C3 AI beats Wall Street's expectations after completing new business model shift

C3.ai shares tumble on criticism by short seller

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Shares of enterprise artificial intelligence software provider C3.ai Inc. tumbled for the second straight day on Wall Street in the wake of allegations by a short seller of accounting irregularities.

The selloff also dragged down shares of other AI firms, which in general have bucked the downtrend among tech stocks this year.

C3.ai’s stock fell 26% on Tuesday and was down a furter 17% as of 3 p.m. EDT today. The stock had more than doubled in value since the beginning of this year, compared with a 15% increase in the tech-heavy Nasdaq Composite Index and a 7% increase in the S&P 500.

In a letter to Deloitte & Touche LLP, which is C3.ai’s auditing firm, hedge fund Kerrisdale Capital Management LLC alleged that C3.ai had inappropriately inflated both its revenue and margins and used “highly aggressive accounting… to conceal significant deterioration in its underlying operations.”

Unbilled receivables targeted

Specifically, the hedge fund cited growth in both unbilled accounts receivable and days sales outstanding, which is a measure of how long it takes a company to get paid. It pointed to one customer in particular – oil-services firm Baker Hughes Co. —  which it said accounted for $80 million in C3.ai revenues over the past four quarters for which it had never been billed.

Kerrisdale said it calculated that C3.ai’s gross margins on subscription revenue from Baker Hughes were over 99%, a figure that it alleges the firm inflated to make its financial performance look more like a software-as-a-service firm than a consulting business.

Kerrisdale Capital registered as a short-seller of C3.ai shares last month, calling the firm “a minor, cash-burning consulting and services business masquerading as a software company.” Short sellers bet on a decline in the price of a security by borrowing shares of a stock and selling them to buyers at the market price in the belief that they can purchase the shares later at a lower cost.

Siebel: ‘Poppycock’

In an interview with SiliconANGLE, C3.ai founder and Chief Executive Tom Siebel (pictured) characterized Kerrisdale’s tactics as “very creative” but spurious. Kerrisdale “basically takes a short position, publishes the letter and drives like a billion and a half dollars off the stock,” he said. The firm “probably made $200 million yesterday questioning things that are just kind of crazy.”

Siebel called unbilled receivables a standard accounting practice in software and other industries. “Let’s say we did a deal with your firm for $100,000 a month [at the beginning of the year] and you negotiated a good deal that says we can’t invoice until July 1,” he said. “That’s basically $100,000 a month that we recognize from January through June and the $600,000 that you owe us is an unbilled receivable until July 1 when it becomes an accounts receivable. There’s nothing wrong with it. It’s nothing improper and it’s fully disclosed.”

Siebel called the Baker Hughes allegations “absolute poppycock. A, [the gross margin is] not 99%, and B, we don’t disclose margin on a customer-by-customer basis,” he said. “But [Kerrisdale] adds two numbers that are apples and oranges and gets it to move the stock by a lot of points.”

In a statement, C3.ai said Kerrisdale’s accusations represented “a fundamental misunderstanding of U.S. [generally accepted] accounting practices and principles.”

The fall in the price of C3.ai shares dragged down other pure-play AI stocks. The price of Guardforce AI Co. Ltd. shares is down 53% since Tuesday, BigBear.ai Holdings Inc. has fallen nearly 32% and SoundHound AI Inc. is down more than 18%. They’ve led a broader sell-off in the Nasdaq index, which is down 1.8% since Tuesday.

Photo: Christian Purdie/SiliconANGLE

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