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spk02: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1. Music
spk04: Thank you for standing by, and welcome to the C3AI first quarter fiscal year 2023 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Ruben Gallegos, Vice President, Investor Relations. Please go ahead, Sarah.
spk05: Thank you, and good afternoon, and welcome to C3AI's earnings call for the first quarter of fiscal year 2023, which ended July 31st, 2022. My name is Ruben, and I'm the Vice President of Investor Relations. With me on the call today is Tom Siebel, Chairman and Chief Executive Officer, and Juho Parkinen, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our first quarter results, as well as a supplemental to our results. both of which can be accessed through 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. For further discussion of the material risks and other important factors that could affect our actual results, please refer to our filings at 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 remarks in response to your questions, we may discuss metrics that are incremental to our usual presentation to give 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. And with that, let me turn the call over to Tom.
spk07: Okay, thank you, Ruben, and thank you all for joining the call today. I want to apologize in advance for the unusual length of my comments today, but there are a number of initiatives, some of which have been in planning for years, some for a few quarters, that are converging at C3.ai, some of which you will want to understand to fully appreciate the gestalt of the business operations at C3.ai. It is clear that the commentary that we have all been hearing in recent earnings announcements about market uncertainty, budget cuts, and lengthening sales cycles as the market anticipates economic downturn is real. This was our experience in the last quarter also. Our customers and prospects appear to be expecting a recession, and we are seeing customer purchasing behavior consistent with that expectation. It appears to us that this market downturn could be significant. So we have put into place a combination of measures that will allow us to not simply weather this downturn, but to emerge a stronger, more rapidly growing company with greater market share and greater market presence. The measures that we have implemented include a restructured, more productive enterprise sales function, an enhancement of our strategic partnering model, several new product offerings, a new consumption-based pricing model, and an acceleration of our path to profitability. These measures in aggregate will allow us to accelerate sales cycles, accelerate product adoption, increase market share, increase revenue growth, and increase profitability. I will explain each of these actions in some detail, but first I will comment on the financial results and significant developments during the first quarter. Our total revenue of $65.3 million grew 25% year over year. This was in line with our guidance. I will comment also that this is the seventh consecutive quarter as a public company that we have met or exceeded revenue guidance. Our subscription revenue for the quarter was $57 million, a growth rate of 24% year over year. Subscription revenue represented 87% of total revenue. Services revenue was 13%. Total RPO grew 58% year over year to $458.2 million. Our current RPO at the end of the quarter was $173.5 million, nearly 20% growth year over year. We signed 31 customer contracts in the quarter and had an average total contract value of $1.4 million as compared to 24 contracts with an average TCV of $1.9 million in the year-ago quarter. This represents a 29% increase in contracts compared to the year-ago period. We maintained non-GAAP gross profit margins of 81%. Customer growth increased 27% over a year ago, ending the quarter with 228 customers. We ended Q1 with $938.2 million in cash and investments. Free cash flow in the quarter was an outflow of 53%. $4.8 million. Note, please, that this included $15 million of CapEx related to the build-out of our new headquarters and $16 million related to a commission payment to Baker Hughes. Since going public in December of 2020, C3AI has spent $245.9 million on R&D to expand our technology leadership. This investment amounted to 59% of revenue. The bulk of this substantial investment was focused on the development of version 8 of the C3 AI platform, a four-year engineering effort representing over 1,000 years of development. It provides our customers order of 10 to 1,000 times scalability and performance improvements, many new data integrations, new no-code, low-code, and deep-code development tools, improved data science tools, and importantly, dramatically improved ease of use, more comprehensive content-sensitive documentation, new integrated development environments, a content-rich distance learning library for remote training, and a 24 by 7 developer community. The capabilities of C3 AI version 8 are a carefully planned prerequisite to our important transition to a new consumption-based pricing model that we are announcing today. C3.ai has been broadly recognized in the industry for its functional and architectural leadership as a, if not the, premier AI ML application development platform in the market by Forrester Research, Gardner, Constellation Research, IDC, and Bloomberg. In July, Forrester Research named C3.AI a leader in the 2022 Forrester Wave for AI and machine learning platforms. This is a first of its kind comprehensive analysis of enterprise AI and machine learning platforms, highlighting the importance of comprehensive AI ML platforms like C3.AI, as opposed to do-it-yourself widgets to realize business value. Of the 15 vendors, evaluated, the Forrester report ranks the C3 AI platform and applications number one in