C3.ai, Inc.

Good afternoon, and welcome to C3AI's earnings call for the first quarter of fiscal year 2026, which ended on July 31st, 2025. My name is Amit Berri, and I lead investor relations at C3AI. With me on the call today are Tom Siebel, Executive Chairman, Stephen Ehikian, Chief Executive Officer, and Hitesh Lath, 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 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 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 most recent annual report on Form 10-K filed with the SEC, as it may be supplemented by other filings and reports we make with SEC from time to time, including our quarterly report on Form 10-Q that will be filed for the fiscal quarter ended July 31st, 2025. All financial results will be discussed on a non-GAAP basis unless otherwise noted. A reconciliation of GAAP to non-GAAP financial measures to the extent reasonably available 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 and 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 Hitesh. Good afternoon, everyone, and thank you for joining our call today. I will share our financial results and provide additional color on our business. All figures are non-GAAP unless otherwise noted. Total revenue for the quarter was $70.3 million, a decrease of 19% year over year. Subscription revenue for the quarter was $60.3 million, representing 86% of total revenue. Revenue from sale of software licenses that are demonstration versions of C3 AI applications was $17.9 million during the quarter, which was sequentially lowered by $15.9 million. We sell these licenses at the request of our distribution partners to enable them to demonstrate our software effectively to their customers and at the request of our large strategic customers to enable them to accelerate C3 AI application adoption across their companies. Professional services revenue was $10 million, of which $8.7 million was revenue from prioritized engineering services, or PES. Professional services represent 14% of total revenue during the quarter. Our subscription and PES revenue combined was $69 million and accounted for 98% of total revenue. I'll now walk you through some of our strategic customer wins this quarter. Nucor has expanded its commitment with C3 AI in a multi-year partnership to build an enterprise-wide AI program across their facilities. We are supporting and optimizing day-to-day planning, inventory, and scheduling decisions, and now expanding to additional plants and use cases. Comerica, a global leader in chemicals, launched its first enterprise-scale AI program with C3.AI. After initial success improving yield in its salt business, Comerica is now scaling to 100 assets and multiple use cases, the start of a company-wide AI transformation. HII, America's largest military shipbuilder, is expanding its partnership with C3 AI to accelerate throughput at Ingalls and Newport News. Initial deployments cut complex shipbuilding timelines and we are now scaling these AI capabilities across HII shipyards to strengthen US Navy fleet readiness. The US Army Rapid Capabilities and Critical Technologies Office is deploying a contested logistics application built on the C3 agentic AI platform to support frontline vehicles in high-risk environments. This system applies agentic and generative AI to enhance sustainment, readiness, and decision speed in contested environments. I'll now move on to rest of the financial results. Non-GAAP gross profit for the quarter was $36.3 million, and non-GAAP gross margin was 52%. Non-GAAP gross margin for professional services remained high at over 80%. Non-GAAP operating loss for the quarter was $57.8 million. Non-GAAP net loss for the quarter was $49.8 million, and non-GAAP net loss per share was 37 cents. Our net cash used in operating activities was $33.5 million. Free cash flow for the quarter was negative $34.3 million. We continue to be well capitalized and close the quarter with $711.9 million in cash, cash equivalents, and marketable securities. During the first quarter, we signed 28 initial production deployments or IPDs. At the end of the quarter, we had cumulatively signed 374 IPDs of which 266 are still active. This means they are either in their original three to six month term or extended for some duration or converted to ongoing subscription or consumption contract or are currently being negotiated for conversion to ongoing subscription or consumption contract. Non-GAAP gross margin declined this quarter to 52%, primarily due to a higher mix of IPD-related cost, a lower mix of demonstration license revenue and PES revenue, and lower economies of scale. As compared to fiscal 25, we expect to continue to see moderated gross margins in the near term due to higher mix of IPDs, which carry a greater cost of revenue during the initial production deployment phase of the customer lifecycle due to our investments in expanding our support capacity and lower economies of scale. Now I'll move on to our guidance for the next quarter. Our revenue guidance for Q2 of fiscal year 2026 is $72 million to $80 million. Our guidance for non-GAAP loss from operations for Q2 of fiscal year 2026 is $49.5 million to $57.5 million. Given the appointment of our new chief executive officer and the recent restructuring of the sales and services organizations, we are withdrawing our previous guidance. We plan on providing guidance for the third quarter of fiscal 2026 and full year fiscal 2026 when we announce our financial results for the second quarter of fiscal 2026. With that, I'd like to turn the call over to Tom.

