ARR

Annual Recurring Revenue (ARR) is contractually committed subscription revenue Sourcegraph expects to generate from customers at a point in time. ARR is an operating metric that helps us measure subscription revenue performance.

ARR includes committed bookings with contract start dates that fall in the first 15 days of the following calendar month. This allows Sourcegraph sales team members to get credit for renewals and expansions that may fall in the (near) future. Exceptions to this require written approval from the VP of Operations and the VP of Sales. Please see ARR timing examples.

Furthermore, if the Company enters into a multi-year contract with a customer and the out-year billings are contractually locked in, then we will recognize ARR on a straight-line basis. If there is a term or clause in the contract that provides for an opt-out arrangement, then we will only recognize the portion of ARR that is contractually guaranteed. This policy allows Sourcegraph sales team members to get credit for deals with higher pricing in the later portion of the contractual period. Exceptions to this require written approval from the VP of Operations and the VP of Sales. Please see ARR examples.

Contractual Commitment

  • New Business

    • Countersigned (by customer) order form that ties back to a subscription record in Salesforce
    • Self-service acceptance of our TOS and checkout qualifies as “countersignature”
    • A PO does not constitute a contractual commitment in the absence of a signed order form

  • Expansions:

    • Soft cap: no counter signed order form is required so long as the expansion opportunity ties back to an existing subscription with a signed order form in which the customer explicitly opted into a “soft cap”.
    • Hard cap: a new, countersigned order form is required
    • No contractually committed soft or hard cap policy: a new, countersigned order form is required (i.e., default to hard cap treatment)

Defining Subscription Revenue:

  • Subscription revenue must be re-occurring; any one-time revenue/service does not qualify.
  • Subscription revenue does include any on-going professional services; Managed Services and Premium support qualify as ARR as they contribute to the recurring revenue stream. Implementation services are categorized as a one-time sale and do not qualify as ARR as they are typically provided to set up or deploy a solution initially but do not have an ongoing, recurring nature.

ARR Timing Recognition:

Annualized subscription revenue is recognized per the terms of the contractual customer commitment Finance utilizes the following terms for recognition:

  • “Contract Start Date”
  • “Contract End Date”

In the case of a step-up in a customer’s commitment that occurs mid-term (i.e. in-year or in a multi-year contract) ARR and the timing of ARR will mirror contractual terms outlined in the commitment both on a $ basis and a period/timing basis.

ARR Grace Period: A 15 calendar-day grace period on ARR recognition will be given on all customer contracts that have a contract start date landing on day 15 or prior of the subsequent month that are closed in the prior month. Under the grace period ARR would be recognized in the month prior to the contract start date month. A 15 day grace period on ARR recognition is given so as not to penalize our sales force for a prospect/customer’s internal business processes. Sales reps performance and compensation are tied to IARR. IARR is the incremental change in ARR from one period to the other. Offering a 15 day grace period allows Sourcegraph to better align sales performance and behavior to Company ARR growth.

sales forecasting and reporting will be anchored off of IARR recognition as opposed to closed-won date. Doing so will avoid a disconnect when measuring sales performance against ARR while also limiting volatility in the ARR forecast.

Discounts on New Logos (Lands): One time credits, free periods or add-ons, or any other forms of customer discounts will impact the value of ARR, even if the customer agrees or the order form indicates that they are a one-time discount. Any current or future customer discount incentives implemented will go through the appropriate deal desk approval matrix.

Sales compensation will be aligned with the value Sourcegraph receives from a customers annual commitment and is currently being discussed. In other words, aligning sales comp with our ARR definition and the long-term best interests of the company is a priority and we do not plan on promoting a scenario where an AE is financially incentivized to sell / structure a customer contract in a way that is eroding value to Sourcegraph

Subscription Renewals:

A subscription renewal requires a signed Order Form.

  • If a customer intends not to renew, we continue to recognize that customer’s current subscription/ARR until the last day of the subscription term. Churn will fall on subscription term end date + 1 day regardless of the date the customer notifies Sourcegraph.

  • If a subscription term ends and a renewal has not yet been completed:

    • The customer subscription ends the day after the subscription term end date + 1 day; churn will also fall on subscription term end date + 1 day.

    • Churn will not be recognized upon subscription term end date +1 day only in the event of both VP of Sales and VP of Finance written approval in response to a request for a subscription contract extension. Approvals should be requested in the #deal-desk channel.

    • A contract extension request will be evaluated on a case-by-case basis, not exceeding 30 calendar days from the last date of the initial subscription term end date.

    • End of period contract extensions will also be evaluated on a case-by-case basis based on the following indicators, and if approved, ARR will be recognized at the point in time the order form gets signed:

      1. Budget: Has as the budget been signed off?
      2. Decision: Has the decision maker approved? Was Legal involved and have they approved?
      3. Time: What are the steps missing to complete the procurement process?
      4. Evidence: Can you show any written/email evidence that they intend to renew and that there´s no risk to the renewal?

