Speaker 1: Zon Media Hell and welcome to a very special better
Speaker 1: offline monologue. I'm your host ed Zron And. Wednesday, the
Speaker 1: Wall Street Journal ran a story about how Anthropic is
Speaker 1: about to have its first profitable quarter, specifically an operating
Speaker 1: profit or a bit duh profitability so earnings before interests,
Speaker 1: tax and bad stuff, really, saying that anthropics revenue was
Speaker 1: said to more than double to ten point nine billion
Speaker 1: dollars in the second quarter of twenty twenty six, which
Speaker 1: is when said profit would happen. But the journal Anthropic
Speaker 1: generated four point eight billion dollars in sales in the
Speaker 1: first quarter, and in Q two, that's that five hundred
Speaker 1: and fifty nine million dollar operating profits home interesting, there's
Speaker 1: a lot of certainty, considering we're barely through the first
Speaker 1: half of the second quarter, and quite a specific number
Speaker 1: given the fact that June hasn't start, and all of
Speaker 1: these numbers are mysteriously leaking exactly while Alanthropic is raising
Speaker 1: its funding round. And there's another important note from the
Speaker 1: story too. The journal adds at the very bottom of
Speaker 1: the article that it and I quote is unclear what
Speaker 1: accounting methods Anthropic has used to book revenue and costs.
Speaker 1: As the company isn't yet required to follow the financial
Speaker 1: reporting requirements of a public company. That's right, Anthropic is
Speaker 1: possibly going to be a bit to profitable for a
Speaker 1: single quarter on a non gap so generally is accepted
Speaker 1: accounting principles basis. Anyway, I wonder how they did it,
Speaker 1: because based on the unhelpfully labeled diagram from the Journal's article,
Speaker 1: it appears, as I said last year, the Anthropics costs
Speaker 1: scale linearly with its revenues, except they magically didn't in
Speaker 1: the second quarter. How and I wonder if Anthropic will
Speaker 1: somehow stay profitable. Let's see if the journal has a quote, Oh,
Speaker 1: there we go, Okay, the company might not remain profitable
Speaker 1: for the full year, as it plans spending increases due
Speaker 1: to its fasting needs. Interesting. That's very interesting. So Anthropic
Speaker 1: may be profitable very specifically in the second quarter of
Speaker 1: twenty twenty six, but might not be afterwards. It's almost
Speaker 1: as if it found a way to specifically cut its
Speaker 1: costs in May and June somehow, because it did. Remember
Speaker 1: that deal Anthropic sign with SpaceX to take over Colossus one, Well,
Speaker 1: it's also extending to Colossus two, and they're going to
Speaker 1: be paying SpaceX one point two five billion dollars a
Speaker 1: month starting in May and June, and in those two
Speaker 1: months they're going to have reduced fees. You know, the
Speaker 1: quarter in which Anthropic is magically profitable, the one with
Speaker 1: the lower costs ah per SpaceX is s one. Pursuant
Speaker 1: to its agreement, Anthropic will pay SpaceX one point two
Speaker 1: to five billion dollars a month through May twenty twenty nine,
Speaker 1: with capacity ramping up in May and June at a
Speaker 1: reduced fee as fifteen billion dollars a year in compute
Speaker 1: cost but due to an indeterminately discounted level for the
Speaker 1: precise months that Anthropic is using to tell its investors
Speaker 1: in the media that it has an operating profit. Five
Speaker 1: hundred and fifty nine million dollars in operating profit in
Speaker 1: a three month period is absolutely possible when you're not
Speaker 1: paying for all your costs. While I wouldn't say this
Speaker 1: is cooking the books, I would say it's definitely a
Speaker 1: Shiatsu grade massaging of the numbers. Anthropic is deliberately leaked
Speaker 1: a quarterly profit, and I'm doing air quotes where it
Speaker 1: knows it can suppress its costs. Specifically made sure that
Speaker 1: the journalist gave it an out of costs might increase
Speaker 1: and released it on the day of Nvidia's earnings as
Speaker 1: a means of keeping the AI bubble inflated. Nothing has changed.
