C3.ai Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 31, 2023

There are 8 speakers on the call.

Operator

Afternoon, and welcome to C3AI's Earnings Call for the Q4 fiscal year 2023, which ended on April 30, 2023. My name is Amit Bedi, and I lead Investor Relations at C3AI. With me on the call today is Tom Sibel, Chairman and Chief Executive Officer and Juho Parkinen, Chief Financial Officer. After market close today, we issued a press release with details regarding our Q4 results as well as a supplemental of our results, both of which can be accessed through the Investor Relations section of our website at ir. C3.ai.

Operator

This call is being webcast 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 be caused that could cause the actual results to differ materially from expectations. For a further discussion on the material risks and other important factors That could affect our actual results, please refer to our filings with the SEC.

Operator

All figures will be discussed on a non GAAP basis unless otherwise noted. Also during the course of today's call, we will refer to certain non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our press release. Finally, at times in our prepared remarks, in response to your questions, we may discuss metrics that are incremental to our usual business 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.

Operator

And with that, let me turn the call over to Tom.

Speaker 1

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We finished the Q4 strong and the coming year looks stronger. I believe that it is generally agreed that the overall market for enterprise AI now appears substantially larger and is growing at a much greater rate than most analysts and experts predicted. We have been working since 2009 to develop Product leadership and established thought leadership in enterprise AI, assisting private and popular sector enterprises to apply AI to improve operational processes.

Speaker 1

C3AI has been at the vanguard of enterprise AI of the enterprise AI market for over a decade. As the market has developed from its roots in IoT to supervised learning, unsupervised learning, NLP, deep learning, reinforcement learning and now generative AI. In the past 14 years, we have developed and enhanced the C3AI platform and now offer over 40 Enterprise AI applications developed with that platform that allow our customers to rapidly take advantage of AI to improve their business processes. We have been communicating for over a decade that we believe that the market for enterprise AI solutions would be quite large. And now as we enter the summer of 2023, it has become a dominant theme in technology discussions.

Speaker 1

Government or AI has become a dominant theme in technology discussions, government discussions, media reports, defense and intelligence imperatives and government and business imperatives. I do not believe that it's an overstatement to say that there is no technology leader, no business leader and no government leader who is not thinking about AI daily. AI chipmakers like NVIDIA are accelerating production to try to keep up with the very real demand that's out there. And all of this is being accelerated by the advent of generative AI. The interest in AI and in applying AI to business and government processes has never been greater.

Speaker 1

Business inquiries are increasing, the opportunity pipeline is growing, demand is increasing. And C3AI is well positioned To serve that increasing demand with our tried, tested and proven AI platform, our applications, our global footprint and our large global ecosystem. The world is in many ways now coming to us. The interest in applying AI to business processes is substantially greater than we have ever seen. In the Q4, we increased our customer base, expanded our work with existing clients and saw especially strong growth in our federal business.

Speaker 1

In the Q4, our total revenue was $72,400,000 Our free cash flow was $16,300,000 and we ended the quarter with over $812,000,000 in cash and cash equivalents. Importantly, we have a well defined plan to be sustainably cash positive and non GAAP profitable by the end of this fiscal year. For fiscal year 2024 I'm sorry, for the fiscal year 2023, okay, total revenue was 266,800,000 an increase of 5.6% over fiscal year 2022. Okay. Subscription revenue was $230,400,000 representing 11.4% increase over the prior year.

Operator

Let's talk a little bit about

Speaker 1

The AI applications market. Now as the enterprise AI market has developed, It appears that the bulk of the demand is increasingly for turnkey enterprise AI applications rather than for development tools. This thesis is supported by an evaluation of our bookings for the past fiscal year This indicates that 83% of our bookings were driven by application sales, 17% of our bookings were driven by the sales of the C3a platform. Importantly, we are seeing increasing diversity in the industries we serve. For fiscal year 2023, an analysis of our bookings includes oil and gas was 34%, federal defense and aerospace was 29%, high-tech Tech was 13%, energy and utilities 11%, manufacturing 4%, food processing 2%, Chemicals 2%, life sciences 1.5% and other industries made up the remaining 3%.

Speaker 1

An important leading indicator of our increasing industry diversity is evidenced by the trial and pilot agreements closed in Q4. Federal Defense and Aerospace made up almost 37%. Manufacturing comprised approximately 16% and high-tech made up more than 10%. Oil and Gas also made up more than 10%. When we look at ag, state local, chemicals, Energy and Financial Services each made up approximately 5% of our bookings.

