C3.ai, Inc.

and welcome to the C3AI Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speakers today. Paul Phillips, Vice President of Investor Relations at C3AI. Thank you. Please go ahead, sir.

Good afternoon, everybody, and welcome to C3AI's earnings call for the third quarter of fiscal year 2021, which ended January 31st, 2021. This is Paul Phillips, Vice President of Investor Relations of C3AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer, and David Varder, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our third quarter results, as well as a supplement to our results, both of which can be accessed on the investor relations section of our website at ir.c3.ai. This call is being webcast, and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including our prospectus. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared comments or responses to your questions, we may discuss metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to Tom for his prepared remarks.

Tom? Thank you, Paul, and good afternoon, everyone. It's my great pleasure to have the opportunity to spend some time with you this afternoon. So let's talk about the company and talk about the market. Overall, we're really quite pleased with the progress that we continue to make in the market globally. We continue to break ground as the only enterprise AI software pure play. This is a large and rapidly growing market. We continue to innovate. We continue to expand our market partner ecosystem and the associated increased distribution capacity associated with that. We continue to demonstrate technology leadership. I believe that we are increasingly well positioned to establish a global market leadership position in enterprise AI software. So let's talk about the financial highlights. All in all, it was a strong third quarter. Revenue in the third quarter was $49.1 million. $42.7 million of that was subscription revenue, an increase of 23% from a year earlier. Subscriptions have increased to 87% of our revenue mix. Services revenue for the quarter was $6.4 million, or 13% of total revenue. representing a decrease of 4% from a year ago. Non-GAAP operating expense for the quarter increased to $49.2 million, up 27% from a year ago. And non-GAAP operating loss for the quarter was $11.9 million, compared to $8.4 million a year ago. Let's talk about the overall state of the market. When we think about enterprise and digital transformation, we are focused on an extraordinarily large addressable market that according to analysts was $174 billion in 2020, increasing to $271 billion by 2024. This is a significant opportunity by any standard and the largest software market opportunity that I have seen in my professional career. Digital transformation enabled by enterprise AI remains at the top of the agenda of virtually every CEO and board globally. We see increasingly robust interest and demand for enterprise AI solutions, and our pipeline continues to grow substantially across all industries and all regions. Let me address a few of the significant customer wins in the third quarter. Firstly, Infor. Okay, we have formed a strategic wide-ranging relationship with Infor, a multibillion-dollar ERP software provider. Under the terms of the agreement, Infor will be integrating many existing Infor applications with the C3 AI suite and the C3 AI applications to market, sell, and deploy Infor. AI-based solutions to their customers under the Infor brand. This will evolve into a broader partnership with Infor to market C3 AI solutions to Infor customers, including C3 AI Reliability, C3 AI CRM, and C3 AI Ex Machina, a next-generation predictive analytics application that empowers anyone to develop, scale, and produce AI-based insights without writing code. Secondly, I want to talk about Johnson Controls in Milwaukee. Johnson Controls recently selected C3AI for the inventory and supply chain optimization. Johnson Controls is a $23.5 billion company that's a leading manufacturer of fire, HVAC, and security equipment for buildings and energy services. Finally, I want to talk about an opportunity at the United States Army where we expanded our work with the U.S. Army aviation to improve aircraft readiness. In addition, with our partner Raytheon, we recently began work on the US Army's next generation tactical ground station that will enable automated processing and analytics of massive amounts of incoming sensor data for improved situational battlefield awareness. This is, you know, this is very, very high tech, think Star Wars level technology. This AI-based system will provide decision support to commanders based on information coming from a multitude of sensors and sources within the C3 AI suite, synthesizing this into a single unified data image. I want to talk about industry diversification. We continue to diversify across industries. We're seeing increasing contributions from life sciences, financial services, and high-tech sectors, as well as increasingly healthy growth in international sales. High-tech accounted for 8% of our business in 2020. fiscal year 21 year to date, compared to less than 1% for the same period a year ago. Life sciences accounted for 7% of our business in fiscal year 21 year to date, compared to less than 1% for the same period a year ago. Manufacturing sector accounted for 11% of our business in fiscal year 21 to date, compared to approximately 1% over the same period a year ago. At the same time, oil and gas accounted for 38% of our business in fiscal year 21 year-to-date, compared to approximately 59% a year ago. Addressing strategic partnerships. Core to our market growth strategy is, one, the evolution of our global direct geographic and vertical market sales organizations to include major accounts, enterprise sales, mid-market sales, and mass market sales channels, and two, the expansion of our market partner ecosystem in both horizontal and vertical markets. We realized significant benefits from these efforts in the third quarter, with increased geographical expansion, increased vertical diversification, significant growth in software subscriptions, and importantly, increased volume and diversity in the average contract in our sales pipeline. By way of example, our average total subscription contract value decreased from $12.1 million in fiscal year 20 to $5.2 million in Q3 fiscal 21. This is substantial progress. We continue to build and increase our engagement with our partner ecosystem as a key growth strategy, enabling us to significantly expand our market reach and serve customers across industries globally. In the third quarter, we established or expanded such partnerships with Microsoft, Baker Hughes, Engie, Shell, Infor, FIS, and Raytheon. And you can expect to see continued activity, accelerated activity in this area going forward. In the financial services sector, our industry partner FIS launched FIS AML Compliance Hub powered by C3AI, the first joint product release under a broad alliance between FIS and C3AI. This solution leverages C3.AI's advanced machine learning technology combined with the deep financial industry domain expertise of FIS to dramatically improve the effectiveness of financial crime detection. C3.AI and Microsoft closed our first AI CRM deal with a Fortune 500 customer. We believe AI will represent a significant and growing part of the $60-plus billion CRM market globally. In the defense sector, we engaged with our defense industry partner Raytheon to provide technology for the U.S. Army's Intelligent Ground Station Initiative. As I referenced earlier, we formed a comprehensive alliance with Infor to integrate many existing Infor applications using the C3 AI suite and C3 applications and enabling Infor to market these applications to its customers through all its channels. You can expect that in the coming quarters, we will make increased efforts