C3.ai, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended July 31, 2021; comparison is the three months ended July 31, 2020. Financial statements are unaudited. C3.ai provides enterprise AI software, subscriptions and related implementation services.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Subscription revenue | $46.1 million | $35.7 million | +29% |
| Professional services revenue | $6.3 million | $4.8 million | +31% |
| Total revenue | $52.4 million | $40.5 million | +29% |
| Gross profit / margin | $39.4 million / 75% | $30.0 million / 74% | Margin +1 percentage point |
| Operating expenses | $75.9 million | $33.3 million | +128% |
| Operating loss | $(36.5) million | $(3.3) million | Loss widened |
| Net income (loss) | $(37.5) million | $0.2 million | Turned to loss |
| Operating cash flow | $1.0 million | $17.1 million | Down $16.0 million |
| Free cash flow, non-GAAP | $0.01 million | $16.4 million | Down substantially |
- Subscription revenue was 88% of total revenue in both periods. Subscription gross margin improved to 80% from 76%; professional services gross margin fell to 39% from 60%, reflecting costs to support growth.
- Sales and marketing expense rose to $36.8 million from $14.4 million, including higher advertising and headcount costs. Research and development increased to $26.7 million from $13.3 million; general and administrative expense increased to $12.4 million from $5.7 million.
- Stock-based compensation was $13.9 million, compared with $2.5 million a year earlier. Other expense was $0.9 million, versus $3.0 million of other income in the prior period, largely reflecting foreign currency losses.
- Cash and cash equivalents were $273.8 million and short-term investments were $825.2 million at July 31, for a combined $1.10 billion. Total current assets were $1.17 billion and current liabilities were $140.1 million. Total liabilities were $147.7 million; the balance sheet shows no outstanding borrowings. The $6.3 million PPP loan was repaid in August 2020.
- Deferred revenue totaled $99.9 million, up from $75.2 million at April 30, 2021. Remaining performance obligations were $290.6 million, including $145.0 million expected to be recognized within 12 months.
Material changes and business developments
- Revenue grew by $11.9 million year over year, while operating expenses increased by $42.6 million. As a result, the company moved from a small prior-year profit to a $37.5 million net loss.
- Operating cash flow decreased despite a $24.7 million increase in deferred revenue. Management noted that working-capital movements and non-cash stock compensation affected cash flow; investing cash flow was positive primarily because investment maturities and sales exceeded purchases.
- Two customers represented 23% and 13% of quarterly revenue. The filing also reports that the two largest market partners together accounted for 36% of revenue. Baker Hughes-related revenue was $16.1 million in the quarter; the company recognized $10.2 million in subscription revenue and $2.1 million in professional services revenue from Baker Hughes.
- RPO was slightly lower than the $293.8 million reported at April 30, 2021, while cancellable backlog increased to $66.6 million from $51.3 million. RPO excludes certain usage-based amounts and unsigned partner resale commitments.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expects continued operating losses and potentially negative operating cash flow as it invests in sales and marketing, research and development, personnel, international expansion and product development. It believes cash, cash equivalents and short-term investments will fund working capital and capital expenditures for at least the next 12 months.
- Management expects substantial near-term sales and marketing investment and continued high research and development spending. It anticipates those expenses may decline as a percentage of revenue over the longer term as the business scales; these statements are forward-looking and not guarantees.
- Key risks include reliance on a small number of large customers and partners, contract renewals and expansion, long and unpredictable sales cycles, competition, and the company’s history of losses. The filing also highlights COVID-19-related uncertainty, data privacy and cybersecurity exposure, foreign currency risk, and dependence on strategic partners.
- A noncancelable web-hosting arrangement requires at least $30.0 million of spending over November 2019–November 2022. Potential remaining C3.ai Digital Transformation Institute contributions were $40.2 million, conditional on program requirements.
- After quarter-end, the company signed a lease for approximately 283,015 square feet of Redwood City office space. Undiscounted base rent is approximately $103.1 million over the lease term; the agreement includes a $44.2 million tenant-improvement allowance and a $12.6 million letter of credit.
- In a long-running lawsuit, the Third Circuit affirmed judgment for the company and other defendants. A special master recommended awarding the company $9.7 million in fees and expenses; plaintiffs objected, and the district court had not yet ruled on the award as of the filing.
- Management said disclosure controls and procedures were effective at the reasonable-assurance level, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether customer and partner concentration, particularly Baker Hughes and the largest accounts, changes materially and how much contracted revenue converts to recognized revenue.
- Whether revenue growth can outpace sharply higher operating expenses and stock-based compensation, and what path management sees toward profitability and sustainable cash generation.
- The composition and quality of RPO and cancellable backlog, including the effect of usage-based revenue and partner resale commitments not included in RPO.
- The cash and contractual implications of the new office lease, hosting commitments, and conditional institute grants.
- The district court’s final decision on the recommended legal-fee award, and any material changes in COVID-19, foreign-exchange, privacy or cybersecurity risks.