Speaker 1

As a result of the increased demand for enterprise AI, helped by our transition to consumption based pricing, we are seeing substantial increase in opportunities and shorter sales cycles. In Q4, we closed 43 agreements, including 19 pilots that were initiated in the quarter. The number of qualified enterprise opportunities targeted for closure within 12 months in our sales pipeline has increased by more than 100% in the past year. During fiscal year 2023, we closed 126 agreements, up from 83 in the prior year. The average sales cycle for new expansion deals was 3.7 months, down from 5 months in Q4 of the previous year.

Speaker 1

An examination of the composition of our pilot account profile suggests There is significant opportunity for growth as these accounts convert to consumption pricing. Of the 19 pilot accounts Signed in Q4, okay, 7 word accounts greater than $100,000,000,000 in revenue, 7 word accounts between $10,000,000,000 $100,000,000,000 in revenue, 4 were accounts between $1,000,000,000 $10,000,000,000 and one was an account less than $100,000,000 in annual revenue. In fiscal year 2023, we expanded our application footprint with a number of our customers, including Shell, Cope Industries, The Defense Counterintelligence and Security Agency, Baker Hughes, the New York Power Authority, Duke Energy, ATB in Canada, Defense Innovation Unit, Roche, Cargill and Engie. We also established many new relationships during the year, including the Department of Defense Common DoD AI Office, Daly City, California, Dow, ExxonMobil, Flex, Hexagon, Nucor, Owens Illinois, Panteleon, Riverside County, California, Stark County, Ohio, TELUS, Department of Defense SOCOM, Department of Defense TRANSCOM and ESAL. Many of these also expanded their AI engagements with us in the course of the year.

Speaker 1

Let's address the C3AI partner network. The C3AI partner ecosystem is increasingly effective at opening new doors. With our partners, we're able to provide prospects the assurance of success with and the highest quality service. In fiscal year 2023, we closed 71 agreements with and through our partner network, including Google Cloud, AWS, Microsoft, Baker Hughes and Booz Allen. CTAI increased its qualified pipeline with AWS by over 24% in the Q4 with particular focus on state and local government.

Speaker 1

With Google Cloud, Our joint qualified 12 month opportunity pipeline grew from 25 opportunities at the end of fiscal year 2022 to 140 opportunities at the end of fiscal year 2023, a 4 60% increase. And importantly, we closed 10 new Oil and gas accounts in the year with our strategic partner Baker Hughes with accounts including ExxonMobil, AdNOC, ENI and others. In Q4, we released the C3 generative AI solution to the market. Our generative AI solution leverages the capabilities of the C3AI platform and is distinguished from other GPT, LLM solutions in the market in several ways. Number 1, it allows enterprises to access All their enterprise and open source data ERP, CRMs, data, text, PDFs, Excel, PowerPoint, sensor data, you name it.

Speaker 1

Secondly, importantly, it provides traceable, deterministic, consistent answers. Thirdly, It enforces the corporate information access controls and security protocols that are currently in place. Fourthly, it has no risk of IP or data exfiltration caused by the large language model. And importantly, it is hallucination free. So if the system doesn't know an answer, which is clearly unacceptable for any commercial or serious government application.

Speaker 1

After releasing the product in March, we rapidly closed 3 generative AI applications in the quarter with large enterprises, including Georgia Pacific, Flint Hills Resources and the U. S. Department of Defense Missile Defense Agency. We expect these applications to be live during this current quarter. We are currently working a Quite substantial pipeline of additional C3 generative AI opportunities with large corporations.

Speaker 1

The C3 AI generative application is now available, today available on both the AWS Marketplace and the Google Cloud Marketplace. It is difficult to estimate Size of the addressable market for these generative AI solutions, but it appears to be extraordinarily large. We saw a lot of momentum last year and in the Q4 with the our U. S. Federal business.

Speaker 1

The U. S. Federal sector represented 29% of our bookings in fiscal year 2023, and it continues to show Significant strength. Our predictive maintenance solution, predictive our predictive analytics and decision assistant, also known as Panda, has been in production use for several years at the United States Air Force Rapid Sustainment Office. And last quarter, it was selected as the system of record for all Predictive maintenance for virtually all United States Air Force assets.