to expand our market partner ecosystem across both horizontal and vertical markets as we see this as a key point of leverage for market growth. We focused a lot on strengthening company leadership. We expanded the company's leadership with the addition of Jim Snabe, formerly co-CEO of SAP, and chairman of Siemens, also chairman of Maersk, to the C3 AI board of directors. I've come to rely on Jim as a trusted advisor, as he's been an advisor to the company for some time, as an advisor to me for some time, okay, as we work to establish C3AI as a leading global enterprise software company. He brings a unique set of leadership skills and expertise to the company and is a great addition to our world-class board. In addition... We continue to expand our global advisory board that has been really, really important in establishing customer relationships, okay, and building presence in country and in industries. The advisory board now includes Jacques Attali, who is founder and first president of the European Bank for Reconstruction and Development and former special advisor to the president of France. Sachin Javid, who is a member of parliament and former Home Secretary and former Chancellor of the Exchequer in the UK, Admiral Denny McGinn, former U.S. Assistant Secretary of the Navy in the Obama Administration, Rick Leggett, former Deputy Director of the NSA in the Obama Administration, Frank Cohen, former President of SAP in Europe, and George Matthew, former President and COO of Alteryx. Now, those of you who have been tuned into financial channels or watching the Wall Street Journal or reading the Financial Times or Bloomberg, you know, have noticed that we have been investing, okay, in branding globally. And we expanded our enterprise AI branding campaign to include significant cable TV and radio presence with spots running worldwide. on virtually all the major business and financial networks in the United States and Europe. We also expanded our advertising to include the UK, EMEA, and APAC, as well as the United States. We are becoming increasingly known as the enterprise AI market leader. Leading indicators of brand equity and brand recognition have been substantially increasing, including PR volume, public relations volume, news sentiment volume, social media sentiment, and Internet search frequency. Let's talk about energy sustainability. Well, the energy and sustainability market is back, okay, and it is on fire. And so we are seeing increased interest for AI-enabled solutions in the energy and sustainability market. This market is coming back strong. Over the last year alone, the number of companies and governments that have committed to reach net zero emissions has doubled. No doubt you've seen the flood of announcements from companies such as Engie, Shell, Baker Hughes, Microsoft, Amazon, Ford, BP, JetBlue, American Airlines, and others announcing their zero carbon commitments. Sustainability is also clearly a top priority for the U.S., for the new U.S. administration, targeting a $2 trillion investment in climate security. C3 AI is a leader in this space. Energy and climate sustainability is the core market, many of you will recall, where we started with our first product offering in 2010, C3 Energy Management, which we have deployed into production use with many large organizations globally, including Engene and the New York Power Authority. One iconic Fortune 100 company has been a customer since 2012. They have set ambitious sustainability goals and use our energy management application to identify and prioritize their energy efficiency and carbon reduction investments globally to meet their climate goals. Many utilities use C3 AI technology and C3 energy management applications. not only to optimize their own energy usage and optimize the grid infrastructure, but also to help their customers meet their energy efficiency and greenhouse gas goals. A great example is New York Power Authority that employs C3A Energy Management as a service, enabling its large commercial and industrial customers to achieve their energy efficiency and greenhouse gas goals. And with our energy partner, ENGIE, we're delivering innovative solutions built with C3 energy management. Ohio State University, for example, has deployed ENGIE smart institutions built on C3 AI technology to reduce and manage its energy use and carbon footprint across its entire 485-building campus in Columbus. We're also working with Engie on a novel cutting-edge solution addressing the very difficult challenges of managing Scope 3 emissions, a problem that requires an entirely new technology approach. In the third quarter, we significantly expanded our effort, our investment in the C3AI Digital Transformation Institute, issuing a new call for papers to fund innovative research in applying AI and digital transformation to energy and climate security. We're very excited to support this next wave of research by providing, enabling safer, cleaner, lower cost and more reliable energy and to help lead the way to a lower carbon future. We are extraordinarily well positioned for this new opportunity. Many of you will know that, you know, C3AI was recognized by Glassdoor as the best place to work during the pandemic. We were ranked among the top 25 cloud computing companies with stellar employee satisfaction during the COVID crisis. This ranking is based on employee feedback provided through Glassdoor during the first six months of the pandemic. I encourage those of you who are interested to take a look at Glassdoor to get a feel for the high levels of employee engagement and enthusiasm at C3.ai. As you know, we place an exceptionally strong focus on human capital at C3 AI and are aggressively expanding the company. In the few short months since the company went public in December, we've increased our headcount by approximately 10% to roughly 560 today. We continue to attract massive interest from the global data science and data engineering software pool. In the third quarter, we received over 17,000 job applicants. We conducted 3,966 interviews with over 1,700 candidates and administered almost 700 assessments. Of that, we hired 60 full-time employees, and we processed an additional 57 job offers that have been accepted. One of the unique aspects of C3 AI is our clear technology and product differentiation. And we continue to protect the company's intellectual property with a combination of trade secret, copyright, trademark, and a growing family of U.S. and foreign patents, with 13 U.S. and foreign patents having been awarded and 40 U.S. and foreign patent applications pending. The U.S. Patent Office recently awarded us a broad and important patent entitled Systems, Methods, and Devices for an Enterprise AI Development Platform. This is the most significant and substantial patent we have been awarded to date. This patent essentially secures the fundamental concepts of applying a model-driven architecture for all enterprise AI applications, and it secures it as C3 AI intellectual property. And we are working now to form a technology licensing office at C3 to license some of this IP to companies that elect to attempt to internally develop their enterprise AI applications. Big picture We see a robust and growing interest in enterprise AI software and the solutions that we offer. We continue to make significant progress on all fronts in our objective to establish and maintain a global leadership position in enterprise AI. We continue to aggressively grow the company, diversify our business across industries and geographies, and expand our partner ecosystems. We believe we are very well positioned to address this $200 billion-plus addressable market opportunity, and we are just getting started. With that, I will turn it over to our CFO, David Barter, for further details on our financial results in the third quarter. David.

