Chit Chat Stocks - C3.ai (AI) with Jason Moser

Episode Date: December 16, 2021

C3.ai is an enterprise artificial intelligence software company. The company's AI suite is a platform that allows clients to design, develop, and deploy AI applications. Jason Moser brings his expert knowledge of C3.ai for a great discussion regarding the history and future of the company. Enjoy the show! Our Thursday Deep Dives are sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128  Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android  Special promotion through the end of 2021: Subscribe to 7investing with the code "chitchat" and get $50 off your annual subscription: https://7investing.com/subscribe/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested in more of Jason's work? Follow him on Twitter: https://twitter.com/TMFJMo?s=20 Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ  Contact us: [e-mail]  Timestamps C3.ai | (4:05) Competition | (21:03) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today, we have an interview with Jason Moser, longtime friend of the show. I'd say one of our first big guests ever, way back when. I think we actually conducted that interview over the phone and just put our phone next to the mic. Don't worry. They're not live anymore, so you can't listen to that. Low quality. We joke, I think, either before or when we might have been recording about how we've upped our professionalism here. A little bit. Just a tad, and hopefully it'll get better. It's always a pleasure to talk to Jason. And today we're talking about C3 AI, which we kind of struggled to understand, but he presents it in a pretty digestible way. And it really is a compelling business and it does something that is super valuable for enterprises.

If you like software, if you like AI, I mean, we came in and we're like, gosh, this stuff's way over our head. And luckily, when we finished the interview, I think I grasped a decent grasp of how the business works. So anyone that's afraid of that type of stuff, Jason really goes over it well. And hopefully he can bridge that gap for you too. Before we get to the interview, though, we want to talk about our friends, our sponsor, Quarter, Q-U-A-R-T-R, no E. They are the all-in-one investor relations app. And you can listen to conference calls. You can look at investor presentations, transcripts, all from a single app. It's fun to use. It's easy to use. it's one of the, the, it's pretty much the only way that I listen to conference calls nowadays. I, you used to have to like go onto your computer and listen to it live or, and that just didn't really work. So this is a really easy way to do it. And you can do it on the go. You can do it in your car, on walks, anything like that. And it's a hundred percent free. They've got on iOS and Android. There's companies from all over the world and yeah, go ahead, download it. There's no reason not to. And it's Q-U-A-R-T-R, no E. And you can also follow him on Twitter at quarter

underscore app. And one more word before we get to the interview, you can use our code chitchat at 7investing for $50 off an annual membership. Limited time only. That's right. And this is a perfect time. Christmas special. Yeah. This is, I mean, Christmas gift, you know, someone that'd be fantastic. Get it at a discount, limited time, ends at the new year. So when you're listening to this, there'll only be about two weeks left to use this fantastic offer. And the Rex just came out. I guess if you're listening to this, it might be a little bit a while ago, but interesting Rex. As always, yeah. Go ahead, check them out. Great assortment of research reports.

All right. Without further ado, here's our interview with Jason Moser. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

Now, please enjoy this episode. Okay, today we are welcomed by Jason Moser. i want to say this is your third time on the show i think you're one of our like original guests way back when i want to say it was like three years ago i feel like three is right we did i think one show and then maybe was it last year this year before but we did the christmas special the holiday season special um and yeah so maybe this is three maybe this is three yeah hopefully from three years ago. I don't even think that shows live anymore. We've hopefully gotten a lot more professional during that time, but I am, I am certain of it. Just having listened to some

of your shows through, through the years yet, you keep on getting better and it's been fun to watch listen to, I guess, but fun to see too. Yeah. Yeah. And last time we spoke ANSYS today, we're talking C3 AI, which admittedly I had a hard time understanding the business when I started digging in a little bit, cause there was a lot of buzzwords, but how did you find the business to begin with? Well, you're right. I think it's an intimidating business. I think just by virtue of the name alone, you see it's a unique, the letter C, the number three, the dot AI. And it's like, all right, I mean, is this a Star Wars robot or is this a real company? And so for me, I first found it just, I mean, I saw it as it was getting ready

to IPO. And when I saw AI in the name, I thought, okay, well, this is artificial intelligence and And this plays in my universe with the service that I run at The Fool. I run a service that focuses on 5G and the opportunities that stem from the rollout of 5G. So, you know, it's not just 5G, but things that come from that, like Internet of Things and artificial intelligence, machine learning and whatnot. And so that was how it first got on my radar. And then I had seen also, as it was going public, that Microsoft had also taken a stake

