C3.ai, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended January 31, 2021; filed March 2, 2021. Unaudited results. C3.ai provides enterprise AI software, applications and implementation services.
Key financial metrics
| Metric | Three months ended Jan. 31, 2021 | Nine months ended Jan. 31, 2021 |
|---|---|---|
| Revenue | $49.1 million; +19% year over year | $130.9 million; +14% |
| Subscription revenue | $42.7 million; +23% | $114.2 million; +16% |
| Professional services revenue | $6.4 million; −4% | $16.7 million; +2% |
| Gross profit / margin | $36.9 million / 75% | $98.1 million / 75% |
| Operating loss | $18.5 million | $36.4 million |
| Net loss | $16.9 million | $31.6 million |
| Cash used in operating activities | $5.8 million for the nine-month period; free cash flow, as defined by the company, was negative $7.0 million |
Quarterly gross margin increased from 74% a year earlier, while nine-month gross margin was unchanged at 75%. Quarterly operating expenses rose 36% to $55.4 million, including higher sales and marketing, research and development, and general and administrative costs. Nine-month operating loss and net loss improved year over year, but the quarterly losses widened. Stock-based compensation was $6.6 million in the quarter and $14.3 million year to date.
Liquidity, debt and capital
- At January 31, cash and cash equivalents were $960.1 million and short-term investments were $162.9 million; combined, $1.123 billion. Current liabilities were $104.1 million.
- The December 2020 IPO generated $694.6 million net proceeds; concurrent private placements to Koch Industries affiliate Spring Creek Capital and Microsoft generated $150.0 million. The IPO also converted preferred and Class A-1 securities into common equity.
- The company reported accumulated deficit of $325.3 million and expects operating losses and negative operating cash flows for the foreseeable future. Management said available cash and short-term investments should cover working capital and capital expenditure needs for at least 12 months.
- The $6.3 million PPP loan was repaid in August 2020, including accrued interest. No material debt balance is identified in the provided filing text.
Material changes and business indicators
- Remaining performance obligations (RPO) were $247.5 million at January 31, versus $239.7 million at April 30, 2020; $131.1 million was expected to be recognized over the next 12 months. RPO includes deferred revenue and non-cancellable contracted amounts, but excludes certain usage-based charges.
- Deferred revenue totaled $62.3 million, compared with $60.3 million at April 30. Cancellable backlog, excluded from RPO, increased to $48.4 million from $7.2 million.
- North America revenue fell year over year in the quarter, while EMEA and Asia Pacific revenue increased. International customers represented approximately 40% of quarterly revenue and 35% of nine-month revenue.
- Two customers individually represented 16% and 12% of quarterly revenue. The top three entities together accounted for 36% of nine-month revenue. Baker Hughes revenue was $8.0 million in the quarter and $21.6 million year to date, versus $9.9 million and $30.6 million, respectively, a year earlier.
Outlook, commentary and risks
The filing provides no quantified revenue or earnings guidance. Management expects continued investment in product development, sales, marketing, international expansion and public-company costs; it anticipates operating losses and negative operating cash flow for the foreseeable future. It expects research and development and sales and marketing spending to rise in absolute dollars near term, while those expenses may decline as a percentage of revenue over time as the business scales.
- Management said COVID-19 had adversely affected the conclusion of new and additional agreements in 2020 and could continue to lengthen sales cycles, reduce customer spending or renewals, and complicate collections.
- Customer concentration, long and unpredictable sales cycles, and reliance on renewals and expansion create revenue volatility. Baker Hughes has multiyear minimum revenue commitments; any shortfall is assessed at fiscal year-end, and the company may owe commissions on reseller sales above the commitments.
- The company has a non-cancellable cloud-hosting commitment of at least $30 million over November 2019–November 2022, with a minimum $10 million per year. Potential remaining C3.ai Digital Transformation Institute grants were $44.6 million, conditional on program requirements.
- Foreign currency exposure is unhedged; management said a hypothetical 10% exchange-rate change could have a material financial-statement impact. The filing also highlights privacy, cybersecurity, competition, execution, and technology risks.
- The Third Circuit affirmed a favorable judgment in the Blattman litigation on February 17, 2021; the company intends to seek recovery of previously awarded legal fees and costs. Management said resolution of other ordinary-course legal matters was not expected to have a material adverse impact.
- Class B shares carry 50 votes each. Thomas Siebel and related entities controlled approximately 75.2% of voting power at January 31, 2021, according to the filing.
Key facts for investors to verify
- Whether customer additions, renewals and expansion can sustain subscription growth as dependence on a small number of large customers remains material.
- How much of RPO and Baker Hughes’ minimum commitments converts to recognized revenue, and the timing and conditions attached to those commitments.
- Whether subscription-margin gains persist while professional-services margins fell sharply in the quarter, and whether operating expenses and stock-based compensation remain elevated.
- Actual operating cash burn and investment liquidity relative to management’s stated 12-month sufficiency assessment.
- Potential share dilution, post-IPO lock-up expirations, and the continuing effect of the dual-class voting structure.