Shares of C3.ai dropped by 20% in premarket trading on Thursday, following the company’s disappointing subscription revenue for the first quarter. The enterprise AI software manufacturer posted $73. 5 million in subscription revenue, missing LSEG analysts’ estimate of $79. 1 million. This has led to concerns among investors with the possibility of a $600 million drop in market valuation. 

C3.ai is one of the key revenue earners through the sales of subscriptions, which include software licenses, SaaS, and trials of its applications such as generative AI. However, the slow conversion rate of pilot customers has impacted these numbers adversely. Subscription revenue declined by around $6.5 million compared to the previous quarter, which is a reversal from the $9.5 million growth rate in the prior period.

Gross margins face pressure from costly pilot deals

The company cited this decline to conservative spending by enterprises due to high interest rates and economic conditions. As companies squeeze the spending, the pilot customers of C3.ai are hesitating to switch to full-scale, which affects subscription revenue. Analysts at D. A. Davidson also pointed out this decline, which only served to underscore the factors that make it difficult for the company to sustain its growth. 

In addition, revenue concerns C3.ai’s management also indicated that there would be pressure on gross margin due to the cost incurred in pilot deals. This means that pilots have a higher cost of revenue, which is detrimental to profitability, especially when trying to acquire new customers.  The company also forecasts near-term pressures on its operating margin due to higher investment in salesforce, R&D, and marketing. 

CFO Hitesh Lath also mentioned during the conference call that the company is under pressure from these factors. “We also expect short-term pressure on our operating margin due to additional investments we are making in our business, including in our salesforce, research and development, and marketing spend,” finance chief Hitesh Lath stated.

Total revenue exceeds expectations despite subscription challenges

Despite the problem of subscription revenue, C3.ai was able to achieve a total revenue of $87.2 million. The total revenue is 21% higher than the revenue of the same period last year. This was higher than the market’s expectations, which had projected the firm’s revenue to be $86.9 million. 

Additionally, C3.ai is further widening its reach in both private and public domains, with 71 agreements signed in the quarter, out of which 25 were with state and local governments. The company also experienced a dramatic increase in pilot projects, with 52 new pilots, which is 117% more than the previous year. 

C3.ai’s share prices had more than doubled the previous year mainly because of the growing demand for ai solutions in different fields. Siebel pointed out that growth in the public sector was a major achievement for the company and pointed it out as an opportunity that was not utilized earlier. 

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