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C3.ai (NYSE:AI) Surprises With Q4 Sales But Stock Drops 13.9%


Radek Strnad /
2023/05/31 5:00 pm EDT

Artificial intelligence (AI) software company C3.ai (NYSE:AI) announced better-than-expected results in the Q4 FY2023 quarter, with revenue flat year on year at $72.4 million. The company expects that next quarter's revenue would be around $71.3 million, which is the midpoint of the guidance range. That was roughly in line with analyst expectations. C3.ai made a GAAP loss of $65 million, down on its loss of $58.4 million, in the same quarter last year.

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C3.ai (AI) Q4 FY2023 Highlights:

  • Revenue: $72.4 million vs analyst estimates of $71.3 million (1.5% beat)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.17
  • Revenue guidance for Q1 2024 is $71.3 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for upcoming financial year 2024 is $307.5 million at the midpoint, missing analyst estimates by 3.03% and predicting 15.3% growth (vs 6.85% in FY2023)
  • Free cash flow of $16.3 million, up from negative free cash flow of $71.7 million in previous quarter
  • Gross Margin (GAAP): 65.6%, down from 76% same quarter last year

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.

Sales Growth

As you can see below, C3.ai's revenue growth has been strong over the last two years, growing from quarterly revenue of $52.3 million in Q4 FY2021, to $72.4 million.

C3.ai Total Revenue

C3.ai's quarterly revenue was only up 0.13% year on year, which might disappoint some shareholders. We can see that the company increased revenue by $5.74 million quarter on quarter re-accelerating up on $4.26 million in Q3 2023.

Guidance for the next quarter indicates C3.ai is expecting revenue to grow 9.1% year on year to $71.3 million, slowing down from the 24.6% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $307.5 million at the midpoint, growing 15.3% compared to 5.55% increase in FY2023.

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Profitability

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 65.6% in Q4.

C3.ai Gross Margin (GAAP)

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 been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

Key Takeaways from C3.ai's Q4 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 $4.93 billion and more than $731 million in cash, the company has the capacity to continue to prioritise growth over profitability.

It was a positive that quarterly revenue slightly topped analysts’ expectations; however, this can be considered a lower-quality topline beat because subscription revenue missed and the the shortfall was made up for by a professional services revenue beat. Note that professional services is more one-time in nature rather than recurring like subscription revenue. Additionally on the negative side, remaining performance obligations (RPO), a key leading indicator of revenue, missed expectations.

Guidance was also mediocre. C3.ai's revenue guidance for the next quarter was roughly in line, but non-GAAP operating loss guidance was worse. Full year revenue guidance missed analysts' expectations, although it calls for an acceleration in growth compared to the most recent year. Non-GAAP operating loss guidance for the full year was roughly in line despite the revenue guidance miss. Overall, this quarter's results could have been better, especially given the hope baked into a stock whose ticker is AI and who has spoken at length about the AI tailwinds to the business. The company is down 14.4% on the results and currently trades at $34.25 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.