C3.ai, Inc.

Good day and thank you for standing by. Welcome to the C3AI's first quarter fiscal year 2024 conference call. At this time, all participants are in a list only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amit Barry. Please go ahead.

Good afternoon, and welcome to C3AI's earnings call for the first quarter of fiscal year 2024, which ended on July 31st, 2023. My name is Amit Berri, and I lead investor relations at C3AI. 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 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 uncertainties that could cause actual results to differ materially from expectations. For a further discussion on the material risks and other important factors that would 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, 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.

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We're off to a strong start for fiscal year 24. Our revenue came in at the high end of our guidance, exceeded analysis consensus, and we're seeing significant traction across our business. This is the 11th consecutive quarter as a public company in which we have met or exceeded our revenue guidance. Following the release of ChatGPT in November of 2022, we are seeing a dramatic increase in demand for enterprise AI adoption. In Q1, we experienced strong traction with our enterprise AI applications, and especially strong traction with C3 generative AI. Let's take a look at our revenue highlights for the first quarter. Total revenue for the quarter was $72.4 million, coming at the high end of guidance. That was $70 to $72.5 million and exceeding the analyst consensus. Subscription revenue for the quarter was $61.4 million, constituting 85% of total revenue. Gross profit for the quarter was 40.5 million, representing a 56% gross margin. Non-GAAP gross profit for the quarter was 49.6 million, representing a 69% non-GAAP gross margin. GAAP RPO was 334.6 million. Current RPO was 170.6 million. GAAP net loss per share was 56 cents. Non-GAAP net loss per share was $0.09. Both exceeded analyst consensus expectations substantially. We finished the quarter with $809.6 million in cash, cash equivalents and investments, exceeding the average analyst consensus of $774.3 million. Net cash provided by Operate Activities was $3.9 million, and free cash flow was negative 8.9 million, significantly exceeding analyst consensus that was negative 38.7 million. The market interest in applying enterprise AI to business processes appears to be expanding exponentially, fueled by the interest in ChatGPT and other consumer generative AI tools initially released late last year. CEOs, business leaders, military leaders, and investors are all focused and how they can take advantage of these powerful new tools to improve operational processes. In Q1, we entered into new and expanded agreements with Saudi Arabia, Smart City Neom, Nucor, a steel company, Roche, sugar producer Pantaleon in Central America, Ball Corporation, Cargill, Con Ed, Shell, Tyson Foods, and the US Department of Defense. Our partner ecosystem continues to expand. In Q1, we closed 60% of our agreements with and through our partner network, including Google Cloud, AWS, Microsoft, and Booz Allen Hamilton. Our qualified partner opportunity has increased by over 100% in the past year, and our qualified pipeline with our cloud providers grew by 61% just from Q4 to Q1, Q4 23 to Q4 21. C3A's federal business is showing significant strength with federal bookings up 39% compared with the year-ago quarter. The company continues to expand its work with the U.S. Department of Defense with new and expanded projects with the Chief Digital and AI Office, CDAO, the U.S. Marine Corps, U.S. Air Force, the Missile Defense Agency, and the Defense Counterintelligence Security Agency. C3 AI commercial customers, including Shell, Georgia Pacific, Koch Industries, Bank of America, and others, and the U.S. Department of Defense continues to expand their C3 application footprints, increasingly now including C3 generative AI, realizing outsized economic benefit from digital transformations using C3 enterprise AI. Let's talk about a few of these. First, the Department of Defense. Our business relationships with the Department of Defense are extensive and rapidly expanding. The DoD uses the C3AI platform and C3AI applications across many services, components, and combatant commands to realize significant improvement in readiness and decision advantage. One example, beginning in 2017, we started work for the U.S. Air Force to improve the readiness and applied predictive maintenance for the E-3 Sentry, an aircraft that you probably know of as the AWACS. By fusing the handwritten maintenance notes with the flight logs and historical inventory and pilot logs, C-3A readiness improved the Air Force's legacy maintenance procedures substantially. Following this initial project, The United States Air Force Rapid Sustainment Office selected C3AI for additional readiness projects, an additional readiness project called Conditions-Based Maintenance Plus, CBM Plus, to apply similar analytics-based predictive maintenance approaches to the B-1 strategic bomber and other aircraft weapons systems. This configuration of C3 AI readiness for the United States Air Force called the Predictive Analytics and Decision Assistant, or PANDA, went live into production and has now scaled out to over 16 Air