Customers pay on a regular schedule, such as monthly or yearly, and the company recognizes the revenue over the period during which the service is provided. A customer who pays for a full year upfront is counted as revenue gradually across the twelve months, with the unearned part sitting on the balance sheet as deferred revenue.
Investors value it because it is recurring. It is more predictable than one-time sales and often comes with higher margins. Related measures include annual recurring revenue, churn, renewal rates and remaining performance obligations.
It is not risk-free. Customers can cancel, competition can push prices down, and growth depends on both winning new customers and keeping existing ones. Some firms blur the line by labeling usage fees or services as subscription revenue.
Check how the company defines it, look at renewal and churn data, and compare its growth with total revenue growth.