C3.ai, Inc.

a day and thank you for standing by. Welcome to the C3 AI third quarter fiscal year 2023 earnings conference 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ruben Gallegos. Please go ahead.

Thank you, and good afternoon, and welcome to C3AI's earnings call for the third quarter of fiscal year 2023, which ended January 31st, 2023. My name is Ruben Gallegos, and I am the Vice President of Investor Relations. With me on the call today is Tom Siebel, Chairman and Chief Executive Officer, and Abo, our Chief Technology Officer, Yuho Parkinen, our Chief Financial Officer. After the market closed today, we issued a press release with details regarding our third quarter results as well as the supplemental to our results, both of which can be accessed through our 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 this 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 uncertainty 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 Today, all figures will be discussed on a non-GAAP basis unless otherwise noted. And also, after the course of today's call, we will refer to certain non-GAAP financial measures in the reconciliation of GAAP to non-GAAP as included in our press release. Finally, at times in our prepared remarks in response to your question, 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.

Okay. Good afternoon, everyone, and thank you for joining our call today. You might recall that two quarters ago, I spoke of economic headwinds, lengthening sales cycles, as our customers and prospects anticipated a recession. In July... In August of 2022, we saw a significant negative change in the business environment with the lengthening of decision cycles, and I cautioned that the market downturn could be significant. Now, as we enter into our fourth quarter, we are seeing tailwinds from improved business optimism and increased interest in applying C3 AI solutions to address an increasing range of applications across a broadening set of industries. This is a dramatic change from what we experienced in mid-2022. There is a genuine optimism in the marketplace for our solutions, and the overall business sentiment appears to be substantially improving. In the course of the quarter, we validated our transition to a consumption-based pricing We expanded our partner ecosystem. We expanded our business pipeline. We delivered industry-leading product innovation in enterprise AI. And importantly, we remain on track to become cash positive and non-GAAP profitable by the end of fiscal year 24. Looking at third quarter results, we delivered a strong quarter. Our total revenue was $66.7 million, which exceeded our guidance. Current RPO increased to $176.3 million, and we have 236 customers. We ended the quarter with almost $790 million in cash. And as we enter Q4, we believe C3II is well positioned to continue to invest in growth through enterprise AI innovation and sales expansion while sustaining our path to profitability. Importantly, we have validated the conception-based pricing model. The response to our conception-based pricing model from partners and prospects has been uniformly enthusiastic. Believe it or not, we currently have more than 290 qualified pilot opportunities in our pipeline, exceeding our expectations. Our pilot to production conversion rate is on track. The consumption, pricing, revenue conversion model that we provided last quarter, and Juho will review that with you in a few minutes, appears to be realistic, suggesting substantially increasing revenue growth rates in fiscal year 24 and beyond. We made significant progress with our partner ecosystem in the third quarter. We established, re-established, and substantially expanded our go-to-market partnerships. With Google Cloud, we closed eight new customer deals and expanded our joint pipeline. Our combined teams are currently pursuing 291 enterprise opportunities for our joint solutions over 100 of which we are currently engaged in licensing discussions. Thomas Curran, the CEO of Google Cloud, and I held a joint meeting with a number of clients, prospects, and partners in the US federal region. We've made substantial progress to ensure that all C3 AI products perform optimally in the Google Cloud environment. Finally, we expanded our partnership agreement with Google so that our customers can purchase any C3 AI software solution on the Google Cloud Marketplace. We also renewed and expanded our go-to-market partnership with AWS in the quarter. AWS funded C3 AI to enhance its C3 AI law enforcement application to assure that it's optimized for AWS, integrating Amazon OpenSearch and AWS machine learning services to enhance the speed and quality of analysis for state and local agencies using the application on AWS. C3 and AWS are currently pursuing 75 new opportunities, of which 41 appear highly qualified, and we closed six agreements in the quarter. With Azure, we collaborated to close a deal with a super major U.S. energy company and a European technology company serving the mining and construction sectors. We cooperated to deliver a highly successful pilot engagement to a large U.S. defense agency that shows potential for very large expansion. In the quarter, we established a highly strategic relationship with Booz Allen, focused on providing solutions to the government, defense, and intelligence sectors. We are jointly going to market with Booz Allen. to bring the C3AI platform and a suite of prebuilt C3AI solutions to solve their requirements. Together, the companies have cross-trained our employees on our respective services, and we already closed our first engagement with the Chief Digital Artificial Intelligence Office, CDAO. With Accenture, we renewed our partnership to help customers drive product innovation, design and development, and provide strategic support and systems integration at scale. Together, the companies have trained Accenture employees on the C3II platform and have already collaborated to close two pilot deals in the consumer packaged goods and oil and gas sectors. We are actively engaged with a large oil and gas services company and have generated several new opportunities with target accounts. With EY, we are teaming to address the needs of the healthcare industry in the UK. With Periton, a Washington, D.C. beltway systems integrator, we entered into a partnering agreement to address the modernization of the Veterans Administration. With Baker Hughes, we substantially expanded our strategic partnership in the third quarter. The terms of this expansion resulted in an incremental C3AI booking of $32.5 million, and the frequency of payments from Baker Hughes was accelerated over the term of the agreement. C3AI