Force aircraft weapon systems. This system, PANDA, was subsequently selected as the system of record for all United States Air Force predictive maintenance applications. This is the only system of record for an AI application in Department of Defense that we are aware of. The goal of C3 AI Panda is to realize up to a 25% increase in overall aircraft mission capability. And when rolled out to all aircraft in the United States Air Force, this is budgeted to realize a $3 billion cost savings. in maintenance and readiness. Talk for a minute about the CDAO. The Department of Defense Chief Digital and AI Office, this is the organization that is chartered with choosing, with selecting the AI platform of record for all DoD. We began working with them less than a year ago, initially to bring the C3 AI platform into production across a number of unclassified, secret, and top secret enclaves as part of CDAO's ADVANTA ecosystem, a centralized data repository for the entire Department of Defense. Our first project showed how nodal analysis and contested logistics can radically improve when AI systems are applied to U.S. Transportation Command or TransCom data. This application took a simulation-based approach to provide options in response to global logistics disruptions. We're able to accelerate the time it takes to conduct this kind of global analysis from days to minutes. C3 AI has now been engaged, less than a year later, in a dozen projects through CDAO, including contested logistics, strategic force readiness, supply chain visibility, commander's dashboards, and combined, joint, all-domain command and control. Let's take a look at Shell. Shell has been an important customer since 2018. The CJA applications are continuing to expand across the entire Shell asset base, including upstream, downstream, integrated gas, renewables, and retail to address asset integrity, optimization, ESG, and predictive maintenance. Today, Shell's C3AI predictive maintenance program monitors almost 20,000 pieces of equipment. And because C3AI can identify failure in advance with very high levels of accuracy, this can both increase production and prevent potential disasters, such as offshore oil rug failures, the cost of which may be incalculable. The economic benefit for Shell is enormous. and they have given presentations at Bank of America and other conferences where they estimate it to be in excess of $2 billion per year. In the past three months, Shell and C3AI have further expanded deployments, applying AI-based estimation techniques in subsurface reservoir management, deployed a new C3AI-based Shell oil condition monitoring application for its customers to reduce unplanned downtime and optimize maintenance of heavy-duty assets and expanded Shell's use of the C3 AI ESG solution. Let's switch to Koch Industries. We continue to expand our partnership with Koch, particularly at Georgia Pacific and Flint Hills Resources. We generate almost 4 million monthly predictions across 300 plus assets using our reliability and C3 AI supply chain applications. Georgia Pacific is realizing up to 5% improvements in overall equipment effectiveness. Koch also initiated two generative AI projects to help process data, documents, and files. Georgia Pacific is improving efficiency in triaging and resolving equipment and production and maintenance issues to automate processing for paper manufacturing. Flint Hills Resources is using C3 generative AI to increase efficiency and improve information access in commodity trading operations. At Bank of America, our C3 applications are deployed to deliver customer insights, optimize business workflows, and provide recommendations to its liquidity product specialists and treasury sales officers. The liquidity team is responsible for managing the bank's cash flow. Over 500 liquidity and sales users log in to the C3 AI applications. The bank is applying AI-based techniques to access client responsiveness, assess client responsiveness and sensitivity in a fluctuating interest rate environment. Three applications are in production today. Bank of America and others are in development. All are expected to generate significant annual benefits especially in a higher interest rate environment where balance retention, optimal pricing of interest rates, and efficiency of sales and operations become important drivers of profitability and expense reduction. Let's talk for a minute about C3 generative AI because, ladies and gentlemen, this is big. Now, by combining the power of the tried, tested, and proven C3 AI platform that we've built in the course of the last 14 years with large language models that you've been reading about every day. C3 generative AI enables immediate interaction with the relevant and frequently massive corpora of data, documents, and signals associated with enterprise domains. For example, machines, factories, systems, supply chains, natural phenomena, biological systems, and operating divisions. We use a natural language interface to rapidly locate, retrieve, and present relevant data across an entire enterprise's information systems, allowing users to use the full power of AI to optimize productivity, monitor systems, forecast demand, and in general, understand what is happening, what will happen, how to plan, and how to maximize efficiency. The production adoption and customer success since our initial March 2023 C3 generative AI release has been