in the business, which, you know, listen, whenever Microsoft takes a stake, I think it's reasonable to at least want to dig a little bit deeper why. But that was how it first got on my radar. It was just through the market that it pursues and the service I run at work. Right. And this is a recent IPO, I think less than a year old at this point. Can you give some brief notes on the history of the company? How did the founders decide to do this and how did they get to where they are today? Yeah. Well, I think it really just boils back down to the founder of the business thomas siebel and so uh siebel who founded the business i think back in 2009 has a he i mean he has a relatively uh long history with with in the tech

industry and publicly traded companies uh he used to work at uh oracle uh then he founded a uh crm customer relationship management company called Siebel Systems, which he ultimately sold to Oracle in 2006. And so, you know, he himself, understanding the nature of markets, being somewhat of a forward thinker, understanding the tech world, he started to see the value in artificial intelligence. I think questioning a little bit of how it was going to be delivered. and uh and that was where he came up with the idea for c3 ai and and we can certainly get into uh you know his ideas as far as delivering uh his versions of artificial intelligence but but it really seems like um that that's kind of where this all came from once he got done with

siebel systems and sold that to oracle that was on to the next thing and he's uh got an entrepreneurial spirit to begin with so uh it was it was natural progression for him i think Okay. And so do you want to explain the C3 AI business model, how it actually, what value they're providing for their customers? Sure. Yeah. So in simplest terms, and I mean, it is a business where, yeah, if you read through the 10K, you're going to see a lot of buzzwords. It's going to be a little bit intimidating to understand exactly what they're doing. But in simplest terms, what they built is ultimately a platform. It's kind of like platform as a service, right? And they have built this platform

that helps roll out artificial intelligence to customers, and customers being big companies. But the idea is that they can roll out artificial intelligence, AI, in the form of models as opposed to companies having to get in there and actually write their own code to build AI into their businesses. They can go to C3.ai and rely on their library of these tens of thousands of models that essentially can plug and play right into whatever needs those businesses may have. And so I think in simplest terms, that's the idea, is that they have this library of tens of thousands of models that continues to grow every day as their developers continue to

write new models. And these models are essentially built to serve a number of different verticals and a number of different purposes within those verticals so that whatever the customers may need, they can go to this library, they can plug their AI needs right in from C3 AI's library and get rolling quickly. And I think that's really the value proposition there is it saves these businesses, their customers, it saves them from having to invest the money and the time and the manpower into, number one, really figuring out the problems and how to solve them, but then also writing the code that's required to build out these AI functionalities, right? So I think it's

an interesting value proposition from that perspective. Could you give like an example use case? I saw that there were like a lot of, I think a lot of their customers were like manufacturing businesses or like real physical world businesses. So like oil and gas producers and stuff like that? What's like a good use case? Yeah, I think so. Early on, they had outsized exposure to the energy space. They still have fairly heavy exposure to the energy space. It used to account for about two-thirds of the business. It's since come down. But I think you look at the different verticals. I mean, whether it's manufacturing or energy, for example, I mean, this artificial intelligence functionality can help these energy companies, oil and natural

gas companies extend their uptime. It can help increase output. With manufacturing, they can increase throughput, incorporate, implement more supply chain efficiency. I think that really, at the end of the day, is what it all boils down to with AI. AI is meant to make the business better, more efficient, more productive. That's where they're really looking. And then I guess really the, you know, an interesting part of the business that really where Mr. Siebel, the biggest opportunity he seems to think exists is actually in the precision medicine space, right? So healthcare we know is obviously a very big market opportunity. And as we move more into machine learning, robotic surgery, remote healthcare, stuff like that,

artificial intelligence is becoming more and more incorporated in all sorts of healthcare companies. And so they also see a tremendous opportunity there with the healthcare space. So I think there's some examples there. Right. And yeah, they serve quite a few different verticals. If you go on their website, I think there's quite a few you can look at. They give a lot of good information there. One thing from an investment perspective, I think some people may be concerned with or thinking about is how many customers they have. So I think it's under 100 right now it could be right around 100 i'm not i'm not exactly sure but how many customers do you think would want to use c3 ai's expertise because i know for like a small business like

