C3.ai Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2023

There are 9 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the C3AI Second Quarter Fiscal Year 'twenty four Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentations, there will be a question and answer session. Please be advised that today's call is being recorded.

Operator

I would now like to turn the conference over to your host, Mr. Amit Bary. Please begin.

Speaker 1

Good afternoon, and welcome to C3AI's earnings call for the Q2 of fiscal year 2024, which ended on October 31, 2023. My name is Amit Bary, and I lead Investor Relations at C3AI. With me on the call today is Tom Seebel, Chairman and Chief Executive Officer And Juho Barkkanen, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our Q2 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.ar. This call is being webcast and a replay will be available on our IR website following the conclusion of the call.

Speaker 1

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 statement or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from 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.

Speaker 1

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.

Speaker 2

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 account and continue to gain traction with C3 generative AI Enterprise AI Applications in the 2nd quarter. Total revenue for the 2nd quarter was $73,200,000 an increase of 17% compared to $62,400,000 1 year ago and accelerating from an 11% increase in the Q1.

Speaker 2

The total number of customer engagements was 404, an increase of 81% compared to 223 last quarter. North American revenue of $61,200,000 increased 28% year over year, while EMEA Revenue of $10,600,000 decreased 11% year over year and federal revenue increased 100% year over year. Subscription revenue for the quarter was $66,400,000 constituting 91% of total Increasing 12% from a year ago. GAAP gross profit for the quarter was $41,100,000 representing a 56 Our non GAAP gross profit for the quarter was $50,400,000 representing a 69% non GAAP gross margin. Our GAAP net loss per share was the loss was $0.59 and non GAAP Net loss per share was $0.13 We ended the quarter with $762,300,000 in cash, Cash equivalents and investments.

Speaker 2

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've signed new and expanded agreements with Nucor 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 reduced cost levels in the steel casting process. C3AI is now helping Nucor scale this across Several additional mills.

Speaker 2

In Q2, C3AI also kicked off 2 new additional use cases At Nucor, tackling process optimization and demand forecasting, and we also completed a C3 generativeai pilot targeting operational health and safety. GSK, formerly GalaxoSmithKline is now using C3AI supply chain suite to increase efficiency in its supply chain, using AI to optimize yield and improve demand forecasting processes. Con Edison, a C3 customer since 2017 continues to expand its use of the C3AI 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 Q2, Con Edison completed 2 pilots of C3 generative AI, which have now converted to production.

Speaker 2

We also continue to expand our footprint in state and local governments with particular interest in C3AI Law Enforcement from San Mateo County, California and C3AI Residential Property Appraisal from Stark County, Ohio In 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-eight, 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.

Speaker 2

S. Department of Health and Human Services. The agreement with C3AI was part of their first order under a $90,000,000 purchase blanket purchase agreement. And this part of ACF's work involves helping 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. C3Ag continues to leverage its extensive commercial Apply chain experience in the federal government is now applying this experience with the defense sector With the C3AI contested logistics application for Transcom and for DLA.

Speaker 2

During the quarter, C3AI converted 2 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 parts shortage and conduct impact assessments and put into place mitigation plans. The second project supports DLA's energy directorate leveraging C3AI's commercial expertise In the oil and gas sector, the C3AI contested logistics application modernize 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 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 application, C3 Generative AI, now available on the AWS Marketplace. I think we announced that last week.

Speaker 2

This new application allows customers, users of all technical levels to begin using generative AI with 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, okay, 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. C3AI and AWS' joint Qualified pipeline has more than doubled year over year with heightened interest in the C3 generative AI suite.

Speaker 2

In Q2, C3I 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.

Speaker 2

In Q2, we closed 62 agreements, including 36 pilots and trials. Our new pilot count is up 2 170% 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 are engaging customers across a diverse set of industries in this quarter. Our pilots came from manufacturing, federal, defense, Aerospace, Pharmaceuticals and Other Industries.

Speaker 2

Now we did see sales headwinds in the quarter. Okay. 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, okay, in the last 3 to 6 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.

Speaker 2

You might have heard it here first, Okay. But you will be hearing this from every AI vendor, okay, in the next few quarters. Take it to the bank. It has simply it has added a step to the process. It is And it is lengthening the normal sales cycle.

Speaker 2

So this had a Yes, this provided a sales headwind in the quarter, okay. And while the increased scrutiny lengthens the sales prices, we believe this is a healthy To ensure that companies are adopting safe and appropriate AI solutions. So we're all for it, okay? And did it move revenue a little bit, A click below the center of the range? Yes, it did.