    • Customer churn is voided upon a completed renewal order form. A completed renewal order form includes customer signatures with a signature date falling on or before the last day of the Sourcegraph approved contract extension term. A completed renewal order form will have a term start equal to the subsequent date of the prior contract term end date + 1 day.

A finalized renewal closed-won after prior contract end date + 1 day and within the extension period will result in a renewed contract term backdated to contract end date + 1 day. The result is a renewed customer commitment with a future renewal date equivalent to the renewal date if renewed timely.

A contract extension (up to thirty days) can be offered free of charge to the end customer with the understanding the customer is considered in their new term.

The contract extension request process is designed to be customer-first; avoiding a poor customer experience where service gets discontinued during a renewal negotiation.

Quota credit is subject for review in the event a customer churns in one month and gets resuscitated within a 90-day window from the date of churn. Example: Customer A churns in June. Sourcegraph turns off service on the last day of Customer A’s subscription. Customer A comes back to Sourcegraph in August requesting a new enterprise plan. Sourcegraph captures this new enterprise subscription as incremental IARR. Sourcegraph Sales Rep does not necessarily get 100% of the incremental iARR value due to the previous churn and is commensurate with the time/resources in the subsequent sales cycle. The goal of this parameter is to ensure we are incentivizing our sales org to renew customers timely.

Early Subscription Renewals

  • Sourcegraph supports early renewals as it (1) increases visibility in future revenue (2) reduces churn risk and (3) improves internal resource utilization / productivity.

  • An early renewal agreement requires an early termination of an existing contract with a revision to a new, 12+ month commitment.

  • A credit is applied to the new License fee to reflect the days of unused service. Deal Desk approval is required.

  • ARR/IARR should be calculated as follows: Early Renewal Contract ARR - Current Contract ARR.

  • For early renewal deals with churn, we will recognize churn on the start date of the new contract. Contract end date + 1 day is our traditional churn guidance, but we will bring it forward for rip and replace deals. Ex: The Customer’s contract expires in July 2024, and signs an early renewal in December 2023 with a new start date of February 01, 2024. Even if the Order Form is signed in December, we will not recognize churn until Februry 01, 2024.

Other Commercial Considerations and Proposed ARR Treatment:

  • Sourcegraph only sells contracts in increments of 12 months up to 36 months on an initial, new business customer commitment.

    • Sub-12 month contracts, will need deal desk approval and VP-level approval from both Finance and Sales. Finance believes this will help simplify our sales motion.
    • For >12 month contracts, not sold in increments of 12 months deal desk approval is required, as well as FP&A approval and VP-level approval from Sales.
    • For some large enterprise accounts with many subsidiaries, we expect to have multiple contracts. ARR recognition for these contracts is consistent with our outlined ARR guidance above. We will accept a sub-12 month contract with a subsidiary account as ARR if it is co-termed with a parent account’s contract and (1) the parent account is a signing entity OR (2) the parent account provides written approval that the subsidiary’s contract will be absorbed into the parent account’s contract upon renewal.
    • Allowing any other term lengths (such as a 13-month contract) may create confusion around the calculation of ARR and an administrative burden resulting in delayed delivery times for internal financials, increased costs and unexplainable volatility in our forecasts. Simply said, we want to align contract structuring as close as possible to our current systems and processes (currently limited at this point).

Sourcegraph measures performance in annual revenue (ARR/IARR.) A contract up for renewal (risk of churning) more than once in a 365 period has a different value/risk profile than annual commitments. Compensation / quota credit will reflect this. In other words, Sourcegraph does not intend to incentivize selling <12 month contracts. Sales compensation/credit will account for this exchange of value.

For Contracts with in-period step-ups in $ commitments:

  • One Year Contract (in-period step-ups): ARR is recognized at the point in time the step-up occurs as outlined in the customer contract, tying 1:1 with the $ value associated with the committed raise. One example is where a step-up occurs in month 4 of the contract start date. In this example ARR would be constant for three months and then would increase in month 4. To be consistent, the 15-day grace period would apply to these contracts.

  • Two Year Contract (step-up in year two): Recognized ARR would be recognized using the same, consistent logic above. The step-up in ARR would occur in month 13 of the contract start date.

Customer/Prospect POC’s:

  • POC’s offered to a customer/prospect free of charge will be subject to deal desk approval for terms greater than 3 months

    • Deal desk approval is required to help safeguard Company resources
    • VP of Sales and VP of CE approval will be required for any free POC’s greater than 3 months in length
    • POC’s greater than 3 months will be subject to a customer charge; ensuring Sourcegraph can manage the additional costs that may arise from an increase in the # of POCs and extended prospect/customer SLA’s

  • POC’s, either free or paid, regardless of term length, are not considered ARR and are not eligible for sales compensation and/or quota credit

  • A paid POC does not qualify as IARR/ARR. See “Other Considerations” section regarding <12 month committed contracts.

Examples of ARR Recognition:

Note close dates have no bearing on current discussion around ARR definition. ARR recognition is based on contractually committed start/end dates. Link to examples here

New logo – subscription (1- year, no step-up): Sourcegraph closes a new logo subscription with a one-year term for $100,000 on November 30, 2021. A close date reflects when an opportunity is closed-won in SFDC.

