Artificial intelligence (AI) software company C3.ai (NYSE:AI) reported Q2 FY2023 results that beat analyst expectations, with revenue up 7.11% year on year to $62.4 million. Guidance for the full year also exceeded estimates, however the guidance for the next quarter was less impressive, coming in at $64 million, 4.22% below analyst estimates. C3.ai made a GAAP loss of $68.8 million, down on its loss of $56.7 million, in the same quarter last year.
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C3.ai (AI) Q2 FY2023 Highlights:
- Revenue: $62.4 million vs analyst estimates of $60.8 million (2.61% beat)
- EPS (non-GAAP): -$0.11 vs analyst estimates of -$0.16
- Revenue guidance for Q3 2023 is $64 million at the midpoint, below analyst estimates of $66.8 million
- The company reconfirmed revenue guidance for the full year, at $262.5 million at the midpoint
- Free cash flow was negative $77 million, compared to negative free cash flow of $54.7 million in previous quarter
- Gross Margin (GAAP): 66.7%, down from 72.5% same quarter last year
“It was a solid second quarter, with subscription revenue growing 26% year over year,” said CEO Thomas M. Siebel.
Founded in 2009 by enterprise software veteran Tom Seibel, C3.ai (NYSE:AI) provides software that makes it easy for organizations to add artificial intelligence technology to their applications.
Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.
As you can see below, C3.ai's revenue growth has been strong over the last two years, growing from quarterly revenue of $41.3 million in Q2 FY2021, to $62.4 million.
C3.ai's quarterly revenue was only up 7.11% year on year, which might disappoint some shareholders. But the revenue actually decreased again in Q2 by $2.9 million, compared to $7 million decrease in Q1 2023. While one-off fluctuations don't always have to be concerning, we have no doubt that shareholders would like to see the revenue rebound soon.
C3.ai is guiding for revenue to decline next quarter 8.27% year on year to $64 million, a significant deceleration on the 42% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 5.23% over the next twelve months.
In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. C3.ai's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 66.7% in Q2.
That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.
Key Takeaways from C3.ai's Q2 Results
Since it has still been burning cash over the last twelve months it is worth keeping an eye on C3.ai’s balance sheet, but we note that with a market capitalization of $1.3 billion and more than $840 million in cash, the company has the capacity to continue to prioritise growth over profitability.
It was good to see C3.ai outperform Wall St’s revenue expectations this quarter. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and gross margin deteriorated. Overall, this quarter's results could have been better. The company is up 7.02% on the results and currently trades at $12.8 per share.
C3.ai may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.