Tom Siebel has been riding the synthetic intelligence wave.
Three years after selling his prior software company, Siebel Systems, to Oracle for nearly $6 billion in 2006, he began C3.ai, a provider of AI solutions to businesses. That company, which went public in 2020, now sports a roughly $4 billion market cap and, in Siebel’s words, is “increasingly recognized because the gold standard in enterprise AI.”
But Siebel has a growing chorus of skeptics.
Thomas M. Siebel, chief executive officer of C3.AI Inc., during a panel session on the Bloomberg Tech Summit in London, UK, on Wednesday, Sept. 28, 2022.
Chris J. Ratcliffe | Bloomberg | Getty Images
Short sellers have been pounding his company of late with a series of allegations: inflating margins, misclassifying revenue, engaging in “aggressive accounting” and for a scarcity of transparency in the way it counts customers. Siebel says it isn’t true, and blasts the shorts for driving his stock price down so that they can earn cash, or “cover the short and pocket the profits,” as the corporate said in an official response.
Siebel has also been criticized for selling lots of of hundreds of thousands of dollars value of shares within the months following the corporate’s 2020 IPO. An investor lawsuit from last 12 months alleges that, ahead of its public market debut, the corporate made misleading statements about its access to a 12,000-person sales force tied to its partnership with energy company Baker Hughes.
And over two dozen former C3.ai employees, who CNBC contacted in looking into these allegations, described a culture of fear at the corporate that filtered down from the highest. A lot of the ex-employees asked not be named due to nondisclosure agreements or concerns over job repercussions for those still within the tech industry.
Wall Street doesn’t know what to make of the story. The stock, which fortuitously trades under the ticker symbol AI, shot past $177 within the heady post-IPO days of late 2020 because the Covid boom led to increased demand for cloud software while near-zero rates of interest incentivized investors to pump money into growth. The corporate’s market cap swelled beyond $17 billion on the time.
Since then C3.ai has been on a stock market roller coaster, featuring mostly steep declines. Shares plunged 77% in 2021, a 12 months that was quite good for software, after which one other 64% in 2022, which was the worst 12 months for tech for the reason that financial crisis.
The allure of AI has brought investors back, with C3.ai shares up 210% 12 months up to now, by far the very best performance within the cloud software group.
At the center of C3.ai is the 70-year-old Siebel, who has a net value of near $4 billion, in response to Forbes. One former worker in a leadership position compared him to Logan Roy, the media tycoon from the HBO series “Succession.” The ex-employee described Siebel as charming and charismatic, but a “tyrant” who “humiliates people.”
Siebel began Siebel Systems in 1993, a couple of years after leaving Oracle, where he worked under founder Larry Ellison as a senior vp. That company was a pioneer in customer relationship management (CRM) software, or software for salespeople, and it became the core of Oracle’s CRM offering when his former employer acquired it, a deal that launched Siebel into the billionaire class.
Tom Siebel, CEO of C3 AI, left, is interviewed by Yasmin Khorram at C3.ai’s headquarters in Redwood City, CA.
Source: CNBC
In an exclusive interview with CNBC at C3.ai’s headquarters in Redwood City, California, Siebel sat right down to discuss the recent allegations from investors and former employees regarding him and his company. He insisted that demand for C3.ai’s technology is growing rapidly, and he struck a defiant tone in defending the corporate’s accounting practices in addition to the culture that he’s built.
C3.ai says it uses artificial intelligence to predict a number of issues starting from fraud detection to helping firms optimize their operations. Through the years, it’s attracted outstanding customers, including the U.S. Department of Defense in addition to oil and gas giants like Shell and Baker Hughes.
Lawsuit alleges C3.ai misrepresentation
An investor lawsuit, originally filed within the Northern District of California in March 2022 and amended in February of this 12 months, focuses on C3.ai’s relationship with oilfield-services company Baker Hughes, which accounted for 45% of total revenue within the first quarter of 2023.
Of their three way partnership agreement, Baker Hughes says it uses C3.ai’s solutions and likewise sells the product to firms within the oil and gas industry.