strategy, number one in product vision, number one in application tools, number one in application accelerators, number one in market approach, number one in runtime, number one in architecture security, number one in data features, number one in partner ecosystem, and number one in performance. The Forrester report concludes that C3 AI could become, and I quote, the de facto AI platform standard for the world's most complex industries. Aside from the new and enhanced C3 enterprise AI, aside from the C3 AI platform, okay, and the enhancement of the new applications that we've developed, you can think of as AI enhanced or predictive ERP. supply chain risk, inventory optimization, process optimization, fraud detection, predictive maintenance, and money laundering, et cetera, each with industry-specific versions. Our R&D investments resulted in the release of five new C3 AI applications since our IPO, each with functional capabilities and addressable market opportunities sufficient to support a standalone company. Let's start with C3AI CRM. This allows customers to make their existing, often very expensive, CRM investments instantly predicted. We've been piloting the new C3AI CRM product with a large professional services company, an industrial products company, and a large fintech company. The initial results are dramatic. According to Gardner, the CRM market should reach $137 billion in 2025, and we believe C3 AI CRM addresses a significant unmet need in that market. Let's talk about C3 AI ESG. This enables customers to integrate data from all their ERP, supplier, customer, and manufacturing systems, plus relevant exogenous market data, emissions, and commodity data, and provide comprehensive Scope 1, Scope 2, Scope 3 ESG reporting in compliance with any of the SASB, GRI, TCFD, and CDP reporting standards. C3.AI ESG, like all C3 applications, is entirely predictive, allowing companies to accurately forecast their ESG KPIs and plan and manage mitigation measures to achieve their corporate ESG objectives. Consistent with our overall partnering strategy, you can expect us to partner with a large global service provider to bring this product to market. According to Verdantex, ESG is estimated to be a $30 billion digital market by 2030. C3 AI Property Appraisal. Designed to meet the needs of state, county, and local governments, C3 AI Property Appraisal allows real estate appraisers real-time integration of all data sources and the application logic necessary to rapidly complete commercial and residential property appraisals using a multiplicity of valuation technologies, including income capitalization, sales comparables, and cost of replacement. Complete evidence packages are provided to defend appraisal protests and adjudication. Initial results suggest this application reduces the time and cost to complete appraisals by an order of magnitude. C3AI property appraisal addresses the needs of over 3,000 U.S. counties and over 19,000 U.S. cities, villages, and towns in 50 states. C3AI law enforcement. Derived from our C3AI intelligence application developed for the U.S. federal intelligence community, C3AI intelligence analytics from law enforcement provides peace officers the ability to apply the power of AI to rapidly investigate crimes. A unified current data image of criminal history, law enforcement records, cell phone tracking, traffic violations, past associations, gang membership, vehicle records, jail records, surveillance images, and body camera image body camera footage, social media, and news is embedded in an intuitive workflow employing sophisticated AI and ML techniques to surface insights in near real time. Designed to meet the needs of over 15,000 law enforcement agencies in the U.S. alone, according to the market research from Markets and Markets, this is expected to be a $22 billion software market in 2026. C3AI at Samarkand. This is a point-and-click, drag-and-drop analytics tool that enables business analysts to rapidly apply sophisticated AI ML techniques and predictive analytics to large data sets. At Samarkand, it can be used as a standalone tool and is fully inoperable with the C3AI enterprise applications and the C3AI platform. Ex Machina meets the needs of the rapidly growing citizen data science community. Gardner predicts this is a $14 billion addressable market in 2025. Now, in response to your request from the investor community to see C3 AI application demos, we have published demos of these and other applications on our website at this address that's shown, basically c3.ai.applications. These demonstrations are available to you today. In addition, to provide you even more complete information about these applications and our other applications, we're hosting a C3 AI live demo series starting in September to provide you more in-depth product demonstrations. Registration for these demonstrations opens next Tuesday. and you can register at our IR site at C3.ai. Talk a little bit about customer success in the quarter. Our customers continue to be highly successful with their C3.ai applications. Shell, for example, continues to expand the global deployment of its AI applications to deliver cleaner, safer, more reliable energy with less environmental impact at Shell, We integrate over 1.2 million data streams and monitor over 13,000 pieces of critical equipment in near real time. At the U.S. Missile Defense Agency, they submitted its third order against our five-year, $500 million production OTA agreement that we were awarded in December of 2021. This agreement makes it easy for everybody in DOD to purchase C3AI products and services. At the U.S. Air Force Rapid Sustainment Office, we continue to expand and scale our efforts to improve aircraft readiness, and now have 14 aircraft platforms live on our software platform, including the F-15, F-16, F-18, F-35 Joint Strike Fighter, C-5 Galaxy, KC-135, Black