ACV Bookings vs. ARR
ACV bookings vs. ARR - I am not getting it after reading some of the definitions online.
- What are the differences between each?
- What would it tell you about a company if their ACV Bookings were AHEAD of forecast while ARR was BEHIND forecast?
- SImilarly, what would it tell you about a company if their ACV Bookings were BEHIND forecast while ARR was AHEAD of forecast?
Thank you. Silver banana to anyone who can help, and also the knowledge that you have my sincere gratitude.
I am a little bit on the hot seat today with this and so if anyone can advise, I would be most grateful - point #1 I can muscle through if need be but #2 and #3 would be beneficial to hear more on. Thank you.
The simple answer like a lot of things in SaaS (and revenue lol) is timing
1. Going to start with simple explanations first.
ACV Bookings - How much $$$ you have signed up to come into your business (often also looked at as a 1 year period).
ARR - The $$$ (annualized payments) of your contracts / number of years. This is actually different than GAAP recurring revenue as ASC 606 can bring you to recognize things earlier that you wouldn't recognize as early in ARR. ARR is non GAAP, but there is a performance component to it and that is where it diverges from ACV Bookings.
1.9 When looking at mismatches we are given insight into our sales velocity. For example, we can have a huge increase in ACV Bookings one year BUT ARR captures none of it as we haven't performed on it.
2. ACV Bookings ahead of forecast indicates that we are signing up contracts and future revenue faster than we thought we would be, ARR behind schedule means that we are recognizing / performing on less annual revenue than we thought we would be (due to churn etc.)
3. Similarly ARR ahead of schedule means we are performing on more revenue than we expected to. but our sales motion is slowing down.
3.1. If you time ARR and ACV Booking so that they are looking at the same contracts (would lead to different periods as ACV is forward looking) they should be the same
This is a pretty strong reference: https://www.inturact.com/blog/acv-annual-contract-value-vs-arr-annual-recurring-revenue
I’m assuming you’re looking at a B2B SaaS business of some kind - but to give a more detailed answer, could you provide some more information on the target?
ARR = the total amount of contracted recurring revenue the company has. I think of ARR as a waterfall: starting ARR + New customer ARR + Existing customer expansion ARR - Customer Downgrades - Customer Churn = ARR eop. So, if a software company signs a client with $100 per annum subscription charge and $50 implementation fee - the company will have added $100 of ARR, but will book $150 of revenue in the year.
ACV = the average annualised revenue per contract. If a customer is signed with a total contract value of $30 over a 3yr period - that would equate to an ACV of $10. Consequently, companies with many smaller value clients will have a lower ACV than a company targeting large enterprise. To get to $100m of ARR, you can either have 100 clients with a $1m ACV or 2 clients with a $50m ACV.
ARR is exceptionally important at ascertaining a company’s momentum (especially at early stage), whereas ACV is more situationally useful.
It’s worth noting that there are often different approaches to calculating and adjusting these metrics
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