Thank you, Tom. We delivered a strong performance in the third quarter, and we're optimistic about the growing demand we're seeing for our software. Revenue in the third quarter was $49.1 million, up 19% from a year ago, reflecting continued business momentum and increased adoption of enterprise AI. During the third quarter, subscription revenue was $42.7 million, an increase of 23% from a year ago. Professional services revenue was $6.4 million, a decrease of 4% from a year ago. We also saw an increasing diversification of our revenue mix. Our revenue growth in the quarter was highlighted by contributions from over six different industry verticals, including some of our newer verticals such as life sciences and financial services that delivered approximately 24% of our third quarter revenue. Geographically, EMEA and APAC drove over 30% of our revenue. Finally, it's important to note the improving operating efficiencies. This quarter, subscription revenue increased 23% year over year, while non-GAAP sales and marketing expense increased 14% year over year. An important aspect of our model is the usage of market partners. It is a leveraged selling model that significantly extends our sales reach into each industry vertical. Our partners possess deep domain expertise in their respective vertical market, a commitment to enterprise AI, and a significant customer base that will benefit from our enterprise AI applications. This will provide us with sales leverage over time. It is worth noting that our contract with Baker Hughes, our market partner for oil and gas, includes a very specific contractual commitment. It is a five-year agreement, and the total contract value is $450 million. Their commitment to C3 AI increases over the five-year term of the agreement. This offers predictable growth in the years ahead. For example, the Baker Hughes commitment is $75 million in fiscal year 22 compared to $53 million in fiscal year 21. Our contractual backlog continues to provide us with healthy revenue visibility. It is important to note that we use adjusted RPO to measure our backlog. This metric includes our GAAP remaining performance obligations, our contracts with a cancellation clause, and the Baker Hughes commitment. At the end of Q3, adjusted RPO was $538 million, up 16% from the prior year. Within adjusted RPO, the GAAP RPO was $247.5 million, our contracts with a cancellation clause was $48.4 million, and the Baker Hughes commitment was $241.8 million. With the healthy revenue visibility and coverage that comes from an unusually large contractual backlog, we continue to focus on expanding our footprint within existing customers, adding new market partners, and adding new customers in existing and new industry verticals. In discussing our expenses and profitability, I will be referring to non-GAAP measures unless otherwise indicated. A GAAP to non-GAAP reconciliation is provided with our earnings press release. This can be found in the IR section of our website, and it is on file with the SEC. The difference between our GAAP and non-GAAP financial measures in the quarter was stock-based compensation expense. Gross margin in the third quarter was 75.9% compared to 73.8% a year ago. This expansion was driven by subscription gross margin. It increased to 84% compared to 74.7% in the prior year period. operating expense increased to $49.2 million, up 27% from a year ago. As Tom described, we are making significant investments in R&D in order to bring new products to market that can enhance our growth. C3AI CRM and C3AI Ex Machina are two such initiatives. We are also investing in our go-to-market efforts, including the expansion of our direct sales force. We're also investing in brand awareness, market education, and enterprise AI thought leadership. Operating loss for Q3 was $11.9 million, or a margin of 24.3% compared to $8.4 million, or a margin of 20.3% a year ago. Turning to our balance sheet and cash flows, we ended the third quarter with $1.12 billion in cash and cash equivalents. This includes net proceeds, of $844.6 million from our initial public offering in December. Our operating cash outflow for the period was $24.7 million, due primarily to increased investments in sales, marketing, and headcount. CapEx in Q3 was $0.2 million. This led to free cash outflow of $24.9 million. The timing of our billings and collections can vary. In order to capture a complete picture of our cash flow quarter basis. For the last four quarters, our free cash flow margin was a negative 24%. Deferred revenue was $62.3 million at the end of the quarter. It's important to note that deferred revenue is not a perfect measure for our business due to the quarter-to-quarter variability in the timing of invoices to our customers and our historical large transaction sizes. In addition, our billing terms vary. For some contractual arrangements, we are not billing at inception and but instead we will bill the customer periodically over the duration of the arrangement. So these customers' revenue commitments do not appear in deferred revenue. As an example, at the end of the third quarter, we booked several deals that will generate $4.1 million of revenue, but this amount is not in our deferred revenue. Looking to the fourth quarter, we expect total revenue to be in a range of $50 to $51 million, representing approximately year-over-year growth at the midpoint of the range. Non-GAAP loss from operations is expected to be in the range of $28 to $27 million. For full fiscal year 2021, we expect total revenue to be in the range of $180.9 to $181.9 million, representing approximately 16% year-over-year growth at the midpoint of the range. Non-GAAP loss from operations is expected to be in the range of $50.1 to $49.1 million. Historically, the difference between our GAAP and our non-GAAP financial measures has been limited to stock-based compensation expense. Beginning with this guidance for the fourth quarter and full-year fiscal 2021 and in future reporting periods, the difference between GAAP and non-GAAP measures will include stock-based compensation expense and the employer portion of payroll tax expense related to stock transactions. In summary, we are pleased with our strong performance in our first quarter as a public company. Our results and outlook reflect growing market demand from enterprises across an increasing range of industries. With continued investment in multiple growth drivers, we are increasingly well positioned to capitalize on a large multi-billion dollar market opportunity, generating value for all of our stakeholders. Thank you for joining today's call. Now I'll turn the call over to the operator for questions. Operator?

