To The Moon

Summary

• C3.ai, Inc. reports earnings after close on May 31.

• Investors can better gauge long-term growth prospects by paying attention to some key details.

• These details are further explained here.

Janos Varga

The recent market excitement surrounding artificial intelligence, or AI, has catapulted AI-related stocks to new heights. Nvidia Corporation's $NVIDIA Corp(NVDA)$ enormous guidance for the current quarter has further fueled this enthusiasm. Investors now eagerly await the impact of AI across the industry's financial performance.

C3.ai, Inc. $C3.ai, Inc.(AI)$ earnings are up next, reporting earnings after close May 31. C3.ai has already released preliminary results for the recently ended quarter (its fiscal Q4 2023), which showed a slight outperformance relative to their guidance from the previous quarter. The results also included some positive commentary regarding C3.ai's business. However, the guidance for the next quarter (Q1 2024) remains unknown, and this is what most investors are likely to be interested in when C3.ai reports later today.

In my opinion, there is a good chance that this guidance won't be as dramatic as Nvidia's. The process of acquiring customers and recognizing revenues can be lengthy for C3.ai. It often involves multiple steps, including planning, pilot projects, product development, deployment, and revenue recognition. This entire process can span several months or quarters. Therefore, even if C3.ai experiences rapid growth as interest in AI balloons, it is possible that much of this growth will not be reflected in this quarter's guidance. However, we can try to rectify this limitation by paying close attention to other signs of long-term growth that may provide a clearer picture of C3.ai's future.

In this article, I discuss three key items that investors should follow closely.

The New Generative AI Offerings

Earlier this year, C3.ai launched the C3 Generative AI Product Suite, which became generally available in March. This suite combines generative AI with various existing C3.ai products, allowing users to parse and use large amounts of internal enterprise data along with other sources of information. It's a fascinating technology, and for readers who haven't seen it, I have included C3.ai's demo video of one application from the suite: the C3 Generative AI for CRM (customer relationship management). While marketing materials should always be taken with a grain of salt, this gives us a rough idea of what C3.ai is aiming for and what their generative AI products are supposed to look like.

During the last earnings call, we didn't receive many concrete details about the potential financial impact of these new generative AI offerings. However, when reporting preliminary results for Q4, the company provided the following commentary: "C3 Generative AI is being enthusiastically received by both existing C3 AI customers and new prospects. Now generally available, we signed three new C3 Generative AI application agreements with large enterprises in Q4 FY 23."

While this is great news, it would be helpful to hear more details from management about the potential impact of generative AI on C3.ai's business. New details on a number of topics would be useful, including levels of interest from customers, the scope of the signed agreements, ongoing and upcoming pilot projects, as well as the margins that the business is likely to see. Further information on these and other dimensions should help investors make more informed decisions.

The Cloud Partnerships

Over the last few quarters, C3.ai has been strengthening its partnerships with three major cloud providers — Google (GOOG), Amazon (AMZN), and Microsoft (MSFT) — with a focus on integrating C3.ai offerings and pursuing a coordinated sales strategy. In last quarter's earnings presentation, C3.ai provided some more detailed information on these partnerships, presented in Figure 1 below.

C3.ai Cloud Partnerships (C3.ai Investor Supplemental Q3 2023)

The company also sounded optimistic in its preliminary Q4 earnings release—although the details were a bit vague: "Our partner ecosystem is increasingly effective at opening new doors, providing prospects the assurance of success, and providing customers with the highest quality service. We are particularly active with Google Cloud, AWS, Microsoft, Baker Hughes, and Booz Allen."

Progress regarding C3.ai's cloud partnerships should be a key item to watch in this quarter's earnings. C3.ai has been rather forthcoming here, giving us relatively precise numbers for both wins through the end of Q3 as well as the opportunities being pursued. Updated figures from this quarter should help investors gauge C3.ai's progress and success rate in converting opportunities into contracts. C3.ai's partnerships with the major cloud providers could potentially make an enormous difference to revenues given their large reach across a very large swath of industry. Investors should therefore pay very close attention.

Pilot Projects

It would also be useful for investors to get more details about the numerous pilot projects that C3.ai is conducting with various customers. The preliminary earnings release did provide some new details: in Q4, C3.ai "closed 43 deals, including 19 pilots that were initiated in Q4 FY 23.... Examples of pilot conversions include Dow, Alberta Treasury Branches (“ATB”), and Chief Digital and Artificial Intelligence Office (“CDAO”)." This compares favorably to last quarter, when, per the earnings call, C3.ai "closed 27 deals during the quarter, 17 of which were pilot deals under the consumption model."

However, these numbers are potentially just the tip of the iceberg. During the last earnings call, management claimed the following: "Believe it or not, we currently have more than 290 qualified pilot opportunities in our pipeline, exceeding our expectations." It would be very useful for investors to see how this pipeline has progressed, and perhaps C3.ai will give us further updates regarding it.

Of particular interest should be C3.ai's efforts to increase the diversity of customers. Previously, C3.ai has focused on a few sectors, the most successful among them being oil and gas. However, C3.ai is making efforts to change this, and last quarter included more details about their pilot projects across a broader range of sectors—with management noting in the earnings call that "we continue to see positive trends in pilot bookings diversity as we have increased to nine industry segments in Q3 compared to six in Q2." Relevant information from the earnings slides is provided in Figure 2 below.

C3.ai Booking and Pilots (C3.ai Investor Supplemental Q3 2023)

It should be of great interest to investors how these efforts are going. Penetration across a wider swath of enterprise would allow C3.ai to capture a bigger slice of its addressable market and considerably improve its future outlook. Hopefully, we will get an update today to learn more about the conversion of recent pilot projects, as well as updates about new pilots—perhaps even ones in new sectors.

Conclusion

C3.ai, Inc.'s stock price has recently shot up in response to rising expectations, so it is essential for investor that the company continue to grow. But since this growth will take time to materialize, investors can gain a clearer picture of C3.ai's growth prospects by paying close attention to the details discussed here. Doing so should allow investors to more accurately gauge the extent to which C3.ai, Inc.'s current rally is justified by fundamentals and not merely narrative.

Source: Seeking Alpha