Speaker 1

Okay. This important designation expands our opportunity really substantially in the U. S. Air Force and other services. Let's talk about guidance.

Speaker 1

C3AI has a consistent and solid track record of meeting or exceeding guidance as we have done in every quarter since we've been public. Okay. And we are at this time, we are not inclined to pot on the table regarding Guardant. In general, we feel comfortable with the expectations that the sell side analysts have set for the coming year and we are not inclined to change those expectations at this time. For fiscal for Q1 fiscal year 2024, we see revenue in the range of $70,000,000 to $72,500,000 For the full year Fiscal year 2024, we expect revenue to be in the range between $295,000,000 $320,000,000 As it relates to non GAAP loss from operations, we expect to fall between $25,000,000 to $30,000,000 in Q1 and $50,000,000 to $70,000,000 for the year.

Speaker 1

As we begin fiscal year 2024, C3AI has never been better positioned. The addressable market is large and expanding. The overall business environment for enterprise AI is strong And c3 dotai is front and center in the minds of CEOs and government leaders. Our balance sheet is strong And with over $812,000,000 in cash and cash equivalents,

Operator

we are

Speaker 1

in a great position to expand market share. As the dynamics of the enterprise AI market are developing so rapidly, we thought it appropriate to host a mid quarter Investor Day in New York City on June 22. We will provide at that time, we will provide C3 AI investors a company update, Additional information about our product roadmap, product demonstrations, direct access to the C3AI executive team, Updates on our partner ecosystem, C3 AI C3 generative AI demonstrations and additional company developing news. Okay. We hope you can attend either in person or online.

Speaker 1

And that Investor Day event would be available to view online live, okay, for all investors via webcast. I will now turn this call over to my colleague, Juha Parkhanen, Chief Financial Officer, for additional details regarding our financial results. Ju Ho?

Speaker 2

Thank you, Tom. I will now provide a recap of our financial results, Add some color to the drivers of our financials, provide more detail on our Q1 and full year fiscal 2024 guidance, And I will conclude with some additional color related to the consumption based revenue model we introduced 3 quarters ago. All figures will be discussed on a non GAAP basis unless otherwise noted. Overall, the business activity is higher than we have ever seen. Our sales reps are more engaged.

Speaker 2

There are more opportunities they're working on And there are more interest from our prospects. During Q4, our ability to close agreements was more consistent throughout the quarter compared to prior quarters this fiscal year. We ended the 4th quarter with a total revenue of $72,400,000 of which subscription revenue was 78.5%. As we discussed last quarter, we expected professional services would be within our historical range of 10% to 20%, with our actual professional services coming in at 21.5 percent of the mix. Gross profit for the Q4 was $53,900,000 And our gross margin was 74.4 percent.

Speaker 2

We generated $27,100,000 in positive operating cash flow And $16,300,000 in free cash flow for the quarter. As mentioned during the prior updates, we have a short term pressure on our gross margins due to a higher mix of pilots, which carry a higher cost of revenue than production deployment. Operating loss of 23,500,000 was improved due to more rigorous expense management. As a reminder though, the Q4 is when we host our C3 AI Transform customer event. As such, our marketing expenses ramped up to support the successful execution of that event.

Speaker 2

Operating loss margin was 32.5% in Q4, where the sequential increase was driven by our annual customer conference. For the full year fiscal 2023, Our revenue was $266,800,000 an increase of 5.6% from fiscal 2022. Non GAAP loss From operations was $68,100,000 and free cash flow was negative $187,000,000 Our gross margin for the year was 77%. Our subscription revenue was 86% of total revenue compared to 82% in fiscal 2022. We ended fiscal 2023 with $812,400,000 in cash and investments.

Speaker 2

At the end of Q4, our accounts receivable, including unbilled receivables, was 134,600,000 Unbilled receivables at quarter end was $77,600,000 inclusive of $70,700,000 created to Baker Hughes. During the quarter, we collected from Baker Hughes near the $35,000,000 The general health of our accounts receivable is excellent. 76% of our receivables were current or less than 30 days past due. For the entirety of FY 2023, Our bad debt expense was approximately $300,000 Now turning to RPO and bookings. As consumption based go to market model continues to pick up, RPO is less important indicator of future performance.