ourselves we're never going to need to do that is it only for the biggest companies in the world what kind of opportunities are for that how many for customer expansion well yeah that that's a very good question yeah they they just reported uh their most recent quarter and customers uh crept over 100 i think somewhere in the neighborhood of 100 and 304 or 5 something now. And yeah, that does sound small, but the reason why it's intentional, they have a strategy they have been pursuing here since the business really got underway in regard to customers. And in the strategy, they refer to it as this lighthouse customer strategy, the market entry strategy. Ultimately, it's been to establish these high value customer engagements with large

global early adopters, right? So they're focusing first and foremost on getting these big businesses in place. So that's why you see companies like Shell or Baker Hughes or 3M, the United States Air Force, Liberty Mutual Insurance. There's another one right there. You're seeing them pursue these big customers first and foremost. They ultimately serve as proof points, right? They feel like they get these big customers in their universe, start plugging into that library, those models, and incorporating AI into their businesses. And that essentially proves the value proposition for the business. It gives them the opportunity then to go down that funnel and pursue smaller businesses that may need their services. Now, I think to your point, it's probably not

necessarily, at least in the near term, it's not a business that's going to be focusing so much on that small to medium-sized business market, but they are really focused primarily first and foremost on these large global businesses in order to basically prove the value proposition that then lets them start moving downstream a little bit towards some of the other perhaps smaller businesses that then they can look and say, oh, wow, well, if these big global businesses are using your product and they're raving about it, you must be doing something right. So let's talk, let's figure out how we can incorporate this into our business as well. And, you know, I think ultimately when you look at the actual market opportunity, I mean, they play in what

it's called the Global Enterprise AI Market. It was valued at $4.68 billion in 2018. It's projected to reach $53 billion by 2026. So we're seeing a lot of companies expressing a lot of interest in AI and how it can benefit their business. And I think that's really the exciting part. It maybe is less about the pure customer number right now, but more understanding that dollar figure that's out there, that market that they continue to pursue as they grow their library and grow the verticals that they serve. Okay. And to give maybe some context on that, when was their first customer launched? Do you know that? Or how early are they on rolling out these models actually at customers? Who was their first customer, do you mean?

No, I don't know. Not the first customer, but say like to give some context for the listeners, How long have they been deploying these models publicly? Has it been since the start when they were founded in 2009, or has it only been for a few years? I guess maybe you may not know that. No, I'm actually not really sure of that timeline there. I mean, the business was founded back in 2009 based on this general strategy of AI and IoT and ultimately connectivity and how, you know, businesses are going to need incorporating more of this artificial intelligence and machine learning into their into their models. So I'm not I'm actually not certain of when they started rolling these these these products, these models out to customers.

But, you know, clearly they're just the very they always refer to it as the first inning of this. Right. They are very early in their own view in the development of the business and the customers that they ultimately want to serve. right yeah they've only been yeah yeah i mean it's barely 10 years yeah they i can't really quantify when but they always refer to it as uh first inning okay so and how do they actually make money is it just like one big contract and they can use as many models as like the customers can use as many models as they want or does is there like an upcharge for every model how does the pricing work yeah so revenue typically consists of subscription it breaks down into subscription and professional services. And so most of their revenue, typically somewhere in

the 85% range, it's generated from subscriptions to software, right? So it's the subscription model that really I think is attractive from an investment perspective. And so the subscription contracts are generally speaking, they're non-cancelable, they're non-refundable, typically three years in duration. And depending on how they work, the contract is going to depend, And that will dictate what access to what services or what models they're going to be able to get. That can vary depending on the contract that's actually agreed upon. But generally speaking, it's a subscription business that accounts for most of the revenue the company makes and a pretty high degree of visibility given the length of the contracts. Okay. And one of the big parts of the business here, especially for someone that's building software, is the people there.

So what are your thoughts on management? What are your thoughts on the founder? I'm forgetting his name. I think it's Seibel. Yeah, Thomas Seibel. I think he's an interesting character. I mean, if you listen to him, he has a long history in this business. I mean, like I said, he was with Oracle for a number of years and then had founded a customer relationship management company called Seibel Systems. And so when you think about customer relationship management at CRM, I think most people in our world here, when you hear CRM, I hope at least you think of Salesforce, because I know that's where I go immediately. That's even their ticker. And so I think that with his expertise in customer relationship management as well,

