C3.ai, Inc

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

C3.ai, Inc. is an enterprise AI application software provider, offering a platform and applications to diverse industries, leveraging AI and machine learning for predictive analytics and operational improvements.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: C3.ai provides a suite of AI-powered applications and a platform designed for enterprise use. The platform allows organizations to develop, deploy, and operate AI solutions with a focus on predictive maintenance, fraud detection, and supply chain optimization, among others. The company has transitioned toward a consumption-based pricing model that should increase stickiness with existing clients.

Revenues: C3.ai’s revenues primarily come from subscriptions to its software platform and applications, along with professional services for implementation and support. Subscription revenues are its largest and most reliable income stream. Professional services revenues can be more volatile, depending on project timelines and contract size. The company recently moved to a consumption-based pricing model, and they believe that this new model will support long term growth and higher revenues. Recurring revenues are about 80 percent and recurring like revenues is a key driver of revenue growth.
Industry Trends: The AI market is rapidly expanding, with significant growth projected in the coming years. Enterprises across industries are increasingly seeking ways to leverage AI for operational efficiencies, enhanced decision-making, and competitive advantages. However, this rapid growth and high demand has attracted increased competition. Customers are also seeking solutions that are easy to implement, as well as customized. There is also increased data privacy concerns and scrutiny, the company will have to do more in order to gain customer trust.
Margins: C3.ai has been working towards improving its margins, with an emphasis on greater operational efficiency. However, its net profit remains negative. This may be due to the large sales and marketing team, or R&D, or something else. It’s interesting to note they are moving the bulk of their investments from sales and marketing to R&D. Gross margins were around 70%.
Competitive Landscape: The AI market is crowded, with competition from established tech giants, smaller specialty AI firms, and consulting firms that also offer AI services. Key competitors include Microsoft, Google, and SAP, as well as other niche and emerging AI players. There are very high barriers to entry for smaller companies due to significant investments needed in R&D. The market is increasingly competitive with some companies trying to cut prices to gain a customer base, which will reduce profitability of all companies.
What Makes C3.ai Different: C3.ai focuses specifically on enterprise AI, offers pre-built AI applications tailored for specific business needs, and provides a low-code/no-code platform to enable quicker deployment and customization. Its strong relationship with various partners, including technology companies, also helps in its distribution.
Other Relevant Factors: The company is in a state of transformation from a contract-based model to a consumption-based model. Their CEO is very focused on AI, and all their efforts go into that niche.

Financials (latest 10-Q and other relevant filings): Revenue: C3.ai’s revenue has shown growth, but there are still issues in some metrics. The company reported $69.7 million in total revenue for the most recent quarter, representing a 20% year-over-year increase. Subscription revenues are up 14% year over year and representing 85% of the total revenue, while professional services revenue was $6.5 million with a drop of 19%. They are shifting from professional service revenue toward subscription revenue. Profitability: The company is still not profitable, but they are improving towards their goal of profitability. Gross profit was $52.3 million and gross margin was 75%. Their operating margin is still a major issue as it was a loss of 49%. Free cash flow was a loss of $47.1 million, which is a significant loss and they continue to work to reduce it. Balance Sheet: The company has around $772.5 million in cash, cash equivalents, and marketable securities. They have no debt, but substantial deferred revenue and non-cancellable purchase commitments are a form of liability. This is a great strength to the company and means they are able to take on new investments without worrying about financing them. Their intangible assets are $2.5B while their total assets are $1.76B.

Recent Concerns and Management’s Stance:

The change from a term-based subscription revenue model to a consumption-based revenue model has resulted in some short-term volatility in revenues. Management has been focusing on long-term opportunities and growth and improving efficiency, however, their current financials are a bit weak.
The company is trying to reduce its sales and marketing expenses and increase R&D, but so far their sales still have not changed.
The competitive landscape is very aggressive and the need for continuous innovation and development can stress their resources.
The company’s financials have been improving but there are issues with profitability.
Management believes their current financials are as per their expectations, as they are trying to find a way to expand their business rapidly, while also investing in R&D to maintain a competitive advantage, while also trying to improve profitability.

Moat Analysis: C3.ai’s moat can be classified as a 3 out of 5. It possesses a narrow moat due to some intangible assets such as its software platform and intellectual property, alongside moderate customer lock-in. Its reliance on the AI field as a whole exposes it to fast-evolving technologies and a highly competitive field. Here is a deeper breakdown.

Intangible Assets: C3.ai’s AI software platform and pre-built applications create some degree of product differentiation and brand loyalty. However, these are challenged by rapidly evolving technology.
Switching Costs: There are some switching costs as companies invest heavily in C3.ai’s solutions for long-term use, however the complexity of deployment makes implementation more expensive. The consumption-based model should help in increasing stickiness to increase a moat.
Network Effects: The company isn’t a platform as such, but they have a good reach with various partners. This creates some network effects, but not as much as true network platforms.
Cost Advantages: The company doesn’t have any cost advantages based on current financial information.

Legitimate Risks to the Moat:

Rapid Technological Change: AI technology is rapidly advancing, and new companies and advancements could quickly displace C3.ai’s solutions.
Increased Competition: The market is becoming increasingly competitive, and other companies may offer solutions that are very similar, even cheaper or more effective.
Customer Churn: If customer contracts are not renewed and subscription income isn’t recurring or new clients cannot be acquired, then the company can get significantly impacted.
Acquisition/Merger Risks: If the company fails in their goals of organic growth and decide to acquire or merge with other companies, then it would mean they are unable to find a competitive advantage on their own.
Integration Issues: Since they do a lot of third party applications, problems could occur with implementation and integration that would impact their effectiveness.

Business Resilience: C3.ai has good resilience, but it will be tested going forward. They have a good amount of cash and no debt, and their business model has been showing promising returns. However, due to being a growth company, and in an aggressive market, they will need to be quick in their decision making and take advantage of any opportunities that are presented to them.

Understandability: The business model is complex, but their products and services are very clear, making the company easy to understand. Therefore we will rate it at 4 out of 5.

Balance Sheet Health: C3.ai’s balance sheet has the strength to handle future challenges. The company has a great cash position and no debt. However, their operating margins are a concern. Their lack of profits, if the trend continues, may present a risk for the company’s operations. Due to the above reasons we assign a rating of 4 out of 5.