C3.ai, Inc. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the C3.ai Third Quarter Fiscal Year 2025. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amit Berry. Please go ahead.

Good afternoon, and welcome to C3.ai's earnings call for the third quarter of fiscal year 2025, which ended on January 31, 2025. My name is Amit Berry, and I lead Investor Relations at C3.ai. 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 third quarter results as well as our supplemental 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, 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, as we 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 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, and thank you, everyone, for joining us this afternoon to talk about our business results for the third quarter. Let me provide some introductory comments. Clearly, the market for enterprise AI is huge and rapidly growing. This interest has been accelerated by Generative AI and Agentic AI, which is becoming a significant and rapidly growing business for us. Now as a matter of background, some of you will recall that we began work with Generative AI in 2020 associated with classified work that we're doing for the United States Missile Defense Agency, which I believe continues today. When Generative AI became widely recognized in November of 2022, we were well prepared to take advantage of this technology. Many organizations, government agencies, and corporations are wrestling with problematic issues associated with language models and Agentic AI—issues like hallucination, unimodal or bimodal data sources, data exfiltration, and well-documented problems that open up new cyber-attack vectors and liability exposures. By combining the work that we did, which includes billions of dollars of software engineering associated with the C3 Agentic AI platform, we've effectively addressed these issues. As a result, C3 Generative AI is installed today in some of the most secure installations on the planet, including U.S. Intelligence agencies, the Department of Defense Missile Defense Agency, Koch Industries, Nucor, and many others where we've solved these problems. This allows us to tackle various issues—whether it's dealing with hypersonics and space, coordinating swarms, assisting people in operating large plants, or delivering government services. Today, we are doing something historic that I believe has never been done before. We have integrated C3 Generative AI to handle much of the substance of this call and brief you on the quarter, after which Hitesh will provide details on our financial results. Please meet C3 Agentic AI. Here is the analysis summarizing the major themes across Q2 and Q3. In Q2, C3.ai demonstrated strong financial performance and strategic growth, setting the stage for further advancements in Q3. Our revenue growth accelerated to 29% year-over-year in Q2, reaching $94.3 million, with subscription revenue increasing by 22% to $81.2 million, supported by a robust partner ecosystem including Microsoft, AWS, Google, and others that are critical to driving our market leadership. A significant development in Q2 was the expansion of our strategic alliance with Microsoft Azure, which we believe will be a turning point in the enterprise AI industry. This partnership not only expanded our sales reach but also shortened our sales cycles. Building on the momentum from Q2, Q3 total revenue reached $98.8 million, a 26% increase year-over-year. Subscription revenue grew by 22% to $85.7 million, and our non-GAAP gross profit was $68.2 million, representing a 69% gross margin. Our non-GAAP operating loss improved to $23.1 million, better than our guidance of $38.6 million to $46.6 million. These results underscore our continued financial strength and operational efficiency. A key theme across both quarters has been the expansion and deepening of our strategic alliances, particularly with Microsoft, AWS, and McKinsey QuantumBlack. In Q3, our partnership with Microsoft yielded significant results, with 28 agreements closed across nine different industries, marking a 460% increase quarter-over-quarter. Our sales cycles with Microsoft shortened by nearly 20% thanks to effective co-sell motion. We've integrated with Microsoft's global sales infrastructure, running numerous partnership onboarding and joint training sessions. These efforts have resulted in a 244% year-over-year surge in our joint qualified sales pipeline with Microsoft as we pursue 621 target accounts recognized as eligible customer opportunities. This disciplined, data-driven approach is already showing measurable outcomes, and we are excited about the enthusiasm we see in the field. Our expanded strategic alliance with AWS in Q3 deserves particular mention. Under the new agreement, C3.ai and AWS will focus on offering advanced enterprise AI solutions together, enhancing our global reach and execution speed. Our alliance with McKinsey QuantumBlack further bridges the expertise in modern business transformation with our leadership in enterprise AI. In Q3, 71% of our agreements were delivered in collaboration with our partners, highlighting the importance of our ecosystem in driving our business forward. Customer success remains a cornerstone of our strategy. In Q3, we secured new and expanded agreements with clients such as Flex, Worley, New York Power Authority, Sanofi, Nucor Corporation, Holcim, Shell, ExxonMobil, GSK, Quest Diagnostics, and Swift. In the federal sector, we closed agreements with the U.S. Department of Defense, the U.S. Air Force, the U.S. Navy, and the Missile Defense Agency. We also expanded our work with state and local governments, closing 21 agreements across various states. Our focus on Generative AI continues to drive innovation and customer traction, with 20 C3 Generative AI pilots closed with clients including Mars, Liberty Coca-Cola Beverages, the U.S. Department of Defense, and various government agencies. Our success demonstrates our ability to deliver safe, secure, and reliable AI solutions that drive tangible business outcomes. A significant highlight of Q3 was our continued leadership in Agentic AI, with further advancements in high-quality planning, orchestration, retrieval, and reasoning over omni-modal data. This enhances the autonomy, accuracy, and efficiency of AI models, strengthening our market position. Our latest work includes a foundational time series embedding model that unifies and simplifies the development, deployment, and maintenance of AI use cases. New models like DeepSeek represent an emerging trend benefitting C3.ai as the cost of inference decreases, pushing the focus to translating AI into applications that produce tangible outcomes. C3.ai is positioned to capitalize on this shift with over 130 AI applications that are enterprise-ready. Specific customer wins in Q3, such as GSK leveraging our AI solutions for demand prediction, illustrate our growth potential. Looking ahead, our strategic alliances position C3.ai for sustained growth. With all our solutions now orderable on the Microsoft, AWS, and Google Cloud portals, we significantly shorten our sales cycles. Our partner ecosystem, combined with our leadership in Agentic AI and Generative AI, sets the stage for continued acceleration. As we enter Q4, we'll focus on ensuring the company is structured to expand both direct sales and services and provide support to our expanded distribution ecosystem. Fiscal years 2026 and 2027 will be focused on continuous growth and market share expansion. The market has never been larger, and our product family has never been stronger. The company has never been better positioned to capitalize on all of this. In conclusion, we made remarkable progress last quarter, laying the groundwork to substantially increase our global distribution capacity for all our enterprise AI applications. We now have experienced sales and service professionals at Microsoft, AWS, McKinsey, and Google Cloud distributing our solutions globally. This inflection point for C3.ai is a growth accelerator. I am confident we have the right people, leadership, and execution plans to achieve our goals in the coming quarters and years. Thank you, C3 Agentic AI, and now let me turn this over to my colleague, Hitesh Lath, the Chief Financial Officer at C3.ai, for additional commentary on our business results.