Hawk helicopter, and others. Our results for the B-1B bomber demonstrate the capability increased daily mission rate capability by 22 to 27%. The value of this may be incalculable. For those of you who are interested, go look up the B-1B bomber on Wikipedia. This is a very cool supersonic aircraft, okay? And basically, we're able to increase the number of aircraft that are available in any given day by order of 25%. This is a big deal. As a result of this, we expect to see significant licensing expansion of this program in the coming year, leveraging the $100 million and $500 million ATO contract vehicles that we have been awarded. to expand this AI predictive maintenance application across many additional aircraft platforms. Let's talk about our partnering models. We further expanded and deepened our highly productive strategic partnership with Google Cloud and QWAP. This is a big deal. Now, under this enhanced strategic partnership, Google Cloud has substantially increased its commitment to C3 AI over the next three years to co-sell and co-fund over 100 new C3 AI Tier 1 pilot deployments. Talk about Microsoft joint selling activity with Microsoft was brisk in Q1 with over 16 joint selling agreements. Microsoft also funded C3 AI trials to accelerate new customer acquisition To date, we have closed over $265 million in contracts with Microsoft. We're seeing a significant uptick in joint selling interest from AWS that we expect to continue and to grow in fiscal year 23 and beyond. AWS remains our largest installed base with approximately 56% of our customers running on the AWS cloud. Our strategic partnership with Baker Hughes remains strong. In Q1, C3AI and Baker Hughes signed one of the largest petrochemical companies in Latin America to license the C3AI reliability application. In addition, C3AI is collaborating with Baker Hughes, Microsoft, and Accenture to develop and market a comprehensive industrial asset management solution for clients in the energy and industrial sectors. Now let me make some comments on kind of the overall kind of macro market conditions that we saw last quarter. The fact of the matter is that similar to what we've been hearing from other companies, we saw significant change in the business environment in the quarter with the lengthening of decision cycles, and that was particularly accelerated in July. In the course of the quarter, we saw 66 forecast deals move out of the quarter, many of which we would have fully expected to close under normal market conditions. While we expect that the bulk of these transitions will close going forward, it is clear that the decision processes are being subjected to more rigorous budgetary scrutiny and additional levels of approval authority. As a result, we have gotten together with the management team and we have taken decisive action to address what appears to be a significant global market correction to accelerate business, accelerate profitability, and strengthen the company. We are substantially reducing spending that does not directly impact revenue to accelerate our already communicated path to profitability, and importantly, preserve our significant cash resources. We have further adjusted our go-to-market model, our partnership model, and our pricing model around consumption-based pricing to better meet the needs of our customers and more effectively address the market opportunity in this new economic reality. With $938 million cash and investments in hand, we are well positioned to weather this economic storm. Now, we have taken action to accelerate our path to profitability and have restructured our pricing model in a manner consistent with SAS industry standards to accelerate business velocity, increase revenue visibility, increase revenue growth rate, and increase profitability. We will emerge from this recession a stronger and more competitive company. We have reduced marketing expenses and cut virtually all non-critical expenses. We continue to hire, especially in sales and engineering, and our engineering growth is expanding more rapidly in Guadalajara with its significant cost benefits. As we enjoy non-GAAP gross margins in excess of 80%, it is a straightforward proposition to reach non-GAAP profitability and cash positivity from normal business operations. As a percent of revenue, we have taken action to target a reduction in marketing expenditures from 29% to 11%, We're reducing R&D expenses just associated with the scale of what we're doing, okay, from 44% to 29% of revenue. G&A expenses will be reduced from 15% to 12%. We expect sales expenses will increase from 23% to 26% of revenue. While we are not providing guidance to this effect, we currently expect to obtain non-GAAP profitability and positive cash generation from normal operations by the end of fiscal year 24. During this same period, absent any extraordinary events, we do not expect our cash and investment balances to fall below $700 million. Now I want to talk about our sales force. In our Q2 fiscal year 22 call, I talked about reengineering the profile of the sales organization from a traditional SAP, Oracle, enterprise-like sales software organization to more of an emphasis of organization consisted of highly educated, experienced, technical domain experts who are engaged in selling. We have succeeded at that task. After an extensive interview and screening process, we hired, trained, and continue to mentor scores of new high performance technically competent technical sales professionals and their initial progress and promise is impressive. I want to give you a feel for the composition of this new team that is becoming the fabric and leadership of the new C3 AI sales organization. The average age is 35, all have one or more advanced degrees, 67% have MBAs, on average they have 12 years of work experience. Many were at or near the top of their classes at West