C3.ai, Inc.

Excuse me, the call will begin momentarily. Again, the call will begin momentarily.

Thank you.

Good evening. Thank you for attending today's C3AI second quarter fiscal year 2022 earnings call. My name is Tania, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star 1 on your telephone keypad. I would now like to pass the conference over to our host, Paul Phillips with C3AI. Please go ahead.

Good afternoon and welcome to C3AI's earnings call for the second quarter of fiscal year 2022, which ended October 31st, 2021. This is Paul Phillips, Vice President of Investor Relations at C3AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer, and David Barter, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our 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 relating 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. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our filings with the SEC. 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, In response to your questions, we may discuss metrics that are incremental to our usual presentations to get 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. Good afternoon, everyone. I'm pleased to provide an update on our second quarter results and give you a feel for the state of the business. We finished Q2 quite strong, exceeding company guidance and analyst expectations on almost all fronts. Top line revenue for Q2 was $58.3 million, a 41% increase over the prior year. This exceeds company guidance and all published sell side analyst expectations. Customer count at the end of the quarter increased to 104, up from a 63% increase over Q2 of last year. Gap RPO ended at $465.5 million, an increase of 74% year-over-year. Our cash burn for the first six months of fiscal year 22 was $19.8 million. reflecting increased investments in human capital, marketing, and brand equity. We finished Q2 with $1.08 billion in cash and cash equivalents and investments, enabling us to continue to invest in growth for some time. As we enter Q3, our increased revenue visibility and improved sales processes lead us to raise revenue guidance, to 62 to 68 million for Q3, and 248 million to 251 million for fiscal year 22, representing a 35 to 37% growth rate year over year, up from a 17% growth rate in fiscal year 21. Let's address customer momentum. We expanded and extended our strategic partnership with Baker Hughes last quarter for the second time. In June of 2020, we extended the agreement for the first time by extending the agreement for two years and increasing the cash and revenue commitments to C3 from Baker by $130 million. This October, we increased the value of the contract again, this time by an additional $45 million to $495 million and extended its term from five to six years. Importantly, Now, guaranteeing a minimum of $357 million in revenue to C3 over the next three and a half years. Now, historically, C3 AI has relied upon a high-touch, white-glove service, strategic selling model to acquire and retain customers. In July of 2021, in an attempt to further accelerate revenue scalability and customer adoption, we reorganized sales as an independent unit along kind of traditional, hierarchically regimented selling structures like those in place at SAP and IBM. That proved to be a mistake. While the revenue attainment in the quarter was strong, the overall performance of the sales organization and specifically new sales activity in the second quarter was unacceptable. The management team and I have spent the past month restructuring the global sales function, molded in the traditional model that we know to be effective, as a high-touch, classic strategic selling machine. That process is now complete, and the early indicators are quite positive. Our customer intimacy has increased. Our sales visibility has increased. And the amount of revenue, of Q3 revenue, that we have closed as of the end of November gives us very high confidence levels in our Q3 revenue forecast. A positive note. We expanded our enterprise AI footprint in a number of diverse industries, including agriculture, agricultural implements, manufacturing, oil and gas, insurance, financial services, life sciences, and energy, with new enterprise production deployments at Cargill, JASA Control, Shell, a new contract signed with CNHI, Liberty Mutual, a top five life sciences company, and new additional business with existing customers, including Cargill, Enel, FIS, Mosaic, and PTT Global Chemical. We substantially increased our public sector business in defense and intelligence with new production deployments at the U.S. Air Force, new business with the U.S. Space Force, and additional business with the Missile Defense Agency. In Q2, our public sector business grew 33% year over year, We expect that growth rate in this sector to increase substantially in the last two quarters of fiscal year 22. Let me talk a little bit about our partner ecosystem. We are off to a strong start with our new strategic partnership with Google Cloud, making significant progress on joint product roadmaps and joint sales pipelines. A significantly growing joint sales pipeline with Google Cloud contributes to our confidence in increased growth in the second half of this year. I think our pipeline that we're currently working with the Google Cloud team is over 90 transactions totaling, as of today, we have $58 million in business that we're working together for the second half of this year. Our Significant partnership with Microsoft continues apace. I think to date we've closed over, I think, $220 million in business with Microsoft or something like that. But if I look at the forecast, the joint pipeline that we're working