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Brad Sills with B of A Securities. Your line is open.

Oh, great. Hey, thanks, guys, for taking my question, and congratulations on your first quarter as a public company. I wanted to ask about the vertical partner focus here. Obviously, you talked about some leverage that you'll see here from some of these partnerships. Could you help us understand perhaps some of the newer ones like Raytheon, FIS? These are relatively new verticals for the company. What kind of resources are committed from these partners? How are you going to market together? How are you expecting to get that leverage through these partnerships? Thank you so much.

Hey, Brad. This is Tom. I'll field this one because it's kind of sales and marketing related. Well, as you know, we're going to market across three planes. We have horizontal market partners like, say, Microsoft would be the largest, but also IBM and NVIDIA. We're building a geographic marketing organization in North America, Asia Pacific, and in Europe. And then across all sectors, we have vertical market sales organizations in oil and gas, in utilities, in financial services, in precision health, et cetera. And you can expect that each of the – the goal is that each of these vertical markets will align with a leveraged market partner. So the classic case is Baker Hughes. So we've aligned in oil and gas with Baker Hughes. This is a 24, roughly, I think, billion-dollar oil services company that gives us access to 12,000 people now selling with us around the world. And there's virtually not one of the largest, say, 20 or 30 oil companies that we are not in active sales motion with, whether it's Aramco, Adnok, Rosneft, Gazprom, Shell, And 12,000 salespeople is a lot of sales capacity. If we look at financial services, as you know, we have a very large and successful relationship in banking with Bank of America and with a number of applications there and with Standard Chartered Bank. And we've built a large product line to meet the needs of banks, whether it's anti-money laundering, cash management, securities lending, vocal rule compliance, interday liquidity, what have you. And so through our partnership with FIS, which I think does roughly $12 or $13 billion of the revenue, it got into banking. These people are now, we have access to their, I think, 20,000 banking customers around the world with their entire sales organizations. This is the entire FIS sales organization. As it relates to Infor, I don't know how many salespeople Infor has. I'll have to look it up. But, I mean, it's a ton of salespeople. These guys sell billions of dollars in software, and now they're selling our software solutions as core to what they're doing. So we're dealing with, you know, by the time you roll in companies like, you know, what we're doing with Microsoft and Adobe in CRM, What we're doing with oil and gas and Baker Hughes, what we're doing in banking with FIS, what we're doing in manufacturing and particularly with Infor, we're dealing with literally tens of thousands of people that are selling for us around the world. And if we're able to successfully execute this strategy in the next two, three years, honestly, I think we can put the lights out on the market before anybody else gets here. And so this is core to the strategy. I think nobody has ever attempted this before. We believe it's a core competence for us. And, you know, expect us and, you know, specifically people like me and Ed and Oman, who you know, to be spending a significant amount of time on this. And then we brought in a very senior executive by the name of Gene Resnick, who was the chief strategy officer at Accenture, to head up this initiative of coordinating the vertical market partners. So expect a significant investment here and expect in the coming quarters there will be additional announcements with these vertical market partners that we think will give us a increase our competitive advantage in the market.

That's great. Thanks so much, Tom. And then one more, if I may, please. You know, the concept of embedding C3's platform into some of these horizontal categories. You mentioned an early win with the Microsoft partnership here for C3. I enabled CRM. Infor is a new partner for ERP. Can you remind us a little bit on kind of where you are with those partnerships? I know they're early. How quickly does it take one of these partners to ramp up from an integration standpoint and then go to market? When do you think you'll see the leverage out of those two partnerships in particular.

Thank you. Well, I think we've been at Baker Hughes now, if I'm not mistaken, five quarters. Is this about right, guys? Okay. David, are you going to correct me?

I think we're up to something.

Seven quarters? So, guys, I stand corrected. Okay, thank you. And I think Baker Hughes is a large global company, and they're fully spooled up. I mean, we're building probably four products together that we're bringing to market. We have two products that we already have in the marketplace. We're fully spooled up. Granted, Infor is brand new. Granted, FIS is relatively new. And so you can expect this. I mean, it'll take us, you know, one, two, three, four quarters to get these things really spooled up and get the momentum going. And, you know, it's not going to turn out overnight, but we're building, you know, a revenue capacity flywheel that I think, you know, once you get in, when you start looking at calendar year, you know, you know, you know, you know, 22, 23, I think this is going to be a significant force to be reckoned with.

That's great. Thanks so much, Tom.

Your next question comes from the line of Jack Andrews with Needham. Your line is open.

Well, good afternoon. Thanks for checking the questions and the congratulations of the results. I wanted to see if you could, you know, expand a little bit on your go-to-market strategy around the Ex Machina product. I believe this is somewhat of a different offering from the solutions that you've historically sold. So how should we just be thinking about your strategy? And, you know, is this something that you expect the uptake to be mainly from your existing base of customers, or do you expect Ex Machina to effectively draw in some brand-new customers to the C3 AI family?

