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C3.ai's (NYSE:AI) Q1 Sales Top Estimates But Stock Drops


Full Report / September 01, 2021
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Artificial intelligence (AI) software company C3.ai (NYSE:AI) reported Q1 FY2022 results that beat analyst expectations, with revenue up 29.4% year on year to $52.4 million. C3.ai made a GAAP loss of $37.4 million, down on its profit of $150 thousand, in the same quarter last year.

C3.ai (AI) Q1 FY2022 Highlights:

  • Revenue: $52.4 million vs analyst estimates of $51.2 million (2.21% beat)
  • EPS (GAAP): -$0.37
  • Revenue guidance for Q2 2022 is $57 million at the midpoint, above analyst estimates of $56.1 million
  • The company reconfirmed revenue guidance for the full year, at $245 million at the midpoint
  • Free cash flow of $11 thousand, up from negative free cash flow of -$32.19 million in previous quarter
  • Gross Margin (GAAP): 75.1%, down from 77.5% previous quarter

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.

We are still in the early stages of an AI adoption cycle and coupled with the shortage of talent and the enormous costs of developing AI technology from scratch, the demand for platforms that make implementing AI-based technology easier is expected to continue to grow.

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 strong over the last year, growing from quarterly revenue of $40.4 million, to $52.4 million.

C3.ai Total Revenue

This quarter, C3.ai's quarterly revenue was once again up a very solid 29.4% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $122 thousand in Q1, compared to $3.17 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 35.1% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

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, licences, technical support and other necessary running expenses was at 75.1% in Q1.

C3.ai Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite the recent drop, this is still a good gross margin that allows companies like C3.ai to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

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 $5.35 billion and more than $1.09 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

It was good to see C3.ai deliver strong revenue growth this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is down -6.03% on the results and currently trades at $49.9 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 a little slower, but at least that growth rate is expected to increase in the short term. And while its strong gross margins suggest it can operate profitably and sustainably, the downside is that its customer acquisition is less efficient than many comparable companies and its growth is coming at a cost of significant cash burn.

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