  • New logo subscription has a contract start date of December 15, 2021, and a contract end date of December 14, 2022.

    • IARR recognition month = November (2021)

    • IARR recognition value = $100,000

    • November 29, 2021 ARR balance = $0

    • November 30, 2021 ARR balance = $100,000

    • December 15, 2021 ARR balance = $100,000

    • December 14 , 2022 ARR balance = $100,000

New logo - subscription (1-year, with step-up): Sourcegraph closes a new logo subscription with a customer for a one-year term. The first 6 months of the 12 month contract have a contractual commitment of $75,000 in ARR (75 users at $1,000 price per user / year). There is a step-up in the contractual commitment on the first day of month 7. The customer increases their commitment to $100,000 in ARR (100 users at $1,000 price per user / year) reflecting an incremental commitment of $25,000* (25 users at $1,000 price per user / year).

  • This new logo subscription had a close date of November 30, 2021.

    • New logo subscription has a contract start date of December 15, 2021, and a contract end date of December 14, 2022.

    • First IARR recognition month = November (2021)

    • First IARR recognition value = $75,000

    • Second IARR recognition month = June** (2022)

    • Second IARR recognition value = $25,000

    • November 29, 2021 ARR balance = $0

    • November 30, 2021 ARR balance = $75,000

    • December 15, 2021 ARR balance = $75,000

    • June 15, 2022 ARR balance = $75,000

    • June 16, 2022 ARR balance = $100,000

    • December 14, 2022 ARR balance = $100,000

*Note customer billing for step-up commitment would be prorated to reflect remaining days in the contractual commitment and billed accordingly.

**Note this abides by the 15 day IARR recognition grace period. The last day of the first 6 months of this subscription falls on June 15, the next break-point happens on June 16 (first day of the last 6 months of the one-year term) falling outside of the 15-day grace period and is the reason this would not be IARR recognition month = May.

New logo – subscription (2-year, with step-up): Sourcegraph closes a new logo subscription with a customer for a two-year term with an annual commitment of $100,000 in Year 1, stepping-up to a $200,000 annual commitment in Year 2 (TCV of $300,000)

  • This new logo subscription had a close date of November 30, 2021.

  • New logo subscription has a contract start date of December 15, 2021, and a contract end date of December 14, 2023.

    • Year 1 Term: December 15, 2021, start date, December 14, 2022, end date
    • Year 2 Term: December 15, 2022, start date, December 14, 2023, end date

  • First IARR recognition month = November (2021)

  • First IARR recognition value = $100,000

  • Second IARR recognition month = November (2022)

  • Second IARR recognition value = $100,000

  • November 29, 2021, ARR balance = $0

  • November 30, 2021, ARR balance = $100,000

  • December 15, 2021, ARR balance = $100,000

  • November 30, 2022, ARR balance = $200,000

  • December 14, 2022, ARR balance = $200,000

  • December 15, 2022, ARR balance = $200,000

  • December 14, 2023, ARR balance = $200,000

Expansion – subscription amendment (co-termed): Existing Sourcegraph customer (Customer A) closed a one-year subscription on December 1, 2021 with a subscription start date that day - December 1, 2021. The subscription’s last day of service is November 30, 2022. This subscription is for $100,000 (100 user accounts at annual $1,000 price per user).

  • On August 1, 2022, Customer A raised their commitment by $50,000 —> 50 users (going from 100 users to 150 users) at the existing, agreed upon price of $1,000 annual price per user.

    • Customer A’s existing subscription is amended and now reflects a $150,000 commitment with contract start/end dates staying the same (December 1, 2021 to November 30, 2022).

  • First IARR recognition month = November (2021)

  • First IARR recognition value = $100,000

  • Second IARR recognition month = August (2022)

  • Second IARR recognition value = $50,000

  • December 1, 2021, ARR balance = $100,000

  • July 31, 2022, ARR balance = $100,000

  • August 1, 2022 ARR balance = $150,000

  • November 30, 2022, ARR balance = $150,000

Partnership-related ARR guidance:

  • Channel partnership/referrals influenced ARR is recognized, net of fees.
  • Cloud partnership influenced ARR is recognized, gross of fees, with a cap set at 8%.
  • ISV & Codehost partnership ARR is recognized as is - given there are no fees.

Process for communicating and reporting on, out of Period Adjustments

  • Please see our process for communicating and reporting on, out of period ARR adjustments.

Discounts for multi-SKU purchases

When discounts are provided to a customer, we recognize and report on them (for non-GAAP metrics, such as ARR) according to the following rules, regardless of what the order form states.

  1. First, discounts are applied against all one-time/non-recurring revenue E.g., implementation fees.
  2. Second, discounts are applied proportionally against all recurring SKUs based on list prices.

For an example of the second bullet above: if a customer purchased $100k (list price) of software and $50k of recurring services, but they were only paying $135k (i.e., they had a 10% discount), then we would record it and report it as $90k of software IARR and $45k of services IARR, or 10% off of each product at list price.