Speaker 1: If Anthropic was paying the full rate for its compute
Speaker 1: in those two months, its economics would shift right back
Speaker 1: to where it's always been. Per my reporting from last
Speaker 1: year on its aws costs. A business that has its
Speaker 1: costs linearly increase with its revenues, I also severely doubt
Speaker 1: that Anthropic managed to make the cost of running their
Speaker 1: services profitable in the space of six months, per the information.
Speaker 1: In January, Anthropic missed on its gross margin projections to
Speaker 1: twenty twenty five, saying that its inference costs were twenty
Speaker 1: three percent higher than the company had anticipated. How did Anthropic,
Speaker 1: who faced a massive influx of new business to the
Speaker 1: point that it was forced to buy more compute from
Speaker 1: elon fucking Musk, suddenly have its revenue outpaced its costs.
Speaker 1: Have had a few guesses other than the obvious way
Speaker 1: in which they reduced their costs. Number one, for large enterprises,
Speaker 1: they're taking prepayment of tokens, so fifty million dollars intended
Speaker 1: to be spread over twelve months that it's taking us
Speaker 1: upfront revenue. This would both inflate revenue numbers and depressed
Speaker 1: costs because Anthropic wouldn't have actually provided the compute necessary
Speaker 1: to earn that revenue. Yet perfectly legal, because this isn't
Speaker 1: non gap. This is non gap accounting like you could
Speaker 1: just you could say whatever in a real company or
Speaker 1: a public company, that would be considered deferred revenue. Anthropic
Speaker 1: is already offering discounted tokens for Claude users too, through
Speaker 1: the by Extra Credits page on their accounts, with discounts
Speaker 1: ranging from ten percent to thirty percent. It again, maybe
Speaker 1: booking this upfront rather than saying, okay, let's book this
Speaker 1: as the person uses the compute. They could also be
Speaker 1: front loading annual commitments of basically any kind, subscriptions to
Speaker 1: Claude enterprise team agreements and so on. And they could
Speaker 1: have deliberately ratcheted downtraining to ease the burden on its
Speaker 1: infrastructure to provide inference. But if I'm honest, the revenue
Speaker 1: side is where the real problems lie. So Anthropic has
Speaker 1: said it brought in four point eight billion dollars in
Speaker 1: revenue in the first quarter of twenty twenty six and
Speaker 1: projects to ten point nine billion dollars in Q two
Speaker 1: twenty twenty six. This is pretty tough to reconcile with
Speaker 1: previous reporting. On February twelve, twenty twenty six, Anthropic claimed
Speaker 1: it had reached fourteen billion dollars in annual recurring revenue.
Speaker 1: As a reminder, ARR is the accounting tool largely used
Speaker 1: by startups but some public companies too, where a snapshot
Speaker 1: of a single month's income is taken and multiplied by twelve.
Speaker 1: This gives you an implied monthly revenue of like one
Speaker 1: point one six one point one seven billion dollars. On
Speaker 1: March third, twenty two, twenty six, Warrio Ama Day would
Speaker 1: claim Anthropic had reached nineteen billion dollars an ARR, so
Speaker 1: about one point five to eight billion dollars per month.