Thank you, Tom. I will now provide a recap of our financial results and additional color on our business. All figures are non-GAAP unless otherwise noted. Total revenue for the quarter increased 26% year-over-year to $98.8 million. Subscription revenue increased 22% year-over-year to $85.7 million, representing 87% of total revenue. Revenue from the sale of demonstration software licenses was $28.6 million. We sell these licenses to our distribution partners to enable them to demonstrate our software effectively. I will note that our non-Baker Hughes revenue grew by 43% year-over-year in this quarter. Professional services revenue reached $13.1 million, 13% of total revenue during the third quarter. Our prioritized Engineering Services (PES) revenue was $5.7 million. As stated in prior quarters, we expect professional services revenue, including PES, to generally stay within 10% to 20% of total revenue for fiscal '25. Our subscription and PES revenue combined was $91.4 million, accounting for 93% of total revenue, an 18% increase from $77.5 million one year ago. Gross profit for the quarter was $68.2 million with a 69% gross margin. Gross margin for professional services remained high at over 85%. Our operating loss for the quarter was $23.1 million, and our net loss was $15.8 million, significantly better than our guidance due to continued focus on expense management, including reduced marketing spend. Our non-GAAP net loss per share was $0.12. Our net cash used in operating activities was $22 million. Free cash flow for the quarter was negative $22.4 million, compared to negative $45.1 million in the third quarter of last year. Free cash flow for the first nine months of the year also improved to negative $54.8 million from negative $109.2 million the previous year. We remain well capitalized, closing the quarter with $724.3 million in cash, cash equivalents, and marketable securities. At the end of the third quarter, our accounts receivable balance was $180.4 million, along with unbilled receivables of $89.8 million. The total allowance for bad debt remains at less than $650,000 with no concerns regarding collections. The general health of our accounts receivable remains strong. In Q3, we signed 50 pilots, totaling 310 cumulatively, of which 245 are still active. We expect to see some moderation in our gross margins due to the higher mix of pilots in the near term, which carry greater costs. We also anticipate moderation in our operating margin due to additional investments we're making in sales, partner ecosystem, customer support, and R&D. While we expect to be free cash flow negative for fiscal '25, we are on track to be free cash flow positive for Q4. Now, I will move on to our guidance for the next quarter. Our revenue guidance for Q4 of fiscal year '25 is $103.6 million to $113.6 million. For the full fiscal '25, we anticipate revenue in the range of $383.9 million to $393.9 million. Our guidance for non-GAAP loss from operations for Q4 is $30 million to $40 million, and for the full year, we expect it to be $87 million to $97 million. This guidance assumes geopolitical stability. Should there be a government closure or indications of a global trade war, there could be adverse impacts on business results.

