C3.ai, Inc.

Good afternoon, and welcome to C3.ai's earnings call for the fourth quarter fiscal year 2023, which ended on April 30th, 2023. My name is Amit Berri, and I lead investor relations at C3.ai. With me on the call today is Tom Siebel, Chairman and Chief Executive Officer, and Juho Parkinen, Chief Financial Officer. After market close today, we issued a press release with details regarding our fourth quarter results, as well as a supplemental of 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 be caused that could cause the actual results to differ materially from expectations. For a further discussion on the material risks and other important factors that could affect our actual results, please refer to our filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. 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 and response to your questions, we may discuss metrics that are incremental to our usual business 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.

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We finished the fourth quarter strong. and the coming year looks stronger. I believe that it is generally agreed that the overall market for enterprise AI now appears substantially larger and is growing at a much greater rate than most analysts and experts predicted. We have been working since 2009 to develop product leadership and establish thought leadership in enterprise AI. assisting private and popular sector enterprises to apply AI to improve operational processes. C3.AI has been at the vanguard of enterprise AI of the enterprise AI market for over a decade, as the market has developed from its roots in IoT to supervised learning, unsupervised learning, NLP, deep learning, reinforcement learning, and now generative AI. In the past 14 years, we have developed and enhanced the C3 AI platform and now offer over 40 enterprise AI applications developed with that platform that allow our customers to rapidly take advantage of AI to improve their business processes. We have been communicating for over a decade that we believe that the market for enterprise AI solutions would be quite large. And now, as we enter the summer of 2023, has become a dominant theme in technology discussions. AI has become a dominant theme in technology discussions, government discussions, media reports, defense and intelligence imperatives, and government and business imperatives. I do not believe that it's an overstatement to say that there is no technology leader, no business leader, and no government leader who is not thinking about AI daily. AI chip makers like NVIDIA are accelerating production to try to keep up with the very real demand that's out there. And all of this is being accelerated by the advent of generative AI. The interest in AI and in applying AI to business and government processes has never been greater. Business inquiries are increasing. The opportunity pipeline is growing. Demand is increasing. And C3 AI is well positioned to serve that increasing demand with our tried, tested, and proven AI platform, our applications, our global footprint, and our large global ecosystem. The world is, in many ways, now coming to us. The interest in applying AI to business processes is substantially greater than we have ever seen. In the fourth quarter, we increased our customer base, expanded our work with existing clients, and saw especially strong growth in our federal business. In the fourth quarter, our total revenue was $72.4 million. Our free cash flow was $16.3 million. And we ended the quarter with over $812 million in cash and cash equivalents. Importantly, we have a well-defined plan to be sustainably cash positive and non-GAF profitable by the end of this fiscal year. For fiscal year 2024, I'm sorry, for the fiscal year 2023, total revenue was $266.8 million, an increase of 5.6% over fiscal year 2022. Subscription revenue was $230.4 million, representing an 11.4% increase over the prior year. Let's talk a little bit about the AI applications market. Now, as the enterprise AI market has developed, it appears that the bulk of the demand is increasingly for turnkey enterprise AI applications rather than for development tools. This thesis is supported by an evaluation of our bookings for the past fiscal year that indicates that 83% of our bookings were driven by application sales. 17% of our bookings were driven by the sales of the C3A platform. Importantly, we are seeing increasing diversity in the industries we serve. For fiscal year 23, an analysis of our bookings includes oil and gas was 34%. Federal defense and aerospace was 29%. High tech was 13%. Energy and utilities, 11%. Manufacturing, 4%, food processing, 2%, chemicals, 2%, life sciences, 1.5%, and other industries made up the remaining 3%. An important leading indicator of our increasing industry diversity is evidenced by the trial and pilot agreements closed in Q4. Federal defense and aerospace made up almost 37%. Manufacturing comprised approximately 16%, and high-tech made up more than 10%. Oil and gas also made up more than 10%. When we look at ag, state and local, chemicals, energy, and financial services, each made up approximately 5% of our bookings. As a result of the increased demand for enterprise AI, Helped by our transition to consumption-based pricing, we are seeing a substantial increase in opportunities and shorter sales cycles. In Q4, we closed 43 agreements, including 19 pilots that were initiated in the quarter. The number of qualified enterprise opportunities targeted for closure within 12 months in our sales pipeline has increased by more than 100% in the past year. During fiscal year 23, We closed 126 agreements, up from 83 in the prior year. The average sales cycle for new and expansion deals was 3.7 months, down from five months in Q4 of the previous year. An examination of the composition of our pilot account profile suggests there is significant opportunity for growth as these accounts convert to consumption pricing. Of the 19 pilot accounts signed in Q4, seven were accounts greater than $100 billion in revenue. Seven were accounts between $10 billion and $100 billion in revenue. Four were accounts between $1 billion and $10 billion. And one was an account less than $100 billion in annual revenue. In fiscal year 23, we expanded our application footprint with a number of our customers, including Shell, Hope Industries, the United States Air Force Rapid Sustainment Office, PwC, Ball, ExxonMobil, Con Edison, the Defense Counterintelligence and Security Agency, Baker Hughes, the New York Power Authority, Duke Energy, ATB in Canada, Defense Innovation Unit, Roche, Cargill, and Engie. We also established many new relationships during the year, including the Department of Defense Common DOD AI Office, Daly City, California, Dow, ExxonMobil, Flex, Hexagon, Nucor, Owens, Illinois, Pantaleon, Riverside County, California, Stark County, Ohio, TELUS, Department of Defense SOCOM, Department of Defense TRANSCOM, and ESAL. Many of these also expanded their AI engagements with us in the course of the year. Let's address the C3 AI Partner Network. The C3 AI Partner Ecosystem is increasingly effective at opening new doors. With our partners, we're able to provide prospects the assurance of success and the highest quality service. In fiscal year 23, we closed 71 agreements with and through our partner network, including Google Cloud, AWS, Microsoft, Baker Hughes, and Booz Allen. CTA AI increased its qualified pipeline with AWS by over 24% in the fourth quarter, with particular focus on state and local government. With Google Cloud, our joint qualified 12-month opportunity pipeline grew from 25 opportunities at the end of fiscal year 22 to 140 opportunities at the end of fiscal year 23, a 460% increase. And importantly, we closed 10 new oil and gas accounts in the year with our strategic partner, Baker Hughes, with accounts including ExxonMobil, AdNoc, ENI, and others. In Q4, we released the C3 generative AI solution to the market. Our generative AI solution leverages the capabilities of the C3 AI platform and is distinguished from other GPT, LLM solutions in the market in several ways. Number one, it allows enterprises to access all their enterprise and open source data, ERP, CRMs, data, text, PDFs, Excel, PowerPoint, sensor data, you name it. Secondly, importantly, it provides traceable, deterministic, consistent answers. Thirdly, it enforces the corporate information access controls and security protocols that are currently in place. Fourthly, it has no risk of IP or data exfiltration caused by the large language model. And importantly, it is hallucination-free. So if the system doesn't know an answer, it doesn't fabricate it, which is clearly unacceptable for any commercial or serious government application. After releasing the product in March, we rapidly closed three generative AI applications in the quarter with large enterprises, including Georgia Pacific, Flint Hills Resources, and the U.S. Department of Defense Missile Defense Agency. We expect these applications to be live during this current quarter. We are currently working up quite substantial pipeline of additional C3 generative AI opportunities with large corporations. The C3 AI generative application is now available, today available, on both the AWS marketplace and the Google Cloud marketplace. It is difficult to estimate the size of the addressable market for these generative AI solutions, but it appears to be extraordinarily large. We saw a lot of momentum last year and in the fourth quarter with our U.S. federal business. The U.S. federal sector represented 29% of our bookings in fiscal year 23, and it continues to show significant strength. Our predictive maintenance solution, our predictive analytics and decision assistant, also known as Panda, has been in production used for several years at the United States Air Force Rapid Sustainment Office. And last quarter it was selected as the system of record for all predictive maintenance for virtually all United States Air Force assets. This important designation expands our opportunity really substantially in the U.S. Air Force and other services. Let's talk about guidance. C3AI has a consistent and solid track record of meeting or exceeding guidance, as we have done in every quarter since we've been public. And we are, at this time, we are not inclined to pout on the table regarding guidance. In general, we feel comfortable with the expectations that the Southside analysts have set for the coming year, and we are not inclined to change those expectations at this time. For Q1, Fiscal year 24, we see revenue in the range of $70 to $72.5 million. For the full year of fiscal year 2024, we expect revenue to be in the range between $295 million and $320 million. As it relates to non-GAAP loss from operations, we expect to fall between $25 million to $30 million in Q1 and $50 million to $70 million for the year. As we begin fiscal year 24, C3 AI has never been better positioned. The addressable market is large and expanding. The overall business environment for enterprise AI is strong, and C3 AI is front and center in the minds of CEOs and government leaders. Our balance sheet is strong, and with over $812 million in cash and cash equivalent, we are in a great position to expand market share. As the dynamics of the enterprise AI market are developing so rapidly, we thought it appropriate to host a mid-quarter investor day in New York City on June 22nd. We will provide, at that time, we will provide C3 AI investors a company update, additional information about our product roadmap, product demonstrations, direct access to the C3 AI executive team, updates on our partner ecosystem, C3 AI technology, C3 generative AI demonstrations, and additional company developing news. We hope you can attend either in person or online, and that investor day event will be available to view online live for all investors via webcast. I will now turn this call over to my colleague, Juho Parkinen, Chief Financial Officer, 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, provide more detail on our first quarter and full year fiscal 2024 guidance, and I will conclude with some additional color related to the consumption-based revenue