Speaker 2

We reported GAAP RPO of $381,400,000 down 20% from last year, which is expected as a result of the transition to consumption based pricing. Trade GAAP RPO of $186,300,000 is up 9.8% from last year end and up 5.7% on a sequential basis. We continue to see positive trends in pilot bookings diversity as we have sold pilots to a broad range of 9 different industries during the quarter. Regarding our outlook for fiscal 2024, regarding Q1 revenue to range between $70,000,000 to $72,500,000 For the full year 2024, we expect revenue to range between $295,000,000 $320,000,000 As it relates to the full year, We finished the Q3 of our transition under the consumption pricing model. As a returning model, we expect flatness And somewhat of a decline in revenue during the transition with an acceleration as consumption starts to have meaningful portion of our in quarter revenue.

Speaker 2

As such, we expect the second half of FY twenty twenty four to have higher growth rates on a sequential basis than the first half. We expect our non GAAP loss from operations to range between $25,000,000 $30,000,000 for Q1. And for full fiscal 2024, We expect non GAAP loss from operations between $50,000,000 $75,000,000 As a reminder, We expect to be non GAAP profitable for Q4 2024 and beyond. And as it relates to full fiscal 2024, we are guiding through a range in operating loss due to the potential investments we made for C3 generative AI applications. We expect our cash and investments to be at its lowest at around $700,000,000 during fiscal 2024.

Speaker 2

Turning to customer metrics. Historically, we have provided a quarterly customer count estimate as a proxy for the adoption of our products and solutions. However, due to the complexity of our contractual and pricing structures and the involvement of resellers, we believe comparing customer counts from quarter to quarter Based on our current methodology, we've apologies, customer comes from quarter to quarter based on our current methodology does not fully convey the acceptance and adoption of our products and solutions. To help address this, we retained an external big four consulting firm to update our current We believe a metric that demonstrates contracted use cases that our customers are using our solutions to solve would provide a more meaningful understanding of the product adoption. This is defined as customer engagement.

Speaker 2

The customer engagement increased from 247 to 287 comparing Q3 2023 to Q4 2023. Our traditional customer count metric went from 236 to 244 for the same periods. There will be additional detail included in the supplement, which is available on our website. We are on track with our plan for profitability Q4 2024 and expect to have cash positive this quarter starting Q4 2024 on a consistent go forward basis. The entire executive team is managing the business to have detailed budgets on our plan for profitability.

Speaker 2

We are expecting to invest aggressively to generative AI initiatives during the first half of the year, which is reflected in the operating income guidance. As it relates to the model assumptions that we Provided 3 quarters ago for our consumption based pricing, our preliminary analysis of the actual results suggest we are on that model. Overall, we're very excited about the business momentum as we start FY 2024. As a go forward KPI for the investing community assess our performance, we believe good KPIs to focus are the number of pilots started during the quarter, the conversion of those pilots to production And finally, the actual vCPU consumption fees generated. With that, I would like to open this up for questions.

Speaker 2

Operator?

Speaker 3

Thank you. Thank you. Our first question comes from the line of Kingsley Crane of Canaccord. Your line is open.

Speaker 4

Hi, thanks for taking the question. So, Tom, you said that sales cycles were down to 3.7 months From 5 months last year. Why do you think that is? Is this entirely due to the consumption model? How much of this is due to general excitement around the potential in the space and even potentially increased sales productivity?

Speaker 1

No, I think it's thanks Kingsley. I think it's all of that. I mean clearly AI is on everybody's mind. The consumption based pricing model that we have makes it much easier to adopt our technology. I mean, in the old days, 1 2 years ago to do business with us was $5,000,000 $10,000,000 $20,000,000 $50,000,000 to open the door.

Speaker 1

And now the transaction is pretty much we're bringing the application live in 6 months for $500,000 if you like it, keep it and pay $0.55 per CPU hour or should be CPU So we're pretty easy to do business with. And so we're seeing the number of transactions increase dramatically as we'd expect. The ease of contracting with us, as you know, We have largely reconstituted the sales organization in the last year and a half to a sales team that is candidly Much more productive and effective than our other sales organization. So I think all of those are contributing to Increased pipeline, increased business, increased business activity, about which we're quite optimistic.

