C3.ai (AI) intends to raise $100 million in an IPO of its Class A common stock, according to an S-1 registration statement.

Redwood City, California-based C3 was founded to develop a suite of machine learning software capabilities to help businesses make better decisions and optimize their operations and strategic activities.

Management is headed by founder and CEO Thomas Siebel, who was previously founder and CEO of Siebel Systems until it merged with Oracle in 2006.

Below is a brief overview video of C3's Covid-19 data lake:

Source: Dr. Rex Yeap

The company’s offerings and capabilities include:

  • Predictive Maintenance
  • Inventory Optimization
  • Energy Management
  • Customer Relationship Management
  • Precision Health
  • Anti-Money Laundering

C3 has received at least $543 million from investors including TPG and Baker Hughes Holdings.

The firm pursues enterprise clients through a direct and inside sales force organized in a traditional geographic/industry manner and designed to work with the firm's technology partners such as AWS, Baker Hughes, FIS, IBM, Google and Microsoft.

C3 aims to expand its use cases to target middle market companies using telesales and online sales methods as well as through distribution channels.

Sales and Marketing expenses as a percentage of total revenue have been uneven as revenues have increased.

The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, has dropped to 0.2x in the most recent reporting period.

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth trajectory. AI’s most recent calculation (for FYE April 30, 2020) was 26%, so C3 needs some improvement in this regard.

While the firm does not provide a dollar-based net revenue retention rate, it did disclose that ‘Since their initial purchase, our top 15 Entities based on cumulative revenue to us have, on average, made subsequent purchases equal to 2.0x the value of their initial purchase. The average initial purchase among this group was $12.8 million.’

According to a 2018 market research report by MarketsAndMarkets, the global market for AI/ML-based solutions was valued at $625 million in 2016 and is expected to exceed $6.1 billion by 2022.

This represents a forecast stunning CAGR of 48.7% from 2017 to 2022.

The main drivers for this expected growth are continued innovations in the development of AI such as natural language processing as well as the 'growing use of personal devices and smartphones, and the rising rate of internet usage, [and] the need for human-to-machine level interaction.’

Also, there will be continued growth in demand for machine-to-machine [M2M] translation.

By application area, the analytics application segment is expected to account for the largest market share.

Additionally, managed services offerings are expected to represent a higher CAGR than self-run offerings.

Management says its primary competition sources are in-house, company specific applications.

But it faces major platform competition offering components that may compete, such as AWS, Azure and Google Cloud.

C3’s recent financial results can be summarized as follows:

  • Growing topline revenue, at a decelerating rate of growth
  • Increasing gross profit but uneven gross margin
  • Reduced operating losses and lower negative operating margin
  • A swing to positive cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

c3pl

Source: Company registration statement

As of October 31, 2020, C3 had $114.6 million in cash and $121.4 million in total liabilities.

Free cash flow during the twelve months ended October 31, 2020, was negative ($41.3 million)

C3 intends to raise $100 million in gross proceeds from an IPO of its Class A common stock, although the final figure may vary.

Class A common stockholders will be entitled to one vote per share and Class B shareholders, which is primarily founder and CEO Siebel, will be entitled to 50 votes per share.

The S&P 500 Index no longer admits firms with multiple classes of stock into its index.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Management says it will use the net proceeds from the IPO as follows:

We currently intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. We cannot specify with certainty all of the particular uses for the remaining net proceeds to us from this offering.

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Morgan Stanley, J.P. Morgan, BofA Securities, Deutsche Bank Securities, Canaccord Genuity, JMP Securities, KeyBanc Capital Markets, Needham & Company, Piper Sandler and Wedbush Securities.

Commentary

C3 is seeking to go public after eleven years since its founding in 2009.

The firm’s financials indicate slowing topline revenue growth but a turn toward operating breakeven and positive cash flow from operations in the recent reporting period.

Sales and Marketing expenses as a percentage of total revenue have been uneven; its Sales and Marketing efficiency rate has dropped significantly.

The Covid-19 pandemic has negatively impacted C3’s ability to close new deals as the firm has had to make operational changes like many other companies while prospective customers have likely put purchase decision on hold due to the uncertain business environment in various industries negatively affected by the pandemic.

The market opportunity for AI/ML-driven solutions is large and growing at an impressive rate, as businesses seek an edge for their information systems and decision processes

Morgan Stanley is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 59.5% since their IPO. This is a top-tier performance for all major underwriters during the period.

C3 has strong growth prospects ahead of it as the firm is well placed to take advantage of substantial tailwinds forecast for industry growth.

However, the Covid-19 pandemic will likely continue to weigh on its revenue trajectory. Positive vaccine and treatment results that shorten the pandemic and reduce its negative effects will be favorable to C3 as it seeks to get prospect contract wins back in gear in 2021.

I’ll provide a final opinion when we learn more about C3’s expected IPO valuation and price range.

Expected IPO Pricing Date: To be announced.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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