C3.ai (NYSE:AI) Surprises With Q1 Sales But Gross Margin Drops

Full Report / September 06, 2023

Artificial intelligence (AI) software company C3.ai (NYSE:AI) reported Q1 FY2024 results beating Wall Street analysts' expectations, with revenue up 10.8% year on year to $72.4 million. The company also expects next quarter's revenue to be around $74.3 million, in line with analysts' estimates. Turning to EPS, C3.ai made a GAAP loss of $0.56 per share, improving from its loss of $0.67 per share in the same quarter last year.

C3.ai (AI) Q1 FY2024 Highlights:

  • Revenue: $72.4 million vs analyst estimates of $71.6 million (1.07% beat)
  • EPS (non-GAAP): -$0.09 vs analyst estimates of -$0.17
  • Revenue Guidance for Q2 2024 is $74.3 million at the midpoint, above analyst estimates of $73.8 million
  • The company reconfirmed its revenue guidance for the full year of $307.5 million at the midpoint
  • Free Cash Flow was -$8.9 million, down from $16.3 million in the previous quarter
  • Gross Margin (GAAP): 56%, down from 71.8% in the 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.

Building a functional AI-powered application from scratch is a really complex and time consuming technical problem, even for a large company. A dysfunctional AI-based software can be at best useless, but at worst can be actually damaging to the company, for example resulting in a false clinical diagnosis or a failure to detect complications in an energy plant.

C3.AI’s software development platform includes features to build AI applications with little or no code and it also provides pre-built AI applications and models tailored to a wide range of industries that can be automatically installed and deployed.

To drive the adoption of its software, C3.AI provides a place for organizations to connect their data so that AI technology can be applied and it also integrates with sales and marketing systems such as CRM to generate more meaningful feedback.

The company was initially called C3 Energy to focus on analyzing electricity flow from plants to homes and has since expanded its scope by developing solutions to address problems in other industries such as predictive maintenance, fraud detection, and network optimization.

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.

This expanding market opportunity is attracting competition from the likes of Palantir (NYSE:PLTR), IBM (NYSE:IBM) and a number of growing startups.

Sales Growth

As you can see below, C3.ai's revenue growth has been solid over the last two years, growing from $52.4 million in Q1 FY2022 to $72.4 million this quarter.

C3.ai Total Revenue

This quarter, C3.ai's quarterly revenue was once again up 10.8% year on year. However, the company's revenue actually decreased by $48 thousand in Q1 compared to the $5.74 million increase in Q4 2023. Sales also dropped by a similar amount a year ago and management is guiding for revenue to rebound in the coming quarter, which might hint at an emerging seasonal pattern.

Next quarter's guidance suggests that C3.ai is expecting revenue to grow 19% year on year to $74.3 million, improving on the 7.11% year-on-year increase it recorded in the same quarter last year. Looking ahead, analysts covering the company were expecting sales to grow 17.8% over the next 12 months before the earnings results announcement.


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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 56% in Q1.

C3.ai Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.56 left to spend on developing new products, sales and marketing, and general administrative overhead. C3.ai's gross margin is poor for a SaaS business and it's deteriorated even further over the last year. This is probably the opposite direction that shareholders would like to see it go.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. C3.ai burned through $8.9 million of cash in Q1 , reducing its cash burn by 83.8% year on year.

C3.ai Free Cash Flow

C3.ai has burned through $141.3 million of cash over the last 12 months, resulting in an uninspiring negative 55.2% free cash flow margin. This poor FCF margin stems from C3.ai's poor unit economics or a constant need to reinvest in its business to maintain market relevance.

Key Takeaways from C3.ai's Q1 Results

Although C3.ai, which has a market capitalization of $3.71 billion, has been burning cash over the last 12 months, its more than $750.9 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.

It was encouraging to see C3.ai narrowly top analysts' revenue expectations this quarter. However, gross margin missed and has generally been on a downward trend. We were also glad that its full-year revenue guidance came in higher than Wall Street's estimates. However, the outlook for the full year operating loss is larger (meaning the company expects to lose more money for the full year than its outlook, which was given about three months ago). Zooming out, we think this was a mixed but mediocre quarter. The stock is down 2.7% after reporting, trading at $30.6 per share.

Is Now The Time?

When considering an investment in C3.ai, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of C3.ai, we'll be cheering from the sidelines. Its revenue growth has been mediocre, and analysts believe that growth rate will remain steady. On top of that, unfortunately its customer acquisition is less efficient than many comparable companies and growth is coming at a cost of significant cash burn.

Given its price to sales ratio based on the next 12 months is 11.3x, C3.ai is priced with expectations of a long-term growth, and there's no doubt it's a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

Wall Street analysts covering the company had a one year price target of $27.2 per share right before these results, implying that they didn't see much short-term potential in the C3.ai.

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