Point, the Naval Academy, MIT, Princeton, Illinois, Michigan, Berkeley, Stanford, the Cole Polytechnic, et cetera. They went on to gain technical advanced degrees at the Army War College, MIT, Georgia Tech, and Carnegie Mellon. Many continued with MBAs from Harvard, Booth, Sloan, NCIET, et cetera. They have commanded F-18 squadrons. They have taught in the Top Gun School. They have worked at BCT and Bain, managed at Goldman Sachs, Amazon, and SpaceX. We are providing this team with extensive sales training and ongoing sales mentoring. This program is exceeding our expectations in every respect, and we will continue to expand this new sales force in the coming quarters. I can assure you, this is a force to be reckoned with. Now, the C3 AI pricing model, this is important. I want to talk about the switch from subscription-based pricing to consumption-based pricing. This is an important, this is a secular change in our business. We have been planning it for some years, and it is now enabled by the general availability of C3 AI version 8.0. both the platform and the applications. Now, the C3 AI pricing model has historically been something of a black swan in the SaaS world, while others, including Snowflake, AWS, Azure, Datadog, and Mongo, have been selling based on a low price of entry, pay-as-you-go, consumption-based pricing model. C3 AI has historically been an anomaly in the SaaS world with a subscription-based pricing model. Our sales cycles included lengthy negotiation of what were typically 36-month contractual contracts, including developer license fees, application license fees, data scientist license fees, professional services, and runtime fees, with the total initial commitment ranging from $1 million to $35 million or more. These customer commitments typically expanded over time in $1 million, $5 million, or even $50 million increments as our customers achieved success. And we've been able to command these types of customer commitments in the past decade because of the substantial customer value that our products and services generated, sometimes on the order of billions of dollars a year in economic benefit. This pricing model has allowed us to attain 228 customers realized a 38% revenue growth rate in fiscal year 22 and achieved a compound annual growth rate of 40% for revenue from fiscal year 19 through fiscal year 22. The downside has been more lumpiness than we would like to see in bookings, lengthy sales cycles, and higher levels of uncertainty associated with individual deal closures and periods. While this elephant hunting subscription sales model has served us well in establishing C3 AI as a leader in enterprise AI, it is clear that it is not well suited to the deliberate decision and approval processes inherent in the current economic environment. With the completion of C3 AI version 8, this is the ideal time for us to adopt a consumption-based pricing model, partner model, and sales model They'll allow our customers a low-cost point of entry and pay-as-you-go expanded usage pricing. Our new consumption pricing model brings us in line with what we believe is becoming the accepted standard in enterprise SaaS application software pricing. The sales motion now begins with a six-month pilot project during which the customer will bring its first C3 AI enterprise application into production use. After the initial six months, ongoing pricing is simply $0.55 per CPO. The cost of entry is low. The business decision to move forward is easy. The protracted acquisition deliberation process is avoided. While the initial revenue ramp will be slower from each new customer, considering the substantial increase in the number of new customers, we expect to see a substantial increase in revenue and revenue growth rates after three to four quarters. We believe this will be further accelerated by increased effectiveness of our joint partner selling model, and especially by our new agreement with Google Cloud to co-sell and fund 50% of the cost of over 100 Tier 1 new customer engagements, making it quite easy for new customers to adopt C3IA applications. Now, without providing guidance, okay, for modeling purposes only, We will assume that each onboarded sales rep can close an average of four new customer pilots in case it's a pretty year. We assume that 70% of pilots will convert into production use. We estimate customer efficient at 10% a year. We believe that each new pilot will generate on average $80,000 per month for six months. Okay, and then initially $70,000 per month in consumption fees growing and actual usage increases. Assume that we have an average of 60 sales professionals in Q2 and that sales headcount will grow at 10% per quarter. If you run this model without eight to 12 quarters, you will find that revenue flattens for three quarters and then graphically accelerates in fiscal year 24 and beyond to growth rates in the top decail of the SaaS software universe. A new consumption model aligns well with our partners Baker Hughes, Google Cloud, Microsoft Azure, Amazon Web Services, and fits perfectly with the hyperscaler marketplaces and their pricing models. Combining the effectiveness of our new sales organization, the consumption-based pricing model, the power of the Google Cloud joint sales and pilot funding program, and our other important marketing partnerships, we expect a substantial increase in new customers, an associated increase in SAS revenue, revenue growth rate, and market share. Like other companies that have transitioned from perpetual licensing to subscription licensing or subscription to consumption licensing, including, for example, Adobe, Mongo, New Relic, and Elastic, the near-term impact on revenue in RPO will be negative. But after three to four quarters, we expect it to become highly accretive to revenue and RPO. The near-term effect of new customer cap will be quite positive.