Thank you, Hitesh, and good afternoon, everyone. As Hitesh reported, the financial results of the first quarter were completely unacceptable and completely unacceptable in virtually every respect. I've given this a lot of thought as to what the root cause of this is. Is there a market? The market is huge. Is there some new competitor to change the competitive dynamics of the space? There is not. Is there some secular change in the market that we haven't seen before? There is not. The fact of the matter is that it boiled down to poor sales execution and poor resource coordination. It's clear That the new leadership that we brought into the organization globally in sales and service, in the service organization, in EMEA, in federal, in North America, kind of mid-quarter, caused confusion in the sales process. As I previously announced, I ran into some unanticipated health issues. And as a result of these health issues, I was unable to participate as actively as I used to in the sales processes and the coordination of resources necessary to make these sales processes successful and come to closure. In hindsight, it's clear that my active involvement in that sales process had a greater impact than any of us knew. The good news is that we have completely restructured our sales and service organizations globally. We have brought in new, highly experienced leadership across the board to drive growth and to drive customer satisfaction. Even better, Consistent with our announcement last July, we have completed the search and we have appointed a new chief executive officer in the person of Stephen Hickian, who is highly experienced and well-equipped to drive the details of this business, to coordinate resources, and to accelerate growth. In the sales and service organizations, we have combined these organizations under a new leader and the person of a chief commercial officer to bring a more seamless experience focused on delivering value for each and every one of our customers. In addition to a chief commercial officer, We brought in a new general manager of EMEA. We brought in a new group vice president for North American operations. And we brought significant leadership into the federal business operations. By combining the sales and service organizations into a cohesive whole, we are assuring a focus on delivering rapid economic benefits to each of one of our customer engagements to ensure their continued success. As we entered Q2, we have installed new leadership across the board. We have reorganized our sales and service organizations with a tightly integrated, detailed execution plan going forward where everybody knows where they fit, what their job responsibilities are, and we've assured that everybody has the resources to do their job. We have a product that is unmatched in technical sophistication and functionality. We have over 131 turnkey enterprise AI applications in the market. I believe we have the highest levels of customer satisfaction as measured by Net Promoter scores in the application software industry. We have a huge and rapidly growing addressable market opportunity. We have the leadership in place and we are positioned to grow. We are in position to gain market share and we are in a position to assure the success of each and every one of our customer engagements. An important development in Q1 was the introduction of our strategic integrator program. This is a software OEM program. whereby we are licensing the C3 Agentic AI platform to others, enabling them to design, develop, provision, and operate the industry and domain-specific applications for their markets. We're finding that the Strategic Integrator Program is being well-received by OEMs, systems integrators, service providers into the defense intelligence and civilian government communities, and we expect this to be a large and rapidly growing line of business for C3AI going forward. The use of the Gentric AI platform enables them to use all of the assets that they've developed in the last couple of decades, be these machine learning models. And so it's an entirely open architecture that allows them to use any of the capabilities that they have, any new capabilities that the market may bring going forward. So it's an entirely open model-driven architecture enabling complete flexibility going forward vendor lock-in. It's difficult to overestimate the scale of the generative AI, energetic AI opportunity that is before us. As of the end of the first quarter, we're involved in approximately 60 large-scale customer engagements in state and local government, in manufacturing, in federal government, in defense, intelligence, manufacturing, what have you. Many of you are familiar with the MIT report that shows that an order of 95% of these LLM projects run into a dead end and are unsuccessful. Our experience is that the majority of our LLM deployments are successful. across industries and across use cases. The reason for the success is the combination of these generative free-drain transformers with the C3 agentic AI platform solves all the hobgoblins that are associated with generative AI. These hobgoblins include data exfiltration, cybersecurity risk, hallucination, the inability to enforce data access controls, the inability to take advantage of omni-modal integration. All of these problems are solved by C3 generative AI, resulting in a very, very high success rate associated with our projects. Q1 2025 was our 19th quarter operating as a public company. This is the first quarter in which we have missed our revenue guidance. Know that we take that very seriously, and we will take that seriously going forward. Candidly, there is no excuse for the economic results that we delivered in the first quarter. That being said, going forward, our objective remains the same. We're here to establish and maintain a market leadership strategy positioned globally in enterprise AI applications, not in infrastructure, not in semiconductors, not in machine learning models, not in professional services implementations. We're here to establish a market leadership position in enterprise AI software, both with the C3 agentic AI platform and with the enterprise AI application footprint that we have in place and will be expanded. We have tried, tested, and proven products. We have incredibly sophisticated architecture in the agentic AI platform. We're establishing clear leadership in agentic AI, a concept for which you know that we hold the patents. We have tried, tested, and proven products. executive leadership in place. We have highly satisfied customers. We have a large and expansive addressable market opportunity for us that some estimate approaches $2 trillion a year. And we are geared up to grow our product footprint, grow our market share, increase our market penetration, and operate a rapidly growing cash-positive profitable business. Going forward, I will continue to remain actively engaged in the business, now in the role as executive chairman. In that role, I will particularly focus on strategic partner relationships, strategic customer relationships, and keep an eye on direction and product strategy going forward. I am most enthusiastic to announce the appointment of Stephen Ahikian as the new Chief Executive Officer of C3AI. Stephen brings a superlative educational background, a wealth of industry experience, having started and built and grown two successful AI companies that he sold to Salesforce. Stephen is also an experienced and accomplished public sector leader, having served as President Trump's appointee as the acting administrator of the General Services Administration, where Stephen was responsible for reforming the General Services Administration, reforming the acquisition activities of all the divisions of the federal government, and driving President Trump's AI strategy across the federal government. On behalf of the board of directors of C3AI, the executive leadership of C3AI, and the, I don't know, 1,100 or 1,200 employees of C3AI, whatever that number may be, I can tell you we're all enthusiastic about working closely with Stephen in his new leadership role to ensure that he is successful in bringing more creativity to the process, more energy to the process, more drive to the process as we accelerate growth, accelerate market penetration, and accelerate market leadership and enterprise AI. Ladies and gentlemen, thank you so much for your time. And now I'll turn this back to Kitesh to field your questions.

