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C3.ai (NYSE:AI) Misses Q2 Revenue Estimates, Stock Drops


Full Report / December 06, 2023

Artificial intelligence (AI) software company C3.ai (NYSE:AI) missed analysts' expectations in Q2 FY2024, with revenue up 17.3% year on year to $73.23 million. Next quarter's revenue guidance of $76 million also underwhelmed, coming in 2.2% below analysts' estimates. It made a GAAP loss of $0.59 per share, improving from its loss of $0.63 per share in the same quarter last year.

C3.ai (AI) Q2 FY2024 Highlights:

  • Revenue: $73.23 million vs analyst estimates of $74.33 million (1.5% miss)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.18
  • Revenue Guidance for Q3 2024 is $76 million at the midpoint, below analyst estimates of $77.68 million
  • The company reconfirmed its revenue guidance for the full year of $307.5 million at the midpoint
  • Free Cash Flow was -$55.13 million compared to -$8.90 million in the previous quarter
  • Gross Margin (GAAP): 56.1%, down from 66.7% 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.

Data Infrastructure

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 mediocre over the last two years, growing from $58.26 million in Q2 FY2022 to $73.23 million this quarter.

C3.ai Total Revenue

Even though C3.ai fell short of analysts' revenue estimates, its quarterly revenue growth was still up 17.3% year on year. On top of that, its revenue increased $867,000 quarter on quarter, a strong improvement from the $48,000 decrease in Q1 2024. This is a sign of acceleration of growth and very nice to see indeed.

Next quarter, C3.ai is guiding for a 12.3% year-on-year revenue decline to $76 million, a further deceleration from the 4.4% year-on-year decrease 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.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 56.1% in Q2.

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 $55.13 million of cash in Q2 , increasing its cash burn by 28.4% year on year.

C3.ai Free Cash Flow

C3.ai has burned through $119.4 million of cash over the last 12 months, resulting in a negative 43.2% free cash flow margin. This low FCF margin stems from C3.ai's poor unit economics or a constant need to reinvest in its business to stay competitive.

Key Takeaways from C3.ai's Q2 Results

Although C3.ai, which has a market capitalization of $3.55 billion, has been burning cash over the last 12 months, its more than $762.3 million in cash on hand gives it the flexibility to continue prioritizing growth over profitability.

We struggled to find many strong positives in these results. Although the company brought in more subscription revenue than expected, its revenue missed Wall Street's estimates. Furthermore, its guidance for next quarter underwhelmed, with its revenue outlook slightly below analysts' estimates and its projected adjusted operating margin missing significantly. Overall, the results could have been better. The company is down 7.8% on the results and currently trades at $26.9 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 over the last two years, and analysts believe that'll remain steady. On top of that, its customer acquisition is less efficient than many comparable companies and its gross margins show its business model is much less lucrative than the best software businesses.

Given its price to sales ratio based on the next 12 months is 10.3x, 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.

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