Deep|C3.AI: Fundamentals Should Be Approached With Caution

Attempt an options play each quarter, either lose 1% or gain 50%

Background

Baker Hughes is currently the most important strategic partner contributing to C3's revenue (the partnership started in 2019, and Baker Hughes serves as both a customer and a channel). In C3's recent quarters, there is a minimum of $18.1M in revenue coming from Baker Hughes (this is the amount guaranteed by Baker Hughes to C3 under their agreement). In FY25Q1, this accounted for 21% of C3's revenue, and in the following quarters, it still accounted for at least 15% of the revenue. However, this agreement will expire in the middle of next year, and there is a high likelihood that it will not be renewed.

C3's partnership with Shell (which began in 2018) will also expire sometime in CY25H2-26. Currently, Shell contributes around $6M in revenue each quarter. There is also a possibility that the agreement will not be renewed upon expiration, but the probability is not as high as with Baker Hughes.

Together, these two companies account for 28% of C3's revenue in FY25Q1.

Why we believe the partnership will not be renewed

The partnerships between Baker Hughes, Shell, and C3 began during the period of 2018-2019, and they have been collaborating for a very long time. The initial reason for the partnership was that Baker Hughes and Shell lacked the relevant talent and capabilities in big data and AI, which C3 happened to possess. However, after so many years of cooperation, both companies have nearly figured out the underlying technology of C3, have a clear understanding of how to handle various scenarios, and have developed similar platforms themselves, along with having relevant personnel to provide services. After the contracts expire next year, they will release their own products and services.

According to our forecasting, 70% of the money paid to C3 each quarter comes from C3 serving Baker Hughes and Shell's own businesses. Since they have been working together for many years, it has become difficult to create new things. Although C3's technology platform has high technical barriers, the two companies have collaborated long enough to complete their own research and development. They feel that continuing to pay for C3's services has a relatively low cost-effectiveness.

The remaining 30% of the money comes from customers served by Baker Hughes and Shell. Over the years, C3 has been continuously trying to leverage these customers and turn them into C3's own customers. The main impact is that in this situation, the customer revenue counted towards Baker Hughes and Shell's commitment is relatively small, making it increasingly difficult for the two companies to fulfill their commitment through normal customer revenue.

If the agreements are not renewed, the impact on revenue would be as follows