FT warns AI companies may be overstating revenue with ARR metric

In short: The Financial Times argues that some private AI companies are sharing revenue figures that can make growth look larger than it really is.

What's going on

The Financial Times Unhedged newsletter says private AI companies can choose which financial numbers to share, and those numbers may not be easy to compare. Unlike public companies, private companies do not have to follow one common reporting format in public.

A key example is “annual recurring revenue,” often shortened to ARR. ARR usually takes revenue from a recent month and multiplies it by 12 to estimate a year (like taking one good Saturday at a shop and assuming every week will be the same).

The newsletter says ARR can be calculated in different ways, and it often does not include “churn,” which is how many customers stop paying. It also may ignore seasonal patterns, like students canceling subscriptions during summer.

The article points to reports about Anthropic, the maker of Claude, and says it has benefited from a steady flow of upbeat stories ahead of a possible stock market listing. The newsletter questions whether reported “annualised revenue” growth figures make sense, especially as some AI companies move from flat subscriptions to usage based pricing, meaning bills can rise and fall based on how much customers use the service.

What to watch

If Anthropic and other AI companies move closer to an initial public offering, they will face more detailed scrutiny from regulators and investors. Watch for clearer explanations of how revenue is calculated, and whether reported growth holds up once customers can easily reduce usage.

Source: Financial Times