Shares of C3.ai (AI), an enterprise artificial intelligence software company, plummeted by 20% in premarket trading on Thursday after the company reported weaker-than-expected subscription revenue for the first quarter.
If the decline in share price persists, it could erase over $600 million from its market valuation of $2.97 billion.
The company has been struggling with slow conversions of pilot customers and cautious spending by enterprises due to high interest rates and economic uncertainties.
This report represents a significant setback for C3.ai, whose shares more than doubled last year.
What does the missed subscription revenue mean for C3.ai?
C3.ai’s subscription revenue for the first quarter amounted to $73.5 million, falling short of LSEG estimates of $79.1 million.
Subscription revenue, a key indicator for the company, comprises software licences, Software-as-a-Service (SaaS) offerings, pilot programmes, and trials of its AI applications, as well as consumption-based pricing models where revenue is recognised over time.
The shortfall of approximately $6.5 million compared to the previous quarter marks a stark contrast to the $9.5 million increase in the preceding quarter and the $5 million growth in the same period last year.
Analysts from D.A. Davidson have highlighted this decline as a significant concern for investors.
Why are enterprises tightening their spending?
High interest rates and economic uncertainty have led enterprises to tighten their spending, particularly on new technology investments such as artificial intelligence software.
C3.ai has faced challenges in converting pilot customers into paying subscribers, resulting in a slower-than-expected growth trajectory.
The cautious spending environment has led many companies to prioritise cost-saving measures over new investments, impacting C3.ai’s ability to expand its subscription base and revenue.
C3.ai’s gross margins under pressure
The company’s gross margins have come under pressure due to the high costs associated with pilot programs.
Management has noted that a greater mix of pilots in the sales pipeline is driving up the cost of revenue during the pilot phase of the customer lifecycle.
Finance chief Hitesh Lath stated in the post-earnings call that C3.ai expects continued short-term pressure on its operating margin due to additional investments in areas such as its salesforce, research and development, and marketing spend.
These investments are seen as crucial for long-term growth, but they also strain the company’s near-term profitability.
C3.ai 21% increase beats expectations
Despite the weak subscription numbers, C3.ai did report an overall increase in total revenue for the quarter.
The company posted $87.2 million in total revenue, a 21% year-over-year increase, and slightly above LSEG estimates of $86.9 million.
While this represents growth, the market has focused more on the decline in subscription revenue and the potential implications for future earnings.
The revenue beat is somewhat overshadowed by the broader concerns about the sustainability of the company’s business model in the face of economic challenges.
C3.ai is attempting to navigate a challenging landscape by investing in key areas such as research and development and expanding its salesforce.
However, these moves come with risks, particularly if the economic environment remains uncertain and enterprise spending continues to be conservative.
The company’s ability to convert pilots into long-term customers will be crucial in determining its future growth trajectory.
For now, C3.ai is facing an uphill battle to stabilise its subscription revenue and reassure investors about its long-term potential.
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