Summary
C3 AI reported fiscal second quarter revenue of $62.41 million, up 7.1% from $58.26 million a year earlier. Gross profit slipped 1.5% to $41.66 million from $42.29 million. Gross margin fell to 66.7% from 72.6%, a drop of 5.8 percentage points. The company tied the margin decline to higher personnel costs, greater stock-based compensation, and a mix shift in professional services. Year to date, revenue reached $127.72 million, up 15.4% from $110.67 million, while gross profit rose 8.4% to $88.56 million. Even so, year-to-date gross margin declined to 69.3% from 73.8%.
Operating losses widened. The quarter's operating loss was $71.97 million, compared with $55.68 million a year earlier, a 29.3% increase in the loss. Operating margin was -115.3%, down 19.8 percentage points from -95.6%. Net loss was $68.85 million, compared with $56.74 million, and diluted EPS was -$0.63, compared with -$0.55. For the first six months, operating loss was $145.18 million, up 57.5% from $92.19 million, and net loss was $140.72 million, up 49.4% from $94.20 million. Year-to-date diluted EPS was -$1.30, compared with -$0.91. Operating expenses rose on higher research and development and general and administrative costs, while sales and marketing expense decreased slightly. On a non-GAAP basis, gross profit was $47.8 million, gross margin was 77%, and loss from operations was $15.0 million, an improvement from $22.6 million a year earlier. Non-GAAP net loss per share was $(0.11), compared with $(0.23) a year earlier.
Cash generation weakened sharply. Operating cash flow was an outflow of $52.59 million for the quarter, compared with an outflow of $18.90 million a year earlier, a 178.3% decline. Year to date, operating cash flow was an outflow of $90.84 million, compared with an outflow of $17.88 million, a 408.2% decline. Capital expenditures were $24.44 million, up 2562.5% from $0.92 million. Deferred revenue fell 58.0% to $30.60 million from $72.88 million. Remaining performance obligations, or RPO, dropped 10.4% to $417.30 million from $465.50 million. The company said GAAP RPO represents 163% of Q2 annualized revenue. C3 AI also noted that RPO is not necessarily indicative of future revenue growth because it does not account for the timing of customers' consumption or their consumption of more than their contracted capacity.
Operationally, C3 AI completed its shift from subscription-based pricing to consumption-based pricing. New customers start with a two-quarter pilot and then pay a minimum monthly fee plus overage charges based on vCPU hours. The number of completed contracts rose to 25 from 12 a year earlier. Average contract value fell to $0.8 million from $19.0 million because of the new model. Customer count was 236 as of October 31, 2022, up from 203 a year earlier. The company expanded work with the U.S. Department of Defense, Shell, a large LNG producer, and New York State. It also deepened partnerships with Google Cloud, AWS, Microsoft, and Baker Hughes. C3 AI and Baker Hughes secured strategic deals with two supermajor national oil companies in the Middle East, another supermajor European oil and gas company, one of the largest chemical and plastics manufacturers in North America, and a major oil and gas company in the Asia-Pacific region.
Guidance points to continued pressure. The company issued total revenue guidance for the third quarter of fiscal 2023 and for the full fiscal year 2023. For the third quarter of fiscal 2023, non-GAAP loss from operations is guided to $25.0 million to $29.0 million. For the full fiscal year 2023, non-GAAP loss from operations is guided to $85.0 million to $98.0 million. The company expects to be operating profitably on a non-GAAP basis and to be cash positive by the end of fiscal 2024. Management said the pricing transition lowers revenue growth and decreases RPO in the short term, while the medium and long term effect should accelerate revenue growth. Risks include the ongoing COVID-19 pandemic, which could pressure IT spending, lengthen sales cycles, reduce renewals, and hurt collections. C3 AI also expects continued operating losses and negative cash flows, and it may need additional capital. International customers represented 23% of total revenue for the quarter.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $62.4M | $65.3M | -4.4% | $58.3M | +7.1% |
| Gross profit | $41.7M | $46.9M | -11.2% | $42.3M | -1.5% |
| Gross margin | 66.8% | 71.8% | -5.1 pp | 72.6% | -5.8 pp |
| Research & development | $50.1M | $55.9M | -10.4% | $36.5M | +37.0% |
| Sales & marketing | $44.9M | $43.0M | +4.5% | $46.2M | -2.7% |
| General & administrative | $18.6M | $21.2M | -12.3% | $15.3M | +22.0% |
| Total operating expenses | $113.6M | $120.1M | -5.4% | $98.0M | +16.0% |
| Operating income (loss) | -$72.0M | -$73.2M | +1.7% | -$55.7M | -29.3% |
| Operating margin | -115.3% | -112.1% | -3.2 pp | -95.6% | -19.8 pp |
| Net income (loss) | -$68.8M | -$71.9M | +4.2% | -$56.7M | -21.3% |
| Net margin | -110.3% | -110.0% | -0.3 pp | -97.4% | -12.9 pp |
| Diluted EPS | -$0.63 | -$0.67 | +$0.04 | — | — |
Risks
In Q2 FY2023 the company announced a shift to consumption-based pricing for new customers, with smaller initial contracts, two-quarter pilots, and revenue recognized on monthly vCPU consumption rather than ratably over subscription terms. Management expects FY2023 total revenue growth to be lower than historical rates until enough customers conclude pilots, and warns that slow consumption could cause actual results to differ from forecasts.