immediate. In the last quarter, C3 AI closed eight new agreements for C3 generative AI, addressing use cases across multiple industries, including agriculture, consumer packaged goods, defense, intelligence, manufacturing, state and local government, oil and gas, and utilities. To date, we have closed 12 generative AI agreements and have a pipeline of more than 140 qualified generative C3 generative AI enterprise opportunities. Over 140. Okay, now, in less than six months. So putting this in perspective, our qualified pipeline of generative AI sales opportunities exceeds that of any other product in our product line that we've reduced, of all the products we've released in the last 14 years. This is big. To meet market demand, C3 AI today announced the immediate availability of the new C3 generative AI suite, including 28 new domain-specific generative AI solutions for industries, business processes, and enterprise systems. C3 Generative AI provides fine-tuned, tailored, domain-specific generative AI solutions that mitigate the crippling problems that prevent the widespread industry adoption of LLMs. The market response to our generative AI offerings is simply staggering. We believe that the advent of generative AI may more than double the addressable the immediately addressable market opportunity available to C3 AI. And now, with our suite of generative AI products out the door, you can expect that we will be investing in the coming quarters to promote, market, and support these initiatives. The 28 applications that we released today and are available today are in three categories. C3 generative AI for industries, this includes generative AI for aerospace, for defense, for financial services, C3 generative AI for healthcare, intelligence, manufacturing, C3 generative AI for oil and gas, for telecommunications and for utilities. Our family of products to address the requirements of business processes include C3 generative AI for customer service, C3 generative AI for energy management, C3 generative AI for ESG, C3 generative AI for finance, for human resources, for process optimization, for reliability, and C3 generative AI for supply chain. Finally, we're releasing a family, and importantly, of C3 generative AI for enterprise systems. Ladies and gentlemen, this is not slideware that's being offered by software vendors. This is production software available to order today, available to ship today, and available to install tomorrow, and it'll be live in 12 weeks. These products include C3 generative AI for Databricks, C3 generative AI for Microsoft Dynamics 365, C3 generative AI for Oracle ERP, C3 generative AI for Oracle NetSuite, C3 generative AI for Palantir, for Salesforce, for SAP, for ServiceNow, for Snowflake, and C3 Genitive AI for Workday. LLM support is immediately available in these products for Falcon 40B, Llama 2, Plan T5, Azure GPT 3.5, AWS Bedrock Quad 2, Google Palm 2, OpenAI GPT 3.5, and MPT7B. Additional support will be announced for leading LLMs as the market develops. By combining the power of LLMs and generative AI with the tried, tested, and proven C3 AI platform, we believe C3 generative AI solves the troubling problems endemic to all other generative AI solutions currently being proposed in the marketplace. Firstly, the answers from C3 generative AI are deterministic, not random. That means every time you ask the same question, you get the same answer. You don't get a different answer. All answers are immediately traceable with one click to ground truth. So honestly, the LLMs that you're playing with on ChatGPT, okay, and Google Bard or whatever, they don't tell you where the answers come from because they don't know where the answer's coming from. With C3II, we can tell you, we give you the link, where immediately you can go to ground truth. No matter what the question is, how am I doing against my diversity goals in North America? Which of my product lines are the least profitable? How am I doing against my readiness levels of F-35 squadrons in Central Europe? How am I doing? What are the gaps in my satellite coverage in Indo-Pacom? It'll give you the answer, and it'll tell you then exactly where the answer came from. With C3 AI, the LLM is, by combining the LLM and utilizing all the investment of the platform, the LLMs are firewalled from the data, minimizing the risk of LLM-caused data exaltation. See Samsung for details. You've all read about it. Enclosing the many... LLM-caused cyber attack vectors that are now becoming evident. There's a lot of research. If you go look at what's going on in the research that Zico Coulter is doing at Carnegie Mellon, you'll see that they're finding really troubling cybersecurity problems associated with these LLMs that do not manifest themselves in the C3 solution. The C3 AI platform, the C3 AI-generated AI solution, assures the enforcement of all enterprise access and cybersecurity controls, in addition to providing end-factor authentication and data encryption both in motion and at rest. LLM reasoning is limited to enterprise-owned and enterprise-licensed data, mitigating the potentially unbounded risk that you're now starting to read about in the literature associated with IP liability provided from most LLM virtually unlimited IP liability associated with other LLM solutions. Because C3 AI generative AI is LLM agnostic, not LLM, not specifically LLM dependent, we allow enterprise to interchange