Q4 2024 C3.ai Inc Earnings Call
Yeah.
Good day and welcome to the C. Three eight is fourth quarter fiscal year 2024 conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.
We'll then hear an automated message advising your hand is right to withdraw your question Press Star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker Mr. Amit Berry. Please go ahead.
Good afternoon, and welcome to <unk> earnings call for the fourth quarter of fiscal year 2024, which ended on April 30 of 2024. My name is I'm, a dirty and I lead Investor relations at TCT.
With me on the call today is Tom people, Chairman and Chief Executive Officer, and today, Scott Chief Financial Officer.
After the market closed today, we issued a press release with details regarding our fourth quarter results as well as the supplementary to our results.
Which can be accessed through the Investor Relations section of our website at IR Duffy.
This call is being webcast and a replay will be available on our IR website. Following the conclusion of the call.
During today's call, we will make statements related to the business that maybe considered forward looking under federal Securities laws. These statements reflect our views only as of today and should not be considered.
Presented in five years.
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 on material risks and other important factors that could affect our actual results.
Please refer to our filings with the SEC.
All figures will be discussed on a non-GAAP basis, unless otherwise noted.
Also during today's call, we will refer to certain non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our press release.
Finally at times in our prepared remarks in response to your questions. We may ask it's got some 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.
Tom: Thank you Matt Good afternoon, everyone and thank you for joining our call today.
Our cash and I are pleased to share with you our results for the fourth quarter and for the entire fiscal year of 2024.
Q4 was a great quarter.
Tom: And the end of a huge year for <unk>.
We exceeded all expectations for revenue cash flow and profitability, let me be clear there was no expectation that we did not exceed.
This was our fifth consecutive quarter of accelerating revenue growth our quarterly year over year revenue growth has accelerated from 11% in Q1 to 17% in Q2, 18% in Q3 and now 20% in Q4 of fiscal year 'twenty four.
Quarterly subscription revenue is also significantly accelerated going from 8% in Q1 to 12% in Q2, 23% in Q3 and 41% in Q4 at a year over year basis, we finished the quarter with $86 6 million in revenue exceeding the high end.
With our guidance and analysts expectations.
I'll note that this is the 14th consecutive quarter as a public company and we have met or exceeded our revenue guidance for the quarter subscription revenue was $79 9 million accounting for 92% of total revenue and increasing <unk>.
41% from a year ago, our non-GAAP gross profit was $60 9 million, representing a 70% gross margin.
Our GAAP operating loss was $82 3 million, our non-GAAP operating loss was $23 4 million better than our guidance for a loss of <unk> 43, and a half to 51 5 billion.
Our non-GAAP net loss per share was <unk> 11 cents, we generated free cash flow of $18 8 million to end the quarter with $754 million in cash cash equivalents and investments again exceeding analysts' consensus.
Yeah.
Full year results exceeded both the high end of our guidance and analysts expectations with record revenue of $310 6, million% to 16% increase over last year.
<unk> revenue was.
$278 1 million or 21% increase over last year.
Now with the transition that we went through to pay as you go consumption pricing. Okay. We are engaging in a much larger number of smaller transactions of a shorter term.
This offers us greater revenue visibility and greater revenue predictability.
Average CCC has plummeted as a result from over $16 million in fiscal year 19 to $900000 last quarter.
As we work through this pricing transition we are seeing as expected. Okay. At first a decline and now return to accelerating revenue growth also as expected. We are seeing a reduction in RP up we expect <unk> to continue to decline in the next few quarters as we expect revenue to increase this is.
Mathematical certainty from the change in our go to market model and I am not certain at all that <unk> is a valid leading indicator of our business in the short term going forward.
Let's take a look at the AI value stack.
There clearly is a market frenzy today around AI infrastructure now when you look at the value stack at AI at the bottom the other silicon above that you have infrastructure above that foundation models and on top of all of that you have enterprise AI applications.
<unk> three I players at the top of the stack okay.
Exclusively on enterprise AI applications, and we believe that in the long run silicon and the infrastructure get Commoditized and.
AI applications dominate the value stack.