spk08: And our prospects, and we are confident that this will significantly
spk07: option processing model against actual revenue that we realized from a number of representative C3AC customers over their first, over their initial 10 quarters, and we find it to be license revenue neutral across that customer listed aggregate. Now, we can see, you know, for example, this, I thought there were kind of three slides that were going to happen here, but I guess it didn't work that way. Okay. We can see that this is, so this, um, Okay, so this shows the orange line shows our cumulative subscription revenue that we did from 10 actual customers over the first 10 quarters. This amounts to initially it was $60 million in bookings. And when you put the additional bookings that each did over this 10 quarters, I think it's $214 million in bookings. And in aggregate, it adds up to $41 million in revenue. Now, using this new subscription, consumption-free pricing model, it's basically revenue neutral, except that we didn't have to close, you know, it's revenue neutral, except we basically had to close 10 half-million-dollar deals. And after that, it's just 55% for CPU out. So it avoids the, you know, having to close the, you know, $60 million in initial deals, and then one, five, 10, 25, $50 billion incremental deals to get $210 million in bookings. And people in this market environment, I'm telling you, closing a $50 million deal with any multi-billion dollar corporation, it has to go to the board, okay? So you could play this game in the last decade, and we played it very well, but that game is over. Okay, so now we have a pricing model that we think meets the market needs quite well. Okay, so basically, we get the same level of revenue by closing 10 deals for half a million dollars, and we have to keep the customers happy. Okay, bottom line, we're running a leaner company with a faster path to profitability. We're conserving cash. We got lucky. okay, really, and that the availability of version A happened to coincide with the market downturn, enabling us to shift to this consumption-based pricing and partnering model, really, at an opportune time. As we can see, growth was slower. This is the blue line. The orange line shows, basically, where your analyst projections were for the company growth kind of, you know, in the next, you know, 12 quarters. Okay. And we're going to see the blue line is the shift to consumption-based revenue. Revenue flattens out in the short term because we're doing, you know, half a million dollar deals instead of $50 million deals. Okay. But then, you know, as this, you know, as the number of customers increases, you know, about three or four quarters out would cross to a dramatically accelerated revenue growth rate. And so we expect to see growth will be forward for the next three quarters, and then we expect to see rapid revenue growth, increased customer count, and increased profitability in fiscal year 24 and beyond. When this economic turmoil has subsided, C3AI will emerge stronger, bigger, more profitable, with greater market share. Turning to guidance, as mentioned, We expect a short-term negative impact on our revenue growth as a result of the new consumption model, and our guidance takes that into consideration. The model also suggests when you run the model, if you run the model with the assumptions that we have provided, you'll see that the model anticipates a dramatic acceleration of revenue growth and profitability in fiscal 24 and beyond. As such, our Q2 23 total revenue is expected to be in the range of 60 to 62 million. Our total fiscal year 23 revenue is expected to be in the range of 255 to 270 million. For fiscal year 24 and beyond, we expect revenue growth will revert to historical annual growth rates to be more in line with our historical annual growth rate, and actually we expect them to be significantly in excess of 30%. Now I'll turn the call over to my colleague, Juho, to provide more color on the financial results of the quarter. Juho.
