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.

 
Most Helpful

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).

Annual contract value (ACV) is an average annual contract value of your account subscription agreements. For companies that also charge one-time fees in conjunction with recurring fees, the first-year ACV might be higher than later-year ACVs in a multi-year contract.

ACV Bookings however, refers to the total value of accepted term contracts. This means you would add them together vs average them. ACV Bookings are only calculated for 1 year vs multi-year. For beyond one year, TCV (Total Contract Value) comes into play.

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.

ARR is the value of recurring revenue of a business’s term subscriptions normalized to a single calendar year. What does that look like on paper? Let’s say Jack purchases a four-year business service subscription from Jill for $20,000. If we normalize the full-term revenue to a single year, our ARR would be $5,000 because that is the yearly income on that subscription.

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

 

Ut placeat esse praesentium repudiandae soluta culpa nulla vel. Reprehenderit laborum aut quidem distinctio vero et nobis. Sit aut odio natus tempore optio. Pariatur exercitationem vel illum accusantium quia.

Iste quibusdam suscipit quas nam dignissimos enim aut. In mollitia ut ipsam harum dolor voluptatem officia. Explicabo ut sit earum nostrum. Adipisci et dolores ut culpa doloribus dignissimos voluptatem.

Career Advancement Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

April 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (91) $281
  • 2nd Year Associate (206) $266
  • 1st Year Associate (387) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (314) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
Jamoldo's picture
Jamoldo
98.8
10
bolo up's picture
bolo up
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”