As an analog to think about the early stages of the personal computer market at the beginning most of that value was in the silicon and the infrastructure thinking about the IBM <unk> that you might have been used in 1983 it costs $7900 in today's dollars that would be $22000 you might.
We have had two to $300 or the software running on that machine that you purchased from busy Cal for Lotus arb or wherever.
That PC Thats on your desk today cost your company about $200, a year and depreciation expense for the hardware and another $200 a year or so for infrastructure cost and by.
By the time, you add all the applications youre running on that computer via Bloomberg SAP CRM, okay, whatever it might be if those applications can exceed $8000 a year okay.
In total cost.
The AI era will be no different.
Okay and the same game is going to play out as we move forward. The bulk of the value is going to accrue to the applications that leverage the entire AI stack and deliver value to the business.
Silicon will get commoditize, it always gets commoditized infrastructural commoditize. It always gets commoditized what doesn't get commoditized in the long run are the applications and Thats, where <unk> plays.
Let's take a look at the market dynamics in AI. Okay. This is proving a headwind for some companies as we're seeing and it's proving a tailwind for us for some companies for US It is clearly a tailwind okay.
Primary competitor to <unk> remains trying to build versus buy.
Building AI applications for an enterprise is incredibly difficult and unlike anything cio's have encountered before in fairness. Most cio's have their hands full trying to install a single sign on trying to get their security firewall still work and trying to figure out how to manage over budge.
Tom: It's delayed sometimes multibillion dollar SAP upgrades from et cetera Deloitte.
Developing enterprise scale application software is simply not what they do.
The extensive infrastructure and software services required to operate applications at scale are exceptionally complex and not feasible for most companies to manage with an in house team of engineers today. Many companies are dabbling in trivial AI projects are relying on outside the integral.
Or do you try to cobble together something that works.
These are nothing more than large and expensive experiments nobody succeeds.
In reality enterprise customers don't want to buy tools to build applications. They want to buy applications. So we've already proven that with prudent in the relational database market flip through the ERP market, we've proven it in the CRM market.
It's C. Three AI, we've dedicated 15 years and a couple of billion dollars.
Where the software engineering and building a powerful AI platform that underpins some of the largest enterprise AI deployments on Earth day. We started this effort in 2009 before anybody even talked about enterprise AI before as <unk> existed before GGP existed before.
Tom: Before the GPU existed.
With significant first mover advantage, we serve in the market today with 90 enterprise AI and generative AI applications that offer outsized economic benefit.
Business is focused on enterprise AI applications in fiscal year 'twenty, 488% of our bookings were driven by AI application sales and 12% of our bookings were driven by the <unk> AI platform.
Our pilot accounts surged to 123 for the year as we closed 191 agreements now across 19 different industries underscoring the effectiveness of these products in meetings complex business needs across many business sectors.
Our big bookings distribution for the fourth quarter was approximately 30% federal defense and aerospace, 15% oil and gas, 11% state and government.
7% manufacturing, 6% energy and utilities, 5% consumer packaged goods, 5% professional services.
This increase in bookings diversity will be a leading indicator a leading indicator for <unk>.
Our pilot distribution for the quarter fourth quarter was 29% manufacturing, 21% federal defense and aerospace.
<unk> percent agriculture, 9% chemicals, 6% life Sciences, 6% oil and gas, 6% state and local 6% energy and utilities, and 3% logistics and transportation.
This pilot diversity is kind of a future indicator of whether you would expect this company to be going.
Now let me provide a brief update on some of our recent product advancements first version eight of our platform and applications is providing customers with an order of magnitude improvement in speed efficiency and overall performance.
It is now more than with version eight it is now more than 20 times faster to ingest data train machine learning models and for time series features.
And customers can run thousands of applications in a single <unk> platform cluster to reach highly scalable deployments.
The <unk> community is the name of our interactive training online help and developer platform. It is becoming a thriving ecosystem for engagement and collaboration amongst ctrip developers and data scientists around the world. This year, we supercharged the <unk> community by delivering.
C. Three generative AI co pilot, which incidentally answers questions and generates code for programmers to massively increase developer productivity on the <unk> platform.