Speaker 4

Thanks, Tom. That's really helpful. And then one for Juho. I want to think about the timing of the transition. So If it is the case that the vast majority of existing customers are not necessarily migrating to the consumption model, how should we think about The contribution of consumption over time and then particularly in the back half because I think that you said revenue could accelerate as consumption increases in mix.

Speaker 2

Yes, Tien Tsin, thanks for that question. So that's exactly as we sign and initiate more pilots within the quarter, the pilots are generally 2 And then you start to see the consumption revenue kick in. As we finished the quarter with 19 pilots Last quarter, we had a good increase in pockets with 17 pockets as well. You can start seeing those layer on to the revenue by Q3 and Q4 of this fiscal year. Now to your point about renewals, We do expect our existing customers with the large enterprise agreements to continue to remain on those types of agreement structures, But you will see the RPO trickle down as these contracts enter into renewal phase and then we would expect to see a pickup as they renew.

Speaker 4

Okay, very helpful. Thank you.

Speaker 3

Thank you. One moment please. Our next question comes from the line of Pat Walraven of JMP Securities. Your line is open.

Speaker 1

Great. Thank you. Tom, can you talk some more about the opportunity with National Security and the Department of Defense. And then also you said something I thought was interesting about a version of generative AI It doesn't hallucinate. If you could maybe comment a little more on what hallucinating is and how you prevent it from doing that.

Speaker 1

I think that would be really interesting. Thank you. DoD, well, Pat, you've asked kind of many times about the we have 2 Basically authorities to operate contract vehicles, one's for $100,000,000 and one's for $500,000,000 in DoD that are Associated, it can be applicable to what we're doing at RSO. That was the Rapid Sustainment Office and the predictive maintenance application that we're doing for the United States Air Force for F-fifteen, F-fifteen, F-eighteen, F-thirty five, KC-one hundred and thirty five, etcetera. And, what we made a proposal To the Secretary of the Air Force to take that into full production for all the aircraft in the Air Force, which is 5,000.

Speaker 1

I think the proposal would have increased aircraft availability for the Air Force by 25% and I think, decreased their cost of maintenance and readiness By about $6,000,000,000 So he considered that as did his Chief of Staff, General Brown. And they went off on their own for a few months while you were asking the questions and we didn't have the answers and these That's going to their star chamber the way they do. What they came out with was not a was a selection of C3 as the standard as the system of record, Not only for aircraft in the United States Air Force, but for all AI based predict all predicted maintenance, okay, in the United States Air Force for all assets. So this is Genuinely a big deal. Okay.

Speaker 1

Now we have the opportunity to make this a line item in the budget. So this is it's hard You know, over describe the impact of this or overestimate the impact of this. And then not only do we have it in the Air Force, we can talk now to other services like the Army And the Navy, okay, and the Marines and the National Guard and what have you. So this is a big one. The second one has to do with generative AI.

Speaker 1

So One of the problems with generative AI is the is you're limited to the number of data sources That you can use with these large language models. Typically it's text, HTML or sometimes code. And the large language model will You interact directly with the data. But one of the problems is you get kind of random answers. Every time you ask the question, you get a different answer.

Speaker 1

If 2 people ask the same question, you get a different answer. And the there's no traceability. It doesn't tell you where the answer came Okay. And finally, if it doesn't know the answer, it makes one up. This is what they call hallucination.

Speaker 1

So it doesn't know. So it just kind of wings it, makes up an answer. So we've leveraged we're using the entire C3 platform and the way that we do that is we incorporate As you, I think, all know, we're very good at aggregating enterprise data, extra price data, code, images, text, sensor data, what have you Into a unified federated image. Now when we do that, those data are read by a deep learning model and they happen to be Stored in a vector database. Then we have a kind of a firewall between that and the large language model.

Speaker 1

Now our customer can use any language model they want, be it chat, GBT, be it palm, be it bard, be it 5, whatever comes along next. But we've built a firewall, which is a large language model in the data. So it will every time I mean what's really every time you ask the question, it will give you the same answer. Okay. If 2 people ask the same question and they have the authority, they will both get the same answer every time.

Speaker 1

Associated with the answer, it provides you traceability to see if they click on it, You see exactly where the data came from, okay. And very importantly, there's no risk of LLM cost data Filtration, see Samsung for details where they find out that all of their proprietary information is not published on the Internet. Okay. And Finally, there's no risk of LLM cost hallucination. If it doesn't know the answer, it tells you I don't know the answer rather than making one up.

