C3.ai, Inc.

Good day, and thank you for standing by. Welcome to the C3AI second quarter fiscal year 24 conference call. At this time, all participants are in listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. Please be advised that today's call is being recorded. I will now turn the conference over to your host, Mr. Amit Barry. Please begin.

Good afternoon. And welcome to C3AI's earnings call for the second quarter of fiscal year 2024, which ended on October 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 Parkin, and Chief Financial Officer. After the market closed today, we issued a press release with details regarding our second quarter results, as well as a supplemental to our results. both of which can be accessed through the investor relations section of our website at ir.c3.ai. This call is being webcast and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities law. 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 statement or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risk 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 precedent. Finally, at times in our prepared remarks, in response to your questions, we may discuss metrics that are incremental to our useful 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. Results. Bottom line, we continue to accelerate our revenue growth and our customer engagement count and continue to gain traction with C3 generative AI and our enterprise AI applications in the second quarter. Total revenue for the second quarter was $73.2 million, an increase of 17% compared to $62.4 million one year ago. and accelerating from an 11% increase in the first quarter. The total number of customer engagements was 404, an increase of 81% compared to 223 last quarter. North American revenue of $61.2 million increased 28% year-over-year, while EMEA revenue of $10.6 million decreased 11% year-over-year. federal revenue increased 100% year-over-year. Subscription revenue for the quarter was $66.4 million, constituting 91% of total revenue and increasing 12% from a year ago. Gap gross profit for the quarter was $41.1 million, representing a 56% gross margin. Our non-GAAP gross profit for the quarter was $50.4 million, representing a 69% non-GAAP gross margin. Our GAAP net loss per share was $0.59, and non-GAAP net loss per share was $0.13. We ended the quarter with $762.3 million in cash, cash equivalents, and investments. C3's AI's partner ecosystem continues to drive significant growth. In Q2, the company closed 40 agreements through our partner network, including AWS, Booz Allen, Baker Hughes, Google Cloud, and Microsoft. The qualified opportunity pipeline with partners has increased by 75% in the past year. We signed new and expanded agreements with new core corporation, Roche, Con Edison, Hewlett Packard Enterprise, GSK, formerly SmithKline, the United States Navy, the Administration for Children and Families, the Division of Health and Human Services, Indorama, and First Bank, amongst others. Over the past several months, C3AI has helped Nucor, the largest steel producer in the United States, to better optimize caster production schedules, specifically to improve production levels and reduce cost levels in the steel casting process. C3AI is now helping Nucor scale this across several additional mills. In Q2, C3AI also kicked off two new additional use cases at Nucor, tackling process optimization and demand forecasting, and we also completed a C3 generative AI pilot targeting operational health and safety. GSK, formerly GlaxoSmithKline, is now using C3 AI supply chain suite to increase efficiency in its supply chain, using AI to optimize yield and improve demand forecasting processes. Con Edison, a C3 customers since 2017 continues to expand its use of the C3 AI applications, most recently by adding C3 generative AI. Con Ed is using C3 generative AI to help workers quickly find answers to questions and analyses related to smart meters, service levels, and infrastructure data. In the second quarter, Con Edison completed two pilots of C3 generative AI, which have now converted to production. We also continue to expand our footprint in state and local governments with particular interest in C3 AI law enforcement from San Mateo County, California, and C3 AI residential property appraisal from Stark County, Ohio and Charlotte County, Florida. Our federal business continues to show significant strength with bookings up 187% year over year. We closed new and expanded deals with the United States Navy, the Intelligence Community, Joint Staff J-8, the Defense Logistics Agency, and the Administration for Children and Families. We've talked many times about our success, our successes in helping to monetize or to modernize, sorry, the Department of Defense, and we're proud now to say that our products are helping civilian government agencies as well. This quarter, we began work with the Administration for Children and Families, a division of the U.S. Department of Health and Human Services. The agreement with C3AI was part of their first order under a $90 million blanket purchase agreement. This part of ACF's work involves helping unaccompanied children who cross the US border find temporary shelter and permanent homes. Our platform will be used in complex modeling and predictive analytics at ACF to help them keep track of the number of unaccompanied children in the agency's care, staffing needs, and determine how long these children are with their case managers, amongst other tasks. C3AI continues to leverage its extensive commercial supply chain experience in the federal government. It is now applying this experience to the defense sector with the C3AI contested logistics application for Transcom and for DLA. During the quarter, C3AI converted two Defense Logistics Agency pilots into follow-on projects for the Department of Defense. The first project delivers a common operating picture of the supply chain for DoD and enables leaders at multiple echelons to see in near real time their global Class 9 supply posture. The application unifies disparate supply data and provides the Defense Logistics agency the ability to identify supply chain inefficiencies, forecast parts consumption and part shortage, and conduct impact assessments and put into place mitigation plans. The second project supports DLA's energy directory, leveraging C3AI's commercial expertise in the oil and gas sector. The C3AI contested logistics application modernized modernizes and streamlines global fuel distribution for the Department of Defense. Users can see global fuel inventories, anticipate fuel consumption, identify supply network risks, and create distribution and transportation plans to prevent disruption and assure supply. These applications promise to significantly impact the efficiency of the Department of Defense logistic enterprise and improve readiness. Our partnership with AWS deepened with an expanded strategic collaboration agreement in the quarter. Okay. And the availability of our new no-code self-service generative AI applications, C3 generative AI, now available on the AWS marketplace. I think we announced that last week. This new application allows customers, users, of all technical levels to begin using generative AI within minutes of signing up. And this application CT generative AI is now available to you on the AWS marketplace under a 14 day free trial. And so I encourage you to take a look at it for those of you who are interested. Under the expanded collaboration agreement with AWS, we're focusing on offering advanced generative AI solutions combined with what they're doing in Bedrock and other initiatives for enterprises and for AI applications for customers in multiple verticals, including manufacturing, power and utilities, consumer packaged goods, state and local government, and the federal government. C3 AI... And AWS's joint qualified pipeline has more than doubled year over year with heightened interest in the C3 generative AI suite. In Q2, C3 has been recognized multiple times for its innovation in the AI space. We've been named to the Fortune 50 AI innovators list, and the list kind of goes on and on. So I'm not going to belabor that. We get recognized all the time. Pilot growth, this is important. In Q2, we closed 62 agreements, including 36 pilots and trials. Our new pilot count is up 270% from a year ago. Notably, 20 of these were generative AI pilots, 150% increase from Q1. With the lower entry price points of our pilots, we are more easily able to land new accounts. With our pilots, we're engaging customers across a diverse set of industries in this quarter, Our pilots came from manufacturing, federal, defense, aerospace, pharmaceuticals, and other industries. Now, we did see sales headwinds in the quarter. While the interest in AI applications, and especially generative AI, is growing substantially, we're also seeing, in many cases, lengthening decision cycles. Virtually every company in the last three to six months has created a new AI governance function as part of its decision-making process. These AI governance functions assess and approve those AI applications that will be allowed to be installed in the enterprise. This has candidly added a step to the decision process in AI. You might have heard it here first, but you will be hearing this from every AI vendor in the next few quarters. Take it to the bank. It has simply added a step to the process. And it is lengthening the normal sales cycle. So it's kind of, so, and so this had a, you know, this provided a sales headwind in the quarter. Okay. And while the increased scrutiny lengthens the sales process, we believe this is a healthy process to ensure that companies are adopting safe and appropriate AI solutions. So we're all for it. Okay. And, you know, did it, you know, move revenue, you know, a little bit, you know, a click below the center of the range. Yeah, it did. Okay. But you know, get over it. The world's a better place. People are making, you know, very careful, well-informed decisions. They have their best people on it and we will all be happier for this in the long run. Okay. So it did, you know, that dynamic did provide an unexpected headwind to our Q2 sales revenue performance. In addition, our sales execution in Europe was candidly unacceptable. And since then, we've been through our planning meetings and we've taken appropriate organizational steps to immediately improve sales execution in Europe. Now, let's take a look at if this is the big story, this is the top line. And really what this whole story has been about for the last six or seven quarters has been from the transition from subscription-based pricing to consumption-based pricing. And before we switched to consumption-based pricing, you'll recall the company was growing at quite a rapid growth rate, like I think seven quarters ago, order of 38% year-over-year growth rate. So we were definitely in the top quarter. And we announced the transition to consumption-based pricing that we believed would be and has become the standard in the industry. The consumption-based pricing is based upon per virtual CPU or virtual GPU hour, similar to the pricing at Snowflake, Google Cloud, AWS, Microsoft Azure, et cetera. Prior to this, we were doing large enterprise subscription deals of $1 million, $5 million, $20 million, $50 million. And it was a good business. That being said, the downside of that model was lumpiness in bookings, lengthy sales cycles, and low levels of revenue predictability. We believe the transition from a primarily subscription-based pricing model to an assumption-based pricing model, brought us into line with what we believe are today the industry standard cloud pricing standards, making it easier and less costly for new customers to acquire solutions and then increase their spending as their usage and adoption increase. We anticipated and announced when we made that transition that it would have a short to medium negative effect on revenue growth a long-term drag on RPO as the sales price was significantly reduced and the contracts often lacked a time-certained multi-period commitment. We believed when we made the announcement that the conception-based pricing model would increase the number of customers and increase the total amount of system consumption, resulting in a return to increased revenue growth, increased customer growth, decreased average selling price, and decreased RPO over time. Now, while we are still in the process of working completely through this transition to the new pricing model, the preliminary empirical results that we are seeing, evidence by year-over-year growth rates, appear to be proving out exactly as expected and exactly as we predicted. Since the transition, revenue growth initially decreased, then it flattened, And now it is increasing as the consumption-based pricing model takes effect. Average selling price has decreased. RPO has decreased. Customer engagement has increased substantially. If we look back over the last, say, one, two, three, four quarters, four quarters ago, our revenue growth was negative 4% and then 0%. The last quarter was 11%. Now it's 17%. Bookings growth, 71% year over year. I'm sorry, bookings growth, 100% year over year. Okay, new contracts growth, 148% year over year. Okay, pilot growth, 50%, quarter over quarter, 170% year over year. So this is basically the beginning, the middle, and the end of this story. Okay, we announced six, seven quarters ago a transition to, to our consumption-based pricing. We predicted that revenue would decline and then flatten and then increase, and we are now seeing these increases that we predicted. So now let's talk about generative AI. Generative AI simply changes everything, okay? I believe that it more than doubles the size of our addressable market overnight. We've all seen the predictions, you know, from Bloomberg that predicts this is a hundred, you know, know in excess of a trillion 1.3 trillion dollar market by 2032. uh goldman sachs predicted that this could increase corporate profits by 30 in the next decade and that generative ai alone could raise the global gdp by seven percent people this is a big deal okay it is difficult to overestimate the levels of interest that we're seeing in the category of generative ai now by combining our multi-billion dollar say 14-year investment in the c3 ai platform with the recent developments in life language models and retrieval augmented generation c3 ai is unique in the market and that we are able to to solve the disqualifying hobgoblins that are preventing the adoption of generative AI, okay, in government, in defense, intelligence, in the private sector. What are those hobgoblins, okay? Those are the facts that, you know, the answers that come out of these large light watch models are stochastic. They're random. They're not traceable. We have this hallucination problem, which is extraordinarily problematic, okay? We have research. None of our data access controls, be it DOD or Bank of America, are enforced. We have these problems with LLM cause data exfiltration, LLM cause cyber threats and IP liability. Okay. In addition, all the solutions that are out there, almost all those solutions, I would say with the, with the exception of AWS bedrock tend to be specific. And I don't think anybody wants to be LLM hook their wagon onto any given LLM today with all the innovation that's going on in the market. And to be dependent on any LLM provider that could, you know, make some announcement on Friday and be gone on Monday. See OpenAI for details. So, you