with Microsoft in the second half of this year looks like It looks like roughly 120 transactions that we're working that total, you know, $140 million in business that we're currently tracking. And these pipelines will continue to increase in the course of Q3 and Q4. Through our growing partnership with energy services leader ENGIE, we advanced our position in energy and sustainability and ESG across multiple industries with deployments at a multinational packaging leader, a major hotel group, and an iconic global coffee shop brand where CGAI is helping manage energy consumption and GHG emissions at more than 12,000 sites. huge interest in the new C3 AI CRM offering. CRM software and service represents $120 billion market in 2021. Our best guess is that the total installed base of CRM has to exceed a trillion dollars. Many companies have hundreds of millions of dollars invested in their CRM installations that have been highly customized by their systems integration partners, and they are not seeing returns from those investments. Now, we are seeing substantial interest. from the larger crm systems integrators in leveraging c3 ai crm as a complementary adjunct to their customers existing installed crm systems sitting on top of their existing crm systems and on top of the customizations and modifications they have made added a modern um simple intuitive user experience, and making their existing CRM investments instantly predictive, including precise AI revenue forecasting, precise AI product forecasting, AI-enabled customer retention, next best product, next best offer, predictive interrelation. Relationship management, customer service optimization, AI-based predictive maintenance and service, et cetera. This will be a very large market and a huge growth opportunity for C3 AI. I need to talk a little bit about product innovation. We continue to advance our product leadership in enterprise AI. In Q2, C3 AI announced the launch of C3 AI Data Digital. We believe that C3 AI Data Vision represents a fundamental paradigm shift in the enterprise application user experience model from today's rather clunky forms and table-based metaphor to a highly visual, interactive, dynamic knowledge graph experience. Go take a look at it at the website. It's really exciting. C3AI introduced two new applications, AI residential property appraisal and C3AI commercial property appraisal, will be marketed nationally and have broad applicability for state and local governments and counties, as well as financial services institutions engaged in mortgage lending and related services. Okay, this basically dramatically accelerates the time to generate a highly accurate, highly defensible property appraisal with a complete evidence package to basically support that appraisal should it be adjudicated. We think this represents a significant growth opportunity to the company. This, along with C3AICRM, C3AIX Machina, and other initiatives, further our efforts to increase revenue diversity. C3AI production applications showed expanded industry diversification in the quarter, growing now to 14 industries in Q2 of fiscal year 22 compared to seven industries a year ago, including notable expansions in financial services, life sciences, healthcare, manufacturing, and I'm sorry, manufacturing, agriculture, and agricultural instruments. We addressed company leadership. We significantly strengthened our leadership team this quarter, and we did so in our federal business with the addition of Lieutenant General H.R. McMaster, U.S. Army retired, to the C3A Advisory Board, a graduate of the U.S. Military Academy and a veteran of the Gulf War. Operation Enduring Freedom, and Operation Iraqi Freedom. Lieutenant General McMaster served as the United States National Security Advisor from 2017 to 2018. He has held multiple roles in the United States Central Command and as a senior fellow at the Hoover Institution and a lecturer at the Stanford Graduate School of Business. I'm also most pleased to announce that Adil Mazur has joined the company in the role of Senior Vice President and Chief Administrative Officer. Adil has a rich history in information technology, formerly serving as Chief Financial Officer at Telanav, a wireless location-based services corporation. Prior to that, he served as the vice president and business unit CFO of the storage, big data, and value compute business at Hewlett Packard Enterprise. He also served as vice president and business unit CFO of the converged infrastructure business unit at HPE. Effective December 3rd, Adeel will also assume the role of CFO at C3AI. I'm disappointed to announce that David Barter will be retiring from C3 AI for personal reasons, effective later this month. David has a little bit about the university relations, because I think this is a particular area of strength for our powerful university ecosystem through the C3 AI Digital Transformation Institute. This is a public-private partnership. that consists of C3.AI, Microsoft, Lawrence Berkeley Labs, the National Center for Supercomputing Applications, UC Berkeley, the University of Illinois at Urbana, MIT, Carnegie Mellon, Princeton, Stanford, and KTH in Sweden. The C3.AI DTI sponsors advanced primary research in AI for digital transformation, sponsors industry colloquia, and has awarded significant research funding to develop advanced AI techniques in precision medicine, COVID, pandemic mitigation, and energy and climate security. Touching a little bit about human capital, we continue to attract exceptional talent to the company. The company received, believe it or not, over 18,000 employment applications in the course of Q2. We ended the quarter year over year.