Thank you. Now, the first question coming from the line of Timothy Horan with Oppenheimer. Your line is now open.

Good morning. Thanks, guys. Great job on the relationships here with Microsoft, Amazon, and McKinsey. Can you give a little bit more color? What's going on with the total number of pitches that you're going on at this point and pipeline, and when do you think that will start converting to revenue? Thank you.

It is converting to revenue. I believe that with Microsoft, we're involved in over 600 engagements today where we are the preferred enterprise AI solution. This agreement was signed on September 30, and I believe was announced at Microsoft Ignite in Chicago on November 20. Not much happened between November 20 and the end of the year, as Microsoft was focused on their business. Now, since the first of the year, we’ve really been active with Microsoft. We currently have over 600 joint selling relationships with them across various regions and industries. This is just with Microsoft. We also have initiatives ongoing with AWS, and our partnership with McKinsey QuantumBlack is substantial. These relationships are co-selling arrangements, not just simple distribution agreements. It has occupied much of our attention in the last few months. The agreements are executed, and we are open for business. This is a genuine big deal for C3.ai.

So the 600 engagements have only been since you've announced the deal with Microsoft? And can you provide some color on how long it typically takes from initial engagement to signing a contract?

We've already closed, I believe, 28 agreements with Microsoft already this past quarter, which is quite quick.

Great. And then lastly, can you provide more detail on the remaining procurement obligations and current trends?

The total ARPU at the end of the quarter was around $208 million. As previously indicated, RPO is not the leading indicator of our business. You should expect some decline in our RPO in the near term.

Thank you. Our next question coming from the line of Patrick Walravens with Citizens JMP. Your line is now open.

My apologies. Congratulations on all the partnership momentum. Tom, would you be okay discussing the note that you published on February 18 about your health setbacks?

Yes, I experienced flu-like symptoms after Christmas that evolved into a serious condition identified as giant cell arteritis, impacting my optical nerve and vision. We have implemented accommodations for my situation to ensure operations continue smoothly. I am actively managing the business every day. Although my travel is currently limited due to medical advice, I have a special assistant to support me. I am fully engaged and managing the business regularly. My health is getting back on track.

That’s a very complete answer. Everyone on this call is wishing you a speedy recovery, Tom. Thank you for the details.

Thank you. Our next question coming from the line of Austin Dietz with UBS. Your line is now open.

Yeah, Tom, best of luck on the health front. I have a question regarding the professional services revenue which outperformed this quarter. Can you elaborate on what drove this outperformance?

Certainly. Our professional services revenue, which includes prioritized engineering services, consulting services, and paid installation services, saw an increase in revenue. We experienced a rise in consulting, implementation, and training services during the quarter.

Thank you for that insight. It was helpful regarding the demonstration licenses which have shown outperforming results this year. What has been driving this performance, and how should we consider it going forward?

The increase in demonstration licenses is directly related to our expansion of sales personnel at Azure and AWS. We are arming them with comprehensive sales kits to independently showcase our solutions to prospective customers. This strategy is crucial to our effectiveness. Given the significant interest from major organizations recently, we've recognized that providing these licenses to sales personnel is critical to their success. This development has directly led to an increase in this form of revenue.

Thank you.

And I would now like to turn the conference call back to Mr. Siebel for any closing remarks.

Ladies and gentlemen, thank you for your time and continued attention. It is difficult to describe how exciting things are here. We are involved in some of the largest, most complex, and fascinating enterprise AI deployments on earth. I assure you, this is the professional experience of a lifetime, and we are on the verge of building one of the world's great companies. Thank you for your attention today, and we look forward to updating you on our progress as we move forward. Thank you all.

This concludes today's conference call. Thank you all for participating, and you may now disconnect.