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C3.ai (NYSE:AI) Q4: Beats On Revenue But Stock Drops 20% On Weak Guidance


Full Report / June 24, 2022
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Artificial intelligence (AI) software company C3.ai (NYSE:AI) beat analyst expectations in Q4 FY2022 quarter, with revenue up 38.3% year on year to $72.3 million. However, guidance for the next quarter was less impressive, coming in at $66 million at the midpoint, being 7.84% below analyst estimates. C3.ai made a GAAP loss of $58.4 million, down on its loss of $24 million, in the same quarter last year.

C3.ai (AI) Q4 FY2022 Highlights:

  • Revenue: $72.3 million vs analyst estimates of $71.2 million (1.44% beat)
  • EPS (non-GAAP): -$0.21 vs analyst estimates of -$0.29
  • Revenue guidance for Q1 2023 is $66 million at the midpoint, below analyst estimates of $71.6 million
  • Management's revenue guidance for upcoming financial year 2023 is $312 million at the midpoint, missing analyst estimates by 6.56% and predicting 23.4% growth (vs 37.6% in FY2022)
  • Free cash flow was negative $14.7 million, compared to negative free cash flow of $56.1 million in previous quarter
  • Gross Margin (GAAP): 75.9%, down from 77.5% 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 $52.2 million, to $72.3 million.

C3.ai Total Revenue

And unsurprisingly, this was another great quarter for C3.ai with revenue up 38.3% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.54 million in Q4, compared to $11.5 million in Q3 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates C3.ai is expecting revenue to grow 25.9% year on year to $66 million, slowing down from the 29.4% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $312 million at the midpoint, growing 23.4% compared to 37.6% increase in FY2022.

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 75.9% in Q4.

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. Significantly up from the last quarter, this is 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.

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 $14.7 million in Q4.

C3.ai Free Cash Flow

C3.ai has burned through $90.7 million in cash over the last twelve months, a negative 35.9% 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 Q4 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 $2.01 billion and more than $960.1 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We enjoyed seeing C3.ai’s impressive revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. On the other hand, it was unfortunate to see that C3.ai's revenue guidance for the full year indicates quite a significant slowdown in growth. Overall, this quarter's results were not the best we've seen from C3.ai. The company currently trades at $18.9 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 strong. But 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.

C3.ai's price to sales ratio based on the next twelve months is 5.7x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. 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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