So in summary, what we have at C3 is to establish a substantial leadership position of the enterprise AI market. Opportunity and enterprise AI is staggering, promising to exceed a $300 billion software market. Clear global market leadership. Push and maintain clear technology and product leadership to continue to attract and retain the highest quality human capital. to operate a high-performance global enterprise to maintain the highest levels of customer service. Our technology foundation is without comparison.

Our human capital is exceptional. Our brand equity is increasingly positive. The enterprise AR market is large and rapidly growing. We have the technology. We have the leadership. We have the human capital. I believe the market growth opportunity facing C3 AI has never been greater than it is today.

And the company has never been in a better position to establish a global market position.

And that includes my comments and turn it over to my colleague, David Barter, to drill down further into the financial details.

David. Thank you, Tom.

We delivered strong second quarter results that again exceeded our guidance ranges for revenue and operating income. At the same time, our notable increase in backlog helps improve our revenue visibility and provides us with confidence in our outlook for the full year. Revenue was $58.3 million, which is above the high end of our guidance, and it represented an increase Within revenue, subscription revenue rose to $10.9 million.

Despite the higher proportion of revenue this quarter, we continue to target our subscription revenue mix in the high 80% range.

Our revenue rose across industry verticals and geographies. Five industry verticals each contributed over 10% of our revenue this quarter. Revenue growth from oil and gas and financial services led the way in Q2. We're also excited about the growth being generated by sales to federal government agencies, and we expect growth in this vertical to increase meaningfully in the second half of the year. Geographically, we also are well diversified.

APAC continues to perform particularly well, with revenue up 77%,

28% of our first half revenue. The amendment of our JV with Baker Hughes, which Tom referenced in his remarks, enhances our backlog and our revenue visibility. The amendment includes several noteworthy improvements. One, it increased the total contract value by $45 million. Two, it extended the JV term by one year. And three, a new pricing model The majority of the future revenue related to the JV agreement is now included in GAAP RPO. With this in mind, I think the GAAP RPO was 179.4% from a year ago and 24.4% from last quarter.

Total GAAP RPO was 465.5% from last quarter. included in GAAP RPO, but has historically converted to revenue, was an additional $63.8 million. Combining our GAAP RPO plus cancelable backlogs, $3 million, up a median of $48.8 million from the prior quarter. We believe these are confidence and visibility. As a reminder, revenue associated with the Baker Hughes JV consists of related party revenue contracted directly with Baker Hughes for their own use or as sellers.

The related party revenue in the second quarter was $15.9 million. Non-related party revenue derived from transactions assisted by Baker Hughes, but any customer contracted directly with C3AI was $4.7 million. In total, this produced $20.6 million of revenue from our JV in the second quarter. With the Baker Hughes JV amendment executed in the second quarter, we expect a related party disclosure to be less relevant due to the change in sales model going forward. Turning to expenses and profitability, I will be referring to non-GAAP metrics, which includes stock-based compensation expense and the employer portion a payroll tax expense related to stock transactions.

A gap to non-gap reconciliation is provided with our 80%, up 160 basis points from a year ago, reflecting leverage in our operating model as our business continues to scale. Subscription gross margin in the quarter was 81%, consistent with a year.

to 47% a year ago. Operating expenses were $67.9 million, up 66% from last year, as we continue to focus on executing planned strategic investments to drive our long-term growth. Operating loss was $22.6 million in the second quarter, better than our guidance of a loss of $37 to $30 million. Turning to our balance sheets, and after capital expenditures of $0.9 million. Free cash outflow was $19.8 million. Deferred revenue was $72.9 million at the end of the quarter compared to $82 million in the prior year. Turning to our guidance for the third quarter and the full year, our amended Baker-Hughes JV agreement reinforces our confidence as we look forward. In Q3, we expect total revenue in the range of $66 to $68 million, representing growth of 34% to 38% from a year ago. We expect to invest thoughtfully in headcount and initiatives that will drive our continued growth and anticipate a non-gap operating loss in the range of $30 to $26 million.