Thank you for asking, Jack. So Ex Machina is a product that we've had in the market for some years, and we've been working where we are now is we are releasing this, and we've done all the work. with the documentation, the stack overflow, the online training, the community, basically offer this as a mass market product. You can think of this as serving the same market need that is currently served by Alteryx, which is basically associated with the democratization of data science. This is allowing people who would normally be doing analytics with pivot tables to okay on in excel spreadsheets to be doing you know point no code low code wizzy wig what you see is what you get point and click drag and drop data science and uh what we've released here is kind of a 21st century version of that uh solution And the democratization of data science is something that has to happen. I mean, for when we see the expansion of AI, this is not all going to happen through people hiring, you know, 50, you know, PhD-level data scientists from MIT at a quarter million dollars apiece. It's just not going to happen. So we're going to have to provide the tools where mere mortals can apply data science to their business. to achieve the benefits. And that's what Ex Machina is all about. And so think about it. I think, you know, Algerix is a fine company. I'm sure it'll continue to be successful. But it serves that same market need. Now, Algerix has some constraints. You know, it'll run on any computer you want as long as it's on-premise on a Windows machine. And Ex Machina will run on any computer that supports a browser, so it's entirely cloud-native. Algerics will use any amount of data that you want as long as it doesn't exceed two gigabytes. Well, when we're doing data science at organizations like Enel, Shell, UnitedHealthcare, Department of Defense, we're dealing with hundreds of petabytes, not a couple of gigabytes. And, you know, algorithms will allow you to perform data science on, you know, basically as many rows as you want as long as it doesn't exceed 10,000. And so think about a 21st century interface on a cloud native WYSIWYG application where the nuclear reactor that's under the surface that nobody knows is the entire C3 AI platform. And so that is a, it's a mass market product. It's available on the market right now. You can sign up on the web today and get a free trial. I encourage you to do so. And after you do your 30-day free trial, I encourage you to buy it. I think it costs, you know, $300 a month or something. And so we'll be looking at, that'll be an area where we'll be looking at thousands of customers. It's now a tried, tested, proven production product. And You know, everybody on the call, I encourage you to go find, you know, C3.AI, click on Ex Machina, sign up for a free trial, and, you know, send me an email and tell me your thoughts on the product, you know, either before or after you buy it.

Well, great. Thanks. I really appreciate your detail around that.

Your next question comes from the line of Michael Turretts with KeyBank. Your line is open.

Hey, guys. Congrats, of course, on the first quarter out. So I was really pleased to see the Fortune 500 deal in the Microsoft partnership. I was wondering if you could drill down a little bit on that and tell us, you know, what the value creation was there and why that seems promising going forward. And I've got a follow-up.

Great question, Michael. We have a number of significant partners. We go to market with AWS. We go to market with Google. We go to market with a lot of these guys. But I would say the organization that has the DNA most aligned with ours is Microsoft. These guys are really strong in enterprise selling. And so we've been able to align with them at some of the largest organizations in the world, in the United States government, with Shell, and with others. We're on speed dial with these guys. They are a great partner. It looks to me like, as it relates to cloud computing, these guys are going to be a force to be reckoned with because they really do understand the enterprise and they know how to sell there. And I think they've come to believe that, you know, we're not entirely unfamiliar with that process also. And so we get along with those guys really well. And we're selling with them in oil and gas. We're selling them utilities. We're selling with them in banking. I could, you know, someplace around here, there's a whole pipeline of transactions that are working with Microsoft Enterprise transactions. But I'm confident it's hundreds of transactions that we're working together. They don't hesitate to spool up the big guns. If they need to close a deal or make a commitment to a customer, they'll roll out Satya or Judson or JP or whoever they need to make the commitment and make sure the commitment gets met. They're really strong.

And Tom, if I could just get you to be macro prognosticator here for a minute. You did 20% sequential, almost 20% sequential growth in the quarter. That's the most you've done in seven quarters. And is this an indication that from a, I mean, obviously you're doing a lot of things right, but from a demand or a macro perspective that people are opening up to these kinds of larger projects that you do?

Well, I think our subscription revenue was like 24% growth, wasn't it? And so it was really pretty healthy, and that's what we're focused on. We're really not focused on the services line. We want to keep the services line under control, and we give you guys the courtesy of disaggregating those two so there's no question as to whether we're a software company or a services company. Okay, now, let's talk about, I mean, coming into January of, you know, of 2020, and we were blowing and glowing, right? Blowing and glowing, right? I think our growth rate last fiscal year was 68%, wasn't it, top line? Okay. And 71. Okay. Thank you. I mean, it was, we were blown and gone. You know, when COVID hit in February, I mean, our world just stopped. I mean, I understand back then our average transaction size, as you know, was like, what did I say? $21 million. Okay. And so London closed, Paris closed, New York closed, Chicago closed. God knows San Francisco closed, okay, and even the beaches in our county were closed. There was nobody home for business. So, you know, we hit a speed bump, okay, in the first two quarters of, I would say, in the February, March, April, May timeframe, we hit a speed bump. Okay, then all of a sudden, you start getting all the stimulus starts to take place. People start focusing on digital transformation. They start focusing on AI. And we began to see a significant acceleration in our business once you get into June, July, August, September, which made us feel comfortable talking to you guys about the idea of making this a public company. I mean, there is no question that we're seeing an acceleration, and we believe that as we get into fiscal year 22 and 23, we will see increased growth rates. And so this is a healthy market, and, you know, I believe we know how to grow our business rapidly, and we're pretty optimistic. But, you know, I think the overall growth rate is, And this year, this fiscal year, David, which will be what?

In April, I think. This year? Yeah, we will be in the midpoint of the guidance at 16%.

Midpoint of the guidance at 16%? Okay, fine. But, you know, we're dragging Q1 and Q2 like a boat anchor of this fiscal year, and they hurt us. But COVID has turned from a massive decelerant to an accelerant. And we're, you know, I'd like to say COVID was behind us. Hopefully, he will be behind us soon so we all get together for a cocktail in New York. But, yes, we're optimistic about the next two years.

Thanks, Tom.

Your next question comes from the line of Dan Ives with Wedbush. Your line is open.

Yeah, thanks. So, Tom, could you maybe talk about how your conversations have changed with customers over the last six to nine months when I compare it to a year ago? I mean, maybe does it really feel like it almost went from more of a push to a pull? I mean, could you just maybe talk about some of the drivers and some of the anecdotal conversations with CEOs and CIOs? Thanks.

