Tom Siebel has been riding the artificial intelligence wave.
Three years after selling his prior software company, Siebel Systems, to Oracle for nearly $6 billion in 2006, he started 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 as the gold standard in enterprise AI.”
But Siebel has a growing chorus of skeptics.
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 lack of transparency in how it counts customers. Siebel says it’s not true, and blasts the shorts for driving his stock price down so they can make money, or “cover the short and pocket the profits,” as the company said in an official response.
Siebel has also been criticized for selling hundreds of millions of dollars worth of shares in the months following the company’s 2020 IPO. An investor lawsuit from last year alleges that, ahead of its public market debut, the company 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 company that filtered down from the top. Most of the ex-employees asked not be named because of nondisclosure agreements or concerns over job repercussions for those still in 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 in the heady post-IPO days of late 2020 as the Covid boom led to increased demand for cloud software while near-zero interest rates incentivized investors to pump money into growth. The company’s market cap swelled beyond $17 billion at the time.
Since then C3.ai has been on a stock market roller coaster, featuring mostly steep declines. Shares plunged 77% in 2021, a year that was quite good for software, and then another 64% in 2022, which was the worst year for tech since the financial crisis.
The allure of AI has brought investors back, with C3.ai shares up 210% year to date, by far the best performance in the cloud software group.
At the heart of C3.ai is the 70-year-old Siebel, who has a net worth of close to $4 billion, according to Forbes. One former employee 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 started Siebel Systems in 1993, a few years after leaving Oracle, where he worked under founder Larry Ellison as a senior vice president. 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.
In an exclusive interview with CNBC at C3.ai’s headquarters in Redwood City, California, Siebel sat 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 company’s accounting practices as well as the culture that he’s built.
C3.ai says it uses artificial intelligence to predict a host of issues ranging from fraud detection to helping companies optimize their operations. Over the years, it’s attracted prominent customers, including the U.S. Department of Defense as well as oil and gas giants like Shell and Baker Hughes.
Lawsuit alleges C3.ai misrepresentation
An investor lawsuit, originally filed in the Northern District of California in March 2022 and amended in February of this year, focuses on C3.ai’s relationship with oilfield-services company Baker Hughes, which accounted for 45% of total revenue in the first quarter of 2023.
In their joint venture agreement, Baker Hughes says it uses C3.ai’s solutions and also sells the product to companies in the oil and gas industry.
The complaint alleges C3.ai misrepresented that it had a 12,000-person sales organization with deep industry expertise in the oil and gas industry as part of its partnership with Baker Hughes.
The lawsuit alleges the defendants “failed to disclose that C3 did not have access to and was not able to utilize the 12,000-person salesforce — but instead set up a separate sales division that relied on salespeople that did not 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 at least 13 times in 2021, according to his public appearances reviewed by CNBC.
When asked about this, Siebel said, “I don’t remember saying it 13 times,” but he reiterated that the size of the Baker Hughes team selling C3.ai was represented to him as “somewhere around 12,000.”
A Baker Hughes spokesperson said he “can’t give a specific figure,” adding the company has “teams across the world that sell C3.ai solutions.” Dan Brennan, a senior vice president at Baker Hughes who oversees the partnership, was at the company’s headquarters the day CNBC interviewed Siebel. He also couldn’t provide an exact number when initially asked.
“We’ve got a large sales force,” Brennan said. “That sales force is empowered to sell a number of solutions including C3.” Brennan later estimated that the 12,000 figure was in the right ballpark.
Two former Baker Hughes employees, who asked not to be identified due to fear of repercussions, told CNBC that while there are 12,000 total sales people at the company, they are not all trained and qualified to sell the C3.ai product.
A 2021 amendment to the joint venture agreement between the two companies shows that C3.ai would train “up to sixty (60) Baker Hughes personnel” on its product free of charge.
One of the Baker Hughes employees who spoke to CNBC had trained sales personnel on the C3.ai product. At the training he attended, he estimated there were around 60 sales employees.
He also said the product was difficult to learn and that employees were not allowed to sell it without going through a rigorous approval process. He said he had no idea how they could certify 12,000 people.
A Baker Hughes spokesperson said in response that the company trained “well beyond 60” people on the technology and that “both companies continue to engage in training opportunities on C3.ai offerings.”
In a motion to dismiss the suit, C3.ai’s attorneys wrote that Siebel’s statements about the sales force are “classic puffery that no reasonable investors would have taken literally” and are “obvious hyperbole.”
A former SEC official, who asked not to be named, told CNBC that companies are allowed to burnish their brand through “puffery,” but they can’t change important numbers that are relied upon by investors.
When asked how investors should understand the difference between puffery and factual statements, Siebel said to ask investors because he can’t speak for them. Siebel said he’s confident the lawsuit will be dismissed.
CNBC’s “Last Call” aired a report Thursday night on the investor lawsuit against C3.ai and the company’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.”
In addition to 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 more than 11 million shares.
‘Perverse incentive’ to sell.
Siebel, who remains the largest individual shareholder, sold about 3.4 million shares for close to $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.
“As a result, C3’s lockup provision created a perverse incentive for C3 executives to pump up C3’s stock price in the first 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 failed to deliver on its promises — is now behind this investor lawsuit against C3.ai. His view is that continued statements from the company about the Baker Hughes relationship helped bolster the stock.