that's an additional vertical that they'll be pursuing. And in fact, they're already working in partnership with Adobe and Microsoft to build out a greater customer relationship management facet of the business, which I think is pretty encouraging, particularly when you see the success that Salesforce has witnessed to this date in that market. But generally speaking, I mean, it seems like, I mean, he has a long this market in with public markets. He understands how to run a publicly traded company. He understands how Wall Street works, what analysts are looking for. So, I mean, my perspective, I like that. He has a degree of understanding and knowledge that you probably aren't going to find in a lot of these younger

founder leaders. And that's just because they don't have that same level of experience. Mr. Siebel is a little bit older than them. But they take great pride in the culture there. I think he was just talking about in this most recent call that they recently pulled in, I think, 18,000 applications for employment with the company this year. And they stand at just over 600 employees now for the business, which, I mean, you can do the math there and see, I mean, it's a high demand job and not very many openings, but very proud of the culture there. It was really neat, actually, to hear him. I was watching an interview with him earlier today, actually. It was it was it was neat to hear how I mean, they've got all of their offices back open.

They've got people going back to work, collaborating, working together. He said that the energy level was high. The culture felt great. Everybody was excited to be back together. It was just nice to hear that. Particularly now when you have some companies that are really not wanting to go back to the office, he seems to really, really care about having everybody together and collaborating, which I think that's a good thing. I think in this line of work, I think that's a really good thing. Yeah, that makes sense, especially when they're doing these big software projects. Everyone's got to work together. It's all about just the brainpower of this team of 50 people. Yeah. Slightly unrelated question. I think you mentioned before we started recording that they had that Microsoft had an investment. Is that correct? Yeah. Microsoft had made a modest investment in the business back before, I think right before it went public. They had made a modest investment in the business. Yeah. Okay. And they go on top of an Azure is kind of like a partner. Am I getting that right?

uh yeah yeah to to yeah to a degree i mean they have they have it's not just azure i mean the c3 ai has has worked out they have a a an encouraging partnership network with companies microsoft uh also adobe alphabet amazon um i mean one of one of the attractive parts of this business is that the these models their technology is it's basically cloud agnostic right i mean they it works across providers. And so it's not something where you have to build separate AI functionality for a business that might be using Amazon Web Services and then change something for Google Cloud Provider or Azure, right? I mean, it is something that crosses platforms, which is encouraging from that perspective. So yeah, the partnership network enables them to

work with providers, along with some of their bigger customers as well, like Baker Hughes, for example, in getting that artificial intelligence, that AI, those models into customers of those providers. And so, that's another way to open up new lines of business. And whenever you have networks like Alphabet and Microsoft and Amazon as a partner, I mean, even a little bit, even capturing a little bit of that opportunity could be very meaningful for a small business like C3.ai. Okay, I think, well, we definitely have a lot more questions,

but before we get to them, we're going to hit a quick break. This episode is brought to you by La Quinta by Wyndham. Here you are miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high-speed Wi-Fi to stream all your favorite movies.

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As a business leader, how can you innovate, build trust, and move forward in a digital era? KPMG can help by bringing together the right talent and technologies, generating insights that spark opportunities. To explore their thinking, visit reed.kpmg.us slash opportunities. someone that's competing with C3 AI or one of its customers to copy the product suite? So I think it can be done, but I think it would be difficult. I think interesting way to look at AI these days, it isn't, it's kind of squishy, right? It's a big picture concept with a lot

of different problems that could potentially solve. And so, you know, one of the biggest challenges for businesses today is identifying the problem that they're trying to solve and how AI might be able to solve it. And so, it's not to say that a competitor couldn't build out their own library of AI functionality of code. I mean, absolutely, they could. But it takes time. It takes time and it takes money. And in regard to customers, it's interesting. They actually quoted a study that they had conducted, a third-party study they had conducted. And it helps quantify this a little bit in the value proposition that they offer. So ultimately, what they did is they commissioned a consultancy to develop an AI predictive maintenance application

that was designed to run on the AWS cloud platform. And they used two different approaches to do this. The first approach, they used the C3 AI suite and their structured programming. And I'm sorry, the C3 AI suite and then structured programming. And so the results, I think, really were pretty astounding. So when you look at the structured programming, like when someone has to go in there, identify the problem, write the code, build it out, it took approximately 120 person days with a price tag of $458,000. It required 16,000 lines of code and ongoing maintenance. And it was limited to running only on AWS. And so then you flip to the other side of the coin there and the C3 AI suite was used. It took around five person days, right? Five versus

was $120,000 and around $19,000, right? $19,000 versus $458,000. And it required only 14 lines of code versus $16,000 the other way. And I think even more importantly, as I referred to earlier, the application could run on a cloud platform with no modifications. And so, I thought that was a very eye-opening study there. Granted, obviously, they commissioned the study, but it was a third-party consultancy. So, I mean, there is some legitimacy there, I think. But I mean, I think that really helps quantify the value proposition that C3AI feels like they bring to the table. No, that totally helps for, I think for us, someone that's not in the software realm.