agreed to provide additional products and services to Baker Hughes and provided Baker Hughes additional flexibility in the manner in which they sell C3AI products and services. The expanded agreement also enables Baker Hughes to extend the term of the agreement at its option beyond its current six-year term. We believe the partnership with Baker Hughes has substantially enhanced our credibility in the oil and gas and chemicals markets. As a result of our partnership with Baker Hughes, combining both joint selling through the partnership and the sales that we have closed independently of Baker Hughes, C3AI has closed, to date, 87 contracts in the oil and gas and chemicals sector, including Lyondell Bissell, Shell, Exxon Mobil, Petronas, ENI, Aramco, Qatar Gas, Adnok, Yokogawa, Baker Hughes, Brandscom, Flint Hills Resources, and others. All of these in aggregate have resulted in our closing over $650 million in bookings, and we have recognized in excess of $350 million in revenue through the third quarter of fiscal year 23. Let me talk for a minute about our ESG solutions. We've made significant progress with our ESG application, which is part of our sustainability suite, which includes C3AI Energy Management, our most mature application that was first introduced to market in the first quarter of 2010. This product is used to measure, manage, and mitigate of the energy and greenhouse gas footprint at over 6 million residences and businesses today. In September of 2022, we announced the availability of C3AI ESG, developed as a significant enhancement to the C3AI Energy Management Suite. C3AI ESG provides a single source of truth for all matters of materiality related to ESG, aggregated and synthesized from the many ERP, supply chain, procurement, SCADA, CRM, HR, and other enterprise systems installed in an enterprise, all tracked longitudinally at the asset, division, and corporate levels. This enables organizations to publish their ESG compliance reports consistent with a multiplicity of conflicting ESG reporting standards, including SASD, GRI, TCFD, and CDP. Most importantly, C3 AI ESG provides rich, predictive analytics using AI to allow managers to track their gaps to plan for ESG materiality in out years, be it CO2, H2O, methane, workplace injuries, whatever. And it recommends mitigation measures to close the gaps so the company can be assured of meeting its EST objectives in 2030, 2040, 2050, et cetera. According to Verdantix, EST represents a $16 billion addressable market in 2027, and our product is being enthusiastically received. Our initial EST customers are EY, Shell, and Baker Hughes. Now, I'd like to talk a little bit about our intellectual property portfolio. C3AI continues to make significant investments in technology innovation. We have been awarded 26 patents to date and have an additional 96 patents pending. One of our most important inventions is the model-driven architecture for enterprise AI applications, the core architecture of the C3AI platform. We have issued several patents for this architecture, including systems, methods, and devices for an enterprise AI application development platform. This platform provides all the software services necessary and sufficient for the rapid deployment and operation of enterprise AI applications. Importantly, it also serves as an orchestration system, allowing us to immediately embed and exploit the utility of ongoing innovations in the open source and proprietary world. Examples include new techniques in machine learning, virtualization, encryption, commercial products like Databricks, Snowflake, Vertex AI, Amazon SageMaker, Azure ML, TensorFlow, Jupyter, Python, et cetera, all of which are immediately compatible and interoperable with the C3 AI platform and all of which are commonly used by many of our customers. The recent explosion of innovation and availability of large language models and generative pre-trained transformers are also immediately compatible with the C3 AI platform, enabling us to increase the utility of our platform and our applications. We believe the importance of the ongoing developments in generative AI is difficult to overestimate. Now, there's been a lot of recent news about C3 generative AI. Let me address that for a moment. By combining the utility of the C3 AI platform, predictive analytics, enterprise search, natural language processing, generative pre-trained transformers, and reinforcement learning, we have developed a new and novel technique to fundamentally improve the human computer interface for enterprise applications. This is kind of a non-obvious use of generative AI. This is not about chat. This is about enterprise search. And we believe that this invention represents a breakthrough development that will dramatically facilitate the ease of use and explainability of enterprise AI applications. In addition to providing users immediate, highly controlled access to potentially the entire body of data and information systems within an enterprise, be it Dow Chemical, the United States Air Force, Shell, whatever it may be. In the news release that they put out, we have a link to that application so you can actually see what it is, how it works, and how to put it together. And if you're interested, I encourage you to take a look at it. It is really neat. Okay. We expect the C3 AI generative search capability to be incorporated into the C3 AI platform and applications and generally available to our customer base this spring. It is currently being deployed as a core capability in the C3 AI platform, and we are doing early deployments at Koch Industries and Baker Hughes. To protect this intellectual property, we have several patents pending in multiple jurisdictions around the world. And I encourage you to go find the link on our website and take a look at it because it is really something. Okay, let's talk about guidance. Turning to guidance for the fourth quarter and fiscal year 2023. First, I will remind everybody on the call that this is the eighth consecutive quarter as a public company in which the third quarter is the eighth consecutive quarter in which we have exceeded our revenue guidance, okay? We expect revenue for Q4. Okay, to be between Q4 2023 to between $70 and $72 million. And for the full year, fiscal year 23, we expect revenue to range between $264 and $266 million. Bottom line, Q3 was tough. Okay, we have validated the consumption-based pricing model. The addressable market is huge, business is strong, customers are happy, our workforce is highly productive, and the future is bright. And now I will turn this over to my colleague, Juho Parkinen, for additional details regarding our financial results. Juho.