Speaker 2

Okay, but get over it. The world is a better place. People are making 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.

Speaker 2

So it did that dynamic did provide an unexpected headwind to our Q2 sales revenue performance. In addition, Our sales execution in Europe was candidly unacceptable, okay? And since then, we've taken 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, okay? And really what this whole story has been about for the last 6 or 7 Orders has been from the transition from subscription based pricing to consumption based pricing.

Speaker 2

And before we switch to consumption based pricing, you'll recall the company was growing at a quite a rapid growth rate, like I think 7 quarters ago, Order of 38% year over year growth rate. So we were definitely in the top quarter, okay. And we announced the transition To consumption based pricing that we believe would be and has become the standard in the industry. Okay, 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, etcetera. Prior to this, We were doing large enterprise subscription deals of $1,000,000 $5,000,000 $20,000,000 $50,000,000 And it was a good business.

Speaker 2

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 the consumption 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 We have a short to medium negative effect upon revenue growth, a long term drag on RPO as the sales price was significantly reduced and the contracts often lack a time certain multi period commitment. We believed when we made the announcement The consumption based pricing model would increase the number of customers, okay, and increase the total amount of system consumption, returning 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 through completely through this transition to the new pricing model, the preliminary empirical results that we are seeing Evidenced by year over year growth rates appear to be proving out exactly as expected and exactly as we predicted.

Speaker 2

Since the transition revenue growth initially decreased, then it flattened, okay, and now it is increasing As the consumption based pricing model takes effect, average selling prices decreased, RPO has decreased, customer Engagement has increased substantially. Okay, if we look back over the last, say, 1, 2, 3, 4 quarters, 4 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.

Speaker 2

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.

Speaker 2

We announced 6, 7 quarters ago, our transition 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 from Bloomberg that predicts this is a 100 this is in excess of $1,300,000,000,000 market by 2,032.

Speaker 2

Goldman Sachs predicts that this could increase corporate profits by 30% in the next decade And the generative AI alone could raise the global GDP by 7%. 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 $5,000,000,000 say 14 year investment in the C3AI platform.

Speaker 2

With the recent developments in large language models And retrieval augmented generation, C3AI is unique in the market and that we are able 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 topdroplets, okay? Those are the facts The answers that come out of these large life watch models are sarcastic. They're random. They're not traceable.

Speaker 2

We have this hallucination problem, which is Extraordinarily problematic. Okay. We have research. None of our data access controls yet be it DoD or Bank of America are enforced. We have these problems with LLM caused data exfiltration, LLM caused cyber threats And IP liability, okay.

Speaker 2

In addition, all the solutions that are out there, almost all those solutions, I would say, with the exception of AWS, Bedrock Tend to be LLM specific. And I don't think anybody wants to be LLMs, hook their wagon on to 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 Make some announcement on Friday and be gone on Monday, see OpenAI for details. So, this LMM 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 $2,000,000,000 software engineering for us to be ready for this.

Speaker 2

This is why we could solve it. So while the rest of the world is playing catch up, okay, we're how about multimodal? I mean, we completely nail multimodal. We've been doing it for 40 years, multimodal, what does this mean? Rather than all these LLM solutions basically handle text.

Speaker 2

We handle text, we handle 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 startups with 3 guys, 4 girls and 2 cats in Apartment San Francisco being getting a yes, being getting $1,000,000,000 Funding and multi $1,000,000,000 market valuation. See PitchBook for details. Okay.

Speaker 2

We have I don't know how many customers. We have a throw order of 1,000 employees in I don't know how many countries, and we're delivering these solutions today. 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 organization. Okay.

Speaker 2

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 product Wins on reliability, flexibility, adaptability, accuracy and security, okay, all of the same qualities that are inherent And 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 8 customers to 80 customers to 8,000 customers It's 80,000 customers, okay.

Speaker 2

So what we're dealing with now is kind of a new game With massive market leverage and we are the 1st to market, okay. And we so I think we have the opportunity here through our innovation, There are applications that will proliferate across the business. C3 Generative AI has enabled us to land Hi, Caliber, new customers and expand agreements with the current customers, okay? The surge of interest led to our C3 generative AI qualified pipeline increasing new opportunities increasing 55% Sequentially quarter over quarter in the Q2, 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.

Speaker 2

Our November announcement The self-service C3 generative AI on the 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 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.