Thank you, Tom. Operator, could you please open the line for questions?

Thank you. If you would like to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1 1 again. One moment while we compile the Q&A roster. And our first question will come from the line of Raddy Sultan with UBS. Your line is open.

Awesome, thank you. First for Tom, You know, your involvement in the sales process has obviously been very critical here. I mean, is there any way to more concretely understand how involved you're planning on being in the sales process going forward and what you're doing to ensure a smooth handoff to Stephen and the new sales leadership?

I am here to do everything I can to ensure that Stephen is successful, okay? And so we have an entire new layer of senior leadership in the company who are tried, tested, and proven at selling enterprise AI globally. And I suspect with Stephen's leadership, they're going to be enormously successful. That being said, I will continue to be involved as necessary in monitoring that process and assisting that process. to ensure that this transition goes very smoothly and we dramatically ramp up the sales and service capacity globally.

Awesome. And then second for Hitesh, obviously a lot of moving parts in the quarter. What are you seeing that's giving you confidence in the Q2 guide? And then, you know, as you think about Q3 and Q4, like what is the right starting point to think about that sort of back half outlook, any sort of building blocks would be helpful as we calibrate numbers.

As shown already, our Q2 guidance is based on the sales activity we've seen in the month of August, as well as our review of sales pipeline for the rest of the quarter with the new sales leadership. As it relates to period beyond Q2, while we're not providing any guidance at this point, We note that most analysts who have updated their revenue forecast for the year are forecasting fiscal 26 revenue ranging from 290 million to 300 million. And at this point, I would not argue against any number within that range. As it relates to path to profitability, we acknowledge our performance in Q1 has put us behind, but we remain committed to achieving non-GAAP profitability and free cash flow. We are still bullish about the business, as Tom said, and we will get to profitability and free cash flow with the right scale, and that is a matter of time. Awesome. Thank you.

