C3.ai, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended July 31, 2022; comparable period is the three months ended July 31, 2021. The financial statements are unaudited. C3.ai provides enterprise AI software and related professional services.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $65.3 million | $52.4 million | +25% |
| Subscription revenue | $57.0 million | $46.1 million | +24% |
| Professional services revenue | $8.3 million | $6.3 million | +32% |
| Gross profit / gross margin | $46.9 million / 72% | $39.4 million / 75% | Margin down 3 percentage points |
| Operating expenses | $120.1 million | $75.9 million | +58% |
| Operating loss | $(73.2) million | $(36.5) million | Loss widened |
| Net loss / diluted loss per share | $(71.9) million / $(0.67) | $(37.5) million / $(0.37) | Loss widened |
| Cash used in operating activities | $(38.3) million | $1.0 million provided | Changed to cash outflow |
| Free cash flow (non-GAAP) | $(54.8) million | $0.01 million | Changed to cash outflow |
- Subscription gross margin was 75%, down from 80%; professional services gross margin improved to 48% from 39%. The lower overall margin primarily reflected subscription personnel costs.
- Research and development expense increased 109% to $55.9 million; sales and marketing increased 17% to $43.0 million; general and administrative increased 72% to $21.2 million. Stock-based compensation was $56.6 million, versus $13.9 million a year earlier.
- At July 31, cash and cash equivalents were $221.9 million and investments totaled $716.3 million, for combined cash and investments of approximately $938.2 million. Total current assets were $1.007 billion and current liabilities $131.3 million. The filing reports no outstanding debt balance.
- Total assets were $1.137 billion, total liabilities $158.2 million, and stockholders’ equity $979.0 million. Accumulated deficit was $613.3 million.
- Cash, cash equivalents and restricted cash declined $117.6 million during the quarter. Investing cash outflow was $80.5 million, including $16.5 million of property, equipment and capitalized software spending; investment purchases and maturities also drove substantial cash movements.
Material changes and operating indicators
- Revenue growth was driven primarily by existing customers: management attributed approximately 86% of subscription revenue growth to existing customers, including a $6.1 million increase related to Baker Hughes; approximately 14% came from new customers. Customer count rose to 228 from 180.
- Customer concentration remains significant: two Customer-Entities represented 25% and 14% of quarterly revenue. The United States accounted for 79% of revenue, up from 69%.
- Remaining performance obligations (RPO) were $458.2 million at July 31, down from $477.4 million at April 30. Of the July balance, $173.5 million was expected to be recognized over the next 12 months. RPO excludes certain usage-based amounts and cancellable backlog.
- Deferred revenue was $43.7 million, down from $49.1 million at April 30. Unbilled accounts receivable increased to $39.3 million from $19.9 million.
Outlook, risks and unusual items
- The filing provides no specific quarterly or annual revenue or earnings guidance. Management expects operating losses and negative operating cash flows for the foreseeable future, and says existing cash and investments should cover working capital and capital expenditure needs for at least 12 months.
- Management expects continued investment in research and development, sales, marketing and international expansion. It also identifies long and unpredictable sales cycles, customer renewal and adoption uncertainty, competition, and reliance on a limited number of large customers as significant business risks.
- Baker Hughes is a substantial strategic customer and reseller partner. Revenue related to the arrangement was $23.6 million this quarter. Its annual commitments were revised in 2021 and are subject to reductions for certain revenue beginning in fiscal 2023; management must update estimates of variable consideration. Baker Hughes-related RPO was $198.0 million.
- Significant contractual commitments include a minimum $100 million of cloud services spending over three years beginning July 2022, a web-hosting commitment of at least $30 million through November 2022, and an office lease with approximately $103.1 million of undiscounted base rent. The company also reported $31.6 million of potential remaining C3.ai Digital Transformation Institute contributions, conditional on program requirements.
- The company disclosed a securities class action and a shareholder derivative action alleging, among other matters, misstatements concerning Baker Hughes, strategic alliances, market potential and product uptake. C3.ai says it believes the claims lack merit and that an unfavorable outcome was not probable as of the filing, but acknowledges a possible material impact if the cases are resolved unfavorably.
- Other risks highlighted include foreign-exchange exposure (the company has no formal currency-hedging program), data privacy and cybersecurity, COVID-19-related business uncertainty, and the high-vote Class B share structure. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and customer expansion continue, and how much remains attributable to existing large customers and Baker Hughes.
- Whether RPO converts to recognized revenue as expected, given its decline and exclusions for usage-based and cancellable amounts.
- Whether expense growth—particularly research and development and stock-based compensation—moderates, and what drives the path toward profitability.
- Operating cash use, capital spending and investment liquidity, including the timing and scale of contractual cloud and lease commitments.
- Developments in the securities and derivative lawsuits, and any changes to Baker Hughes commitments or variable-consideration estimates.