Speaker 2

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.

Speaker 2

Separately, now with the release of our platform version of our 8.3 product line, which is really quite remarkable in terms of 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. We continue that being said, we continue to expect positive cash flow in Q4. And while we're not giving fiscal year 2025 guidance yet, we continue to expect positive cash flow for full year fiscal year 2025. C3AI remains focused. We are one of the few AI software peer plays that has established relationships, A TriTest Improvement Technology platform adds reputational equity to capitalize on this Generative AI market opportunity.

Speaker 2

Now, I'll turn the call over to Juha Parkhanen, our Chief Financial Officer, Talk more about our financial performance and provide guidance for the remainder of the fiscal year. Yuval?

Speaker 3

Thank you, Tom. I will now provide a recap of our Q2 financial results and some additional color on our consumption based revenue model, which we introduced 5 quarters ago. Then I'll discuss factors that will drive our financials in the back half of the year. All figures are non GAAP unless otherwise noted. Total revenue for the Q2 increased 17.3% year over year to 73,200,000 Subscription revenue increased 11.7 percent year over year to $66,400,000 and represented 90.7 percent of total revenue.

Speaker 3

Professional services revenue was $6,800,000 and represented 9.3% of total revenue. Gross profit For the Q2 was $50,400,000 and gross margin was 68.8%. As a reminder, we continue to expect short term pressure on our gross margins due to a higher mix of pilots, which carry a greater cost of revenue during the pilot phase of the customer lifecycle. Operating loss for the quarter was negative $25,000,000 compared to our guidance range of negative $27,000,000 to negative $40,000,000 The improvement in operating loss versus guidance was driven by timing and amounts of the generative AI related investments we made to capture market share as well as our team's ongoing focus on disciplined expense management. At the end of Q2, our accounts receivable was 143,200,000 including unbilled receivables of 104,800,000.

Speaker 3

The general health of our accounts receivable remains strong. Now turning to RPO and bookings. Reflecting our transition to consumption based contracts, We reported 2nd quarter GAAP RPO of $303,600,000 which is down 27.3% from last year And current GAAP RPO of $170,200,000 which is up 3.5% from last year. We continue to see positive trends In the diversity of our pilot bookings with 10 industry segments represented in Q2 pilots as compared to 8 in Q1. Free cash flow for the quarter was negative $55,100,000 We continue to be very well capitalized And closed the quarter with $762,300,000 in cash, cash equivalents and marketable securities.

Speaker 3

Now, I'll provide an update on our consumption business model for the Q2. During the quarter, we started 36 pilots, A 50% increase from last quarter. We are pleased to report that the actual vCPU consumption data that we're seeing from pilot activity Has validated the assumptions we made when we transitioned to the consumption based pricing model 5 quarters ago. Our pilot conversion rates are trending upwards Close to our target of 70%. At quarter end, we had cumulatively signed 109 pilots, of which 103 are still active.

Speaker 3

This means they are still in their original 3 to 6 month term, extended for 1 to 2 months, converted to consumption or a license contract or are currently being negotiated for a production license. Finally, our customer engagement count for the quarter was 404, an 81% increase from 223 a year ago. Turning to guidance. As Tom mentioned, we expect Q3 revenues range from $74,000,000 to $78,000,000 and non GAAP loss from operations to range from negative $40,000,000 to negative $46,000,000 We remain committed to delivering positive cash flow in Q4 FY 2024 and for the full year of fiscal year 2025 And non GAAP profitability in the second half of fiscal twenty twenty five. For the full fiscal year twenty twenty four, we are maintaining our previous revenue guidance in the range 295,000,000 to 320,000,000 We are increasing our non GAAP loss from operations guidance to a range of negative $115,000,000 to negative $135,000,000 I would like to turn the call over to the operator to begin the Q and A session.

Speaker 4

Operator?

Operator

Our first question comes from the line of Timothy Haran of Oppenheimer, your line is open.

Speaker 4

Thanks a lot guys. Really appreciate the time. Can you give us A sense of what you're seeing with JAI in terms of productivity improvements? And what is the major bottleneck that I think customers need to overcome to really start implementing services. Thanks.

Speaker 2

I'm sorry, the question related to Gen AI?

Speaker 4

Yes, specifically on GenAI, what type of productivity improvements do you think customers can see on specific applications? And what is the major Bottleneck for them adopting GAI. Thanks.