spk03: Thank you, Tom. I want to provide a brief recap of our financial results. All figures will be discussed on a non-GAAP basis and as otherwise noted. As Tom mentioned, we ended the quarter with revenue of $65.3 million, which represents a 25% year-over-year growth. Subscription revenue increased by a solid 24%, contributing 87% of total revenue. Gross profit increased 29% to $52.6 million, and gross margin increased 260 basis points to 80.6%. Operating loss improved $7.3 million year-over-year, while operating loss margin improved from negative 42% to negative 22%. Our customer count increased by 27% year-over-year to 228, and we closed 31 deals during the quarter. This reflects a nice increase in our band of less than 1 million deals, which grew at 44% year-over-year. We made progress on our path towards lower average total contract value, or TCV, with an average TCV of 1.4 million in the first quarter, down from 2.9 million in the sequential fourth quarter. This gives us further conviction that transitioning to smaller contract sizes and expanding our go-to-market strategy to include smaller deal values is the right way to engage new customers. Now, turning to our RPOs and bookings, we reported non-GAAP remaining performance obligations of $496.8 million, which is up 39% from last year. We were especially happy to see further diversity in our bookings by industry, high-tech increase to 46% of bookings. Turning to cash flow, free cash flow for the quarter was an outflow of $54.8 million. About $15 million was used for the build-out of our new headquarters. In addition, we had a commission payment to Baker Hughes of $16 million. Normalizing for these two payments, our adjusted free cash flow was an outflow of $23.8 million. As a reminder, this will not be a meaningful factor impacting our passive profitability because the impact will be amortized over the term of the lease. Regarding our transition to a consumption pricing model, we have provided a set of assumptions that are intended to assist you in modeling the future potential revenue for the company. Please refer to the attachment that is downloadable on our website after the call. We're keenly focused on executing against our path to profitability as the creator of the enterprise AI space. We have made significant investments in branding and marketing from the start. As we have now successfully built a strong brand in the marketplace, we're comfortable reducing our investments there. We have always been focused on delivering long-term, sustainable, profitable growth for our shareholders, and we're pleased to be able to accelerate our path to profitability with our transition to a consumption-based model. With these remarks, I would like to open this up for questions. Operator.
spk04: Certainly. Ladies and gentlemen, if you have a question at this time, please press star 1-1 on your telephone. One moment for our first question. And our first question comes from the line of Pat Walraves from JMP Securities. Your question, please.
spk06: Okay, great. Thanks. So if you look at fiscal 23, you took revenue down 50 million at the midpoint. How much of that is because of the consumption model and how much of it is because business is slower?
spk07: Good question, Pat. First of all, there is no question that business is slowing out of the market, but it doesn't matter – If we had made this change at any growth rate, okay, revenue would have flattened. Just like when a company switched from a professional licensing model to a subscription model. So the growth rate is absolutely, the change in growth rate is absolutely driven by the change in pricing models. Instead of doing $5, $10, $25, $50 million transactions, A few of them were out doing a lot of half-million-dollar transactions. But when you run the model, there's no way this does not flatten revenue for a few quarters.
spk06: Juho, do you have anything to add? No, I think Tom somewhere asked it perfectly. Okay, so, I mean, let's say you'd stuck with the old model. What would guides have been like?
spk07: Honestly, I think trying to sell 10, 20, 30, 50, 60 million dollar transactions in the next year could be pretty tough, Pat. Okay. At large chemical companies, manufacturing companies, food companies, I mean, these guys are all going to the bunkers, okay? they're preparing for recession.
spk06: Okay. And what drove RPO? I mean, RPO is actually, I think we were looking for 420. It was 458. What, what drew that or what drove that?
spk03: I mean, we still had pretty good, uh, uh, we still had lots of deal activity during the quarter and that's a natural increase on a, on, on the total RPO. Um, every time we do one of those bookings. But I think, Pat, one of the things that we're very excited about is the current RPO increase sequentially.
spk07: So that further highlights... Well, it's very similar. 66 deals. That's out of the court. Okay? That's why RPO is less than the number that he's got. I mean, if you closed him, there'd be an RPO.
spk03: No, you guys beat... Yeah, on the non-GAAP RPO, yes.
spk08: Non-GAAP RPO?
spk03: Yeah, yeah.
spk06: He's right on that, yeah. Yeah, you beat. So I'm just wondering, was there something big with Google or something that had a 10-year term or something like that that helped drive that number?
spk03: No. I mean, we had normal business activities.
spk07: You showed the deal, man. Go back and show the deal, man. It's really, there's no big, go back, show the market. There it is, Pat.
spk03: Most of what you see here, Pat, we have lots of activity in the million-dollar range, which we're very excited about, and we only have one larger deal in the quarter in excess of $10 million. Okay.
spk06: And then last question. So are there any layoffs as part of the cost reductions?
spk08: No. Okay. Thank you.
spk04: Thank you. Now our next question comes from the line of Sanjit Singh from Morgan Stanley. Your question, please.