Thank you, Tom. I will now provide a recap of our financial results, add some color to the drivers of our financials, discuss our expected path to non-GAAP operating profitability by the end of fiscal 24, and I will conclude with some additional color related to the consumption-based revenue model we introduced two quarters ago. All figures will be discussed on a non-GAAP basis unless otherwise noted. As Tom mentioned, we ended the quarter with a revenue of $66.7 million, of which subscription revenue was 85.6%. Gross profit was $51 million, and gross margin was 76%. As I mentioned during the last quarter's update, we have a short-term pressure on our gross margins due to a higher mix of pilots, which carry a higher cost of revenue during the pilot phase of our customer lifecycle. Operating loss of a negative 15 million improved year-over-year and was significantly above our guidance due to improved vendor expense management and timing of timing. Operating loss margin was flat at negative 23% as compared to the same period in the prior year. However, on a sequential basis, our operating loss margin improved. Our customer count increased 8% to 236, and we closed 27 deals during the quarter, 17 of which were pilot deals under the consumption model. Now turning to RPO and bookings. We reported gap RPO of $403 million, which is down 14% from last year. This was expected as we transitioned to consumption-based deals. Trade gap RPO of $176.3 million is up 3% from last year and 7% on a sequential basis. We continue to see positive trends in pilot bookings diversity as we have increased to nine industry segments in Q3 compared to six in Q2. Regarding our cash flow, free cash flow improved to an outflow of $71.7 million compared to $77 million in the prior quarter. Breaking this down, $19.4 million was related to the build-out of our new headquarters, which we moved into in February. Normalizing for this payment, our adjusted free cash flow improved to an outflow of $52.3 million compared to $54.3 million last quarter. We continue to expand our headquarters and will have additional cash outflow in the following quarters as we take over additional space. During the quarter, we expanded the Baker Hughes partnerships. As Tom mentioned, the changes are designed to provide increased flexibility to Baker Hughes to provide BHC3 AI solutions to the market. This resulted in the elimination of the variable consideration, which increased the transaction price by $32.5 million. Regarding output, as Tom highlighted, we are able to narrow our range as we have more visibility as we enter Q4. As such, we're guiding Q4 to $70 to $72 million. And for the year, we're tightening the guide from $264 million to $266 million. For Q4-23, we expect our non-GAAP loss from operations in the range of $24 to $28 million. That is a negative. And for the full year, we expect a non-GAAP loss from operations of negative $69 to negative $73 million. In accordance with our plan, we do expect gross margin percentage to be negatively impacted by the number of pilots active in the fourth quarter. Please recall that during the two-quarter pilot period, customer will have unlimited runtime and premium support resources sufficiently to be successful with their pilot engagement and gain value from the C3I software. During this pilot period, our subscription cost of revenue will be elevated until the conversion to consumption-based pricing occurs. Over time, we expect gross margin percentage to revert to historical ranges as higher percentage of customers on a pilot move to consumption-driven revenue. Our operating margin guidance reflects the fact that we have C3 transformed the world's premier enterprise AI conference and our major customer event happening next week, and we will have related marketing expenses for this quarter's costs. In addition, As we have discussed previously, we're increasing our sales headcount to meet the demand we are seeing for our consumption-based pricing sales and expect to see increased expense in the fourth quarter as a result. It is important to note that we expect that our cash balance will continue to decline into next fiscal year as we complete the build-out of our headquarters. We expect our cash and investments to be at its lowest at around $700 million during fiscal 24. Broadly speaking, As a result of the introduction to consumption-based pricing, we expect RPO to trend down over the coming quarters with some exceptions relating to renewals and existing customer expansions. Also, before I end, I'd like to take the opportunity to shed some light into the details in our financial plan and the progress we're making with our consumption-based pricing. As Tom mentioned in his comments, we are on track with our plan to achieve non-GAAP profitability by the end of fiscal year 24. On a quarterly basis, we assess the business landscape and adjust our operating plan based on what we're experiencing in the market. During Q1, as Tom mentioned in his remarks back then, we experienced headwinds and Tom cautioned that the market downturn could be significant. We and the management team adjusted our operating plan and built out a careful track to become operating profitable by the end of FY24. We're on that plan. In order to make sure that we monitor that plan, we have prepared detailed departments of budgets, we track variances, we hold managers responsible, and if there are variances, we correct them immediately. In our investor supplement, we have shared our current projected path to operating profit on a relative expense basis. Obviously, as I mentioned, we review our plan each quarter, but I wanted to share the detailed path with you guys at this time. As it relates to the model assumptions that we provided two quarters ago for our consumption-based pricing business. Our preliminary analysis of the actual results suggests that we are at or better than that model. Therefore, to summarize, quarter results were above expectations and guidance, clear and well-understood plan for our path to probability is in action, and our consumption-based model assumptions are on track. With these remarks, I would like to open this call up for questions. Operator?