The grievance alleges C3.ai misrepresented that it had a 12,000-person sales organization with deep industry expertise within the oil and gas industry as a part of its partnership with Baker Hughes.
The lawsuit alleges the defendants “didn’t disclose that C3 didn’t have access to and was not in a position to utilize the 12,000-person salesforce — but as an alternative arrange a separate sales division that relied on salespeople that didn’t have the industry connections, expertise, support or mandatory sales quotas of Baker Hughes’ typical salesforce.”
The access to the 12,000-person sales organization was first made public in C3.ai’s IPO filing in November 2020. Siebel continued to publicly tout that sizable sales force with Baker Hughes no less than 13 times in 2021, in response to his public appearances reviewed by CNBC.
When asked about this, Siebel said, “I do not remember saying it 13 times,” but he reiterated that the scale of the Baker Hughes team selling C3.ai was represented to him as “somewhere around 12,000.”
A Baker Hughes spokesperson said he “cannot give a particular figure,” adding the corporate has “teams the world over that sell C3.ai solutions.” Dan Brennan, a senior vp at Baker Hughes who oversees the partnership, was at the corporate’s headquarters the day CNBC interviewed Siebel. He also couldn’t provide an actual number when initially asked.
“We have got a big sales force,” Brennan said. “That sales force is empowered to sell various solutions including C3.” Brennan later estimated that the 12,000 figure was in the best ballpark.
Two former Baker Hughes employees, who asked to not be identified because of fear of repercussions, told CNBC that while there are 12,000 total sales people at the corporate, they usually are not all trained and qualified to sell the C3.ai product.
A 2021 amendment to the three way partnership agreement between the 2 firms shows that C3.ai would train “as much as sixty (60) Baker Hughes personnel” on its product freed from charge.
Certainly one of the Baker Hughes employees who spoke to CNBC had trained sales personnel on the C3.ai product. On the training he attended, he estimated there have been around 60 sales employees.
He also said the product was difficult to learn and that employees weren’t allowed to sell it without going through a rigorous approval process. He said he had no idea how they might certify 12,000 people.
A Baker Hughes spokesperson said in response that the corporate trained “well beyond 60” people on the technology and that “each firms proceed to interact in training opportunities on C3.ai offerings.”
In a motion to dismiss the suit, C3.ai’s attorneys wrote that Siebel’s statements concerning the sales force are “classic puffery that no reasonable investors would have taken literally” and are “obvious hyperbole.”
A former SEC official, who asked to not be named, told CNBC that firms are allowed to burnish their brand through “puffery,” but they cannot change essential numbers which can be relied upon by investors.
When asked how investors should understand the difference between puffery and factual statements, Siebel said to ask investors because he cannot speak for them. Siebel said he’s confident the lawsuit shall be dismissed.
CNBC’s “Last Call” aired a report Thursday night on the investor lawsuit against C3.ai and the corporate’s relationship with Baker Hughes. After the video aired, C3.ai said on Twitter that the statements made by CNBC “misrepresent C3 AI and its fundamental business practices” and that “the business results speak for themselves.”
Along with the claim of an inflated sales force, the investor suit against C3.ai further alleges that the disclosure contributed to an “artificially inflated” stock, which Siebel and other insiders then took advantage of by selling greater than 11 million shares.
‘Perverse incentive’ to sell
Siebel, who stays the most important individual shareholder, sold about 3.4 million shares for near $288 million in March 2021, just three months after the IPO. Lockup periods for insiders are typically six months, but C3.ai insiders could sell after 90 days if certain provisions were met, including if the stock was 33% above the IPO price.
“In consequence, C3’s lockup provision created a perverse incentive for C3 executives to pump up C3’s stock price in the primary six months following the IPO,” the suit said.
Reed Kathrein, who previously represented investors in reaching a settlement against Theranos — the medical-technology company that didn’t deliver on its guarantees — is now behind this investor lawsuit against C3.ai. His view is that continued statements from the corporate concerning the Baker Hughes relationship helped bolster the stock.
“It’s about smoke and mirrors to sell your organization,” Kathrein told CNBC, adding that it is also concerning the final result that comes from selling lots of of hundreds of thousands of dollars value of stock “once the general public has bought into that.”
