C3.ai (AI)

Enterprise AI software company C3.ai (NYSE:AI) fell short of the market’s revenue expectations in Q2 CY2025, with sales falling 19.4% year on year to $70.26 million. Next quarter’s revenue guidance of $76 million underwhelmed, coming in 24.6% below analysts’ estimates. Its non-GAAP loss of $0.37 per share was 75.3% below analysts’ consensus estimates.

Company Overview

Named after the three Cs of its original focus—carbon, cloud computing, and customer relationship management—C3.ai (NYSE:AI) provides enterprise AI software that helps organizations develop, deploy, and operate large-scale artificial intelligence applications across various industries.

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.

C3.ai competes with large enterprise software providers like Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), and Oracle (NYSE:ORCL), cloud service providers offering AI platforms including Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), and specialized AI companies such as Palantir Technologies (NYSE:PLTR) and DataRobot.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, C3.ai grew its sales at a 11.9% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, C3.ai missed Wall Street’s estimates and reported a rather uninspiring 19.4% year-on-year revenue decline, generating $70.26 million of revenue. Company management is currently guiding for a 19.4% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 18.3% over the next 12 months, an acceleration versus the last three years. This projection is healthy 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 $63.63 million in Q2, and over the last four quarters, its growth slightly outpaced the sector as it averaged 12.4% year-on-year increases. This performance aligned with its total sales growth and shows the company is successfully converting sales into cash. Its growth also enhances liquidity and provides a solid foundation for future investments.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

C3.ai is very efficient at acquiring new customers, and its CAC payback period checked in at 28.6 months this quarter. The company’s rapid recovery of its customer acquisition costs means it can attempt to spur growth by increasing its sales and marketing investments.

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 56.5% gross margin over the last year. Said differently, C3.ai had to pay a chunky $43.53 to its service providers for every $100 in revenue.

This quarter, C3.ai’s gross profit margin was 37.6%, down 22.2 percentage points year on year. C3.ai’s full-year margin has also been trending down over the past 12 months, decreasing by 2 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

C3.ai’s expensive cost structure has contributed to an average operating margin of negative 101% 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.

Looking at the trend in its profitability, C3.ai’s operating margin decreased by 3.9 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. C3.ai’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

C3.ai’s operating margin was negative 178% this quarter. 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.

C3.ai’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 23.1%, meaning it lit $23.07 of cash on fire for every $100 in revenue.

C3.ai burned through $34.3 million of cash in Q2, equivalent to a negative 48.8% margin. The company’s cash flow turned negative after being positive in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts predict C3.ai will continue burning cash, albeit to a lesser extent. Their consensus estimates imply its free cash flow margin of negative 23.1% for the last 12 months will increase to negative 6.3%.

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 $85.86 million of cash over the last year. With $711.9 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.

We struggled to find many positives in these results. Its revenue guidance for next quarter missed and its revenue fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 12.6% to $14.59 immediately after reporting.

Updated: November 11, 2025 at 9:16 PM EST

Before making an investment decision, investors should account for C3.ai’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies addressing major business pain points, but in the case of C3.ai, we’re out. Although its revenue growth was solid over the last five years, it’s expected to deteriorate over the next 12 months and its declining operating margin shows it’s becoming less efficient at building and selling its software. And while the company’s efficient sales strategy allows it to target and onboard new users at scale, the downside is its operating margins reveal poor profitability compared to other software companies.

C3.ai’s price-to-sales ratio based on the next 12 months is 6.7x. At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $14.67 on the company (compared to the current share price of $15.30), implying they don’t see much short-term potential in C3.ai.