Speaker 2

The major bottleneck as it relates to generative AI Relates to the problems that are inherent in this large length of models and they're very real. I mean, as you know, if you use chat PPT or Google, BARD, both of which are like excellent products. But the answers tend to be stochastic, okay. So every time you ask a question, you get it every answer. If it doesn't know the answer, it hallucinates.

Speaker 2

The data access controls are not enforced. So the CEO and the person on the factory floor get access to the same information. We're Carnegie Mellon and others are now identifying huge cyber security risks They are associated with these large language models, to corporations and government entities. We have IP liability problems that people are concerned about because these large language models are trained on and have access to All the data is at the Internet. This is weather, stock prices, what have you.

Speaker 2

And those somebody has the copyright to all Those data, be it the weather company or Bloomberg, and they want to get money. So the of the world are going to build big businesses litigating these issues in the next 10 years. We have So there's very real issues. The other issues, it relates to almost all the solutions that are being offered Our LLM specific and in, say, December of 2023, to hook your wagon on Any specific LLM is kind of crazy because next week, somebody's going to leapfrog it by a factor of 10. So you need to be able to Switch, do you need to be L.

Speaker 2

I. Agnostic? So I think those are really the Hobgoblins, cybersecurity, hallucination, Information security that are basically making it so many organizations will not allow any generative AI application to be installed. What's unique about the C3AI solution is that we can talk about this some other time or you can look it up on the Internet, but by combining with 14 years of work that we did with the C3i platform, we've addressed all those problems, cybersecurity, data security, hallucination, what have So I think that's the hop and hop. Now that's what slows things down and people need to be satisfied that those issues Resolved and if they're not resolved, not being installed at some at any reasonable organization like General Motors or JPMorgan Chase or you name it, okay.

Speaker 2

Now, as it relates to productivity increases, holy moly, they're going to be staggering, Whether you're a lawyer, whether you're a realtor, whether you're a physician or whether you're running a paper machine or whether you're operating the Sure. The infantry or the space command, I mean, if you do not have or not Being supercharged by generative AR, a year competition will be, okay. And if they are and you're not, They win, you lose, hide stock.

Speaker 4

So specifically for your customers, what do you think the bottleneck is for adoption? If you have it sounds like you have all these problems What do you think they require at this point to really start adopting?

Speaker 2

Well, Our sales cycles are pretty fast. Our sales cycles for generative AI has been as close as 24 hours. And basically, our offering is, Okay. We'll bring the application live, okay, in 1 or 2 months, if you like it for, I don't know, dollars250,000 or something. And if you like it, keep it.

Speaker 2

So this has to do with people evaluating bond portfolios, people running paper machines, people running steel mills, The intelligence community, missile defense agency, others. So we just many of them are existing C3 customers, although increasingly we will be serving 9 out of 10 will not be existing C3 customers. But we have to address the concerns that identified. We seem to be able to address those. After that, we just bring the application live.

Speaker 2

We had it live in 4 to 8 weeks and if they like it, keep it. And so it's a pretty short sales cycle for us and you're seeing a Very substantial increase in the pilots that we're deploying. We you can expect We're expecting a pilot to production conversion rate of it looks like about 70%. And so it does look like a big opportunity.

Speaker 5

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Mike Sicos of Needham. Your line is open.

Speaker 6

Hey, thanks for taking the questions here guys. I wanted to ask first about the subscription gross margins and this probably goes back to Ju Ho's prepared remarks, but it was good to see Gross margins actually increased sequentially despite the increased pilot count. And I know that you guys are calling out the short term pressure just based on the growing Mix of pilots. And so can you help us think about like what was it that actually went better for you guys? Because I think we were expecting a little bit more degradation in

Speaker 3

Thanks, Mike. This is Juha. So, yes, In the big picture, as we announced 5 quarters ago, as we're seeing, we are expecting the gross margin degradation For the subscription to continue, now in this particular quarter, we were very pleased to see some improvement on a sequential basis, but I think we would expect flattening to down again on the next quarter as the target count increases and It's going to put pressure before the consumption amount start picking up and offsetting that.

Speaker 6

Got it. Thank you. And if I just shift down to OpEx for a second as well. I guess a 2 quarter here. So first, I know that you guys are increasing the anticipated Operating losses here.

Speaker 6

Last quarter, we had cited increased investment in like branding and lead gen and awareness, Right. So can you help us think through where you guys are doubling down? And then the second piece there, there was obviously that article that came out in Bloomberg, I It was mid to late November citing headcount costs headcount cutting, I'm sorry. So can you just comment on The validity of the Bloomberg article just because I think people are trying to see if you did make those headcount cuts, how much are we doubling down on these investments or if that Or if that article proved to be false.

