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C3.ai (NYSE:AI) Q2: Beats On Revenue, Provides Encouraging Quarterly Guidance


Full Report / December 01, 2021
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Artificial intelligence (AI) software company C3.ai (NYSE:AI) reported Q2 FY2022 results topping analyst expectations, with revenue up 40.9% year on year to $58.2 million. Guidance for next quarter's revenue was $67 million at the midpoint, 2% above the average of analyst estimates. C3.ai made a GAAP loss of $56.7 million, down on its loss of $14.9 million, in the same quarter last year.

C3.ai (AI) Q2 FY2022 Highlights:

  • Revenue: $58.2 million vs analyst estimates of $56.9 million (2.3% beat)
  • EPS (GAAP): -$0.55 vs. -$0.41 (34% miss)
  • Revenue guidance for Q3 2022 is $67 million at the midpoint, above analyst estimates of $65.6 million
  • The company lifted revenue guidance for the full year, from $245 million to $249.5 million at the midpoint, a 1.83% increase
  • Free cash flow was negative $19.8 million, down from positive free cash flow of $0.01 million in previous quarter
  • Gross Margin (GAAP): 72.5%, down from 75.6% 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.

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 $41.3 million, to $58.2 million.

C3.ai Total Revenue

This was a standout quarter for C3.ai, with the quarterly revenue up 40.9% year on year, which is above average for the company. On top of that, revenue increased $5.85 million quarter on quarter, a very strong improvement on the $0.122 million increase in Q1 2022, and a sign of acceleration of growth.

Analysts covering the company are expecting the revenues to grow 34% over the next twelve months, although estimates are likely to change post earnings.

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 72.5% in Q2.

C3.ai Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.72 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 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.

Key Takeaways from C3.ai's Q2 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 $3.84 billion and more than $970.4 million in cash, the company has the capacity to continue to prioritize growth over profitability.

We enjoyed seeing C3.ai’s impressive 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. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 2.77% on the results and currently trades at $34.76 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, and that growth rate is even expected to increase in the short term. 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 11.9x, 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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