spk01: Hi, this is Theo. I'm from Sanjit. Thanks again for taking the question. So I wanted to dig a little bit into the shift to consumption pricing and especially sort of on the install-based side. So, I mean, you talked a lot about kind of the new customers, but I was wondering about the adoption with existing customers And sort of what you're expecting over what period of time the install base would transition to a consumption model. And especially for long-term contract, could we see those transitions during contract terms or just upon renewal? And then maybe a second one for you. So what really are the metrics to track here going forward to understand how demand is? or how the business is executing among the shift to consumption pricing. If you could maybe shed some light into sort of what KPIs become more or less relevant as we're moving to the consumption model, that would be great.
spk07: Regarding – let me handle the existing contracts. I think that the existing contracts will not be shifting to – this model. Most of these contracts are so big now, some of them are now in aggregate over $100 million. And when you look at all the collections in terms of conditions that they have, they're actually more favorable than this pricing model. And so I don't think they're going to want to switch to this. As they renew, When they come up for renewal, they can switch to this if they want and work this out at the time. You all, you want to talk about KPI, certainly new customers, is going to be an important one.
spk03: Yeah, absolutely. So thank you, Theo, for the question. I think one of the things that should give you a lot of guidance on this is that you look at our slide deck and we listed some of the assumptions. Those would be good things to track, but certainly new customers and then revenue because, of course, consumption itself will be recorded as revenue for those periods. So that will be one of the most important KPIs that we'll be providing in the future, of course.
spk01: Awesome. Thank you.
spk04: Thank you. One moment for our next question. Our next question comes from the line of Pinjalam Bora from JPMorgan. Your question, please.
spk00: Hi, guys. This is Achit on for Pinjalam. Can you update us on what you are seeing with respect to Ex Machina and is that resonating with the customers?
spk04: Pinjalam Bora from JPMorgan. Your question, please.
spk00: Hi guys, this is Achit on for pendulum. Can you update us on what you are seeing with respect to Ex Machina and is that resonating with the customers?
spk07: I'm not sure what Ex Machina data that we have. We did a couple of large. We did one large agreement with Ex Machina with Ex Machina. It's you know. You know, I just don't have this data before. Do you have a data here from Ex Machina? No, not specifics like that.
spk03: I think that the one deal that was larger than a quarter was a more important one.
spk07: So we're a large insurance company that licensed it. Let us do this. So, Ruben, let's prepare some detailed information and follow up on this. We just don't have it here. So, we'll do a callback with you. We'll get you all the details.
spk00: Okay, got it. And is your largest federal quarter alliance with your fiscal year end? Are you seeing the pipeline build on that, and is there any sign of slowdown on the federal side that you are noticing?
spk07: You're really breaking up, I think, as to how do we see the pipeline. Okay, the pipeline is longer than it's ever been. I can tell you that just with one of the partners who were discussed, we're currently, you know, I think this number is right, okay, that we're currently in active discussion on, you know, 100 co-sell opportunities, okay, with one of the – currently 100. That's just with one partner. So the pipeline now gets dramatically longer. The number of new customers we're expecting to increase pretty dramatically. And the pipeline is very long. You know, that being said, you know, in the – you know, as we get into the fall of, you know, 2022, you know, with war, famine, you know, inflation and all the weird stuff that's going on, you know, if you have a, you know, 10, 20, 30, 40 or $50 million deal in the pipeline, it's hard to handicap it. It really is. So that's why we're You know, we've been anticipating doing this for some years, and now with version 8, we're ready. And so we're pulling the trigger, and we're going.
spk04: Good. Thank you. Thank you. Our next question comes from the line of Brad Sills from Bank of America. Your question, please.
spk08: Brad Sills, your line is open. Sorry about that. Sorry about that.
spk06: Can you hear me okay?
spk08: Yes, we can hear you.
spk06: Okay, wonderful. Sorry about that. I wanted to ask about some color on some of those 66 deals that pushed out. What are your thoughts on, I know there are a lot of moving parts of the macro right now, pricing changes, partner model changes, but any visibility as to timing there when those might close?
spk07: Well, many of them, it's really a question, Brad. So we're now coming back to them with basically the new pricing model, okay? And it is being very well received. So, you know, we think they're very real. We think they're a lot easier to close at half a million dollars than they would have been at five or ten million. And so, you know, that provides a tailwind for our business. And The pricing model, I mean, there's got a number of aspects to it that are really being well received. You know, we used to price per developer. We used to provide per data scientist. Now it's unlimited developers, unlimited data scientists. For the search six months, it's unlimited run time. And so we've kind of taken out all the obstacles that were there. And, you know, if you get somebody to sign up for half a million dollar pilot for six months is not difficult. Okay. And then the decision to go forward, you keep it, you pay 35% per CPU hour. Doesn't need to go to the board. Doesn't need to go to the audit committee. Doesn't need to go to the CFO. Any person in the line of business can sign it. So, um, you know, I think that looks very promising.
