C3.ai: Benchmarking the S1 Data
Last Friday C3 filed their initial S1 statement. A S1 is a document companies file with the SEC in preparation for listing their shares on an exchange like the NYSE or NASDAQ. The document contains a plethora of information on the company including a general overview, up to date financials, risk factors to the business, cap table highlights and much more. The purpose of the detailed information is to help investors (both institutional and retail) make investment decisions. There’s a lot of info to digest, so in the sections below I’ll try and pull out the relevant financial information and benchmark it against current cloud businesses. As far as an expected timeline - typically companies launch their roadshow ~3 weeks after filing their initial S1 (the roadshow launches with an updated S1 with a price range). After the roadshow launch there’s typically ~2 weeks before the stock starts trading. So we’re looking at roughly 5 weeks before any retail investor can buy the stock.
From the S1 - “C3.ai is an Enterprise AI software company. We provide software-as-a-service, or SaaS, applications that enable the rapid deployment of enterprise-scale AI applications of extraordinary scale and complexity that offer significant social and economic benefit. All C3.ai software applications can be deployed on Azure, Amazon Web Services, or AWS, the IBM Cloud, Google Cloud Platform, or on-premise. We provide two primary families of software solutions: (1) The C3 AI Suite, our core technology, is a comprehensive application development and runtime environment that is designed to allow our customers to rapidly design, develop, and deploy Enterprise AI applications of any type. (2) C3 AI Applications, built using the C3 AI Suite, include a large and growing family of industry-specific and application-specific turnkey AI solutions that can be immediately installed and deployed.”
“We serve a large and rapidly growing market, estimated to be $174 billion in 2020, growing to $271 billion in 2024, a 12% compound annual growth rate, or CAGR. Our solutions address use cases across:
Enterprise AI Software. $18 billion in 2020, $44 billion in 2024, a 24% CAGR
Enterprise Infrastructure Software. Application Development, Infrastructure, and Middleware; Data Integration and Quality Tools, and Master Data Management Products: $63 billion in 2020, $82 billion in 2024, a 7% CAGR.
Enterprise Applications. Analytics, Business Intelligence and Customer Relationship Management, or CRM: $93 billion in 2020, $145 billion in 2024, a 12% CAGR”
How C3.ai Makes Money
The bulk of C3’s revenue is generated from subscriptions to their software, accounting for roughly 86% of total revenue. They currently have four primary revenue sources:
Term subscriptions of the C3 AI Suite, usually three years in duration.
Term subscriptions of C3 AI Applications, usually three years in duration.
Monthly runtime fees of the C3 AI Applications and customer-developed applications built using the C3 AI Suite, usage-based upon CPU-hour consumption.
Professional services fees associated with training and assisting our customers.
The data shown below depicts how the C3 data compares to the operating metrics of current public SaaS businesses.
Last Twelve Months (LTM) Revenue
C3.ai is on the smaller end with LTM revenue of $162M
LTM Revenue Growth
C3’s LTM revenue growth of 55% puts them in the upper quartile, however the quarterly YoY growth trends are something to monitor (more below)
Quarterly YoY Revenue Growth Trends
In their most recent quarter, YoY revenue growth slowed down dramatically:
LTM GAAP Gross Margin
Gross margins come in at ~75%, putting C3 right in the middle of the pack
LTM GAAP Operating Margin
C3 is towards the bottom of universe when it comes to profitability
Gross Margin Adjusted CAC Payback
(Previous Q S&M) / (Net New ARR x Gross Margin) x 12. This metric demonstrates how long it takes (in months) for a customer to pay back the cost at which it took to acquire them. It factors in both growth from new logos, as well as upsells on existing customers, and churn on existing customers. In the chart below I’m taking the average of the 4 quarters leading up to IPO to remove any seasonality out outliers.
Valuation - My Prediction!
Predicting the valuation of pending IPOs is nearly impossible, but it adds to the fun to make predictions! In the SaaS / Cloud world companies are valued off a multiple of their revenue. Generally this is a projected revenue number, and for the purpose of this analysis I will be looking at NTM (next twelve months) projections. When I think about what a company will be worth I first like to look at how other public companies are valued. First, let’s look at what SaaS multiples are trading at today, bucketed by growth:
C3 is a very interesting story. Up until this quarter the growth looked quite solid, however it really decelerated quickly in the last quarter (<20%). Because of this it’s tricky to forecast what future growth should be. They also only have 29 customers, and their top 2 customers both account for >10% of overall revenues. Fortunately we have an interesting comp who just went public: Palantir. Both businesses have lumpy, very large sales motions. At the time of their IPO Palantir had 125 customers, and the average revenue per customer was >$5M. C3’s current average subscription contract value per customer is >$4M. These are staggering contract sizes. As such, these types of business are generally not as predictable (more lumpy) than your classic SaaS business.
Palantir initially started trading ~12x forward revenue, and has seen their multiple expand to ~18x today off the backs of a strong earnings report where they grew 52% YoY (and they’re about 6x the size of C3). For C3, given the big drop off in the most recent quarter’s YoY growth and uncertainty around forward growth, the heavy losses (operating margins), and low efficiency (gross margin adjusted CAC payback) I believe they will trade at a discount their mid growth peers, and a slight discount to where Palantir started trading. One positive I haven’t mentioned: Tom Siebel is an incredibly seasoned executive. I’m not sure that alone is enough to overcome some of the other question marks at this time, so I’m predicting C3.ai will trade at ~10x-12x forward revenue out of the gate giving it a valuation of $2.5-$3Bn (this is pending what the future growth estimates are, which of course I don’t know at this moment!) I think they’ll need a couple of “prove it” quarters to show growth >50% is the norm (not the 16% in their most recent quarter), and for the market to understand their model.