Artificial intelligence (AI) software company C3.ai (NYSE:AI) reported Q3 FY2023 results that beat analyst expectations, with revenue down 4.45% year on year to $66.7 million. Guidance for next quarter's revenue was $71 million at the midpoint, which is 1.65% above the analyst consensus. C3.ai made a GAAP loss of $63.2 million, down on its loss of $39.4 million, in the same quarter last year.
C3.ai (AI) Q3 FY2023 Highlights:
- Revenue: $66.7 million vs analyst estimates of $64.2 million (3.77% beat)
- EPS (non-GAAP): -$0.06 vs analyst estimates of -$0.22
- Revenue guidance for Q4 2023 is $71 million at the midpoint, above analyst estimates of $69.8 million
- Free cash flow was negative $71.7 million, compared to negative free cash flow of $77 million in previous quarter
- Gross Margin (GAAP): 66.6%, 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.
As you can see below, C3.ai's revenue growth has been strong over the last two years, growing from quarterly revenue of $49.1 million in Q3 FY2021, to $66.7 million.
But this quarter C3.ai's revenue was down 4.45% year on year, which might be a disappointment to some shareholders.
C3.ai is guiding for revenue to decline next quarter 1.82% year on year to $71 million, a further deceleration on the 38.3% year-over-year decrease 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 13.9% over the next twelve months.
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 66.6% in Q3.
That means that for every $1 in revenue the company had $0.67 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.
Cash Is King
If you have followed 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 $71.7 million in Q3, increasing the cash burn by 27.6% year on year.
C3.ai has burned through $218.3 million in cash over the last twelve months, a negative 81.8% 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 Q3 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 $2.29 billion and more than $772.4 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. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, free cash flow burn continues. Zooming out, we think this was still a decent, albeit mixed, quarter. The company is up 9.3% on the results and currently trades at $23.28 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. We cheer for everyone who is making the lives of others easier through technology, but in case of C3.ai we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its growth is coming at a cost of significant cash burn and its gross margins aren't as good as other tech businesses we look at.
Given its price to sales ratio based on the next twelve months is 7.8x, C3.ai is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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