Speaker 1

So for these, you'd think would be kind of table stakes and they are table stakes for any large commercial or government installation. And this is something that really distinguishes the C3 generative AI offering and one of the reasons that we're seeing very high levels of interest. Great. Thank you.

Speaker 3

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

Speaker 5

I appreciate you guys squeezing me in for the question. Tom, earlier this week you guys announced how to press release about The C3 generative AI suite being available in the Amazon Marketplace. And it got me thinking about what the sales motion going forward It's going to look like, as you sort of mentioned, genera.ai is permeating, the boardroom, the C suite In a pretty substantial way. And when we look at sort of converting this interest into deals and ultimately revenue. How much of this is going to be like flywheel kind of Self-service consumption based marketplace type deals versus you working with partners, Taking a more consultative approach as and helping these large enterprise customers sort of navigate the world of Generate AI and actually deliver value?

Speaker 1

Great question, Sanjit. So our first three engagements that are involved in now will be our organizations, the Order of $100,000,000,000 or greater in revenue, okay. And have Yes, we'll bring the application live in 12 weeks. We're not doing over with and we have like 3 people on the project. So it's pretty straightforward.

Speaker 1

Now the issue of going from say 6 customers to 60 customers to 100 customers It's pretty straightforward. We know how to do that, okay. The real key is, okay, in terms of blowing the doors off this thing, can we go from 6 customers To 60 customers to 6,000. So for 6,000 now we have to leverage these channels like the AWS marketplace where the products are available today, The Google marketplace was available today. But in terms of usability, it needs to be like the Apple iPhone.

Speaker 1

You open the box, You take the cellophane off, you turn it on and it works. And so now we're the next generation, the next The really serious development work that we're doing now on that product kind of relates to really product design, Okay. And making it like an Apple product, you open it up, you turn it on and it works. And so that's the challenge that's before us. I think we're up to it.

Speaker 1

Okay. And if we're able to hit that note, hold on to your socks.

Speaker 5

I appreciate the color, Tom. And then maybe one Follow-up, maybe this is for Jill and Tom as well. And it sort of relates to the guidance for the full year. I'm trying to Contextualize like what's really driving the guidance for next year because we're coming off a year fiscal year 2021, I think you guys grew north 30%, 33%, 34%. This past year, you guys grew sort of mid single digits.

Speaker 5

The initial guidance calls for growth sort of Mid teens at the midpoint, sort of 20% at the high end. And I want to understand like is the acceleration you're seeing A function that you're coming off a tougher year where you had spending environment was more difficult, sales reorg, those types of things versus generative AI really coming online in fiscal year 2024. And so is there any way you can sort of attribute those 2 things between sort of coming off of a tougher year versus the demand that you're seeing in pilots out in the field?

Speaker 1

Josh, let me address the premise, okay. Before we all bring our hands about the tougher year, tougher year, tougher year, I think we got it that in 4 times in the call for all the audience, okay. Let's remember, okay. Okay. When we announced the transition to consumption based pricing, okay, we made it very clear that this was going to have a Short and mid term, okay, negative effect on revenue growth.

Speaker 1

It's actually a mess. Anybody who knows how to use a spreadsheet can figure this out. If we're closing $500,000 deals instead of $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 deals, The short term impact on revenue is to dampen revenue growth. So I'm not certain that's so tough. Okay, that is basically we're actually giving Exactly to the plan that we set.

Speaker 1

So this thing is exactly on track. Now when you run this through your little extra spreadsheet model You get the carriage return, okay, you run it out a few years, a few quarters out there, you can do the math and you know what happens. But I'm not So I think we're exactly on plan with what we did. We made the investment. I think it was a great decision.

Speaker 1

It was a good investment. And now in fiscal year 2024 2025, we're going to yield the returns from that investment.

Speaker 5

Great. I appreciate the thoughts.

Speaker 3

Thank you. One moment, please. Our next question comes from the line of John Kapsingris of Wedbush. Your line is open.

Speaker 1

Hi. Thanks for taking my question. This is John on for Dan Ives. So given the increased diversity seen, I guess, across industries served, How have you seen these use cases develop and how do you see them playing out for the future? Thank you.

Speaker 1

Great question, John. Right now, I mean, in terms of applying AI to enterprises, we're Yes, first half of the first inning and the first guys at bat, okay. So this is an embryonic market. I mean, where we're seeing the biggest uptake Immediately. First, it was in the smart grid.