The lawsuit says the publicity concerning the massive Baker Hughes sales force “artificially inflated C3’s stock” when the corporate first went public. It alleges C3.ai quietly restructured its sales group, which “sat outside of the organization” and “didn’t have the relationships” or “deep industry expertise” of the Baker Hughes sales team. The suit also says that Siebel didn’t announce the change until December 2021.
The day after that announcement, the stock opened at $31 a share, a drop of greater than 80% from its peak a 12 months earlier. Kathrein’s 4 investors allege the multi-month lag on that disclosure was one among the aspects that cost them greater than $1.2 million.
In keeping with financial documents, there have been roughly 11 transactions made by Siebel between March 2021 and November 2021 totaling over $630 million. Siebel and other insiders sold greater than $730 million value of stock, the filings show.
“That’s staggering,” Kathrein said. “If you happen to imagine in an organization, you are not going to dump your stock.”
As of the latest proxy filing last 12 months, Siebel still owned over 31 million Class A and Class B shares.
“If you happen to take a look at the share of my ownership in the corporate, that was a really small percentage,” Siebel said in his defense. “I’m still the most important shareholder and I actually have a considerable commitment to the corporate.”
Traders gather on the post that handles Baker Hughes on the ground of the Recent York Stock Exchange.
Richard Drew | AP
In an April 2023 filing, Baker Hughes announced it divested 1.7 million C3.ai shares, bringing its ownership to six.9 million shares.
A Baker Hughes spokesman said its relationship with C3.ai stays the identical and that its commitment “has not modified.”
But a financial filing shows C3.ai has not yet recognized a considerable amount of revenue from the partnership.
C3.ai’s quarterly filing for the period ended January, indicates it had $87.9 million in unbilled receivables, meaning its customers hadn’t been invoiced and thus had not paid for services they’d received. Baker Hughes accounted for greater than 90% of those unbilled receivables.
Siebel said that is how generally accepted accounting practices (GAAP) work.
“The cash shall be invoiced, the cash shall be collected,” he said. “I’m not certain what there just isn’t to love.”
He said an unbilled receivable is “just money the corporate is owed sooner or later in the long run.”
In a public document published on its investor relations page, C3.ai reiterated it has no concerns about its unbilled receivables related to Baker Hughes and detailed a future payment schedule. The document said unbilled receivables would drop to $57.4 million related to Baker Hughes for the fourth quarter. On its earnings call on Wednesday, C3.ai reported that it still had $70.7 million in unbilled receivables from Baker Hughes.
Risks about the corporate’s close ties to Baker Hughes were central to a letter in April from short-selling investment firm Kerrisdale Capital to C3.ai’s auditor. The letter claimed the corporate engaged in “aggressive accounting” to “inflate its income statement.”
Kerrisdale pointed to C3.ai’s “highly conspicuous growth” in unbilled receivables, largely from Baker Hughes, and wrote that “accounting red flags abound with the Baker Hughes relationship.”
The stock plummeted 38% within the two trading days after Kerrisdale’s letter.
Targeted by other shorts
It isn’t the primary time short sellers have targeted C3.ai.
Spruce Point Capital Management, a short-selling firm, published a report in February that flagged concerns over the corporate’s “less transparent” method for counting customers, its “revolving door” of chief financial officers and its history of pivoting its focus to the most recent buzzword.
C3.ai cycled through three CFOs since 2019, as well as to at least one acting CFO in 2018 and the present CFO, who each still work at the corporate. When asked concerning the high turnover of executives more broadly, Siebel said most left for private reasons and pointed to the same turnover at firms like Tesla, Spotify and Twitter.
Regarding the regular change of focus, the corporate was named C3 Energy to assist energy firms improve their operations, reduce costs and increase revenue. Spruce Point said it pivoted to IoT (Web of Things) when that “buzzword peaked” and expanded to incorporate other industries. In 2019, it modified its name from C3 IoT to C3.ai, a move Spruce Point said reflected the hype around artificial intelligence.
C3.ai has denied the statements from each firms, defending its financial reports as accurate and indicating that its business is growing rapidly.
