C3.ai, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2021. Unaudited results; comparative periods ended October 31, 2020. Fiscal year ends April 30. C3.ai provides enterprise AI software and related implementation services.
Financial results
| Metric | Three months ended Oct. 31, 2021 | Year-over-year | Six months ended Oct. 31, 2021 | Year-over-year |
|---|---|---|---|---|
| Subscription revenue | $47.4 million | +32% | $93.5 million | +31% |
| Professional services revenue | $10.9 million | +98% | $17.1 million | +67% |
| Total revenue | $58.3 million | +41% | $110.7 million | +35% |
| Gross profit / margin | $42.3 million / 73% | 76% margin prior year | $81.7 million / 74% | 75% margin prior year |
| Operating expenses | $98.0 million | +114% | $173.9 million | +120% |
| Operating loss | $(55.7) million | $(14.5) million prior year | $(92.2) million | $(17.8) million prior year |
| Net loss | $(56.7) million | $(14.9) million prior year | $(94.2) million | $(14.8) million prior year |
| Net loss per share | $(0.55) | $(0.39) prior year | $(0.91) | $(0.39) prior year |
Quarterly gross margin fell three percentage points, which management attributed primarily to higher personnel costs. Subscription gross margin was 76%, versus 80% a year earlier; professional services gross margin rose to 58%, from 45%. Operating expenses grew much faster than revenue, particularly sales and marketing and research and development. Stock-based compensation was $32.5 million for the quarter and $46.5 million for the six-month period, compared with $5.2 million and $7.7 million, respectively, a year earlier.
Cash, liquidity, debt, and balance sheet
- At October 31, 2021, cash and cash equivalents were $167.4 million; short- and long-term investments totaled $904.7 million. Combined cash, cash equivalents, and investments were approximately $1.07 billion.
- Current assets were $1.02 billion and current liabilities were $132.2 million. Total liabilities were $138.4 million and stockholders’ equity was $1.03 billion.
- The balance sheet reports no outstanding borrowings. The $6.3 million PPP loan received in 2020 was repaid in full that August.
- For the six months, operating cash flow was $(17.9) million, versus $18.8 million provided in the prior-year period. Free cash flow, as defined by the company, was $(19.8) million, versus $17.9 million provided.
- Cash, cash equivalents, and restricted cash increased $64.2 million over the six months. Investing activities provided $70.8 million, mainly reflecting investment maturities and sales exceeding purchases; financing activities provided $11.2 million, primarily from stock-option exercises.
- Accumulated deficit was $443.5 million. Management said existing cash and investments should fund working capital and capital expenditures for at least the next 12 months.
Business changes and key metrics
- Remaining performance obligations (RPO) were $465.5 million at October 31, up from $293.8 million at April 30, 2021. The company expected $179.4 million to be recognized over the following 12 months. RPO includes deferred revenue and non-cancellable contracted amounts, but excludes certain usage-based amounts and cancellable backlog.
- Deferred revenue was $72.9 million, down from $75.2 million at April 30. Cancellable backlog, excluded from RPO, was $63.8 million, up from $51.3 million.
- The company reported 104 customers. Two customers represented 28% and 11% of quarterly revenue; two represented 25% and 12% of six-month revenue. The risk discussion says the top two market partners together accounted for 39% of quarterly revenue and 37% of six-month revenue.
- North America revenue grew to $43.7 million for the quarter, from $27.8 million; the United States represented 75% of quarterly revenue, versus 66% a year earlier. International revenue was 25% of the quarter’s total, versus 34%.
Outlook, commentary, risks, and unusual items
- No specific revenue, earnings, or cash-flow guidance is provided. Management expects to continue investing in sales and marketing, product development, hiring, and international expansion, and anticipates operating losses and potentially negative operating cash flows for the foreseeable future.
- Management expects sales and marketing expense to remain high in the near term and research and development expense to increase in absolute dollars. It anticipates these expenses declining as a share of revenue over the longer term as the business scales.
- The October 2021 Baker Hughes agreement extends the relationship through fiscal 2025 and revises annual commitments to $85 million in FY2023, $110 million in FY2024, and $125 million in FY2025. From FY2023, commitments may be reduced by qualifying revenue Baker Hughes generates. The company recognized a $16.0 million Baker Hughes sales commission as deferred costs, to be amortized over an expected five years. Six-month revenue associated with Baker Hughes was $36.7 million; the filing identifies substantial customer and partner concentration risk.
- The company signed a lease for approximately 283,015 square feet of Redwood City office space, with approximately $103.1 million in undiscounted base rent over the term. It provided a $12.6 million letter of credit; the lease was not yet included in recognized operating lease assets or liabilities at October 31.
- A non-cancellable cloud-hosting arrangement requires at least $30.0 million of spending from November 2019 through November 2022. Potential remaining C3.ai Digital Transformation Institute contributions were $37.4 million, conditional on program requirements.
- In an ongoing former-unitholder lawsuit, the court had ruled for the defendants and an appeals court affirmed. A special master recommended $9.7 million in attorneys’ fees and costs for the company; plaintiffs objected and sought $8.3 million. The district court had not yet issued its order.
- COVID-19 continued to pose risks to customer demand, sales cycles, collections, and operations. Other disclosed risks include intense competition, dependence on large customers and partners, cybersecurity and privacy exposure, foreign-exchange volatility, and execution of growth plans. The company said a hypothetical 10% foreign-exchange change could materially affect its financial statements and it had no formal currency-hedging program.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter. The company expected to cease qualifying as an emerging growth company on April 30, 2022.
Important facts for investors to verify
- Whether RPO growth converts into recognized revenue on the expected timetable, and how much depends on Baker Hughes and other major customers or partners.
- Whether revenue growth can keep pace with operating expense growth, particularly sales and marketing, research and development, and stock-based compensation.
- Whether the significant increase in losses and the shift to negative operating cash flow persist; assess cash use alongside the company’s large investment portfolio and lease commitments.
- The final economic effects of the revised Baker Hughes terms, including commitment adjustments, reseller performance, commission costs, and related-party balances.
- The outcome of the attorneys’ fee proceeding, the commencement and costs of the new office lease, and obligations under hosting and grant commitments.