Total revenue rose 7.1% in Q2 FY2023 versus prior-year quarter and 15.4% year to date, but MD&A states it expects FY2023 total revenue growth lower than historical rates. Subscription revenue increased 26% in Q2 FY2023 while professional services revenue decreased 73%, and RPO declined to $417.3 million at Oct 31, 2022 from $477.4 million at Apr 30, 2022.
A limited number of customers have historically accounted for a substantial portion of revenue, and the average total subscription contract value is decreasing and expected to continue decreasing. Loss, non-renewal, or reduced spend by large customers could cause revenue to decline; deferred revenue was down 58.0% in Q2 FY2023 versus prior-year quarter.
Baker Hughes is exclusive channel partner and reseller in oil and gas and a significant customer; RPO related to Baker Hughes was $184.9 million at Oct 31, 2022, compared with $215.2 million at Apr 30, 2022, with $36.4 million of commitments not yet contracted. Termination, expiration, or renegotiation could impair co-branding, channel sales, and revenue.
Sales cycles are long and unpredictable, approximately five months on average but can extend over years for large organizations, and individual sales represent a large proportion of overall sales in a period. If deals slip or upfront investments do not yield sufficient revenue, operating results and cash flows may be adversely affected.
The company has incurred net losses since 2009, with net loss widening to $68.9 million in Q2 FY2023 and $140.7 million year to date, and an accumulated deficit of $682.1 million as of Oct 31, 2022. Operating cash flow was negative $90.8 million year to date, down 408.2% versus prior-year period, and management expects continued losses and negative operating cash flows and may need additional capital.
The Enterprise AI market is intensely competitive, with competitors including internal IT, point solution providers, open source, public cloud providers, system integrators, and legacy data management vendors. Larger competitors may bundle competing products, sell at zero or negative margins, or use broader distribution to reduce demand, pricing, and gross margins.
Total gross margin declined to 66.7% in Q2 FY2023 from 72.6% in prior-year quarter, with subscription margin down to 68% from 76% and professional services margin down to 45% from 58%. Higher personnel costs, stock-based compensation, hosting, and mix shift toward lower-margin professional services may continue to pressure margins.
COVID-19 caused global business disruption and had a significant adverse impact on new and additional business agreements in 2022, 2021, and 2020; management says conditions may continue to affect IT spending, lengthen sales cycles, reduce renewals and collections, and harm demand for C3 AI Software. General political and economic conditions also could cause fluctuations.
In March 2022 the company and certain current and former officers and directors were sued in a putative class action alleging material misstatements or omissions about the Baker Hughes partnership, strategic alliances, market potential, and product uptake. Securities litigation could result in substantial costs and divert management attention, and additional litigation may follow.
The company ceased to be an emerging growth company as of April 30, 2022, and now incurs additional costs including auditor attestation under Section 404. Failure to maintain effective disclosure controls and internal control over financial reporting could lead to restatements, loss of investor confidence, or NYSE listing issues.
Success depends on founder and CEO Thomas M. Siebel and other senior managers; all executive officers are at-will and there is no key person life insurance. Competition for data scientists, engineers, software developers, and sales personnel is intense, and some management lacks public company experience.
Dual-class structure gives Class B 50 votes per share; as of Oct 31, 2022 Mr. Siebel and related entities held approximately 57.0% of voting power. This concentrated control limits other stockholders' influence and could adversely affect the market price, and exclusion from certain indices may reduce passive investment.
SaaS KPIs
All quarters →Remaining Performance Obligations (RPO)
Non-GAAP Gross Margin
Cancellable backlog
Non-GAAP loss from operations
Customer Count
Summary, forecast, risks and KPIs are extracted from C3.ai, Inc.'s SEC filings for Q2 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.