We talked a little bit about customer traction.
We are witness witnessing increased usage amongst our customers Cargill has expanded from 13 to 18 plants and production in the past year Baker Hughes sourcing.
Optimization is now deployed across.
855 sites in three business segments with 2000 users offering a potential savings of $100 million a year <unk>.
<unk> reliability is now deployed at 12 plants at electronic monitoring 4000 control valves and realizing.
$25 million a year of annual loss avoidance DAU is enhancing its predictive maintenance capabilities with <unk> reliability and has.
As announced that it's expecting to decrease downtime for steam cracking furnaces at polyethylene production facilities by 20%.
Wholesome a large European construction.
Construction products, our company started with CTV.
Reliability ctrip.
Liability a production pilot in May of 2023, and now has 31 facilities and production running over 200 machine learning models to monitor 3000 sensors from critical equipment, including vertical roller mills. According to rose West Gharib, who is head of plants of tomorrow at wholesome.
This is a quote <unk> AI play at <unk>.
Is playing an important role at wholesome digital transformation, providing innovative AI solutions that drive efficiency and sustainability. She continues the collaboration between <unk> and wholesome has led to advancements and operational efficiency at scale raising the bar for predictive maintenance in our sights.
Thanks to <unk> platform wholesome has achieved a step function change.
Function change okay.
Asset lifestyle management, improving our reliability and capacity for our customers as well as reducing environmental impact.
Edison a <unk> customer since 2017 uses the <unk> platform to improve everything from operational in energy efficiency to public safety billing performance and customer satisfaction.
According to Tom the game, who is general Madden share for Con adds advanced metering infrastructure project.
I quote.
The Ams project the largest in <unk> history included the deployment of $5 3 million smart meters and resulted in significant benefits such as improved outage management and energy efficiency. The use of AI and machine learning has enhanced public safety optimized create operation.
And achieved substantial energy savings.
Tom: Emissions reductions for our customers.
We monitor our customer SaaS satisfaction, very closely and our customer satisfaction levels are well above industry averages for enterprise application software.
We talked a little bit about the strength that we're seeing in the U S. Federal market, we had a strong quarter and closed out a remarkable year for the federal business with revenue growing more than 100% in 2024.
Transaction in this vertical is increasing establishing it as a significant growth engine for <unk> going forward.
Last year, we closed 65 agreements with federal agencies and made inroads either 10, new federal organizations.
In Q4.
We entered into 13, new and expanded agreements with U S Air Force U S Navy and the U S Intelligence community Defense Counterintelligence Security agency, the Chief digital and artificial intelligence office that Validus group in the U S Marine Corps.
Our expertise and leadership in predictive maintenance is clear when you look at the work with you with the U S Air Force and now the Navy.
U S Air Force rapid Sustainment office continues to expand their <unk> footprint by increasing the capabilities and the number of weapons systems monitored on the predictive analytics and decision assisted application.
Yes.
The system they call Panda. Okay. This is the system of record for all predictive maintenance projects within the RSO and the United States Air Force optimizing fleet maintenance, increasing aircraft available Bela ability and minimizing downtime. This application is now being applied to monitor two new weapons systems, the <unk> seven and the KC 46.
And.
It's been expanded to include new capability for the B one bomber the C. Five of the KC 135, According to Jimmy Lawrence who is the Deputy program Executive officer for the rapid Sustainment office <unk>.
<unk> cutting edge technology has been a game changer for the U S Air Force driving unparalleled of AD splits it predictive analytics and maintenance the implementation of <unk> AI solutions have revolutionized the operational capabilities of the air force leading to significant improvements in aircraft readiness.
Speaker Change: And efficiency unquote.
We've also been working with the U S. Navy building on predictive maintenance program for the for <unk> II and the U S. Air Force on the crowd source flight data program at Nellis Air Force base in Nevada.
This new agreement also expands the navy into.
The analysis of electronic emissions.
F 35 weapon system.
Talk a little bit about the <unk> partner network, our partners remain a key driver of growth at customer success as we continue to deepen our relationships with the major hyperscale providers and system integrators or partners last year, we closed 115 agreements through our partner network, representing a 62% increase from the prior.
