If a company's revenue in January is $100 and it grows by 10% every month, the December revenue is $285. The year's revenue would be about $2,138, but ARR in December would be $3,423. That's 1.6x the actual revenue.

ARR could be a useful tool to help predict future revenue, but why not simply report on actual revenue and suggest it might increase in the next year? I have found the most articles to be unclear to the reader about what ARR actually represents.

Why is the calendar year the relevant unit? If you insist on years, then if you consider the year from June to June, $2,138 would be misleading small.

The point of ARR is to give an up to date measure on a rapidly changing number. If you only report projected calendar year revenue, then on January 1 you switch from reporting 2025 annual revenue to 2026 projected revenue, a huge and confusing jump. Why not just report ARR every month? It's basically just a way of reporting monthly revenue — take the number you get and divide it by 12.

I am really skeptical that people are being bamboozled by this in some significant way. Zitron does far more confusing things with numbers in the name of critique.

You're correct, ARRs can be both misleading and for any 12-month period (I just chose a year to simplify), but the problem is AI companies tend to only release their latest ARR, and only selectively, which I believe is misleading in the opposite direction.

Because that's a part of the generally accepted accounting principles: https://www.rightrev.com/gaap-revenue-vs-arr/

Nobody considers a year from June to June because that would be misleading.

That is an article explaining why ARR is useful and important despite not being the same thing as GAAP revenue.

How can you talk about ARR if you only look at 1 year?

It's useful for financial planning. Less useful for overall financial reporting given how volatile it is.

I should've been more clear. How can you talk about ARR if you only have 1 year?

How do you know it's recurring? What data do you have (historic) that makes you believe the revenue will happen again?

Is this based on signed contracts etc so you have some guarantees?

The "annual" just means that the unit of time is a year. It doesn't mean that it is recurring annually. You can call it Annualized Monthly Recurring Revenue if it makes you feel better.

Well people like Sam Altman have not been entirely honest and there's a reason they're not sharing their actual revenue numbers. If they could show they were growing 10% every month they would.

They are sharing their actual revenue numbers. That's what ARR is. Take the number and divide it by 12 and that's monthly revenue.

It's literally not ARR is the highest monthly revenue times 12. Dividing it by 12 doesn't get you the actual, on the books monthly revenue numbers.