Shares are down after earnings showed a different business mix than analysts were expecting, but the CEO says that's not a bad thing
Shares of enterprise software company C3.ai Inc. are sinking more than 12% in Thursday morning trading, which analysts attribute to a lower-than-expected mix of subscription revenue relative to the overall top-line total.
While C3.ai (AI) previously communicated that sort of business mix, "expectations ran ahead of themselves" based on past results, Needham analyst Mike Cikos wrote. Subscription revenue ended up coming in at 84% of the total, while professional-services revenue made up the rest.
See also: C3.ai loses less money than expected, but stock dives after results
Regardless, Chief Executive Tom Siebel told MarketWatch that investors may be "misunderstanding" the results. "People consider professional services to be a low-margin business, kind of like what Accenture does," he said, but C3.ai's professional-services business has a 93% gross margin.
In C3.ai's case, Siebel said professional services "looks like software, smells like software" and considers software a core component of the product. The reason it's not classified in the subscription segment is due to accounting standards for revenue recognition, he added.
On the whole, Siebel thinks C3.ai is well positioned to capture AI spending because it has 15 years of experience building enterprise applications.
Software stocks levered to the AI trend haven't gotten the same boost as hardware stocks like Nvidia Corp. (NVDA), but Siebel thinks their time will come, drawing parallels to the PC era.
"When we were in the PC market the late 80s, Intel was king, with the Intel processor and Microsoft was king with their operating system," he said. PCs then cost something like $15,000 in today's dollars, and people would put a couple hundred dollars' worth of software on them.
Now, "the silicon is commodity," and people use PCs to run all sorts of expensive software from companies like Bloomberg, Microsoft Corp. (MSFT) and SAP SE (SAP).
"In the long run, the value accrues to the application stack, and that's where we play" in AI, he said.
That's not to say Nvidia "isn't a great company, because Nvidia is an unbelievable company...but silicon gets commoditized."
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-Emily Bary
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