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C3.ai (NYSE:AI) Reports Sales Below Analyst Estimates In Q1 Earnings, Stock Drops 13.2%


Full Report / August 31, 2022
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Artificial intelligence (AI) software company C3.ai (NYSE:AI) fell short of analyst expectations in Q1 FY2023 quarter, with revenue up 24.6% year on year to $65.3 million. Guidance for the next quarter also missed analyst expectations with revenues guided to $61 million at the midpoint, or 14.9% below analyst estimates. C3.ai made a GAAP loss of $71.8 million, down on its loss of $37.4 million, in the same quarter last year.

C3.ai (AI) Q1 FY2023 Highlights:

  • Revenue: $65.3 million vs analyst estimates of $66 million (1.08% miss)
  • EPS (non-GAAP): -$0.12 vs analyst estimates of -$0.24
  • Revenue guidance for Q2 2023 is $61 million at the midpoint, below analyst estimates of $71.7 million
  • The company dropped revenue guidance for the full year, from $312 million to $262.5 million at the midpoint, a 15.8% decrease
  • Free cash flow was negative $54.7 million, compared to negative free cash flow of $14.7 million in previous quarter
  • Gross Margin (GAAP): 71.8%, down from 75.1% 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 very strong over the last year, growing from quarterly revenue of $52.4 million, to $65.3 million.

C3.ai Total Revenue

Even though C3.ai fell short of revenue estimates, its quarterly revenue growth was still up a very solid 24.6% year on year. But the revenue actually decreased by $7 million in Q1, compared to $2.54 million increase in Q4 2022. Shareholders might want to pay closer attention to this as the management is guiding for the decline in sales to continue in the coming quarter

Guidance for the next quarter indicates C3.ai is expecting revenue to grow 4.69% year on year to $61 million, slowing down from the 40.9% 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 24.5% over the next twelve months.

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 71.8% in Q1.

C3.ai Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.71 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still around the lower average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market so it is important to track.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. C3.ai burned through $54.7 million in Q1.

C3.ai Free Cash Flow

C3.ai has burned through $145.5 million in cash over the last twelve months, a negative 54.7% free cash flow margin. This low FCF margin is a result of C3.ai's need to still heavily invest in the business.

Key Takeaways from C3.ai's Q1 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 $1.99 billion and more than $907.2 million in cash, the company has the capacity to continue to prioritise growth over profitability.

C3.ai delivered solid revenue growth this quarter. That feature of these results stood out as a positive. On the other hand, it was unfortunate to see that C3.ai's revenue guidance for the full year massively missed analyst's expectations. Overall, this quarter's results could have been better. The company is down 13.2% on the results and currently trades at $15.58 per share.

Is Now The Time?

When considering C3.ai, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although C3.ai is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been strong, though we don't expect it to maintain historical growth rates. But while its efficient customer acquisition is better than many similar companies, unfortunately its growth is coming at a cost of significant cash burn.

C3.ai's price to sales ratio based on the next twelve months is 5.8x, suggesting that the market has lower expectations of the business, relative to the high growth tech stocks. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that C3.ai doesn't trade at a completely unreasonable price point.

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