Speaker 1: Three days later, on March sixth, Krishna Rao, chief financial
Speaker 1: officer of Anthropic, would declare under oath in a court
Speaker 1: filing that Anthropic had brought in revenues exceeding five billion
Speaker 1: dollars to date, so just to be clear lifetime revenues. Also,
Speaker 1: keep in mind that the Information had previously reported that
Speaker 1: Anthropic had four point five billion dollars in revenue in
Speaker 1: twenty twenty five, which already puts US at the limits
Speaker 1: of credulity. While boosters may claim that exceeding could mean
Speaker 1: literally any number they want above five billion dollars. I
Speaker 1: found it doubtful that the CFO of Anthropic would, under oath,
Speaker 1: lead the court to believe its business was thirty to
Speaker 1: forty percent smaller than it was, especially when trying to
Speaker 1: convince it that the damage of being labeled a supply
Speaker 1: chain risk would ruin its business. They would want it
Speaker 1: to seem bigger than it is, not smaller. And at
Speaker 1: this point it's impossible to reconcile that twenty twenty five
Speaker 1: point with that five billion dollar number. No one wants
Speaker 1: to talk to me about it. None of the journalists involved,
Speaker 1: no no analysts. That no one wants to talk about
Speaker 1: this at all. It makes them uncomfortable and angry, I assume,
Speaker 1: probably because it's impossible to reconcile. If we assume that
Speaker 1: the arr claims made by Anthropica correct, we can presume
Speaker 1: that it made revenues of roughly two point four to
Speaker 1: two point five billion dollars in March, given that it
Speaker 1: claimed it had thirty billion dollars of ARR and April
Speaker 1: sixth if you get in confused with the numbers. By
Speaker 1: the way, there's a newsletter attached to this. Nevertheless, when
Speaker 1: you add up all those arrs, you get to about
Speaker 1: five point two five billion dollars, which is in excess
Speaker 1: of what the Wall Street Jurnal has said. And in
Speaker 1: some world maybe there's a way of cherry picking using
Speaker 1: particular periods to the point that the arrs makes sense
Speaker 1: and would actually be in the region of four point
Speaker 1: eight billion dollars. Fine, but they don't make a lick
Speaker 1: of sense when you bring up what Christian to Row
Speaker 1: their CFO said. If we believe anthropics leaks, putting inside
Speaker 1: all the R figures for a second, this means that
Speaker 1: Anthropic A made over ninety percent of its lifetime revenues
Speaker 1: in the first quarter of twenty twenty six, and B
Speaker 1: made virtually no revenue its previous years, and c leaked
Speaker 1: completely imaginary run rates of the media for years. While
Speaker 1: I acknowledge that anthropic abys to have grown significantly, that
Speaker 1: level of stratospheric growth does stretch the limits of their credibility. Moreover,
Speaker 1: the fact that the previous era. ARR figures are inconsistent with
Speaker 1: the leaked charts from Anthropic. Further raises questions about the
Speaker 1: credibility of well any numbers from the company. The only
Speaker 1: real defense that anybody has here is that Krishna Rau
Speaker 1: under oath low balled the US government and adjudged to
Speaker 1: such a dramatic extent that he hid an excess of
Speaker 1: four billion dollars in revenue. And as I've discussed before,
Speaker 1: and Flying Penguin helpfully collated, which I'll link in the notes.
Speaker 1: Adding up anthropics previously reported ARR from January twenty twenty
Speaker 1: five to my twenty twenty six already gets us to
Speaker 1: around six point six six billion dollars. Now, I know
Speaker 1: there are going to be some boosters who hear about
Speaker 1: this and they're going to be like, well, this is
Speaker 1: proof there's a business model emerging from AI and I'm
Speaker 1: I'm sorry, that's not what's happening. Dario Amadianelon Musk worked
Speaker 1: out a sweetheart deal framed as a ramp up that
Speaker 1: allowed Anthropic to artificially depress its costs. I also question
Speaker 1: how much of a ramp up there really was, or
Speaker 1: what Anthropic's actual compute constraints were because Anthropic immediately loosened
Speaker 1: rate limits for Claude subscribers on announcing the deal, meaning
Speaker 1: that it immediately started having higher inference costs, which somehow
Speaker 1: led to it making a higher profit or did. Musk
Speaker 1: has literally described in its s one have SpaceX charge
Speaker 1: Anthropic less for two specific months to make the numbers
Speaker 1: look better. In July, Anthropic will start paying SpaceX one
Speaker 1: point twenty five billion dollars a month or about fifteen
Speaker 1: billion dollars a year, on top of all its other
Speaker 1: compute deals with Google, Amazon, the Microsoft. If we assume
Speaker 1: that its spend is comparable on AWS and Google Cloud,
Speaker 1: and it's most assuredly more, that means Anthropic is spending
Speaker 1: around three point seventy five billion dollars a month in
Speaker 1: compute costs or eleven point twenty five billion dollars a
Speaker 1: quarter or forty five billion dollars a year. I'm one
Speaker 1: hundred percent sure it's more than that. There's also a
Speaker 1: very compelling argument that the Anthropics costs will increase and
Speaker 1: will eat up that profitability. To once again repeat the
Speaker 1: quote from the Journal, the company might not remain profitable
Speaker 1: for the full year as it plans spending increases due
Speaker 1: to its vast computing needs. Also have to wonder this
Speaker 1: company's profitable. Just humoring here for a second. If you're
Speaker 1: so profitable, why aren't you ipoing? Why not take this
Speaker 1: to the public markets, unless, of course, your only non
Speaker 1: gap a bit to profitable based on a two month
Speaker 1: long discount specifically covering the period in which you're profitable.