So I think that'll be good for listeners. But when you look at C3AI, you see that their contract sizes are quite large in the latest earnings report, which luckily, I don't know if you timed this correctly, but luckily it came out yesterday. They said the Baker Hughes contract that you mentioned before is now worth almost $500 million over the next six years. Why are companies willing to pay so much for C3 AI's products? Well, I hope the answer is because they're good. I hope the answer is because C3 AI is putting out a good product that is proving to be very helpful. I think that's the answer. And I guess time will

tell there. Baker Hughes being an early customer of C3 AI and understanding that the value that those AI models can bring to the table there. And I think part of the reason why those contract values are so large early on goes back to that lighthouse customer strategy. And so what we'll see over time, we'll see that contract value continue to come down as they continue to grow out their customer base and pursue smaller customers. But generally speaking, yeah, I'd like to believe that customers are willing to sign on for those lengthy contracts and pay up for them because they're finding true value in the models that C3 is providing. How high do you think the switching costs are for customers that use C3 AI?

I mean, they're obviously paying a ton of money to utilize the models. So, would it be really hard to switch off and find maybe an alternative solution like three years down the road? So, I think the longer it goes, the higher the switching costs go. So, you could certainly have competitors get into that space and produce their own sort of platform as a service. Then it becomes a question of whether they can convince their customers that they have a better platform with better models. And who knows what the future holds there? I mean, that is certainly something that could happen. It's something to keep an eye on.

But I think generally speaking, as time goes on, those switching costs go up because when you look at the alternatives and kind of going back to those numbers I quoted from that study, I mean, those numbers, the difference in those numbers is stark. I mean, I feel like companies are going to look at that and say, you know what, we need to hit the ground running and we can do it one of two ways. We can either try to do this ourselves, right, or we can take this platform that C3.ai has and we can start utilizing that. And I think as time goes on, you're going to see more and more companies looking for ways to avoid having to dive into spending so much time writing code and building out their own models. I think the value proposition alone gives them the opportunity to really establish a lot of relationships up front. And then as time goes on, the other thing to remember is that these models, I mean, this is not static. I mean, this is something this library will continue to grow. And in theory, with things like AI and machine learning, I mean, this library of models, these models should continue just to get smarter and smarter and better and better, right? They sort of compound, to use an investing term that we love so much.

So hopefully down the road, we should see not only the library grow, but the efficacy of the library grow, right? The intelligence of that library should continue to grow, which then I think really only bodes well for C3 AI in regard to the switching costs. And with switching costs over time, maybe you can exercise a little bit of pricing power too, which wouldn't be a bad thing. And let me see if I can frame it like using an example. So you think, and part of the thesis is that, say someone in car manufacturing like Hyundai, or maybe use an American example, Ford, they utilize C3A as products, and then they get a lot better, more efficient, whatever happens within their manufacturing process gets improved. And then that kind of turns on the light bulb goes off for a lot of their competitors, and they're saying, okay, well, to compete now, we got to utilize C3A as products. Is that part of the thesis here, that the momentum is going to build and build over time? Yes. I mean, yes. So, I mean, not necessarily saying they would have to use C3 AI, but I think all businesses out there are trying to figure out ways to gain an edge.