Thank you. As a reminder, if you would like to ask a question at this time, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile our Q&A roster. And our first question comes from the line of Mike Seacost with Needham & Company. Your line is open. Please go ahead.

Hey, guys. Thanks for getting me on the call here. I wanted to start off with some of the comments that you guys had around the customer dynamics. I just want to make sure I'm clear on how we're looking at things. If I'm counting, I think the customer count was actually flat quarter to quarter as far as total customer count. But I know I think you, Ho, in your prepared remarks have discussed C3 had closed 27 deals. Seventeen of those were pilots under the consumption model. Can you just help us think through, like, how are you guys categorizing? Who goes into that category? When do they become what you term a customer?

Of course. Okay. Of course, yes. Thanks, Mike, for the question. So if you take a look at our quarterly findings, we've provided kind of a detailed definition of what a customer is, but I'll provide it here as well. So within a customer entity, which you can think about the ultimate parent entity, of, let's say, Coke Industries, there could be several subsidiaries, groups, departments, various budget owners, or various groups that use either incrementally our tool or use it in different use cases. All of those individual groups we would characterize as a customer.

I guess what I'm getting at is if you closed 27 deals and 17 were pilots, right, if I think about 27 deals that you guys closed, the assumption is then that they were all with existing customers. Is that fair? Or I guess there's movement under the hood in that customer count that you're providing. Again, I'm just looking at the customer count being flat quarter to quarter.

Yes, yes, totally understand. So let me clarify. So we're still, broadly speaking, in our transition phase to the pure pilot model. And if you recall in some of our prior conversations, Some of the old trial arrangements, which are a customer in the period when there are trials, upon the ending of the trial period, we engage in negotiations to turn them into production customers. During that phase, that customer is not considered a customer, it effectively falls off the calculation, and then when they would enter into a production deal, they come back into the calculation. So those dynamics are still at play, because obviously we still had a tail of the former trial model during the quarter. Now, the 17 new pilot arrangements, those also are a mixture of new customers, and then we could have an existing customer who wants to do a trial project with us, so that would be part of the bridge as well.

Got it. Got it. And one other thing, if I could, but I know you guys obviously cited the better profitability here versus expectations, and one of the I guess there were two primary big drivers. The first is we had a large sequential uptick in the pro services revenue and that pro services gross margin. Can you help us think about what drove that strong return in pro services as well as the gross margin there coming in? It was in the 90% plus range, which I think was much higher than what you guys have typically done. Was there any one-time item that benefited that gross margin?

So we have a highly... professional services organization and we do various projects where we are able to command a high margin. Our standard kind of historical implementation services would be at a lower margin but then we also do certain consulting space or more ad hoc projects that carry a very high gross margin.

Okay. And then the other thing that benefited the margins, obviously, was the much lower than expected sales and marketing expense. What was it that drove that benefit? And I guess the follow-up question on sales and marketing is, I know that you guys had previously outlined your assumptions for sales and marketing headcount to grow 40% to 60% year-to-year. Are we tracking to that? Where did the sales and marketing headcount shake out for the quarter?

Okay, thanks Mike. That's another great question on that. So if you take a look at the investor supplement, we broke it out again for your benefit between sales and marketing. So you can kind of see the relative proportions there and how our current plan is to track into operating profit. To answer kind of quickly, To your question, from a marketing perspective, as discussed in prior calls, we believe we have a very high brand value and we no longer have to spend the historical amounts to gain or increase that value. And secondly, on the sales side, we have very aggressive hiring targets, but we're slightly behind those targets because we look for the best type of candidate to sell our products and services.

Got it. I'll take a look at that supplement and turn it over to my colleague. Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Gil Luria with DA Davidson. Your line is open. Please go ahead.

Yes, thank you. Looks like the generative AI conversation, you were ahead of. Can you help us a little bit with the context for that. When did you start the work on that? When did the pilot start? You talked about a couple of implementations. Maybe a preview of what you're going to talk next week about at your conference. Seems like there's a little confusion out there about what came first, the interest in generative AI or your work on it. So would you mind walking us through that timeline?

