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.

FY23 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.