And what we're seeing certainly is that artificial intelligence, machine learning, things like that, those are becoming – if you're a business, you need to be incorporating this stuff. If you're not, you're going to get left behind. So then businesses start looking and saying, okay, how are we going to incorporate AI in our business and in our model? And hopefully, yeah, they're going to be looking to C3 AI for some of that help because I do feel like in most cases, most businesses are not going to be prepared to spend the time and the money. And even then, they may not even necessarily get it right. And so it could amount to a lot of time wasted, right? A lot of sunk costs. And so I think that's one of the bigger value propositions is that really C3 AI gives a lot of these businesses, a lot of its customers, the opportunity to hit the ground running. And what we're seeing as that customer base grows and as testimonials come out, showing the way that these customers are using C3 AI technology, that really only helps bolster the case for using those models, I think. Okay. And last question on customers. You mentioned the Air Force was a customer. What do you think the opportunity is with defense contracts? Because I know those are very lucrative. They're big. There's the Jedi contract that may have been renamed that now is supposed to go to multiple cloud vendors. Do you think there's an opportunity for C3 AI there? Because I know a similar company called Palantir is really getting, you know, they might not be the exact same, but they're really getting a lot of large government contracts. Yeah, I mean, they call out – Thomas Siebel, CEO and founder of the business, he calls out government – the government opportunity in general is a massive one.

I mean, when you think about all of the different facets of our government beyond just national security, I mean, when you talk about security, you talk about intelligence, I mean, you talk about the whole mine yard, so to speak, there. He sees that public sector opportunity as a really big one. And yeah, I can't really speak to Palantir. I'm not really as familiar with that business, but clearly opportunity there as well. So I would imagine that you will continue to see C3 focusing on that government opportunity because it's a big one. What does the valuation look like today for C3? Well, it's been an interesting road so far for the stock as an IPO. And I mean, I think it opened it somewhere around, the offering was at $42 per share and the market just went crazy, sent it up to like $180. And then I think after this earnings call, it sold down to about 30. And so it's one

of those businesses right now, it's still working its way towards profitability. They're calling for around $250 million in revenue this year. They raised, they raised full year guidance and it's around $250 million in revenue for the year, which puts shares somewhere around 12 to 12 times full year, 12 times a full year forecast revenue forecast. And, you know, it's weird to say it in this day and age, but 12 times sales, 13 times sales actually, actually seems kind of cheap compared to some of these other tech high flyers. But I mean, you know, we obviously know that's not. Longer term, though, I think it's really encouraging business, right? They're going to be able to continue growing revenue in the 30% to 40% range annually here for the next several years.

And this is a business with gross margin that should continue to track in the 75% to 80% range. And so, as the business matures, I mean, this is a business, they're always going to spend a healthy amount on R&D as they should, but this is still early on. We're going to see that research and development costs come down, we're going to see SG&A come down as a percentage of revenue. And that'll lead to more sustainable profits and free cash flow. But they are focused on investing back into the business and they could do that right now. Very minimal cash burn with this business and a balance sheet, rock solid. I mean, a billion dollars plus on the balance sheet. So for me, I mean, it's difficult to look at it and say, all right, well, this is where I think

the business should be valued because they just aren't making any meaningful profits right now. But it's one where I look at the opportunity and I see where this market is headed. And I think, all right, it's reasonable enough. I'm aiming to be generally right with this business in regard to the long-term opportunity as opposed to precisely wrong on the valuation, right? It's hard to pinpoint valuation on a lot of these businesses when all you had to go by is revenue for now. But again, I look back to the market opportunity, the annualized growth that we should expect

in this business, the balance sheet, the gross margin, the potential for them to bring so much of that down to the bottom line. It feels like a reasonable valuation today for a business with some attractive prospects, I think. I guess I'm just guessing here because they have such high contract value and I guess you could call it a low customer count, but is the growth pretty lumpy then since it's like enterprise customers or is it kind of smoothed out because it's subscription? No, I think the growth has been fairly smooth thus far because it's big customers with those contracts, right? The subscription revenue and the length of those contracts gives them some ability to forecast and keeps that growth fairly smooth. Now, I mean, that certainly

could uh that could you could see some lumpiness there as they as they continue to to go downstream and pursue uh those smaller businesses and as though contract values those average contracts come back down but generally speaking a fairly fairly predictable business based on the nature of the contracts okay and now with a company an early stage company like this you know the biggest thing is buy and verify you have to track whatever each quarter each year how things are going. What are some things you're watching to identify whether C3 AI is succeeding? I know I might not get the number exactly right here. When I was reading the quarterly presentation that I just put out, I saw that the remaining performance obligation jumped like 74%. Is that

a big number for you? And in general, what are you watching? What do you think investors should watch to track whether this business is doing well or bad? Yeah. I mean, I think remaining performance obligations, that RPO number that so many companies publish in their earnings reports, that's always a good view into the state of the business, into the state of the future of the business. You like to see that number continue to grow because that means they continue to have business to fulfill. For me, I think we go back to the customers first and foremost. Because of a lighthouse customer strategy. Right now, they stand at 104 customers as of this most recent quarter. That was up 63% from a year ago. So, what I honestly want to see is I want to see