Let me try that. This is Tom. So we've been working with generative AI models since 2020. What precipitated this particular spurt of creativity was a request from DoD, which is one of our larger customers. And I got a text about four or five months ago that said, Tom, we need you to be the Google for DoD. I didn't quite understand what that meant. And then I talked to some of our colleagues, like General Hyten, who used to be the vice chair of the Joint Chiefs, and General Cardone, who is the chair of our federal, but he used to run the Cyber Command, and he is the chairman of C3 Federal. And they said, well, Tom, this is the way it works. You know, the chairman of the Joint Chiefs asked some question in the meeting, like, how are we doing against our diversity goals, or what is our satellite coverage at INDOPACOM? Okay, they then, that gets passed down to two stars, goes to four corporals, goes to 16 IP people, and four weeks later, somebody goes back with two PowerPoint slides in the Joint Chiefs meeting. That's really how it works. So when we're thinking about Google for DoD, the way they phrased the question really facilitated the creative process. So Ed and I and a couple of other people got together in a room and we started to think, Google for DoD, what does that mean? Well, Google, if you think about the Google human interface, that's the one human interface that everybody in the world knows how to use. It's basically the search bar. And we figure out a way to use that for every application we do, DOD, manufacturing, supply chain, precision help, demand forecasting, where you simply type in the question, what's my satellite coverage in Indopaycom? It uses generative AI to say, did you mean this, this, this, or this, just like Google does. You click on the answer you do that you want. It uses normal AI to give you the answer. Got a chat capability to give you a detailed explanation on the right with which you can interact via chat. Okay. Understand, though, the chat universe that you notice about is only the information content of the enterprise that were installed, be it DAO, be it EY, or be it the Department of the Army. And then below you get a long list of other areas that you might want to click on that are related to the question, you know, whatever the question was, satellite coverage in Indo-Pacific. You know, and these might be Palantir files, Qlik files, Excel files, documents, what have you. So we put that together and started playing with it. And then we developed some techniques that by combining enterprise search with industrialized processing and generative AI, reinforcement learning, and kind of the Google user interface, in a very non-obvious manner, we're able to solve a very interesting problem. Or now we have an application that the chair of the Joint Chiefs can use and the private on the flight line at Wright-Patterson Air Force Base can use. So there's a link in our news release. We can go on and see the application. And I think this might fundamentally change the nature of the human computer interface for enterprise applications. It's pretty neat, and we'll be showing it in Florida next week to our users, working on about 10 of our applications, and releasing it into production this spring. So it's, you know, it's, we didn't invent and generate AI, we're just taking advantage of the billions of dollars of research that's going on out there, and whoever has the hottest product of the day, be it Microsoft or Google or OpenAI or whoever comes up with it next, we just use that in our engine. And our architecture supports that. So sorry for the long answer, but it is really exciting. And I encourage you to click on the link on our news release. And there's about a four-minute demo there that will give you a feel for it. I think you'll think it's unique, has a lot of utility, and will dramatically increase the usability and attractiveness of our products.

My follow-up is, it sounds like you're talking about two things. One, about how generative AI makes your current product suite better, and another, how you can apply it in an enterprise level beyond your product set to other data sets within the enterprise. Which one is the bigger commercial opportunity?

That's a really good question. You really asked a good question. Because there is a big opportunity to do this in enterprises that do not use C3 and do not intend to use C3, okay, but they want a unified view of their data. And so the honest answer is, you know, we have not figured out how to monetize that yet. We haven't put a price on it yet, but there is potentially a very large market there. And it's no place, it's not in any of our operating plans yet, but it will be. But you, and this is a very, it's a nonobvious use of these open AI libraries. This is not about chat GPT. I mean, chat is kind of cute, right? And, you know, someday I think it'll be useful. But we're not doing chat here. We're doing kind of the antithesis of chat. We're using these large language models to basically crawl the enterprise. And so, but you asked a very good question. There is a monetization opportunity there that we haven't figured out yet.

Excellent. Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Michael Turretts with KeyBank. Your line is open. Please go ahead.

Thanks very much, guys. Hey, Tom, just to continue on the product front, and then a question or two for you, but on the product front and generative today, I think it makes a lot of sense, the combination and the story with DOD. I guess my question is, you know, it's basically enterprise search that you're talking about, which is the name of the product. But that's not, unless I'm wrong, was that a product you had before? Because that's obviously a market unto itself, and there's a lot of existing players in that market. So what's the history of having developed that?

What would be an example of an enterprise search product in the market?

Even like what Elastic does for a lot of people, right? And then how are you, what's the innovation that allows you to interact that with other people's generative AI models?

The innovation is the way that we have combined those core technologies in a new and novel approach for a non-obvious application. Okay, so something that would define what's patentable. Okay, so we're taking the enterprise search UI, NLP, generative AI, reinforcement learning, and predictive analytics and combining those in a non-obvious way to solve a problem of high utility. Ed, why don't you pick it up from there?

Yeah. So, as Tom said, basically we're using more modern techniques than, say, Elastic to do interpretation of the questions using large language models and then the retrieval of information from across the enterprise information systems, documents, BI dashboards, et cetera. And so this is a, as Tom said, a novel approach to be able to search the entire corpus of an enterprise. and leverages generative AI, leverages these large language models, and all of the capability that we've developed over the past decade to be able to integrate and unify data across systems, sensor networks, images, text, et cetera. So this is different, and it's new, and it's much more effective than traditional approaches for indexing.

Got it. Makes sense. And then just on Baker Hughes, so I think that we had in our model, don't know if it was right or not, but I think we were anticipating about another $270 million in the contract. Maybe that, I don't know if you wanted to update that, but so do I just add $35 million to that? And does it change the amount you're expecting each quarter? And what did you get this quarter from them?