For full fiscal year 2022, we are increasing our revenue guidance representing growth of 35% to 37%. In summary, we're pleased to deliver second quarter results that exceeded our guidance ranges.

We are optimistic about the momentum we are generating in the marketplace, which further supports our outlook for fiscal year 2022. Finally, I'd like to add that this has been a We have a strong finance and accounting team, and I'm looking forward to supporting Tom and Adeel with a smooth and thoughtful transition. Before opening up the call for questions, I'd like to invite Adeel Manzoor, our new chief financial officer, to say a few words.

Adeel? Thanks, Tom and Dave, for the warm welcome to C3AI. I'm incredibly excited to be part of the team. The company has established such a strong leadership position and is off to a great start. I'm looking forward to working with Tom and the team to drive growth and realize company goals. I'm also looking forward to working with you all. With that, I'll turn the call over to the operator for any questions that you may have for us. Operator?

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If, for any reason, you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question is from the line of Sandrick Singh with Morgan Stanley. Your line is now open.

Thank you for taking the questions, and sorry to see you go, David. Best of luck with all your endeavors in the future. Tom, I was wondering if you could talk a little bit about some of the motivations around the restructuring of the contract. What was the sort of motivation this time and sort of the contribution in terms of our new RPO?

And then if you sort of –

exclude um you know the bookings from that um from from baker hughes if we just sort of look at the business x baker hughes in the quarter how would you sort of characterize um the bookings performance in the quarter because it seems like it seemed pretty good to by our numbers but then you sort of hinted at a sort of um restructuring of the sales force and kind of put these pieces together to understand like how did bookings evolve relative to your expectations in q2

Well, there's a number of questions here. Let me see if I can tease this apart. The real motivation behind structuring Baker Hughes was to basically kind of realign the sales structure. So Baker Hughes is, I think, roughly a $20 billion business, and they run four essential business units. And, you know, the real relationship with Baker Hughes has to do with their deep, deep energy expertise in oil and gas, process industries, and they have these unbelievably close relationships going back now, I think, 70 years with everybody in the world, from Rosneft to Gasprom to Aramco to Shell, Chevron, you name it. Okay, and those relationships, When we first put together the relationship with C3.AI Baker Hughes, they basically formed a new business unit that was called Baker Hughes C3.AI.

And so they really weren't the people with the relationship quotas, and they weren't the industry expertise. And what we really did here was,

is we restructured it in a way, end of the quote rating units at Baker Hughes.

Okay?

And so that's where the relationships are. That's whether we're talking about the Eco Patrols, the Qatar Gases, the KMG, the Shell.

And so

So we put the quota, end of the people, in the operating units. That was the nature of the restructure. But we also did this in a way that gave them increased pricing flexibility to price in a manner that's consistent with that business segment, be it LNG, be it deep water, be it renewables, be it petrochemicals. So we give them the flexibility. In consideration, for us giving them that flexibility, I think $352 million, if I'm not mistaken. I guess I'm wrong?

$357 million over the next three years.

