C3.ai (AI +2.01%) is in trouble. The enterprise artificial intelligence (AI) application provider reported a steep sales decline in the first quarter of fiscal 2026.
Revenue was $70.3 million, down a whopping 19.4% year over year. The second quarter should be somewhat better, with the company's outlook calling for revenue between $72 million and $80 million. However, the midpoint of that guidance range still represents a year-over-year decline of nearly 20%.
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What's going on with C3.ai?
Thomas Siebel, C3.ai's founder, suffered some health issues recently. Along with the first-quarter report, the company announced that Siebel would step down as CEO while continuing to serve as Executive Chairman. Siebel has already been replaced by Stephen Ehikian, who has a track record in the AI industry.
Siebel apparently played a critical role in the company's sales processes, which is somewhat unusual. "With the benefit of hindsight, it is apparent that my active participation in the sales process may have had a greater impact than I previously thought," Siebel noted in the first-quarter earnings release.
C3.ai completed a restructuring of its sales and services organization in the first quarter. This restructuring, combined with Siebel's lower involvement due to health issues, contributed to the company's revenue decline. C3.ai still closed 40 agreements during the first quarter, including 12 agreements involving the federal government, but the disruption took a toll.
In addition to reporting a large revenue decline and guiding for a similarly large revenue decline in the second quarter, C3.ai withdrew its previous outlook for fiscal 2026. The company will provide a new outlook along with its second-quarter report in a few months.
NYSE: AI
Key Data Points
Massive losses are another problem
The sharp revenue decline is a serious issue, but the company's growing losses may be an even bigger problem. C3.ai reported a net loss of $116.8 million in the first quarter, nearly double the loss reported in the prior-year period. Gross profit was cut in half, and the company's gross margin tumbled to 38%. That's incredibly low for a software company.
C3.ai spent nearly as much on sales and marketing in the first quarter as it produced in revenue, with spending topping $62 million. Research and development spending ate up another $65 million. Free cash flow, which benefits from the company's stock-based compensation being added back in, was a loss of around $34 million for the quarter.
The valuation is the biggest risk
C3.ai has plenty of cash and marketable securities, along with no debt, so it can handle a period of negative cash flow. However, the company is valued at around $2.2 billion, even after the stock plunged more than 90% from its all-time high.
While the company's full-year outlook is still up in the air, the stock trades for roughly 5.6 times last year's sales. However, sales are almost certain to decline this year as the company struggles through its sales restructuring. The forward price-to-sales ratio is likely higher, perhaps substantially so, and profitability doesn't appear to be coming anytime soon.
A new CEO and a revamped sales process could help the company return to growth, but it's tough to see how the current valuation makes any sense. Investors could overlook the company's massive losses when revenue was moving higher, but that's not the case anymore. There will be plenty of AI winners, but C3.ai doesn't appear likely to be one of them, given its current issues.