Okay, good question. So I'd have to, I think we need to look at your model separately, but the short answer is that we disclose both in our release and the queue and the supplement, the Baker Hughes RPO. The RPO is $188.5 million. So we've got to maybe check on offline as to what does that mean for your model. As it relates to the results in the quarter, on the face of the income statement, we show the related party amounts. And for Baker Hughes this quarter, it was $28.9 million. Okay.

Great. And does it extend the amount of time? I think you said it extended the dollar amount. Maybe I missed it, but is it extending the period over which it's being paid also?

No, it's actually one of the really exciting things as part of this extended agreement is that we accelerated the payment schedules. So we're actually collecting cash faster from Baker Hughes. And then as it relates to the transaction price, so the accounting transaction price increased by $32.5 million because the variable consideration was eliminated as part of the expansion deal.

Okay. Thank you very much.

And I think I might have... I might be the source of a little bit of confusion there, Michael. Another term of it is they have a unilateral option to extend the agreement, okay, should they choose to do so. That doesn't mean extend the period of the payment terms. That means add more years to the agreement for pre-existing, pre-determined amounts of cash. Okay.

Thanks, Tom. Thanks, Johan. Thanks, Ed.

Thank you, and one moment for our next question. And our next question comes from the line of Sanjit Sun with Morgan Stanley. Your line is open. Please go ahead.

Thank you for taking the question. So if I take the comments from Tom and his script, and Tom, it's like notable that you are speaking to a better demand environment, and I think the rest of software is still pretty gloomy. And then I sort of take you guys' comments around the consumption actual versus predicted sort of coming in line with what you saw. I'm trying to put these pieces together. Revenue is declining year over year right now, obviously because the business model is going through some transition. And so I guess the big question is what, where does revenue growth go to? I know you guys still have another quarter to go before your Q4, but you know, the street sort of expecting 20% revenue growth. Is that something that seems, achievable from your line of sight and your more optimistic view? Is it something that's better than that, below that? I'm just trying to understand of like where the business is.

I'll let you all handle this, Sanjit, but just for the record, if I'm not mistaken, our revenue for fiscal year 23 will be greater than fiscal year 22, not less. Okay, so year over year, our revenue will increase, not decrease. So I just don't want there to be any misunderstanding amongst other insurers listening. Juho, why don't you take the rest of it?

Yeah, of course, yeah. So thanks, Sanjeev. Let me try to recap your questions. So first of all, as Tom mentioned, the annual guide would be a year-over-year increase on a total annual results. And then on the quarterly basis, yes, we're seeing very promising signs that our model assumptions are good. We're seeing actual results that are at the model or even better. And previously, we have provided some really early onset outlook that 24 would be around 30% growth. I know that the street expects around 20% growth. I'd say that it's achievable at ease to what the street is saying, and we certainly are targeting a higher growth, assuming our model actuates as we plan it to actuate.

That's super helpful. I really appreciate the thoughts. And I guess, Tom, as a follow-up on just your more optimistic view versus, let's say, a year ago, where is that coming from? I mean, is there a way you can sort of talk to it from, like, a vertical perspective? A lot of the companies that are struggling right now are selling to other tech companies, which kind of explains a lot of their weakness. But what are you seeing in your customer base?

Well, that's a really good question. I guess you can't show the slide, right? But if you show the industry diversity, I mean, number one, oil and gas is obviously a very healthy segment for us. But it's one of the healthiest segments in the overall economy, right? So we happen to be in the right place at the right time there with the right partner. That's working out pretty well for us. But if you look at the UofL, please talk to the industry diversification that we saw in the pilot project, because it's really It's kind of all segments of the economy. I mean, all I can say, Sanjit, is like when we go to places like Davos or I go to the UK or I go to Washington, D.C. or I go to New York, I mean, last summer, I mean, it was the end of the world in July and August. Everybody was hunkered down in the basement figuring out how serious they were going to slash expenses to like, you know, survive the recession. Now it's kind of everybody is think, OK, finally, it's going to be a recession. let's get over it and get on with business. And so there's just a dramatically improved sentiment out there. But maybe you can comment on the diversity that we saw as a pilot, because it was really quite remarkable.

Yeah, thanks, Tom. So, Sanjit, on the supplemental or supplement that we have on our website, if you check out slide 24, we show the diversity in total bookings, and then we also show the diversity of the pilot bookings. So we're very excited about the nine industries that we have pilot deals during the quarter. Just to rattle them off, we've got Fed, accounting services, consumer packaged goods, manufacturing, we've got oil and gas, financial services, high tech, we've got telco, and then we have state and local. So we've got a nice diverse group here at Q3.

Yeah, I guess the point would be is that...

Proud and Proud remains a very small slice of our business, unlike a lot of software companies, although... Yeah, yeah, that's right.

And I guess the point you hold would be... I guess it's not just the diversification, right? But, you know, the theme across a lot of software for the past couple of quarters is that people are just conservative with respect to their investments, particularly with, like, public cloud-related investments because they spent a lot of that in the last two years. It sounds like what you're saying is that you are detecting... no such hesitation within the CJI specific customer base.