$357 million over the next three years. three and a half years. So that's a pretty significant, you know, roughly $100 million a year baseline that we start from that we can build on top of. So I'm confident that's in the best interest of the shareholders of C3. So it's a win-win relationship that allows them to accelerate their business as the oil and gas industry recovers. And, you know, it's a good thing. As it relates to the sales organization, You know, the attempt was, and candidly, I think we did it too early, was to put together kind of your traditional, highly hierarchical, highly regimented, kind of independent business unit sales organization. Okay, like they have at SAP, like they have at IBM, like they used to have at Oracle. And... And, you know, the idea is you let a sales organization like that run kind of independently, and theoretically, you know, you can scale the business at a greater rate. Now, that's a different model than we're used to using because I know many of you kind of always ask, well, how many people do we have in the sales organization? And it's really, you know, the answer was how many people do we have in the company? You know, that's how many people in the sales organization. You know, we would always put together sales teams, you know, from engineering or from forward-deployed engineering, from product marketing, from the office of the CEO, whatever it took to take care of the customer. And, you know, You know, I think, candidly, we did it too early. And, you know, the performance of the organization was unacceptable. And so we watched it. We watched it very carefully. It became apparent that it was not going to, you know, meet the growth needs of the company going forward. So basically we reverted to our old selling, old strategic selling model, which is a tried, tested, proven technique that many companies are familiar with. I think it was developed in 1988 by Robert Miller and Stephen Hyman in a book called Strategic Selling. Pretty good book if you haven't read it. And so now we've gone back to what we did before is for every account, you know, we put together a team of four or five, six or seven people who we think are just the best people in the company to handle that account, be they from finance, be they from the engineering organization, product marketing from the sales organization or from the office of the CEO to, you know, surround the customer, develop a strategic partnership with the customer, make sure their trial is successful, their implementation is successful, that their production deployments are successful. And this is what we've done. It took us about two weeks to basically put all that in place in all races and based about

What we're seeing now, it was absolute.

We have a lot of visibility in the Q3 and a large pipeline for Q4. And, you know, to the extent that going to a hierarchical model was a mistake, I guess I'm the CEO, so I have to accept responsibility for that. But we've made a course correction and we're back on track.

I appreciate all the color, Tom. That's super helpful. One more, if I might, and this is on the sort of partnerships go to market. I think you called out a number of them, but the one that sort of perked my ears was Google Cloud and Microsoft. What's driving the momentum behind that partnership? Is it one of the specific apps that you guys, is it the CRM app that's driving a lot of the go-to-market collaboration around that particular app, or is it the broader platform, or even a whole host of other apps? If you can sort of give us some color on the momentum between with Microsoft and Google Cloud, that would be really helpful.

Well, it's really different between the two. I would say that if you look at the DNA between the Microsoft sales organization and the C3 sales organization, they're actually very similar. These people are really highly professionally experienced enterprise sales professionals. We just kind of... you know understand how to approach accounts together you know how to how to address opportunities together we can talk together in shorthand and and figure out how to get the deal done to the customer satisfaction and how to make the customer succeed that has been a hugely hugely successful relationship it is directly between uh judson and satya and i and uh and you know and ad and everybody else but it's at the highest levels And that is a very, very successful relationship. Their motivation is to drive Azure. Now, Google approached us from a very different perspective. So Thomas Kurian, when he took over Google, and I think he had about 400 salespeople. I suspect they're all gone. And now he's got about 4,000 salespeople. Most of them are kind of experienced enterprise salesmen and women from SAP and other companies. He decided to approach the hyperscaler market. He's been very clear that he wanted to approach the hyperscaler market from a different competitive edge. So rather than compete with AWS and Azure based upon CPU seconds and storage hours and with arguably a better architecture, He wanted to approach it to the application layer and deliver a family of applications for manufacturing, for consumer packaged goods, for telecommunications, for life sciences, for financial services, and for aerospace, defense, and intelligence. So he wanted to approach it by delivering applications, tried, tested, proven enterprise AI applications that run on top of the Google Cloud that delivers solutions rapidly to the customer. Now, that's a pretty interesting and, I think, defensible and creative market differentiating strategy. Now, the net effect of it is, you know, it accelerates the sale of CPU seconds and storage hours. It just gets through there a lot quicker. So... If you were in the market and you wanted to partner with somebody that, say, had, you know, 10, 20, 30, 40 turnkey enterprise applications that ran on top of the Google Cloud that address the value chains of oil and gas, utilities, energy, manufacturing, health care, financial services, manufacturing, et cetera, I would argue there's exactly one door in the world that you could knock on, okay? And that's the door right on the front of this building. So that's the door they knocked on. That's the relationship we put together. And now we're jointly selling these applications globally. And it's a really interesting and productive relationship.