Speaker 2

Hi, Mac, it's Tom. Doubling down we're doubling down on data scientists. We're doubling down on Largely, I quote language model engineers, we're doubling down. A lot of it is going into engineering, but also candidly in Lead generation. I mean, there is an opportunity now as we move to these marketplaces to be dealing transactions in 100 to 1,000 to tens of 1,000 of units rather than scores.

Speaker 2

And that I can assure you is the plan that we have. As it relates to I'm not familiar with Bloomberg article that you talked about. It sounds like somebody mentioned something that we did some layoffs in the quarter. Mike, we do performance related layoffs every quarter, okay? And the so we I think last quarter, we had 42,000 job applicants.

Speaker 2

How many people did we hire you, Order of 100? Yes. Okay. Order of 100. And these people, yes, they went to MAT.

Speaker 2

Yes, they worked at Bank of America. Yes, they went to Chicago GSB and they command an F-eighteen squadron. And so we're constantly upgrading Our human capital and we move underperformers out regularly. So If somebody said that in a Bloomberg article, I don't know what they said. What I told you is the truth.

Speaker 6

Got it. Thank you. I'll turn it over to my colleagues, but thank you for the color there.

Operator

Thank you. One moment please. Our next question comes from the line of Kingsley Crane of Canaccord Genuity. Your line is open.

Speaker 7

Hi, thanks for taking the question. I wanted to touch on the pilot program. You mentioned that you'd move to a lower entry price point for pilots. Could you give us a sense of the magnitude of that change? And then has the minimum fee post pilot also changed?

Speaker 7

I'm curious what kind of upsell you're seeing upon conversion, if any?

Speaker 2

Hey, Kingsley, it's Tom. I think the standard pilot that we have with Genevieve and the enterprise is like 250 But that being said, you can get the AWS, Generative AI for AWS, which basically handles documents like every other LLM and actually handles texts. It's not really multimodal, but Yes, that's free for 14 days. So that would be pretty available. Is there a question that he asked that I didn't answer?

Speaker 3

No, the truck, I think.

Speaker 7

Okay. Yes. Thank you. That's helpful. And I just want to touch on OpEx as well.

Speaker 7

So I think it makes sense that you want to invest more in both LLM Engineers and Legion and looks like that's particularly hitting harder in Q4 of this year. But as we think about fiscal 2025, it seems like some of the nature of those investments would naturally continue as you scale in this Large opportunity. So, in the developed timing in this year or are you expecting those to continue next year?

Speaker 2

Kingsley, I don't expect them to continue next year. But if you look at the guidance that we gave you In terms about 6 quarters ago, what we see is the consumption over the 1st 12 quarters in terms of CPU seconds Per new customer, we just did an analysis of UHOA, I don't know, about 30 customers or 12 customers. And Those data that we predicted, I think 6 or 7 quarters ago and provided you, it's uncanny in how accurate it is. It's basically plus or minus 10%. And so if you look as these things kick in, in quarter 5, 6, 7 and 8, Consumption numbers get pretty big.

Speaker 2

So you can expect that we don't really need to cut back on the investments to Get to the point of cash positive and non GAAP profitable. So the top line kind of takes care of that.

Speaker 3

Perfect then. Thanks Tom.

Operator

Thank you. One moment please. Our next question comes from the line of Sanjit Singh of Morgan Stanley. Your line is open.

Speaker 5

Great. Thank you. This is Dion for Sanjeet. Tom, maybe starting with you, I mean, with a couple of quarters of the consumption law now under your belt, Clearly, you're seeing a lot of, sort of quantity of deals and pilots. Is there any way that you can frame or give us a sense of the Quality of those customers that went with the consumption model early on, I guess, is there any sort of Scale in terms of spending or growth profile that they're hitting now that you can kind of shed us some light and give us the quality piece Where you've given us, I think, a lot on kind of the quantity piece of those yields.

Speaker 5

And then for you all maybe, Could you just give us some color on the subscription revenue versus the services revenue this quarter? And then also maybe the part the impact instead of what that looks like on a go forward basis? Thank you.

Speaker 2

Hi, Sanjit. Okay. Regarding quality, I think there's only 2 ways to look at pilot quality. It's going to be what's the conversion rate, Okay. And what are they going to consume?

