Shares of C3.ai (NYSE: AI) have experienced a significant decline, dropping nearly 26% this year, after the company’s latest earnings report failed to meet investor expectations for subscription revenue growth. Let’s delve into the details of the tech company’s recent financial performance and assess whether the market reaction is justified.
Disappointing Subscription Growth and Guidance
For the first quarter of fiscal 2025, C3.ai reported a 21% increase in total revenue year over year, reaching $87.2 million. This marked a slight acceleration from the 20% growth observed in the previous quarter. Revenue was within the company’s forecast range of $84 million to $89 million. However, subscription revenue grew by only 20% year over year to $74.5 million, falling short of the 41% growth recorded in the same quarter last year. The sharp deceleration in subscription revenue growth, which had been consistently accelerating over the past year, disappointed investors.
Gross Margins and Profitability
C3.ai reported gross margins of 59.8%, which are relatively low compared to the industry average of 75% or more for software companies. Adjusted gross margins, excluding stock-based compensation, were around 70%. Subscription gross margins were 54.7% for the quarter, down from 56.4% in Q4 but improved from 50.4% a year ago. The company remains unprofitable, posting an adjusted earnings per share (EPS) loss of $0.05. Despite generating $7.1 million in free cash flow, C3.ai expects to be free-cash-flow negative in fiscal Q2 and Q3 due to ongoing investments, before returning to positive cash flow in Q4. For the full fiscal year, the company anticipates being free-cash-flow positive.
Financial Position and Future Outlook
At the end of the quarter, C3.ai had $762.5 million in cash and marketable securities with no debt. The company forecasts fiscal Q2 revenue between $88.6 million and $93.6 million, indicating 22% to 29% growth. For the full fiscal year, revenue is expected to grow between 18% and 27%, ranging from $370 million to $395 million, unchanged from previous guidance.
The company is shifting from a subscription (SaaS) model to a consumption-based model, which has introduced increased unpredictability in its revenue forecasting. On a positive note, C3.ai closed 71 deals during the quarter, a 122% increase from the 32 deals signed last year. Additionally, pilots, or short-term trial agreements, rose 117% year over year to 52 agreements. Of the 224 pilots signed, 191 are still active.
Investment Considerations
C3.ai’s stock, now trading at a forward price-to-sales (P/S) ratio of about 7 based on current fiscal-year estimates, is not considered expensive relative to its projected low- to mid-20% revenue growth. However, several concerns persist. The company’s gross margins, particularly in the subscription segment, remain below industry standards. The transition to a consumption-based model has increased revenue volatility, and the use of stock-based compensation has been aggressive, diluting shareholder value. The company’s share-based compensation of $54.7 million constituted 62.7% of its Q1 revenue, and its share count has increased by 7.4% over the past year.
Conclusion
While C3.ai’s long-term potential remains, the current challenges in gross margins and high stock-based compensation warrant caution. Potential investors should be wary of the increased volatility and the impact of the company’s transition to a consumption-based model. Given these factors, it may be prudent to stay on the sidelines until there are signs of improvement in these key areas.
Related Topics:
