C3.ai, Inc.

Thank you for standing by and welcome to C3AI's second quarter fiscal year 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. To remove yourself from the queue, please press star 11 again. Please be advised, today's conference is being recorded. I would now like to hand the call over to Amit Berri. Please go ahead.

Good afternoon, and welcome to C3AI's earnings call for the second quarter of fiscal year 2025, which ended on October 31st, 2024. My name is Amit Berri, and I lead investor relations at C3AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer, and Hitesh Lath, 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 the 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 obligations 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 of 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 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, Mitch. Good afternoon, everyone, and thank you for joining our call today. We had another outstanding quarter with strong top and bottom line performance. This quarter marked our seventh consecutive quarter of accelerating revenue growth. Our year-over-year revenue growth has accelerated from 11% in Q1-24, to 17% in Q2-24, to 18% in Q3-24, 20% in Q4, 21% in Q1-25, in Q, the first quarter of 25, and now 29% in the second quarter of fiscal year 25. Total revenue for the quarter was $94.3 million, exceeding the high end of our revenue guide. Subscription revenue was $81.2 million and increased 22% from a year ago. Subscription and prioritized engineering services revenue combined was $90.8 million and accounted for 96% of total revenue, an increase of 27% compared to $71.3 million one year ago. I will also note that our non-Baker Hughes revenue grew by 41% year over year. Our non-GAAP gross profit was 66.3 million, representing approximately a 70% gross margin. Our non-GAAP operating loss was 17.2 million, and substantially better than our guidance for a loss of 26.7 million to 34.7 million. Our non-GAAP net loss per share was six cents. We ended the quarter with over $730 million in cash, cash equivalents and investments. I'll note that this is the 16th consecutive quarter as a public company in which we have met or exceeded our revenue guidance. While I would describe our performance as generally on track with the plan we provided, there is no question that our new Microsoft Alliance provided a tailwind. Our growth continues to gain traction with increasing revenue momentum quarter after quarter. A significant driver of this success is our expanding partner ecosystem, which plays a critical role in driving our leadership in the market. Our partner market ecosystem today includes Google, AWS, Microsoft, Peloton, Fractal, Paradigm, Booz Allen, RTX, ECS, Capgemini, and Baker Hughes. Our partnering activity with the hyperscalers in the quarter remained brisk, with 62% of our agreements being closed with or through Google Cloud, AWS, and Azure. Looking at our current installed base as measured by customer logos as of October 24, 51% of our contracts were on Google Cloud, 21% were on Azure, and 24% were on AWS, and 5% were on-prem. The most significant event of the quarter and perhaps the most significant event in the company's history was most certainly the substantial expansion of our strategic alliance with Microsoft Azure. On September 30th, 2024, Microsoft and C3 AI entered into a new and expanded strategic alliance for an initial five and a half year term ending March of 2030. I believe this will constitute an inflection point in the enterprise AI industry. Under the terms of the Microsoft C3 AI strategic alliance agreement, All C3 enterprise AI and C3 generative AI solutions are now available on the Azure price list. All C3 enterprise AI and generative AI solutions are now orderable on the Microsoft, on the Azure marketplace. All C3 AI solutions are sellable by the entire Azure sales organization globally. Azure sales personnel will receive commissions, quota credit, and special bonuses on Azure C3 AI sales. Azure salespeople will receive design win credits for each Azure C3 AI sale. Importantly, all C3 AI products are now orderable on Microsoft Paper, incorporating the Microsoft Enterprise licensing agreement that Microsoft has in place with, I believe, over 95% of the Fortune 500. This will dramatically shorten C3 AI sales cycles. And finally, Microsoft will subsidize C3 AI pilots and C3 AI production deployments on Azure over the term of this agreement. are a large number of joint sales and marketing activities that we have agreed to in the alliance agreement. The two firms will jointly build a pipeline of customer accounts based on a joint business plan with mutual sales leadership sponsors, joint customer acquisition targets, robust governance structure, and executive meeting cadence. global system integrator alliance, a deal registration process, sales and technical support resources, publicity and press releases, marketing initiatives, and joint solutions offerings. C3.AI and Microsoft will create joint webinars and sales collateral to train the Microsoft and C3.AI sales forces on our joint offering solutions and value propositions. Microsoft will list all C3 AI software solutions on the Microsoft commercial cloud portal, transactable on Microsoft Taylor. A joint marketing fund will be established for cooperative marketing and promotion of the integrated solutions and such other activities as C3 being a platinum sponsor at Microsoft conferences and participation in Microsoft Azure industry days and AI innovation summits. C3AI and Microsoft will schedule and attend industry solution roadmap review meetings on a quarterly basis. The executive sponsors of the alliance are, for C3AI, Tom Siebel, the CEO and Chairman, and for Microsoft, Judson Althoff, the Chief Customer Officer of Microsoft. Importantly, For all of the Microsoft funded projects, C3.AI will position the Microsoft Azure cloud as its preferred cloud provider and Microsoft will designate C3.AI as its preferred enterprise AI application provider. C3.AI has been pioneering enterprise AI now for 15 years. We invented enterprise AI. We've built over 100 enterprise AI applications the deliverable measurable value to our customers around the world. And now Microsoft is fully on board and leaning in. It is difficult to overestimate the impact of this agreement upon C3 AI and upon the enterprise AI market writ large. As a direct result, direct and immediate result of this alliance, the effective number of C3 AI sellers will grow from order of hundreds of sales professionals at C3, order of 100 sales professionals at C3 AI as of October 1st, 2024, to potentially order of 10,000 sales professionals operating in every geography in every vertical market. Microsoft is the largest software company in the world. We believe that over 95% of the Fortune 500 companies use Microsoft products. They're an established brand with the largest sales channel in the cloud. Partnering with Microsoft allows C3 AI to leverage its unparalleled reach, robust cloud capabilities, and trusted reputation in the market. Together, Microsoft and C3 AI share a bold vision to redefine how businesses transform. This partnership will accelerate the adoption of Enterprise AI AI on Azure and enable us to tackle some of the most complex business challenges of the 21st century for organizations across every industry. We are going to market with industry centric turnkey AI solutions that address the value chains of federal defense and intelligence, manufacturing, pharmaceutical, chemicals, oil and gas, utilities, and others by combining C3 AI's proven enterprise AI applications. With Microsoft's superior cloud infrastructure and global reach, we are exceptionally well-equipped to help organizations achieve higher levels of efficiency, innovation, sustainability, and rapid economic return. The momentum that we've generated this quarter is undeniable and we are energized by what lies ahead. Now let's look back at the quarter and shift to customer success. In the second quarter, C3AI closed 58 agreements, including 36 pilots. We entered new and expanded agreements with ExxonMobil, Coke, Dow, Wholesome, Shell, Duke Energy, Boston Scientific, Rolls-Royce, Cameco, Mars, ESAB, Flex, and Worley, among others. Additionally, we continued to expand our footprint across state and local government, closing nine agreements in California, Texas, Michigan, Idaho, New Mexico, Washington, and Florida. In our federal business, we had strong execution across the board and secured key wins and expansions with multiple agencies. We entered into new and expanded agreements with the U.S. Department of Defense, the U.S. Air Force, the U.S. Navy, the U.S. Army, the U.S. Marine Corps, the Defense Logistics Agency, and the Chief Digital Artificial Intelligence Office, among others. The U.S. Army's program manager for intelligence and system analytics selected C3AI and ECS Federal to transform its intelligence collection with C3 AI decision advantage. Delivered under a $23 million award, this AI application unifies data from multiple systems to streamline tasking and collection, including digitizing scheduling workflows. These modernization efforts make it easier for the RME workforce to quickly provide real-time predictive intelligence to leaders for enhanced accelerated decision-making. The United States Air Force Rapid Sustainment Office continued the expansion of its sensor-based algorithms with C3 AI with a new contract. The PANDA application, which is the designated U.S. Air Force system of record for all CBM-plus and predicted maintenance, will expand to include new systems and two monitored aircraft the KC-46, and the KC-135. The Defense Logistics Agency, a cornerstone of the U.S. Department of Defense's supply chain, expanded its use of C3AI-contested logistics applications to drive efficiency and productivity across its workforce, ensuring supply network resilience and availability in contested environments. DLA uses C3AI contested logistics to streamline workflows and decision-making for risk management, sustainment, scenario-based planning, proactive readiness, and predictive maintenance across the Department of Defense. Together, C3AI continues to support DLA to enhance warfighter readiness, drive operational efficiency, and improve mission effectiveness across the globe. C3AI is most certainly a trusted partner for these agencies, providing innovative and secure solutions, empowering modernization and agility. I suspect there will be a question about Baker Hughes, so let me address that up front. Now, five and a half years into the Baker Hughes Agreement, there is no question that this has been and continues to be in the best interest of our shareholders. That being said, The relative importance of Baker Hughes in our overall business mix is diminishing. In fiscal year 23, Baker Hughes accounted for 35% of our revenue. In fiscal year 24, Baker Hughes accounted for 27% of our revenue. In last quarter, Baker Hughes accounted for 18% of our revenue. Revenue ex-Baker Hughes increased by 41% year over year in Q2 fiscal year 25. Our oil services exclusive marketing agreement with Baker Hughes is scheduled to expire in June of 2025 unless we renew or extend it, as we have done three times previously. Now, you know, as I sit here today, I think it's much more likely than not that this agreement will be extended and will be renewed. But as we consider our renewal options going forward, particularly in light of the new Microsoft agreement and the many direct customer relationships that we have successfully established in the oil and gas market, we need to consider carefully whether it is in the best interest of our shareholders to partner exclusively with Baker Hughes in the oil and gas market, or whether we are better off partnering all of the oil and gas service providers any of these outcomes will not impact our guidance and at this point it is not particularly significant to our outlook as we have successfully diversified a revenue mix let's put this into perspective our relationship with Baker Hughes is great they're a great company their order of I think a 24 billion dollar business okay now you know, what is the big story today? The big story is Microsoft. Microsoft, if I'm not mistaken, is the order of a $250 billion business. And so this by far overshadows anything that we've done. And we value our relationship with Baker Hughes. As I sit here today, I think it'll be extended. But whether it's extended or not, it has no impact on our outlook or guidance. Talk a minute about generative AI. This is Clearly this generative AI issue represents a pivotal moment in enterprise technology and the significance of generative AI just cannot be overstated. C3 AI is at the forefront of this revolution with a highly differentiated product offering, providing customers with safe, secure, fast, reliable information from across the enterprise. While many other companies are still making a lot of noise and experimenting with prototypes, C3.AI has already deployed generative AI in production in hardened, real-world, highly secure enterprise environments. In Q2, we closed 15 new generative AI agreements with organizations including Boston Scientific, Koch, Rolls-Royce, the US Navy, the National Science Foundation, and several government agencies in Texas, Washington, and New Mexico. Additionally, we converted pilots into production agreements at Dow, Cargill, Norfolk Iron and Metal, and Florida Crystals, demonstrating our ability to deliver results at scale in manners that are safe, secure, hallucination-free, and kind of avoid all the hobgoblins that you read about associated with generative AIs. Enterprise selects C3 Generative AI for its proven ability to drive measurable business outcomes in a way that is safe, secure, traceable, and doesn't cause data exfiltration problems. To jumpstart these outcomes and better serve our customers, this quarter we introduced the C3 Generative AI accelerator program. We kicked off this program by hosting Multiple Fortune 500 companies at our headquarters in Redwood City for an immersive hands-on three-day workshop. Participants work with experts to tailor generative AI solutions that meet their business needs and leave with production-ready AI applications. The feedback has been extremely positive and we will be doing many, many more of these around the globe in the months and quarters ahead. It's still early days for generative AI adoption, but the trajectory is clear. According to Gardner, by 2028, 33% of enterprise AI software applications will include agentic AI, up from less than 1% today. This will be a massive shift, and C3 AI is uniquely positioned to lead the way. It's a major highlight of the quarter, and it is difficult to overestimate the importance of this, is the award to C3AI of US patent number 12111859 covering agentic AI, which strengthens our market position dramatically. This patent protects a sophisticated system and method for orchestrating multiple AI agents using multimodal foundation models. This patent technology is integrated into the C3 generative AI architecture, enabling independent AI agents to retrieve information across structured and unstructured data, reason, take actions, and actionable insights. I mean, come on. You're listening to all the results. There is no enterprise software company that is not yapping. about agentic AI and the importance of these AI agents to their future. Newsflash, all that is covered by a C3 AI patent dated January of 2023. That is our intellectual property people, and that is an important milestone in the history of enterprise AI.