that customer number grow. I want to see those average contract values come down. I want to see that customer number grow. I want to see that lighthouse customer strategy work. And so, to me, I think that's really first and foremost the point of focus because when your customers are growing, then that means you're doing something right when you're signing on more customers. And then from there, I mean, just looking towards the economics of the business. I mean, as I said, you got that 75% to 80% gross margin. At some point, we need to see them. I mean, part of the thesis here is that we need to see those R&D and those SG&A costs come down. Whenever you have a 75% to 80% gross margin business, that has a lot of potential to be

very profitable. So we want to see them take advantage of that. And then I think also just watching them continue to become less and less dependent on the energy space. I mean, that was something I was a bit more concerned with earlier on when I first started looking into business because it was more around two thirds. That number continues to come down as they continue to sign new customers in different verticals. And then I think ultimately these partnerships with companies like Adobe, Alphabet, Microsoft, Amazon, they are great. But you're also talking about some very, very well-endowed partners there that could, in theory, try to do some of this stuff on their own. And so it seems like it's a healthy state of coopetition today. But if down

the road, you started seeing these partnerships dissolve, that could be a red flag. That could be a sign that maybe something else is, there's a bigger problem at play, but those are, those are some of the things I'm keeping an eye on. What about risks? What are some of the biggest concerns here with C3 as an investment? Well, early on, I think with any of these businesses, I think early on the valuation is going to be one of the bigger risks. When you have businesses that are unprofitable and still working their way towards profitability, valuation just as it's a bit more difficult to really wrap your head around. And so, I think in the near-term valuation could be construed at the risk for a business like this. I would imagine that that

risk should dwindle over time. And then, you know, I think really it just boils down to is what they're building working, right? I mean, does this platform provide the value that they say it does. And, and that'll, that'll, that'll, you know, go back to just tracking the numbers and seeing that they're signing on new customers and new contracts and seeing the numbers all trending in the right direction. I mean, ultimately that's what we want to see is that what they're building is working. And I mean, the early signs are encouraging, but, but that doesn't mean that they've, they've got it all figured out. So, I mean, I think that those are a couple of things that you really want to keep an eye on. Yeah. I mean, those are, there's a couple of things

really stand out that totally makes sense do you have anything else sorry i don't have any more questions no me neither okay uh for listeners that want to keep a track of you where where can they find you uh easiest place probably the only place really is on twitter uh at tmf jmo so you can always reach out to me there i'm always happy to talk shop that's right official official motley fool uh handle those aren't that one just handles yeah yeah that was my first uh first Twitter handle and I kept it. So, it seems to have worked out okay. What about podcasts? You're on Industry Focus, right? Yeah, yeah, we do. We have a podcast family at The Fool. I host the Monday Industry Focus show and you can catch Market Foolery as well or Monday through Thursday

podcast where we talk about just the daily market news. And then on Fridays, we have a radio show called Motley Fool Money, which you can catch wherever you get podcasts or if for some reason you listen to terrestrial radio we are on i think 60 or 70 networks around the country as well uh so yeah those are those are some of the other places you'll uh you'll be able to catch me okay everyone molly full money yeah one of the uh biggest uh biggest uh shows in the country so i don't think we have a lot of fun thanks we have a lot of fun with that one that's that's uh that's our pride and joy man i tell you we've been at that for a while and and uh it's it's a lot of phone yeah over 10 years now right yeah yeah wow that's yeah that's early that's early to the

was it a podcast at that point or was it it was a well it's always been a show we distributed to radio show radio stations first and foremost because thankfully you know some of the some of the guys that i work with they they had the wherewithal to go ahead and start making these these investments and trying uh things in this podcast world back when podcasts really weren't even a thing. I mean, they're just getting started. And so they laid early investments down in 2010 or so to try this out. And it's worked out very well, as you know, podcasts are kind of a thing now. Yeah, definitely. All right. Well, thanks again to JMO for coming on. We want to remind our listeners that Brett and I are not

financial advisors. So anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. We are, however, general partners at Arch Capital, so clients may have positions in the securities discussed in this podcast. Thank you all for listening. We'll see you next time.