenue, its growth rate is where investors look for turning points. A subscription that starts in March adds to ARR at once but to revenue only month by month, so slower ARR growth today shows up as slower revenue growth over the next year. That is what happened with Atlassian: a forecast of 18.5% ARR growth pointed to revenue growth falling from 24% towards the 13.75% the company guided for the full year, partly because its self-managed Data Center product is shrinking as customers move to the cloud.
The term is stretched in other industries, so read the definition. IREN, the former bitcoin miner turned AI cloud provider, reported on November 5 that its operating ARR had doubled to about $1 billion, while it described a target of more than $4 billion of contracted ARR as fully contracted and funded, with that capacity now expected to be running by January or February 2027. Contracted ARR includes deals signed for capacity not yet delivered, which makes it closer to backlog than to current business. Remaining performance obligations, an audited figure under accounting rules, is a useful cross-check.
A short checklist when a company reports ARR: compare its growth with revenue growth, and ask why if they diverge; look at the dollar amount of net new ARR, not only the percentage, since a larger base grows more slowly at the same effort; check whether the definition changed; and compare it with remaining performance obligations. The most useful signal is usually the guidance, as Atlassian showed: the market priced the 18.5%, not the 22.5%.