Yeah, that's a great question, Dan. And I did not anticipate the effect of the IPO on the brand. And I guess I should have because all the tankers tell you it's going to do it, you know, and gee, this is going to be important for your business. I just looked at it as a financing event, you know, to finance growth. And so I guess I'm kind of slipping because the effect of the IPO and the associated PR really has been huge. on the you know on the perceived uh credibility and gravitas in the business and so we're seeing a much you know substantial increase in the growth in the growth of the pipeline uh conversations are happening faster uh you know the the default position the companies are coming into the discussion is that it works and how are we going to make it work um There's virtually, you know, if we want to hire a senior executive today, there's virtually nobody who won't return the call. And so it's, you know, the effect of the company has been extraordinarily positive. If you do a, you know, when you go play on Google Analytics sometime and go do a search on, like, Enterprise AI or C3 AI and look at, you know, what has happened in terms of kind of where we are in, you know, search frequency in these terms. I mean, we've moved way, way up in the list. So it's, you know... As I say, since the IPO, I think the IPO contributed. I think the global economy has contributed. I think the fact that the government is printing $100 billion a day, the U.S. government probably isn't hurting. And, you know, the focus on digital transformation and AI. So we're, you know, I think we're in the right place at the right time. We have a good solution. And I think things have changed significantly.

Thank you. Your next question comes from the line of Mark Murphy with JP Morgan. Your line is open.

Yes, thank you very much, Tom. We've seen quite a bit more excitement about a commodity super cycle, and in particular in oil, because of the pandemic recovery and response. I'm wondering how different is your energy deal pipeline today versus a year ago? I don't think you commented on Petronas in the script. Wondering if you could comment on that. Just how different is that pipeline? And does a typical oil and gas company feel more pressure to modernize during tough times or maybe more inclination to spend into a super cycle?

Well, Mark, I don't pretend to be an expert at energy markets, as you know, but it's been fascinating to watch. And first of all, the relationship with Baker Hughes is extraordinarily positive. And it's kind of funny that it would be because you couldn't find two companies more culturally different. You know, this is an old-school oil and gas company. It was a new-school high-tech company. But these guys are pretty switched on. And, you know, today, you know, we must talk between the two companies 100 times a day. And, you know, we can finish each other's sentences. You know, when we first, you know, you get into February, March, April, oil was, you know, negative $37 a barrel. You think that might have had a little chilling effect on the energy business? Holy moly. I mean, these guys were just reeling, right? They couldn't figure out how to lay off people fast enough. And then after they kind of picked themselves and dusted themselves off, you know, I think they started looking at the reality situation where you had companies like Shell, which is as I recall, roughly a 300 billion euro business, I think the fifth largest company in the world. And they look at the economics of, you know, you look at oil futures at the time, you know, nobody was predicting oil over $50 a barrel. I believe it might be over $50 a barrel today, but it wasn't being predicted to go over it. And, you know, there's a lot of downward pressure on oil prices for all the reasons that we both know. I think if you look at $50 a of barrel oil, there might be one company in the world that can make money at $50 or $45 a barrel, and that would be Saudi Aramco, because they have no lifting cost. I think that stuff comes out of the ground at about $6 a barrel. So then you have the rest of these guys, whether it's Rostef, Gazprom, Exxon, or Shell, who are running these large global enterprises, and they have the choice to either reinvent themselves or slowly go out of business. And so you get to places like Shell. These guys are not – I mean, these are highly educated and really bright people. They made the decision to reinvent themselves. So I think the oil pressure and oil fluctuations are proving an accelerant. to the use of AI as these companies, you really focus on renewable. I mean, Shell's turning itself into a renewable energy company. And, you know, with the bulk of, I think, their revenues, are they going to be coming from electricity in the future? That's a big change. And we see this Rosneft, Gazprom, Aramco, AdNoc, all the big guys are thinking about this, and we're at the table.

Okay, great to hear. And, David, as a quick follow-up, could you clarify how did the GAAP RPO or backlog behave sequentially in the January quarter? I'm just not sure if I heard that number correctly, and I know there's a few different layers on that cake for you. So just how did the RPO, that GAAP RPO behave sequentially? And then I'm just wondering, do you have the current RPO or the next 12 months portion at your fingertips by any chance? Or perhaps do we see that later?

Well, you'll see the current RPO in the queue, but the current RPO is 131 million.

Okay. Okay. Great. And then what was the sequential change just in the total GAAP RPO?

Absolutely. So when you actually look at our total gap RPO, you're looking at it from last quarter, it was 267, and it's 247.5. So 267.4, to be precise, 247.5 is the gap RPO.

One of the changes that's happened here, Mark, is that back in the old days, like, say, pre-December, we were ruthless about the way that we engaged. We did software transactions. Okay. If the commitment from the customer was not irrevocable, non-refundable commitment to buy. Okay. Over multiple years, we just did not do business hard stop. Okay. Now that we have a, now we're kind of a little different position. where we're focused. And what we're doing, we're doing our best to finance a business, and we did a pretty good job, okay, without ringing a lot of doorbells on Sand Hill Road. Another business is pretty well capitalized. We're focused on market share, okay, and we've gone towards more, I would say, market transactions, where we are willing to consider, you know, engaging in multi-year transactions with organizations where some percentage of the of the transaction is cancelable based upon, you know, performance. Well, you could be sure that we're going to bust our asses to make sure that nothing gets canceled. But it does. But that decision did have a negative effect on RPO. Okay. And I think it's the right decision to make for the business. But we've become, you know, we're doing engaging and we're being more flexible and easier to do business with in order to get contracts signed. And it does have some downward pressure on RPO, but I think it will have upward pressure on revenue prospectively.

And, Mark, with that in mind, the cancelable piece went from 37.1 to 48.4, so sequentially up 30%.

