C3.ai (AI)

Artificial intelligence (AI) software company C3.ai (NYSE:AI) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 25.6% year on year to $108.7 million. The company expects next quarter’s revenue to be around $104.5 million, close to analysts’ estimates. Its non-GAAP loss of $0.60 per share was significantly below analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, C3.ai grew its sales at a 15.5% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, C3.ai reported robust year-on-year revenue growth of 25.6%, and its $108.7 million of revenue topped Wall Street estimates by 0.8%. Company management is currently guiding for a 19.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 17.9% over the next 12 months, an acceleration versus the last three years. This projection is commendable and suggests its newer products and services will fuel better top-line performance.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

C3.ai’s billings punched in at $112.3 million in Q1, and over the last four quarters, its growth was fantastic as it averaged 28.3% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s very expensive for C3.ai to acquire new customers as its CAC payback period checked in at 159.6 months this quarter. The company’s slow recovery of its sales and marketing expenses indicates it operates in a highly competitive market and must invest to stand out, even if the return on that investment is low.

For software companies like C3.ai, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

C3.ai’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 60.6% gross margin over the last year. That means C3.ai paid its providers a lot of money ($39.38 for every $100 in revenue) to run its business.

In Q1, C3.ai produced a 62.1% gross profit margin, marking a 2.5 percentage point increase from 59.6% in the same quarter last year. C3.ai’s full-year margin has also been trending up over the past 12 months, increasing by 3.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

C3.ai’s expensive cost structure has contributed to an average operating margin of negative 83.4% over the last year. Unprofitable software companies require extra attention because they spend heaps of money to capture market share. As seen in its historically underwhelming revenue performance, this strategy hasn’t worked so far, and it’s unclear what would happen if C3.ai reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, C3.ai’s expanding sales gave it operating leverage as its margin rose by 19.1 percentage points. Still, it will take much more for the company to reach long-term profitability.

This quarter, C3.ai generated a negative 81.8% operating margin. The company's consistent lack of profits raise a flag.

If you’ve followed StockStory for a while, you know 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.

While C3.ai posted positive free cash flow this quarter, the broader story hasn’t been so clean. C3.ai’s demanding reinvestments have consumed many resources over the last year, contributing to an average free cash flow margin of negative 11.4%. This means it lit $11.42 of cash on fire for every $100 in revenue.

C3.ai’s free cash flow clocked in at $10.33 million in Q1, equivalent to a 9.5% margin. The company’s cash profitability regressed as it was 12.2 percentage points lower than in the same quarter last year, but it’s still above its one-year average. We wouldn’t put too much weight on this quarter’s decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.

Over the next year, analysts’ consensus estimates show they’re expecting C3.ai’s free cash flow margin of negative 11.4% for the last 12 months to remain the same. Hopefully the company’s cash profitability will rise soon.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

C3.ai burned through $44.45 million of cash over the last year. With $742.7 million of cash and no debt on its balance sheet, we think the company is in a strong financial position and has enough runway (we typically look for at least two years) to continue prioritizing growth over profitability.

Revenue and adjusted operating income both beat in the quarter. Looking forward, revenue guidance for next quarter was roughly in line with Wall Street's estimates, but operating income guidance for the period was nicely above expectations. Finally, "C3 AI and Baker Hughes renewed and expanded their strategic partnership through a multi-year agreement", and this is a relief to the market as it is the largest partnership for the software company. Overall, this was a solid quarter. The stock traded up 15.1% to $26.51 immediately following the results.

Updated: June 12, 2025 at 10:12 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in C3.ai.

C3.ai isn’t a terrible business, but it isn’t one of our picks. First off, its revenue growth was uninspiring over the last three years. And while its expanding operating margin shows it’s becoming more efficient at building and selling its software, the downside is its operating margins reveal poor profitability compared to other software companies. On top of that, its customer acquisition is less efficient than many comparable companies.

C3.ai’s price-to-sales ratio based on the next 12 months is 7x. At this valuation, there’s a lot of good news priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $28.93 on the company (compared to the current share price of $24.25).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.