I appreciate all the detail, Tom. Thank you.

Thank you, Mr. Singh. The next question is from the line of David Hines with Ken Accord. Your line is now open.

Hey, guys. This is Luke on for DJ. Thanks for taking the question. So you called out in your – could you just expand there and discuss what drove that dynamic?

Is that just a reflection of new large customer relationships ramping, or is there anything else to call out there?

It's a great question. There's really nothing to call out. Our subscription revenue is five or six points in any given quarter, and this just has to do with timing of projects and delivery, so nothing more.

So you would expect that to stay in the 14% to 20% range of revenue in perpetuity?

Got it. Thanks. That's helpful. And then maybe just another on sort of those three agencies you called out. Do you feel like there's, you know, fruit to be had there, or how would you characterize that opportunity going forward? Thanks. I think that opportunity is huge.

And I think, you know, we've had General Ed Cardone joined us in the capacity of chairing this. I think you can expect some, you know, significant announcements, you know, going forward. And we're quite confident that our business in federal, particularly defense and intel, is going to grow at a substantially increased rate in the second half of this year. Great. Thank you.

Thank you, Mr. Hines. The next question is from the line of Jack Andrews with Needham. Your line is open.

Good afternoon. Thanks for taking my question. Tom, you talked about sort of this continued need for sales approach.

And so I was wondering if you could maybe tie that into just the overall state of the market here. I mean, There's so much noise, it feels like, around AI in general. So could you just maybe frame for us, I mean, do your customers, you know, given the healthy pipeline activity, utilizing, you know, the value proposition of everything you can deliver to customers? Great question.

Right now, if you look at the pipeline that we're working going out the next four quarters, it's about a billion two. Okay, the pipeline that we're working for the second half in what we see as qualified opportunities, second half of this year, is about 800 million. You know, we are looking at a market that is in, you know, this is the first half of the first inning, okay, in enterprise AI, and people are just

starting to figure it out.

And, you know, we're not really spending a lot of time evangelizing.

We're not spending, you know, basically... The next larger segment is... Well, you know, I'm going to...

Take 20,000 people in Bangalore, and I'm going to build this platform myself. And virtually every one of our customers has tried to build this themselves. You know, it's long, it's expensive, it never works. I mean, GE, I think, spent $6 billion. Shell tried to build it, and Nell tried to build it. Coke tried to build it. There's no United States Air Force, God knows how many times they've tried to build it. And, you know, we don't really fight that fight. So we let people kind of go through that first deciding that they want to get to the point that they're going to take advantage of enterprise AI. That's the first qualifying issue. And then when they've gotten to the point where they've decided they're not going to build it themselves, so we're not going to stay around and talk them out of building it themselves. We're not going to stay around and convince them why AI is good. We're mostly in the business of just finding that customer that is number one, committed to easily transform the organization, and has decided no way, no how are we going to build themselves because that's stupid. When we find that customer, we're spending time qualifying, not evangelizing. It's all over. Everybody will be in that third sector. I'm quite confident of that. And we'll be looking at a $300 billion. An evolution the market has to go through, and we're, you know, we have no problem with that.

Got it. Thanks for the color around that.

That's really helpful framing. Maybe just sort of the sales changes. your hiring plans and priorities for the balance of the fiscal year here?

Well, we had 18,000 job applicants in the last quarter. So for some reason, we're just, I think the last time I looked in the last year, we had 52,000, okay?

72,000 annualized as to what, 72,000? Okay, and fast man? Okay, and so we have swapped from, People want to come to work here.

In sales, in data science, in product marketing, you can expect that we will, you know, we're very selective about who we hire, both in terms of personality type and in terms of skill set. I think something like 86% of our people, it's a huge number. Excuse me. I'm sorry. 68% of our people have advanced degrees. 10% of our people have PhDs. Rough numbers. Give me a couple points one way or the other on those guys. I don't have these numbers right in front of me. Okay, but it's, you can expect that we will hire every person that we deem to be qualified who we think can succeed here, okay, in the next two quarters and in the next two years. And so we are open for business. We're hiring. We're hiring in Guadalajara. We're hiring in New York, in Paris, in Rome, in the U.K., in New York, Atlanta, Chicago. And right here in Redwood City, we're hiring. So it's... And we feel very fortunate about the people that we're able to attract and retain. That's great to hear. Thanks for the update.