Speaker 1

Okay. Why the smart grid? Because they had invested $2,000,000,000,000 like they upgraded and created infrastructure globally To make all the devices in the smart grid, remotely machine addressable is a huge IoT constellation. So that's where we saw it first. The next large where we're seeing it in the past year, the largest market is in AI reliability, basically Predictive maintenance.

Speaker 1

So in both the military, they call readiness, okay, or in the private sector, they call reliability. So AI based predictive maintenance is the largest segment today. How will this evolve? I mean, it's clear we will be applying AI To all business processes, production optimization, demand forecasting, supply chain risk, okay, stochastic optimization, the supply chain, CRM, I think there is no aspect of business operations That will not be or okay, and medicine, okay, and research and the science and literature and entertainment That will not be accelerated by the use of AI. So we're just going to have to we're along for the ride and we're going to see where this goes in the next few years And stay on the balls of our feet as it develops, but it is a rocket ship.

Speaker 1

Thank you, Tom.

Speaker 3

Thank you. One moment please. Our next question comes from the line of Mike Sciacos of Needham and Company, your line is open.

Speaker 6

Hey guys, thanks for taking the questions here. Maybe the first would be going to JuHo. So I know that you guys incited the 43 deals you closed this quarter, 19 of those Our pilots, can you further refine that for us and maybe it's just the classifications or names we're using for this, but like How many of those pilots are purely consumption based versus maybe pilots that are still coming in under the old pricing model?

Speaker 2

Hi, Mike. No, these are all these would all follow the new consumption based approach. These are not under the old model at all.

Speaker 6

Okay. And so I guess the follow-up that I have on that is with the 19 deals that are consumption based and I know that you I'm sorry, 19 pilots that you guys closed that are initiated that are consumption base this quarter and the other pilots that we've cited in previous quarters. Do we have a feel for how many of these pilots have now converted to production? And do we have a gauge for what the VCPU Is for those consumption deals once they move into production?

Speaker 2

That's a great question. So Mike, on The Q1 we announced this would have been Q2, which obviously if you take 6 months from that, we get towards the end of Q4. So we are very early in that. In the conversions, we are standing by with the model assumptions, I. E, Whatever we provided 3 quarters ago where it is, each pilot is expected at 70% likelihood to convert into a follow on consumption deal.

Speaker 2

But I would say that the Q1 for consumptions, we really will start seeing more of that this quarter Since it was late in Q2 as we entered into those original target arrangements.

Speaker 6

Understood. Understood on that. Thanks for that. And then just one quick follow-up if I could, but wanted to ask just on the professional services revenue. I know it's skewed just A tick higher versus that typical 10% to 20% range we've been talking about.

Speaker 6

And I just wanted to see, is 10% to 20% still the Appropriate range we should be thinking through or is there maybe more handholding for these pilots as you guys engage in them or is it maybe handholding of Potentially federal sector customers like how do we think about the higher ProServe revenue generation in Q4 versus What you guys are thinking about over the next year?

Speaker 2

I think on a go forward basis, we expect to be in the 10% to 20% range. There's always going to be these types of projects that our customers want that it's difficult to forecast a specific Percent in a go forward revenue, but we believe 10% to 20% is appropriate on a go forward basis.

Speaker 6

Thank you, guys. I'll turn it back to my colleagues. Appreciate the time.

Speaker 3

Thank you. Our next question comes from the line of Brad Sills of Bank of America. Your line is open.

Speaker 7

Hey, great. Thank you. This is Adam Brecher

Speaker 5

on for Brad Sills.

Speaker 7

So you're pretty well positioned in the current market, Just given AI use cases are coming into focus, just kind of curious if this changed your cadence for R and D investments at all?

Speaker 1

Well, this is Tom. I mean, clearly the investments we've made in the last 14 years are paying off, okay, We have over 40 applications and people want applications and I think we're the only company in the world that has 40 applications. I think that I think the only recent change that we've made is, we're a little bit shocked By the response that we had to C3 generative AI. I mean that is we're a little bit overwhelmed by that, but that's a big opportunity. And so now we just came off of plan, I mean, and we decided to really invest in that product category in a big way because It's just difficult to estimate the size of that market, but it's extraordinarily large.