Thank you. One moment for our next question. And now we'll come from the line of Patrick Walravens with Citizens. Your line is open.

Hey guys, thank you so much for taking my question. This is Nick on for Pat. Uh, Tom, one quick one for you. You guys closed 40 partner led deals this quarter. How do you see the mix of partner led versus direct sales evolving?

Um, that's a great question. I think something like a mid correctly is 80% or 90% 90 this quarter and 90% of the business that we closed this quarter was with partners. particularly Azure and AWS and GCP and McKinsey Quantum Black. And you can expect that our investment in those partnerships going forward is going to be big time. I think there are, you know, certainly without quoting a number, there are certainly tens of thousands of salespeople at Azure alone. And we are amping up our go-to-market activities today. with Microsoft, with AWS, with GCP in a big way globally. And so we would hope we're going from, say, hundreds of engagements that we're involved in today where we're joint selling, and we would hope that we'll go to soon to thousands. So that is a major, major advantage that we have, this partner ecosystem, and we fully intend to exploit that advantage.

Great, thank you. And then as a follow-up, I heard Stephen was in the room. If I could ask him a quick one, that would be fantastic. You know, how did Stephen, great to meet you, looking forward to working with you, how did you choose C3 and why was it a compelling opportunity?

Yeah, well, first, the market opportunity here for enterprise AI is enormous. Every company, every government is exploring how to transition away from testing and experimenting with AI to actually rolling out across their core operations and workflows. What's exciting for me is C3 has a technology platform and applications that customers need today. Their technology is being deployed across some of the most viable customers in the world in some most challenging environments. So for me, on top of all that, the ability to learn from Tom Siebel, who invented this entire enterprise AI market, as well as with the extraordinary team here, was honestly an easy decision to say yes to. Awesome. Thank you very much. Looking forward to working with you. Likewise. Thank you.

And one moment for our next question. And that will come from the line of Matthew Colitri with Needham & Co. Your line is open.

Hi, guys. This is Matt Colitri. I'm from Mike Seacrest over at Needham. Thanks for taking our questions. Tom, how would you weight the underperformance this quarter between sales disruption and your impact on the sales process?

I think it was a combination of both, but I would put it, you know, probably 70% sales disruption and 30% my not being as involved in the details as I have previously been. And, you know, I think that, you know, so those are the facts. And, you know, the quarter was dreadful, okay, and now we need to pick ourselves up, test ourselves off, and get on with business, which is exactly what we're going to do.

Understood. And then looking at the execution steps, how would you categorize them as far as assigning pilots or converting them into contracts? What exactly were you seeing there?

It's all of the above, Matt. I mean, there are a lot of new people involved. There's new leadership involved. I think, you know, when you do that, you know, sometimes channels get crossed a little bit and things get confused. And, you know, we were, you know, We were driving the car down the road and replacing the transmission at the wheels at the same time, and the guy who used to drive the car wasn't there. So it was a bad quarter. It happens. I mean, come on, I was at Oracle in 1989 when Oracle had its first miss. I think that the stock went from 27 to 3, as I recall, and it was the end of the world. Since then, as you know, Oracle has missed 34 quarters, and it's still not the end of the world. And NVIDIA has missed 10. Amazon has missed 23. Salesforce has missed a few, certainly six months ago and 12 months ago. And today, nobody remembers any of that. Six months from now, nobody will remember this because we're going to be rocking.

Understood. Thanks so much.

Thank you. That is all the time we have for Q&A today. I would now like to turn the call back over to Mr. Seibel for any closing remarks.

Ladies, gentlemen, thank you for your time this afternoon. We really appreciate your attention. Keep your eye on the screen. There's going to be a lot of things happening at C3AI, and it's exciting. We're encouraged, and we are going for it, people. So stay tuned. And thank you, thank you, thank you.

ladies and gentlemen this concludes today's program thank you all for participating you may now disconnect