Speaker 1: I will give Diario Amida credit. Nobody does it better.
Speaker 1: Nobody does financial engineering and press lead information war better
Speaker 1: than our Anthropic. The utter willingness of the press to
Speaker 1: eat up incongruent numbers and the eagerness of many to
Speaker 1: jump up and find obtuse ways to explain away the
Speaker 1: obvious problems is only made possible when a company's perfected
Speaker 1: the art of manipulation and ingratiation of those who want
Speaker 1: to feel like they're first. If you take this as
Speaker 1: an incontrovertible proof that Anthropic is profitable, you are deliberately
Speaker 1: ignoring the blatantly obvious ways these numbers are being massaged.
Speaker 1: We've got its CFO saying numbers that don't match up
Speaker 1: with any of their leaks or their own marketing materials.
Speaker 1: In the aggressive and deluded way in which people ignore
Speaker 1: them is equal parts frustrating and depressing. So I want
Speaker 1: to speak to any AI boosters in the audience, and
Speaker 1: I want to speak with a little more empathy than usual.
Speaker 1: If you want Anthropic to win, you should be just
Speaker 1: as skeptical of these numbers as I am. You should
Speaker 1: want to smash my face in the tarmac with the
Speaker 1: most crystal clear impossible to argue with numbers, but reft
Speaker 1: of asterisks or discounts from suppliers or obfiscated accounting metrics.
Speaker 1: You should want better from your heroes. If you truly
Speaker 1: think this company is amazing, unstoppable and leading the tech
Speaker 1: industry to a glorious era of innovation, there shouldn't be
Speaker 1: this many questions and the metrics shouldn't be this murky.
Speaker 1: Every other time when a company has played this level
Speaker 1: of silly, weird bullshit, it's led to disaster. For example,
Speaker 1: we Work claimed to be profitable since the second month
Speaker 1: of its operations and repeated those claims of profitability throughout
Speaker 1: its existence until it turned out it was only profitable
Speaker 1: if you remove things like some of the costs of
Speaker 1: doing business. And I get where you're so defensive, and
Speaker 1: I get where you want this to work. A lot
Speaker 1: of you are very excited about generative AI, and being
Speaker 1: excited about it has given you a tremendous community of
Speaker 1: equally excited people. I get that you like these tools,
Speaker 1: and I need you to know that these companies are
Speaker 1: laughing at you. Anthropic timed this lead to focus on
Speaker 1: a specific quarter where it artificially suppressed costs and gave
Speaker 1: you the flimsiest proof imaginable, specifically crafted for you to
Speaker 1: share it as a triumph and spread the idea that
Speaker 1: AI labs are actually profitable when their core economics haven't changed.
Speaker 1: Costs increase linearly with revenue, and will continue to do
Speaker 1: so in perpetuity. I genuinely can't wait for Open AI
Speaker 1: and Anthropic to file that goddamn s once