Okay. So if I'm hearing you correctly, there's a little more inclusion of cancellation clauses in the contracts so that just the RPO is kind of the mix is shifting a little off The long-term and a little off-the-gap piece, and it's rolling a little more into the cancelable piece, but it's netting out positively for revenue. Is that a fair estimation?

Positive what? And it's also positive. If the RPL bus is cancelable, it's increased year over year, right?

Year over year, it is up. Sequentially, it was off a little bit.

Okay.

Thank you very much.

Appreciate it.

Thanks, Mark.

Your next question comes from the line of Patrick Colville with Deutsche Bank. Your line is open.

Thank you for taking my question, and congrats on your inaugural set of results in the public company. So I guess I've got a two-part question. I mean, I think we just touched on it just now, but I just want to just clarify. So the delta between RPO and billings, just help me understand that, because if I look at billings in the quarter, I think it was off about 5%, whereas... the adjusted RPO was up 16. So just help me understand why that might be.

Sure. Well, I think, and I tried to include it in my prepared remarks on Dillings, was I think you were looking at perhaps the deferred revenue. Is that correct? Exactly. Yeah. And so I think what we tried to highlight in our remarks is that, and almost in line with Tom's comment on being more flexible, that is, to an extent, that's what's impacting your math there.

Okay, got it. And are you prepared to call out the Baker Hughes contribution in the quarter?

The Baker Hughes contribution as part of RPO? No, as part of revenue. The Baker Hughes portion I think we will actually be including in our 10Q And so that's where that revenue will be published.

Fantastic. Well, thank you so much for taking questions.

Your next question comes from the line of DJ Hines with Canaccord. Your line is open.

Hey, thanks, guys, and congrats on the results. Tom, when you think about building domain expertise as you enter a new vertical, how much of that falls on C3 development efforts and how much of that is influenced by the Lighthouse account with which you're partnering? I'm just trying to think about how you replicate the model as you continue to grow into new markets.

It's a great question, TJ. And one of the real – gems of this story that really is not realized yet by a lot of the market is that across all of these markets, whether it's AI-based predictive maintenance for the Air Force, whether it's customer churn at Bank of America, whether it's process optimization, AI-based predictive maintenance for paper manufacturing at Georgia Pacific or whether it's hydrocarbon loss accounting at Shell, 99% of the code we're installing is the same across all of the, across the entire installed base. That's the beauty of what we've done, okay? So you don't need to know, we don't need to know first principles of how a turbine works, in order of a gas turbine works, in order to, you know, build a digital twin for the turbine, or... or build a predictive maintenance model for that church. 99% of the code is exactly the same. All the changes are the data sources. the machine learning models, okay, and the user interface. We'll agree that the user interface is trivial. We have trivialized this idea of aggregating very large data sets into a unified federated image. For example, you know, this is what Palantir calls an ontology. This is what Palantir does, okay. Palantir has a large services organization that takes – it's a big business, right, you know, of taking, you know, I think at – at ng and now we've aggregated you know 100 trillion rows of data from 50 enterprise data sources 27 million sensors and then we go out to the extra price for weather and train social media um that we will update weather trade social media 62 billion times a day and when when when the you aggregate that into a unified federated image this is what Palantir says that every sentence of their presentation is ontology, ontology, ontology. Look it up. It's not quite that magic. Rather do that through services, we do that through software. We built, with our partners at Baker Hughes, actually before Baker Hughes, we built a predictive maintenance application for an offshore oil rig at Shell. We don't know anything about offshore oil rigs. We built production optimization for their LNG operations in Australia. That's Queensland Gas. We don't know anything about LNG operations, but we were able to work with their subject matter experts, say our team of six people and their team of six people, and build the applications. Today's Shell, God knows how many people they have working on projects. It's between 100 and 12. It's going to be hundreds because they have 100 projects in flight. We did smart grid analytics for LNG. And now I would say that's the largest AI application in production in non-classified space on Earth. I mean, we don't know anything about how the grid operates, but we know about using AI to do what they want to do, which is vault VAR, predictive maintenance for devices and customer churn and what have you. And we're doing AI-based predictive maintenance for the F-35 Joint Strike Fighter. Do you think we have any idea how a Joint Strike Fighter operates? I assure you we do not, okay? Only the people at Lockheed Martin know that, okay? And so... We're able to build the tools where their subject matters experts can do what they do. And that is the beauty of what we've done. We're able to apply the same code for, you know, for anti-money laundering at a bank and, okay, and predictive maintenance for F-35 drone strike fighter. And so I don't think we will be constrained by domain expertise. Now, that being said, you know, to the extent that we need it, Where are we getting it? We're getting it through partnerships like FIS, like Infor, like Baker Hughes, and Engie as it relates to energy efficiency. So I kind of went all around that, but, you know, you do not need to be a nuclear scientist to build a predictive maintenance application for a nuclear reactor, and that's the beauty of what we built.

Yeah, yeah, makes perfect sense. Very helpful. Thank you, guys.

Your next question comes from the line of Peggy Yu with Morgan Stanley. Your line is open.

Hi, thank you for taking my question. Just wanted to touch on the pipeline. You've mentioned seeing greater customer interest, and the pipeline has continued to grow pretty substantially last quarter. Wanted to see if you could give us a little bit of color on pipeline conversion trends, especially as we go through the year.

I'm sorry, pipeline conversion trends? Peggy, I don't, you know, I don't have that answer, okay? And, you know, it's a legitimate question. Next time we will talk, I'll have the answer. I don't have it, okay? And so anything I would give you would be misleading. It's a good question. And I'm sorry.

No worries at all.

Very, very rarely I get caught absolutely out of my heels and you caught me.

My apologies.

So you win the prize for the day, okay?

So I guess could you talk about, you know, the trends around margins as we go forward? head into Q4. Looks like the margins – so Q3, obviously, you saw a pretty good improvement, and Q4 seems to be slightly down. What are some of the puts and takes there?