model we introduced three quarters ago. All figures will be discussed on a non-GAAP basis unless otherwise noted. Overall, the business activity is higher than we have ever seen. Our sales reps are more engaged, there are more opportunities they're working on, and there are more interest from our prospects. During Q4, our ability to close agreements was more consistent throughout the quarter compared to prior quarters this fiscal year. We ended the fourth quarter with a total revenue of $72.4 million, of which subscription revenue was 78.5%. As we discussed last quarter, we expected professional services would be within our historical range of 10% to 20%, with our actual professional services coming in at 21.5% of the mix. Gross profit for the fourth quarter was $53.9 million, and our gross margin was 74.4%. We generated $27.1 million in positive operating cash flow and $16.3 million in free cash flow for the quarter. As mentioned during the prior updates, we have a short-term pressure on our gross margins due to a higher mix of pilots, which carry a higher cost of revenue than production deployment. Operating loss of $23.5 million was improved due to more rigorous expense management. As a reminder, though, the fourth quarter is when we host our C3 AI Transform customer event. As such, our marketing expenses ramped up to support the successful execution of that event. Operating loss margin was 32.5% in Q4, where the sequential increase was driven by our annual customer conference. For the full year, fiscal 2023, our revenue was $266.8 million, an increase of 5.6% from fiscal 2022. Non-GAAP loss from operations was $68.1 million, and free cash flow was negative $187 million. Our gross margin for the year was 77%, Our subscription revenue was 86% of total revenue compared to 82% in fiscal 22. We ended fiscal 23 with $812.4 million in cash and investments. At the end of Q4, our accounts receivable, including unbilled receivables, was $134.6 million. Unbilled receivables at quarter end was $77.6 million, inclusive of $70.7 million created to Baker Hughes. During the quarter, we collected from Baker Hughes nearly $35 million. The general health of our accounts receivable is excellent. 76% of our receivables were current or less than 30 days past due. For the entirety of FY23, our bad debt expense was approximately $300,000. Now turning to RPO and bookings. As consumption-based go-to-market model continues to pick up, RPO is less important indicator of future performance. We reported GAAP RPO of $381.4 million, down 20% from last year, which is expected as a result of the transition to consumption-based pricing. Current GAAP RPO of $186.3 million is up 9.8% from last year and up 5.7% on a sequential basis. We continue to see positive trends in pilot bookings diversity as we have sold pilots to a broad range of nine different industries during the quarter. Regarding our outlook for fiscal 24, we're guiding Q1 revenue to range between 70 to 72.5 million. For the full year 2024, we expect revenue to range between 295 and 320 million. As it relates to the full year, we finished the third quarter of our transition under the consumption pricing model. As a returning model, we expect flatness and somewhat of a decline in revenue during the transition with an acceleration as consumption starts to have meaningful portion of our in-quarter revenue. As such, we expect the second half of FY24 to have higher growth rates on a sequential basis than the first half. We expect our non-GAAP loss from operations to range between 25 and 30 million for Q1, and for full fiscal 24, we expect non-GAAP loss from operations between 50 and 75 million. As a reminder, We expect to be non-GAAP profitable for Q4 24 and beyond, and as it relates to full fiscal 24, we are guiding to a range in operating loss due to the potential investments we may do for C3 generative AI applications. We expect our cash and investments to be at its lowest at around $700 million during fiscal 24. Turning to customer metrics. Historically, we have provided a quarterly customer count estimate as a proxy for the adoption of our products and solutions. However, due to the complexity of our contractual and pricing structures and the involvement of resellers, we believe comparing customer counts from quarter to quarter based on our current methodology does not fully convey the acceptance and adoption of our products and solutions. To help address this, we retained an external Big Four consulting firm to update our current customer methodology consistent with best practices to be consistent, systematic, and auditable. As a result of that review and adoption of those recommendations, we believe a metric that demonstrates contracted use cases that our customers are using our solutions to solve would provide a more meaningful understanding of the product adoption. This is defined as customer engagement. The customer engagement increased from 247 to 287, comparing Q3-23 to Q4-23. Our traditional customer count metric went from 236 to 244 for the same period. There will be additional detail included in the supplement, which is available on our website. We are on track with our plan for profitability for Q4-24 and expect to have cash positives quarter starting Q4-24 on a consistent go-forward basis. The entire executive team is managing the business to a detailed budget on our plan for profitability. We are expecting to invest aggressively to generative AI initiatives during the first half of the year, which is reflected in the operating income guidance. As it relates to the model assumptions that we provided three quarters ago for our consumption-based pricing, our preliminary analysis of the actual results suggests we are on that model. Overall, we're very excited about the business momentum as we start FY24. As a go-forward KPI for the investing community to assess our performance, we believe good KPIs to focus are the number of pilots started during the quarter the conversion of those pilots to production, and finally, the actual vCPU consumption fees generated. With that, I would like to open this up for questions. Operator?