In an announcement to CNBC, a spokesman for C3.ai called the Kerrisdale letter “a highly creative and transparent attempt by a self-acclaimed short seller to short the stock, publish an inflammatory letter to maneuver the stock price downward, then cover the short and pocket the profits.”
The spokesman identified that Kerrisdale is being sued by an investor who alleges the letter “contained false and deceptive statements for the aim of manipulating and driving down the worth.”
Siebel called the short sellers “shrewd” and said their reports are an try and move the stock price on the expense of retail investors.
“I believe sometimes crime pays and this appears to be one among those cases,” he said.
A day before CNBC was scheduled to interview Siebel for this story, C3.ai released a preliminary earnings report for the primary time, ahead of its reporting date of May 31. Revenue for the fiscal fourth quarter exceeded guidance and its loss was narrower than expected, the corporate said. The stock jumped 23%, recouping a few of its losses that followed the Kerrisdale report.
Nonetheless, following C3.ai’s full earnings report after the close of trading on Wednesday, the stock dropped 13% because of a disappointing forecast.
Siebel told CNBC that the controversy over unbilled business was “misconstrued” by short sellers and that an enormous 4 accounting firm had audited its financials. The corporate declined to supply the name of the firm.
Lots of the 30 former C3.ai employees who spoke with CNBC said the corporate has had a difficult time attracting recent customers and so they claim that people who have are available the door originated from Siebel’s relationships.
The overwhelming majority of those ex-employees also described a problematic culture, revolving around fear of Siebel and intense oversight from the CEO.
Of the 30 ex-workers, five praised Siebel’s hard-charging approach as imperfect but effective.
For a positive perspective on Siebel, an organization spokesperson referred CNBC to Ken Goldman, who served as Siebel Systems’ CFO from 2000 to 2005. Goldman has never been directly employed at C3.ai but said he’s an advisor to Siebel and was an early investor in the corporate.
“He takes excellent care of you for those who do your job,” Goldman said, regarding Siebel. “He’ll be certain financially he takes excellent care of you.”
Goldman also said Siebel “has his identity on this company,” and “is singularly focused on this company to the detriment of other activities and hobbies he used to have.”
But questions remain concerning the health of the business. C3.ai’s financial filings show the corporate pivoted to an opaque recent formula for counting customers.
CNBC reviewed the corporate financial filings, which explain the way it counts customers. The documents say the corporate considers parent firms like Baker Hughes as a customer. Moreover, each division contained in the parent company and all third parties that the entity sells the software to are also considered unique customers.
In a March 2022 earnings report, C3.ai said it didn’t account for all divisions and third parties properly with its prior customer calculation method. Using its recent method, the client count jumped from 110, as had been previously reported for the quarter, to 218. The overall variety of parent firms C3.ai serves declined from 53 within the October 2021 quarter to 50 within the January 2022 period.
Siebel said C3.ai has complex customers and licensing models, which required it to alter its customer count.
The corporate again modified the way in which it counts customers in its latest earnings report and said it was to to account for “customer engagement.” Siebel said the old methodology for counting customers didn’t recognize the “complexity of our contractual and pricing structures and the involvement of resellers.”
Under the brand new formula, customer count jumped to 287 within the period ended April 30, from 247 1 / 4 earlier. Nonetheless, using the old method, C3.ai added only eight customers, closing the period with 244, up from 236 the prior quarter.
Despite all of the recent controversy, C3.ai still has its defenders on Wall Street.
Gil Luria, an analyst at DA Davidson who recommends buying the stock, wrote in a report on May 15, that C3.ai has a growing pipeline of clients and is benefiting from a surge in enterprise demand for AI. He disputes the findings of the short sellers.
“I’d argue that for those who look item by item at all the things the short sellers have said, it’s either proven to not be correct or misleading, or the corporate was in a position to address properly,” Luria said in an interview.
Siebel, after all, agrees with that assessment.
“The demand for what we do has never been greater,” Siebel said. “The business prospects in front of C3 are extraordinarily positive.”
His legacy will depend on it.
— CNBC’s Nick Wells, Scott Zamost and Sam Woodward contributed to this report.
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WATCH: Tom Siebel’s interview with CNBC