“It’s about smoke and mirrors to sell your company,” Kathrein told CNBC, adding that it’s also about the end result that comes from selling hundreds of millions of dollars worth of stock “once the public has bought into that.”
The lawsuit says the publicity about the massive Baker Hughes sales force “artificially inflated C3’s stock” when the company first went public. It alleges C3.ai quietly restructured its sales group, which “sat outside of the organization” and “did not have the relationships” or “deep industry expertise” of the Baker Hughes sales team. The suit also says that Siebel did not announce the change until December 2021.
The day after that announcement, the stock opened at $31 a share, a drop of more than 80% from its peak a year earlier. Kathrein’s four investors allege the multi-month lag on that disclosure was one of the factors that cost them more than $1.2 million.
According to financial documents, there were approximately 11 transactions made by Siebel between March 2021 and November 2021 totaling over $630 million. Siebel and other insiders sold more than $730 million worth of stock, the filings show.
“That is staggering,” Kathrein said. “If you believe in a company, you’re not going to dump your stock.”
As of the latest proxy filing last year, Siebel still owned over 31 million Class A and Class B shares.
“If you look at the percentage of my ownership in the company, that was a very small percentage,” Siebel said in his defense. “I am still the largest shareholder and I have a substantial commitment to the company.”
In an April 2023 filing, Baker Hughes announced it divested 1.7 million C3.ai shares, bringing its ownership to 6.9 million shares.
A Baker Hughes spokesman said its relationship with C3.ai remains the same and that its commitment “has not changed.”
But a financial filing shows C3.ai has not yet recognized a large 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 more than 90% of those unbilled receivables.
Siebel said that’s how generally accepted accounting practices (GAAP) work.
“The money will be invoiced, the money will be collected,” he said. “I’m not certain what there is not to like.”
He said an unbilled receivable is “just money the company is owed at some point in the future.”
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 company’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 company 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% in the two trading days after Kerrisdale’s letter.
Targeted by other shorts
It’s not the first 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 company’s “less transparent” method for counting customers, its “revolving door” of chief financial officers and its history of pivoting its focus to the latest buzzword.
C3.ai cycled through three CFOs since 2019, in addition to one acting CFO in 2018 and the current CFO, who both still work at the company. When asked about the high turnover of executives more broadly, Siebel said most left for personal reasons and pointed to a similar turnover at companies like Tesla, Spotify and Twitter.
Regarding the regular change of focus, the company was named C3 Energy to help energy companies improve their operations, reduce costs and increase revenue. Spruce Point said it pivoted to IoT (Internet of Things) when that “buzzword peaked” and expanded to include other industries. In 2019, it changed 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 both firms, defending its financial reports as accurate and indicating that its business is growing rapidly.
In a statement 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 move the stock price downward, then cover the short and pocket the profits.”
The spokesman pointed out that Kerrisdale is being sued by an investor who alleges the letter “contained false and deceptive statements for the purpose of manipulating and driving down the price.”
Siebel called the short sellers “shrewd” and said their reports are an attempt to move the stock price at the expense of retail investors.
“I think sometimes crime pays and this appears to be one of 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 first 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 company said. The stock jumped 23%, recouping some of its losses that followed the Kerrisdale report.
However, following C3.ai’s full earnings report after the close of trading on Wednesday, the stock dropped 13% due to a disappointing forecast.
Siebel told CNBC that the controversy over unbilled business was “misconstrued” by short sellers and that a big four accounting firm had audited its financials. The company declined to provide the name of the firm.
Many of the 30 former C3.ai employees who spoke with CNBC said the company has had a difficult time attracting new customers and they claim that those that have come in the door originated from Siebel’s relationships.
The vast 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, a company 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 is an advisor to Siebel and was an early investor in the company.
“He takes good care of you if you do your job,” Goldman said, regarding Siebel. “He will make sure financially he takes good care of you.”
Goldman also said Siebel “has his identity in this company,” and “is singularly focused on this company to the detriment of other activities and hobbies he used to have.”
But questions remain about the health of the business. C3.ai’s financial filings show the company pivoted to an opaque new formula for counting customers.
CNBC reviewed the company financial filings, which explain how it counts customers. The documents say the company considers parent companies like Baker Hughes as a customer. Additionally, each division inside the parent company and all third parties that entity sells the software to are also considered unique customers.
In a March 2022 earnings report, C3.ai said it failed to account for all divisions and third parties properly with its prior customer calculation method. Using its new method, the customer count jumped from 110, as had been previously reported for the quarter, to 218. The total number of parent companies C3.ai serves declined from 53 in the October 2021 quarter to 50 in the January 2022 period.
Siebel said C3.ai has complex customers and licensing models, which required it to change its customer count.
The company again changed the way 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 new formula, customer count jumped to 287 in the period ended April 30, from 247 a quarter earlier. However, using the old method, C3.ai added only eight customers, closing the period with 244, up from 236 the prior quarter.
Despite all 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 would argue that if you look item by item at everything the short sellers have said, it’s either proven not to be correct or misleading, or the company was able to address properly,” Luria said in an interview.
Siebel, of course, 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 depends on it.
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