They are in investment mode.

And would that be a fair characterization?

From my perspective, and I think maybe Tom can shed some light or Ed, but I certainly believe and have seen from our customer base that our products provide value to customers. There's efficiencies, there's more productivity. So when you have Whatever market, whatever industry you have, everybody's interested in cutting costs and become more profitable, become more efficient. We are right there. Our stuff is helping them to get business value very quickly. Maybe, Ed, do you want to maybe shed something on that?

We have 290 qualified pilot opportunities that we're working. I mean, with Google alone, we're in the process of trying to close deals with how many? It's a big number. We are engaged. We have 291. Well, we have over 100 opportunities with Google Cloud. We're currently engaged in licensing discussions. I mean, something's changed from July of 2022. Got it.

I appreciate the thoughts.

Thank you. And one moment for our next question. Our next question comes from the line of Arvind Ramanani with Piper Sandler. Your line is open. Please go ahead.

Hey, thanks for taking my question. Yeah, I wanted to ask about, you know, your expanded partnership with Google and also AWS. When you look at these partnerships, you know, how are you sort of measuring kind of the commercial success or the ROI of these relationships, right? Because, like, you're You certainly have a lot of good relationships and partnerships you've established and continue to expand. But looking forward and saying these are the partnerships that are resulting in the greatest commercial success and this is where we need to continue investing in. What's your approach in figuring out that ROI and investment?

In the short term, we're measuring it on pilots closed. In the medium term, we're measuring it on consumption. The reason that AWS and Google and others are partnering with us, and the hyperscalers are partnering with us, is because we accelerate consumption. In other words, the customer doesn't have to spend two years building the AML application, at which time they're not consuming a lot of CPU cycles, or building the supply network risk application, or whatever it might be. They can stall it so consumption happens fast. That's what these guys are interested in. They're interested in CPU cycles and storage hours. So short-term were measured in pilots, medium and long-term were measured in VCBU hours.

Perfect. And then, you know, just on the kind of macro kind of commentary, you know, you were certainly kind of early kind of talking about some of the headwinds, and again, you're talking about those headwinds turning into tailwinds. Do you have kind of Are you seeing enough of science to kind of confidently say that things are turning around, or is it still that we're at a point where things could go in either direction?

Well, you're an expert at this, and we're not. But, you know, we were one of the earliest, I think, to call that it was really ugly out there. and then everybody else piled on, and then everybody else started doing layoffs, 5%, 10%, 20% at a time, and those aren't over yet. All I can say is what we're seeing now is dramatically different. And I was, you know, I mean, I didn't say that to pump our stock price. I was just telling you guys what was really going on in the market, okay? And I'm telling you what's really going on in the market now. I don't know whether this is ephemeral. or whether this is going to be sustained. But I think that the way this looks to me is sooner or later the Fed is going to take its foot off the brakes. When the Fed takes its foot off the brakes, this will be a cash-positive, rapidly growing business. Okay. And I think we're going to be off to the races. Now, I don't know, you know, you guys have, you know, big minds that know when the Fed's going to take off the brakes. I don't know when that is. Okay. But when that is, that's what we will be. You know, whether this thing could take a dip or not, that's, you know, beyond my pay grade, buddy. I just know that right now something has changed.

Super helpful, Tom. Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Kinsley Crane with Cantor. Your line is open. Please go ahead.

Hi, Tom. So I appreciated your comments on the applicability of the generative AI product outside of the typical customer base. But if we just think about the core customer base, what do you think the potential is for generative AI to drive new trials? Or is this primarily a product that would work best as sort of second, third, or fourth product within the database?

I tell you, go look at the demo. People get awfully excited about it. And, you know, I just came back from somewhere. I don't know where. Barcelona. Okay. Just got off a plane from Barcelona and showed it to a bunch of people, Ed and I. And it's a pretty exciting product. It's something brand new. And you got to just go take a look at it. It's hard to describe. And I think it will make our products more attractive. It'll make it easier for people to use, easier to handle change management, which is everything in enterprise applications. And so, and it'll, I think, substantially differentiate us in the market. Go take a look at this user interface compared to what, you know, SAP, Oracle, Salesforce, and everybody else has in the market, which is just kind of a cheap copy of the Siebel version 7 architecture that Ed and I invented in 2002. And this is something very different, and the excitement appears to be palpable.

Thanks. Yeah, we've seen the demo. We're definitely really impressed by it. And so one for Juho. You know, wherever growth ends up next year in fiscal 24, I just want to think a little bit more about the balance of existing customer expansion and then the net new customer deals. Like how much of the ramp in trial conversions are we factoring into growth next year?

Okay, great question. So I would suggest that you take a look at the assumptions that we provided and you model out based on the actuals that we have provided. And that should kind of give you a good idea as to where we should be as it relates to the consumption-based business. I'm happy to chat with you if you have any additional questions on it.

Okay, thanks. We'll follow up.

Thank you. And one moment for our next question. And our next question comes from the line of Pat Walravens with JMP Securities. Your line is open. Please go ahead.