LLMs at will, taking advantage of the ongoing massive innovation that we're going to see in LLMs coming in the coming years. And you can just switch one in and switch one out, and all the applications keep running. Finally, the way that C3 generative AI is structured, the fact that we have firewalled the LLM from the data itself, and we go long on this some of their time, We've basically almost eliminated any risk of hallucination. So it doesn't basically does not hallucinate. If it doesn't know the answer, it comes back and says, I don't know the answer. I can't tell you the answer or the answer. I don't have access to the answer. It's not going to make up some line of creative pros that you've all seen from the LLMs that you've played with on the internet. All C3 generative AI applications can be fully deployed within 12 weeks for $250,000. and they're available today, right now actually, on the AWS Marketplace, the Google Cloud Marketplace, and the Azure Marketplace. The licensing model is straightforward. C3.AI supports the customer to bring its generative AI application into production. We do it in 12 weeks. After that, the customer continues to pay per vCPU or per gCPU hour with volume discounts. The generative AI market appears huge. Bloomberg Intelligence predicts this market will reach $1.3 trillion by 2032. Much of this will accrue to chip manufacturers, cloud service providers, and professional service providers. The balance will accrue to generative AI applications. If we double-click on this generative AI applications box, expected by Bloomberg to reach $280 billion in the same timeframe, We believe the bulk of this will accrue to providers of software that enable businesses to apply LLMs to improve business processes and associated decision-making. Now, countless startups today are proposing companies based on generative AI for one industry niche or another, whether it be doctor's offices or insurance or automotive or pharmaceutical companies or what have you. They're taking their pitches around to venture capitalists all up and down Silicon Valley, and many are getting significant funding, in some cases, with private market valuations in billions of dollars. And their big idea? In each case, a handful of entrepreneurs propose to apply LLMs to develop market-specific, business process-specific, and application-specific LLM solutions. C3AI offers these solutions today, and we offer them from a well-capitalized company with almost 1,000 seasoned professionals partnered with a powerful market partner ecosystem and a global footprint. The market opportunity appears enormous. We have demonstrated in recent quarters that we have solid management and expense controls in place. In Q4 of last year, our cash flow from operations was a positive $27 million. In Q1 of 24, cash flow from operations was $3.9 million. Non-GAAP operating loss substantially beat market expectations in both Q4 of 23 and Q1 of 24. We finished Q1 of 24 with $809.6 million in cash and investments, a decrease of $2.8 million from the prior quarter. Now, after careful consideration with our leadership and our marketing partners, we have made the decision to invest in generative AI, to invest in lead generation, to invest in branding, to invest in marketing awareness, and to invest in customer success related to our generative AI solutions. The market opportunity is immediate, and we intend to seize it. So while we still expect to be cash positive in Q4 of 2020, this year and in fiscal year 25, we will be investing in our generative AI solutions. At this time, do not expect to be non-GAAP profitable in Q4 of 24. You can expect We want to see what actually happens in the market in the next couple of quarters and how this plays out, but it looks the right now you can expect. We'll update you on this as we know more, but you can assume this happens someplace in the Q2 to Q4 time frame of fiscal year 25. We have a tight rein on financial controls. We operate a disciplined business, and we're making this decision to invest in generative AI because we are confident that is in the best interest of our shareholders. C3.AI was well ahead of its time, predicting the scale of the opportunity in enterprise AI applications. When we began, the market was nascent. And as the market has developed and expanded, they've expanded our branding and our marketing offerings to meet market expectations. While we believed for over a decade that this market would be quite large, even we, could not have anticipated the size and growth rate of the AI market that we now address. C3AI has spent the last 14 years preparing for this opportunity, and now the market is coming to us. Our technology foundation is tried, tested, and proven. We have a strong portfolio of Enterprise AI applications in place. We have a pricing and distribution model that meets the needs of the market. We have a quality brand a strong partner ecosystem, and a long list of satisfied customers. We're armed with a battalion of professional employees deployed around the world. Our partner ecosystem with Google Cloud, AWS, Azure, Booz Allen, BiggerUse, and others is well-developed and expanding. The company is well-capitalized with a senior team. leadership team, and now I will turn it over to my colleague, Juho Parkinen, our Chief Financial Officer, to talk about more specific financial details associated with our performance last quarter.