know, this LLM agnostic is there. So the bottom line is our solution in the market addresses every one of those hobgoblins that prevent the installation of generative AI in the enterprise. And so this is really unique. And it took 14 years and $2 billion of software engineering for us to be ready for this. This is why we could solve it. So while the rest of the world is playing catch up, okay, how about multimodal? I mean, we completely nail multimodal. We've been doing it for 14 years. Multimodal, what does this mean? Rather than all these LLM solutions basically handle text. We handle text, we handle telemetry, we handle images, we handle signals. There is, we handle enterprise data, we have the structured data, we have unstructured data. So we are unique in the market and the result is quite exciting. So while the rest of the world is playing catch up and we have scores of, you know, of startups, you know, with, you know, three guys, four girls and two cats in an apartment in San Francisco being, getting, you know, Billion dollar fault funding and you know, multi billion dollar market valuation see pitch book for details. Okay, we have You know, I don't know how many customers really have an order of 1000 employees and I don't know how many countries and we're delivering these solutions today. Okay, okay. And so while the rest of the world is playing catch up, we're working closely with our customers and new customers to install high-value generative AI solutions that rapidly realize value to their organizations. Okay, we believe that our strategic decision to invest in generative AI could address our addressable market opportunity. Our suite of 28, now I think 29, generative AI products wins on reliability, flexibility, adaptability, accuracy, and security. Okay, all of the same qualities that are inherent in our enterprise AI platform. Our vision to expand our customer base is working. Okay. The idea, and this is very much idea about the work that we're doing on the AWS marketplace is to go from eight customers to 80 customers to 8,000 customers to 80,000 customers. Okay. So, so what we're dealing with now is kind of a new game with massive market leverage and we are the first to market. Okay. And we, so I think we have the, opportunity here through our innovation, through our applications that will proliferate across the business. C3 Generative AI has enabled us to land high caliber new customers and expand agreements with the current customers. The surge of interest led to our C3 Generative AI qualified pipeline increasing of new opportunities, increasing 55% sequentially quarter over quarter in the second quarter. representing the most rapid acceleration of all our product offerings. We expect this momentum to grow as we continue to innovate and build increasingly exciting products. Our November announcement of the self-service C3 generative AI on AWS Marketplace plays a big part in this story, potentially expanding our addressable customer pool and our user base exponentially. This new application allows users of all technical levels to enroll in the application and begin productively using generative AI in minutes. Okay, again, this product is available today on the AWS marketplace should you have interest. As I introduced last quarter, we made a well-considered decision to seize the immediate and candidly staggering market opportunity that we see in generative AI. As such, we are making and increasing a sizable and timely investment in application development, model engineering, lead generation, branding, and market awareness to seize market share in generative AI as rapidly as possible. This will put short-term downward pressure on free cash flow and profitability. Closing thoughts. The generative AI opportunity is staggering. We believe that it is in the best interest of our shareholders to further accelerate our investment in generative AI, deepening our investments in lead generation, branding, market awareness, and customer success. Given our substantial cash balance, we believe it is a strategic imperative to invest further in the generative AI opportunity at this time. Separately, now with the release of our platform version of our 8.3 product line, which is really quite remarkable in terms of the benefits that it brings to our customers and the increase in performance that it brings to our customers, we have decided to further invest in our customer base to accelerate their upgrade from version 7 to version 8.3, which we believe will further increase our customer satisfaction levels that are already quite high. That being said, we continue to expect positive cash flow in Q4, and while we're not giving fiscal year 25 guidance yet, we continue to expect positive cash flow for full year, fiscal year 25. C3 AI remains focused. We are one of the few AI software peer plays that has established relationships, a tried, tested, and proven technology platform, and the reputational equity to capitalize on this generative AI market opportunity. Now, I'll turn the call over to Juho Parkinen, our Chief Financial Officer, to talk more about our financial performance and provide guidance for the remainder of the fiscal year. Juho.