Thank you, Mr. Andrews. The next question is from the line of Michael Truitz with KeyBank. Your line is open.

Hi, this is Michael Levitevic. I'm from Michael Truitz, and thanks for taking my question. You called out strength in APAC, and I was wondering if you could dive into that a little bit and then compare that to what you're seeing in the META. Thanks.

Sure. I think what we shared on the call is that APAC was up 77%. I think the strength, if I think about the deals that we've had in APAC and just thinking about the last couple of quarters, it's been certainly financial services. I think we've seen some oil and gas, some chemicals. So I think it hits a number of industry verticals as well. and what we've seen in APAC.

Okay, thanks. And if I could just get a quick follow-up. Is there anything you'd comment on the billing sequential change? Any odd timings or just strange things?

I don't think so. I think overall, if you think about billings, probably the most noteworthy element is just to kind of keep in mind that sequentially things have been very strong. If you were to kind of go back, we had an over, going back to Q4, 18% sequential. So I think sequentially, when you think about it, we were kind of coming off of a higher period. So I just keep in mind that there's going to continue to be some movement around invoicing and how that percolates through the P&L.

Thank you, Mr. Tourette. The next question is from the line of Bradfield of Bank of America. Your line is now open.

Oh, great. Thanks for taking my question, guys.

I wanted to ask about some of the newer vertical industries that you're going after, life sciences, manufacturing, IT services. As you kind of expand into these other verticals, what kind of traction are you seeing there in any color on perhaps applications that you're seeing some early pilots with?

and, you know, what pipelines look like potentially in those industries.

Thank you. Hi, Brad. You know, I wish I had all the pipelines in front of me. I don't have that done. Do you have the sheet by vertical that I look at?

Financial services is going to be huge, Brad. You know, that's a big one. I mean... Now we're moving into agriculture.

Believe it or not, agricultural implements, insurance, telco. I mean, this is going to go everywhere. I think consumer packaged goods will be good. So, I mean, it's just a matter of, you know, these memories in the utility.

I know why the utilities.

They, you know, when you remember when you see everybody talk about IOT, these are the guys that had all the sensors out there. Oil and gas kind of came as a complete surprise. I mean, that came in the course of, you know, a gift horse that walked in the door in the person of Baker Hughes. And then, you know, defense and intelligence. Oh, my God. I mean, how big will that be? I mean, these guys are. The financial services pipeline is very large. In the second half of the year, telecommunications is very large. Defense and intelligence. Defense and intel, God knows how many scores or billions the Chinese are spending on this. And they have some work to do, and I think you'll find it will be part of it. We're going after the verticals in a kind of very pragmatic, coin-operated fashion. And, you know, at the door and, you know, with a check and a mandate, he happens to run Boeing. We're in the aerospace business. That's how it works. Great. Thanks, Tom. And also, if I could ask about some of these vertical partnerships, FIS, NGIS,

If you could elaborate just a little bit on the commitment there, go-to-market resources, any traction you're seeing in those partnerships would be really helpful. Thanks again.

ENGIE is pretty mature, and that's one where we're seeing a lot of traction. And candidly, what they're doing is they're using our technology to provide energy services to large organizations like Ohio State University and others that will remain unnamed.

a number of university systems where they're basically almost stepping in as the role of the utility, okay, where they are, you know, kind of guaranteeing them a reduction in their energy and carbon footprint over the next decade or 20 years. And they're using our software, you know, as the heart of that service that they provide.

So that is mature, growing, hugely successful. FIS is relatively new.

As you're aware, I think it was put in place a couple of quarters ago. We're seeing slow but steady progress there. I'm in touch regularly with the guys who run the business. You know, right now I'm optimistic about it, but we have not yet generated a lot of results there. I think in the next two quarters we'll know whether that's going to succeed or not. I think it will. I spent the morning, you know, I had my regular communication with a person who runs the kind of defense business at Raytheon. We're involved in some very large projects with them.