Q4 margin is down? How was that?

How did one – how does one – oh, I think the non-GAAP operating loss that we highlighted in the guidance.

I think one of the things that is going to contribute to a little bit margin compression in Q4 is we are focused on being a software company. We're not focused on being a software services company, as lucrative as it can be in this particular market, I know. I read, I look at know yahoo finance every now and then too okay um that being said we're going to uh supplement uh in order to facilitate our customers and not be in the professional services business we're going to outsource professional services work for some third-party providers that we've enabled so we have this large ecosystem of third-party providers um like ibm like ibm global services and i think there's about 20 others And so we will actually, you know, give a piece of our contract to them, which will put some downward pressure on – I'm sorry, upward pressure on cost of goods sold and a little bit downward pressure on margins. At the same time, it will keep me out of the services business. And that's – so that's what – it's not a macro trend, but that's what that's all about.

Very helpful. Thank you.

Your next question comes from the line of Arvind Ramnani with Piper Sandler. Your line is open.

Congrats on your first quarter out of the gate. I have a question on your vertical partnerships. As you indicated, it's a very important part of your strategy. And I wanted to understand how your tracking progressed with these partnerships, particularly with the newer ones versus the ones that are more ingrained. Are you looking at deals or pipeline? And are there certain trigger points that will get you to switch from an FIS to FISA if the partnership isn't quite working out? So just kind of conceptually, how are you managing success at these important partnerships?

We have very – thank you for the question. And we have very, very impressive instrumentation here on kind of what's going on in the business, what's going on with business activity with each partner, with each vertical, what's the rate at which we're growing pipeline, what deals are we working together, what's the next step of each deal, what's the expected revenue, what are the revenue goals for this year, next year, the year after, by quarter. So we have very tight metrics on that. You know, fortunately, we haven't gotten to the point where one is not working yet and we need to replace it. We're still focused on, you know, making every one of them successful. And we believe that with the partners we have that we can. You know, are we going to get to the point where one doesn't work? We will. But, you know, sometime, Arvind, when you're here, I mean, we could kind of show you the metrics that we have for tracking this in sales operations. I believe that, you know, we have a finger on the pulse of this business as it relates to the AI-enabled CRM system that we have deployed that is absolutely state-of-the-art.

Perfect. Thank you.

Your next question comes from the line of Pat Walravens with JMP. Your line is open.

Oh, great. Thank you. And if I can, I'd like to ask two. Go for it, Pat.

Hi.

All right.

Thanks, Tom. So the first is, you know, for investors, as they look at this, C3 grew 71% in fiscal 20.

You hit COVID, and then in fiscal 21, revenue at the midpoint is going to grow 16%. So how should we think about sort of the durable long-term growth rate for this business? We believe the growth rate will expand.

Okay. Here's the broader one.

So, Tom, can you talk a little bit about the deal with the U.S. Army that you won with Raytheon? I mean, those things are typically super competitive, right? Who is the competition? And then just more broadly, how big or talk about the opportunity that C3 has with the defense industry. Okay. Now, this is a – I know that everyone on this phone believes that I close every deal that we do, okay? And I got to assure you, that's not true. As a matter of fact, from August 13th, 2020 until like December 13th, December about 21st, I did nothing but talk to you guys for about 21 hours a day. And I never talked to a customer or a prospect. um so as much as i would like to talk about that deal with raytheon on that particular transaction i don't know anything about it okay and uh and we can somehow hold the session to talk about it how big is the opportunity in defense and intel it's freaking huge Okay. And as it relates to applying AI to military and defense, this is going to be a major initiative for the United States government. and you have China spending tens of billions of dollars today a year on AI, and we're in the United States government, I think, been historically under-investing. There's a lot of talk about it and very little action. I think going forward, as it relates to defense and intel, that market opportunity is going to be virtually limitless, and I think we're in a position to... make an impact there, which is why you see Denny McGinn, the former Assistant Secretary of the Navy, and Rick Leggett, former Deputy Director of the NSA, joining our advisory boards to help us figure out how to navigate that. I'll be on the phone on Friday with one of the immediate past secretaries of the of one of the three branches of the US military. to get his advice on how we should structure this going forward. But you can expect us to be making a very, very substantial investment there. I mean, will this ever be anything like 50% of our business? No way, no how, okay? I mean, we're not going to become a federal contractor. But do we expect it to be a large and rapidly growing segment of our business? Yes, we do. Great, thank you.

There are no further questions at this time.

I think we might be at the last, we might be about to wrap this up, is that correct?

Yes, there are no further questions at this time.

Okay, let me just provide a couple of closing comments and then we'll... put a wrap on this so first of all thanks everybody for your attention and your thoughtful questions and to the extent that i i think there were two questions they didn't have the answer to one was from pat and one was from morgan stanley and you know i apologize so but we'll figure out a way to I guess I can't get back to you. We need to figure out a way. Can we follow up? In the world of Reg FTA, we can do this? Okay. So we'll do this. I think that, you know, we're really pleased with third quarter results. We think they illustrate the power and potential of this highly differentiated model-driven architecture that is enabling enterprises across a wide range of industries to rapidly and efficiently develop and operate complex predictive AI applications to scale. We think we... really well positioned to address this rapidly growing, you know, greater than $200 billion addressable market opportunity. And as we enter our fourth fiscal quarter of 2021, I believe that C3 AI has never been more strongly positioned in the market. I believe that we are demonstrating clear technology leadership in enterprise AI. We are building a powerful brand. Our human capital resources are second to none. Our customer and market partners' successes speak for themselves, and the competitive landscape does not appear to be limiting. So thank you so much for your time. We look forward to sharing our progress with you in the months and years ahead, and we wish you all a great day and a great week. So thank you for the courtesy of your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.