Speaker 2

Okay. Based upon our best guess at this time, okay, Based on looking at every pilot we have out there, going to look at what actually has converted and what we think we will convert, we think our guesstimate that we gave you 6 or 7 quarters ago, 70% is about right. So there's one indication of quality. The other indication of quality is How many CPU seconds are they consuming, okay, over as you go from quarter 0 to quarter 12? And it's tracking Right in line.

Speaker 2

I mean, it varies a little bit from 1 quarter to another, but it's basically right in line with what we told you. The quality is pretty high. Now that being said, As we move now to mass markets and start dealing with 100 of 1000 of people, just either kind of ordering this online and Playing with it, you can expect that conversion rate from that level of pilot to be, I would say, I mean, The quality there will be much lower, okay. And I think we need to measure quality by conversion rate and concession A lot of those people will try it for 5 minutes and drop off. And that's just the way that it is with free stuff.

Speaker 2

Now the rest of the question,

Speaker 3

Yes, right. So your second part about subscription versus services. So we were 9.3 percent professional services this period, which is a little bit lighter than our expected long term model of 10% to 20% on professional services. We continue to expect that we will be at that range on a go forward basis. And then I think you were asking about how we feel about the partners in a go forward basis.

Speaker 3

Partners are hugely important for us, and we continue to believe that they're the key part of our go to market approach going forward.

Speaker 5

Excellent.

Operator

Thanks. Thank you. It looks like we have time for one last question. Our last question will be from Pat Walraven Of JMP Securities, your line is open.

Speaker 8

Hey, everyone. Thanks for taking the question. This is Owen Hobbs on for Pat. I guess first one for Tom. What would you say are the top 1 or 2 federal use cases for generative AI that you're seeing with those new those 5 new federal

Speaker 2

Our largest federal use case, as you know, Yes. It's pretty convenient to the United States Air Force. Okay. This was chosen by the Chief of Staff And we now are doing that's the Panda system, which is the only AI system of record that we're aware of in all of DoD. So this is the system record for the Air Force for predictive maintenance for all assets.

Speaker 2

So far, we have loaded the data, I believe, from 22 weapon systems, F-fifteen, F-sixteen, F-eighteen, F-thirty five, KC-one hundred and thirty five, F-twenty two, etcetera, into Unified Federated Image. This is 100 Terabytes of data, okay. Some of it is maintenance data, sorting data, inventory data, flight data, flight history, Telemetry and 1 aircraft like a B-fifty, each B-1 bomber has 42,000 sensors on it, Amitting telemetry and I'm not sure what heard cycles, but pretty fast. So this is a stack of data, okay. I will be there on I will be in Monday.

Speaker 2

On Monday, That is by next Monday. I will be in Washington DC, okay, showing this to our customers with a generative AI front end. So think about this as a Mosaic browser front end, where a general officer can ask any question About 100 terabyte production system, this is one of the largest Production, enterprise AI applications in existence, okay. And that person will be able to ask on Monday, Okay. Be able to ask any question that you could ask of the weapons system.

Speaker 2

For example, where passed or operative at Travis Air Force Base now? What is my cost of operating the B-1 bomber program in the last year? Okay. What is the as it relates to F-thirty 5, what are where are my largest part shortages? And rather than going through some Cold War era menu based SAP or even Cboe Life, I don't want to take shots at SAP, Enterprise Information System User interface that looks like your Bloomberg terminal, okay, which is I have one on my desk, it's unusable.

Speaker 2

Okay. It'll just be a Mosaic browser. You can ask any question and get the answer Related to any one of these weapon systems in the United States Air Force against their production data and we will show it on Monday, on Tuesday, on Wednesday and I am telling you We expect some light bulbs to flash.

Speaker 4

Great. Thank you. And if

Speaker 8

I could sneak one last one in for Juho. Can you please explain the dynamics between the increase in accounts receivable from last quarter to this quarter despite revenues kind of staying flattish?

Speaker 3

Well, accounts receivable is timing of invoicing. So obviously, when we drop an invoice, it shows up in the accounts receivable. So it's

Speaker 8

Great. Thank you, guys.

Operator

Thank you.

Speaker 2

Ken, and thank you very much. And we look forward to talking with you next quarter. Stand by. It does appear to be Game on in the AI industry at global scale, and I can assure you, we are very much in the game. So Thank you all and we're signing off.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating and have a good night. You may now disconnect.

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Earnings Conference Call
C3.ai Q2 2024
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