Those projects will contribute significantly. you know, some of the growth that we've, that David mentioned, and I, the second half of this year. So that, that Raytheon's a good one.

Thank you, Mr. Seals. Our question is from Mark Murphy with JP.

Yes. Thank you very much. So Tom, I was curious, when you look back on it with a few more quarters under your belt and letting companies build their own machines, is it weaponizing the older applications by working the way you are with Microsoft and Adobe and Infor and other application vendors?

Great question. I tell you, it's a lot easier, Mark, to weaponize existing systems. Okay, it really is. Or just go take an account, say a Shell, say an Enel, say a Coke, say a missile defense agency, take an account and make them successful. Build the first app and then the second app.

I think, for example, at the Air Force, we must. Okay, because you have control over the situation.

You're dealing directly with the customer. You can not only set their expectations, you can influence what they're going to do first and second and third. And very much about succeeding at this is picking the right project, as you know. The reason that I think a lot of these companies fail at these projects is because they pick projects that are A, either impossible, Or like, let's say somebody wants to build an AI application to like predict the price of, you know, pork bellies next month.

month.

Well, if we could predict the price of Fortinet, but if AI were that sophisticated, we could predict the price of gold next month, and we could predict the price of Google stock next month. And if we could do that, none of us would be in the software business, would we? Okay? People actually do try to do these applications. People choose applications that are impossible, or people choose applications that are of low value. Now, when you're dealing with them directly, you can coach them and keep them on high-value applications.

Where AI is an appropriate tool.

Now, that being said, if you want to establish and maintain a market leadership position, as you know, we do, we need to think about market leverage, okay? And this is when you're going through, you're going through at much larger scale through distribution partners like Microsoft, like Google, like FIS, like bigger use. Okay, the advantage is you have a scale. We have 12,000 people at Baker Hughes, 4,000 people at Google, I think 60,000 people at Microsoft. I don't know what the number is, but it's some staggering number like that. So the good news is you have leverage. It's harder. You need to be much more sophisticated about the way you're doing it. You need to be willing to allow people to make mistakes. You're going to have higher rates of failure. At the same time, you do have market leverage. And if the goal is established and maintain clear market leadership, you need to do it through a partner ecosystem. So as much as I would prefer to do it the easy way, it's not going to achieve the desired objectives. Sorry to kind of go full circle on it, but, I mean, it was a really good question.

Yeah, okay, yeah, thank you, Tom. I appreciate that insight into the strategies. But my other question is, just observing what has happened with commodity prices, and they're up so much year over year, you have this chunk of business in oil and gas and utilities, although you're diversifying very rapidly. Is the commodity price creating more budget there for that end market when you head into 2022? And I guess I was just curious, You know, if that's benefiting Baker Hughes, has that given them more confidence to kind of make this a stronger commitment to you?

You do business there when oil prices are like above zero. You know, when oil prices were, I think, negative $37 a barrel.

I mean, all these companies were thinking about is how fast they could lay people off, right? and how fast they could slash budgets, they were all just in shock. Now, I don't know where oil is today. You probably do. But I suspect it's something like $86 a barrel, but I don't know. I don't really track it. But it's significantly non-zero, and they're all investing, and they're all investing in the future. Interestingly enough, most of them are investing in becoming non-hydrocarbon companies. Certainly, Aramco is. Certainly, Shell is. I mean, they're all investing and reinventing themselves. You talk about reinventing, say, a $300 billion business that's entirely dependent on hydrocarbons to be entirely dependent on operating on clean energy. It's a pretty significant transformation.

But there's no question, they are looking up at it.

you know, and now there are budgets and they are investing, and I suspect this is one of the reasons that motivated Baker Hughes to restructure our agreement.

Any closing remarks?

Okay, ladies and gentlemen, thank you so much for your time and attention. We look forward to

you know, keeping you posted on the progress of our business.

You know, we're very clear on what the mission here is here, and that is... And if we do that... And we...

Appreciate your time, courtesy, and attention, and we look forward to staying in touch. Thank you all very much.

That concludes the C3AI second quarter fiscal year 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.