Speaker 7

Yes, fair enough. And then for kind of the generative AI use cases and solutions thus far, I guess the first just your first take on it, but do you see any outsized uptake You know or expect any outsized uptick within certain verticals over others in your view? Thank

Speaker 1

It's a good question. It kind of seems like everybody is interested in this. They want at the level of the CEO or the person who operates manufacturing and the person who operates sales, They want basically a Google like interface where they're getting a web browser like interface where they can ask any question about their business. Okay. Where are the problems in our supply chain?

Speaker 1

If I'm the chair of the Joint Chiefs, what am I ready on this level? So we have 35 quadrants in Central Europe. I mean, that's what we call Google for DoD, but there the OpenAI initiatives can provide the Secretary of Defense or the Chair, the Joint Chiefs of Staff answers to that question in seconds. Right now, it actually takes weeks for him or for most people to get those answers. So it's I don't know any industry that will not be taking use of this technology.

Speaker 1

It's really quite amazing.

Speaker 7

All right. I appreciate the perspective, Tom. Thank you.

Speaker 3

Thank you. One moment, please. Our next question comes from the line of Mike Sicas of Needham and Company. Your line is open.

Speaker 6

Hey guys, thanks for getting me back in. I did just have one quick follow-up. Maybe building on the question that Sanjit had asked earlier, But taking a different look, rather than looking at the revenue, let's talk profitability for a second. But obviously, you guys are Issuing guidance now, which is below Street and below what you guys had initially flagged if we go back a quarter ago. Maybe for Juho, Can you help us think about the additional levers you have to pull on to ensure that C3 is achieving its target of exiting fiscal 2024 With non GAAP profitability.

Speaker 1

Before we answer it, Mike, I do want to poke at the premise a little bit. Okay. I think our guidance is pretty much in line with what the Street expectations are once you take out like one outlier or 2 outliers. So I think our current guidance Is in line with what the Street currently has. I'm pretty confident of that.

Speaker 1

Now the other question related to, So how are you sure you're going

Speaker 2

to get to profitability? Right. So Mike, one of the things that I had on the prepared remarks was our planned investments into generative AI, Which combined that and vendor expenses, I think we can control spending towards the end of the year if For whatever reason, the expected revenue would not occur from those, but we're pretty bullish about The generative AI opportunity.

Speaker 6

Got it. Thank you very much.

Speaker 1

But that being said, we don't need the generative 0, okay. And we're still going to run a cash positive profitable business in Q4. When we have well, we have a Very, very detailed plan that's been distributed to all the members of the management team. They all have their budgets. They know what's going to operate and You can expect it to be a cash positive profitable business and non GAAP profitable business in Q4, hard stop.

Speaker 2

That's right.

Speaker 3

Thank you. One moment please.

Speaker 2

One more question.

Speaker 3

Thank you. Our next question comes from the line of Noah Harman of JMP

Speaker 1

It was great See the average sales cycles for agreements tick down, I think by about 1.3 months year over year. What's really driving that? And where do you think a sustainable sales cycle Basically concludes that maybe thinking about the

Speaker 6

rest of this year. Thanks.

Speaker 1

Well, I think the consumption based pricing model Driving it where it's pretty easy to drop when you can have a large scale enterprise AI application live in production in 6 months for $500,000 I mean, that's nothing guys, in terms of what it costs to bring in an Accenture or an IBM or somebody to try to One of these things live, that's going to be scores of 1,000,000 of dollars in years. So it's a pretty easy sale. It's a shorter sales cycle. And so I'm not sure where it ends up, but as we move more and more of our products On to the AWS marketplace, the Google marketplace and other leverage channels like this, we'd expect to see it You don't get shorter. Great.

Speaker 1

Thank you.

Speaker 2

Thank you.

Speaker 3

Thank you. At this time, I'd like to turn the call back over to Mr. Sebel for any closing remarks.

Speaker 1

Ladies and gentlemen, we Thank you so much for your attention today. Thank you for tuning in. I encourage you to mark your calendars for June 22. I think you'll find that the we'll talk about some interesting developments at our investor conference at that time. And we hope you'll have time to join us for that exchange.

Speaker 1

So thank you very much for your time today and we wish you All a good

Speaker 3

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

Speaker 3

Have a great day.

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Earnings Conference Call
C3.ai Q4 2023
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