spk06: Got it. Thanks, Tom, for that. And then one more, if I may, please, on just the GAAP RPO. Maybe this is one for you, Juho. It did decline 4% this quarter from last quarter. Was that related to this change to consumption pricing from subscription? Anything you can do to help us unpack just the GAAP number quarter on quarter? Thank you.
spk03: Well, I think that's kind of on Tom's opening remarks, that it was a tough quarter, and then also the fact that we had the 66 POs that were pushed out in the quarter, that definitely impacted the sequential decline in RPO. That's the primary driver. Got it. Thanks for that.
spk01: Yeah.
spk04: Thank you. Our next question comes from the line of Michael Vidovic from KeyBank. Your question, please.
spk09: I think my question on the Baker Hughes relationship, did you meet targets in the quarter and have there been any changes to the longer term targets with that?
spk07: Did we meet targets in the quarter? I think we did. Yeah, I think we did, Michael. And the relationship with Baker Hughes remains intimate. I mean, I had and were in discussion about any number of interesting things, you know, one of which is the relationship that we discussed with Microsoft, Accenture, Baker Hughes, and C3 to build a, you know, kind of very robust industrial asset management product. So I think we announced that a couple quarters ago, and that's, you know, I was just down in Houston working out the details of that. So Baker Hughes is going well.
spk09: Okay, great. And then just the last one for me. Last quarter you talked about deals being pushed out into fiscal 1Q and fiscal 2Q, but you said at the time that they were not being retired. Did that play out as you expected? And then were most of those closed this quarter, or did you see further pushouts?
spk07: No. I've got an echo coming through here. Sorry. No, I mean, it was – hey, guys, it was a tough quarter out there. I mean, we saw a lot of deals move sideways. All of a sudden that – people who have the approval authority to sign deals in previous quarters, all of a sudden they didn't have the approval authority, uh, to sign deals. Uh, and so, you know, right now doing, you know, large multi-million dollar or tens of millions of dollars capital, um, uh, contracts and corporations in any industry in the world is tough. And, um, You know, everything that we're hearing about in every conference call on CNB or every report on CNBC in the morning, it's true, guys. People are getting ready for, they're going into a recession footing. And so we think that, you know, what we're doing here is quite timely and it's going to allow us to power through it. Again, we have almost a billion dollars cash in the bank. I think we are well prepared for this.
spk02: Great, thank you.
spk04: Thank you. Our next and final question comes from the line of Galimanda from Wolf Research. Your question, please.
spk10: Hey there. Thank you for taking my questions. The first one is just around the new model. Is it fair to assume that all new contracts, all new deals go right away into the consumption model, or would you still kind of allow for exceptions if there was something already in the pipeline for us?
spk07: Okay, great question. Number one, yes, there are a few contracts that we're closing where the paper's already on the table and everybody's happy to move forward. Secondly, you can anticipate that, you know, we will, like we have done kind of very large transactions in the past with companies like BiggerHues, Engie, Shell, where somebody will want to go all in in a big way. And, you know, we're reasonable people and we will sit down with them and we will negotiate a win-win arrangement. that will be based upon some other terms than this consumption-based pricing model. And so, no, you won't see. We'll still see, you know, the occasional black swan that comes in here that, you know, looks like an 800-pound gorilla and wants to do business in a big way. And we're reasonable people and we'll find a way to do that.
spk10: That makes sense. And then just as a follow-up, you mentioned that, you know, within the quarter, there was actually quite a bit of activity. It sounded like maybe from a linearity perspective that maybe towards the end of the quarter, you saw a lot more kind of issues with closing the deals and some of that hesitance. Is that a fair assessment of the quarter, the way that you've seen it, or was it just the whole quarter was very, very hard?
spk07: No, but I'll be honest with you. July was a bracing wind. I mean, it really was. It was a bracing wind in July. And something changed. And something significant changed in July in the world. And there were a number of transactions, everybody, that I would have bet my life on. okay, with people who I know with whom we've done business before. And many of them existing, you know, some existing customers, some not. And, I mean, and they move sideways. And so something happened in July out there that was significant. Thank you. Definitely not specific to us. This is a macroeconomic phenomenon that It's going to affect everybody.
spk04: That's good. Thank you. Thank you. And as a reminder, if you have a question at this time, please press star 1-1. And this does conclude the question and answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.
spk08: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
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