Oh, great. Thank you. Tom, one for you first. So can you just sort of give us an overview of how the business with the DOD is going? And maybe as a touch point for that, in December 2021, you guys signed the $500 million production other transaction agreement. How much of that is the DOD actually taken down? How much of the $500 do they spend?

A good question, Pat, and I don't know the answer. We have two agreements like that. One is for $500 million and one for $100 million, and I'm not sure. I can tell you that our business with the DOD is looking very promising. There's, I think we had, we hosted, Ed and I hosted, I think, A very large number of CIOs from DOD, like two weeks ago, Army, Navy, Air Force, Cyber Command, Space Com, Marines, National Guard, they were all in our office. And there are lots of discussions going on about some very significant projects. And so DOD is looking very promising. But I don't know the answer to how much of that deal we've taken now. And we do have a proposal in front of one of the agencies that will consume a lot of it, and we'll see what happens.

Hopefully that gets done. All right. And then, Juha, I just want to – this is very simple math here. But if I look at your slide 20, I mean, if I take your average CCV and I multiply it by the number of deals that you have for each quarter on the chart, I get your total bookings, right? Right. uh yeah i think that sounds about the right math yeah right that seems reasonable so you had 27 deals in in q3 at 1.9 million so that's 51 million in bookings and you had uh 20 deals in q basically a year ago right at 5.6 million each 112 million bookings so you know booking's been cut by more than half um is that a fair assessment of what's of what's really going on and

Let's also put this in your answers, but understand a year ago the deals were $10, $20, $30, $40, $50 million deals. This quarter, as a result to consumption-based pricing, they're half-million-dollar trials. So this gets into, as you all explained, so you all take it from there, okay? So a completely different kind of deal. And in the quarters going forward, you'll see we're closing a lot, lot more of them. But we're not closing. Our old model used to be $10, $20, $50, $20, $30, $40, $50 million. We don't do those anymore. We're doing half-million-dollar deals. You owe.

Yeah, thanks, Tom. Yeah, Pat, I think Tom summarized it perfectly. This is totally expected, and this is a direct result of the consumption-based pricing shift two quarters ago.

All right. So, I mean, it's great transparency, right? Most companies don't give us their total bookings. So as long as you guys keep getting these slides, we're going to be able to keep doing the math. When do you think we start seeing that go up?

So if you now, since you have that chart open, I'm glad to hear it, go to slide 18. And on slide 18... what you see is the same chart that we provided to that two quarters that shows the kind of the expected consumption revenue model ramp up versus the subscription ramp up. So this is, this is an indicative of what we would expect to see. And as I've outlined, we, we believe we are in our model that we've, uh, we've, we've outlined to you guys. So we've been kind of figure out from here when we should start seeing the ramp up.

Okay. Yeah. Seven quarters through. And where are we now?

So we would have started two quarters ago. So based on this, we are, what's the first quarter, second, we're on quarter three.

Okay, so we got a little ways to go. All right, great. Thank you.

Thank you.

Thank you. And one moment for our next question. Our next question comes from the line of Arsenian Motovic with Wolf Research. Your line is open. Please go ahead.

Hi, this is Arsenio for GAL. Thanks for taking my question. It seems like this is now two quarters of coming in above expectations that were initially communicated for progress in the pilot initiative. Should we think about these pilots coming in faster than your initial communication suggested, given the more positive macro outlook you are seeing relative to the first quarter? And then I had one brief follow-up. Thanks.

I think, like I said, the original assumptions that we provided are still valid. We're seeing great results. We're very excited with the traction with our partners and the number of deals that we're tracking, but we're quite confident with our model at this time.

Got it. That's helpful. What caused the large services contribution from Baker Hughes in the quarter? It looks like it was $8.6 million. Did this contribute to the above 90% services gross margin? And can you remind us how COGS associated with Baker Hughes service revenue is accounted for? Thank you.

Perfect. So I think you missed the initial call or the initial question from Mike, who asked this, and I explained the gross margin impact. But just as a quick recap for you, we have various types of professional services, and we have highly skilled workforce, and we're able to command good premium on those services. And Baker Hughes is one of many customers which provide professional services.

Thank you.

We'll just take one last quick call again.

All right, one moment. And our last question is a follow-up question from the line of Michael Turretz with KeyBank. Your line is open. Please go ahead.

Oh, hey, thanks, Jennifer. So you let me get a follow-up. In the guide for next quarter of the $70 to $72 million, you had that big bump in services, which seemed to have come back faster than I think we might have expected. Any sense you can give us for what the trends are for both subscription and services in the next quarter? The subscription trend down, flat, services high.

I think we've historically provided that our target is between 10% and 20%, and I think we're going to be in that range quite nicely.

Okay. Thanks, Juho.

Thank you very much.

Thank you. And I'm showing no further questions, and I'd like to hand the conference back to Juho Perkin for any further remarks.

Awesome. So thanks, everybody, for joining for our third quarter conference call, and we really look forward to chatting with you guys all in the future, and thank you for your time.

this concludes today's conference call thank you for participating you may now disconnect