This includes 91 agreements with AWS, Google Cloud and Azure are joined 12 months qualified pipeline with partners grew by 63% year over year.
Our business activity with Google Cloud has increased considerably in Q4 alone. We closed 12 pilots with Google Cloud there is a massive amount of support.
TCP and pursuing our state and local pilots.
Google has committed to invest with us.
In a big way in the first quarter. We've also substantially increased our partnerships with two firms when fractal any other called paradigm partnering with them for our professional services to support our version eight upgrades customer servicing agreements quite customer service engagements and pilot delivery. These organizations have.
<unk> dedicated practices around <unk> and AI and are committed to trade over 200, <unk> qualified engineers data scientists and the coming year.
Let's double click on <unk> III generative AI folks. This is a massive opportunity there is substantial and growing demand for our <unk> III generative AI products. The market is very much coming our way the company launched 30 count them 30, generative AI products in fiscal year, 'twenty, four and were being overwhelmed with me.
Interest for these products in Q4 alone we received almost 50000 inquiries from 3000 businesses, each with revenue greater than $500 million all expressing interest in our.
Speaker Change: <unk> AI application.
<unk> thousand 10507% 28 days of February alone. We currently expect this to expand to 90000 inquiries in the first quarter of 'twenty five.
Over the past year C. III generative AI was pilot across 15 different industries, driving us deeper into new verticals and accelerating our industry diversification if.
If we look at the industries that we touch with these pilots be like 21% Federal defense and aerospace, 12% manufacturing, 10% <unk>, 10% state and local government, 7% financial services, 5% chemicals, 5% construction, 5% CPG, 5% energy utilities five person.
Oil and gas 5%.
Pharmaceuticals and life Sciences.
The C III degenerative AI remains a highly differentiated product offering in the UK.
Generative AI market, providing customers with safe secure fast reliable information.
From across their enterprise it enables retrieval and reasoning across omni modal data with deterministic responses fully traceable to ground truth sources. It offers robust enterprise controls no incremental types of security risk caused by or LLM cost data leakage minimal holders the nation risk pauses.
<unk> no IP liability exposure.
From the <unk> and provides flexibility with be completely LLM agnostic, okay, and we further demonstrated we further differentiated.
<unk> three generative AI for mother off from other market offerings in the course of the year in many ways. We have a rich product road map for the coming year, and we will continue to invest in this product to drive innovation in the generative AI market.
So to wrap this up.
We see over the decades as inflation goes up for negotiation goes down and markets boom in market bust, yes, we see equity market mood swings, okay, and great management teams don't build companies based upon the fad of the week as it relates to equity.
Markets with increased inflation. The current personal him has swung to a demand for instant cash generation and profitability now let's put this into perspective.
It took apple over a quarter of a century to be consistently profitable.
A quarter of a century, how does that work out for Apple and investors.
Speaker Change: Okay.
Amazon 29 years to be consistently profitable, okay that generated roughly two trillion dollars and invest investor value.
These companies are going after larger market opportunity and that conviction to invest for growth and market share a lot of the way regardless of the current SaaS that happened in response to market fluctuations quarter to quarter and kind of day to day.
Speaker Change: C III is looking at.
Addressing a potentially one trillion dollar addressable software market.
We believe this is the largest market opportunity in the history of software.
We raised $1 billion in December of 2020, Thank Beth before the world at large was even talking about enterprise AI and we raised that money to invest in growth to invest in technology leadership to invest in brand leadership and to invest in market leadership.
Yeah.
The investments we've made since then have been well considered prudent and consistent with what we communicated to investors.
Our investment plan is a lot longer than day to day investments sacks.
So as it relates to the guidance.
We are expecting additional acceleration of <unk> revenue to approximately 23% in fiscal year 'twenty five.
At the same time make no mistake, we plan to continue to invest in growth as necessary to build.
How much market share to establish a market leadership position and to build a long term cash generating profitable market, leading enterprise AI software company, our revenue guidance for <unk>.
Q1 of fiscal year, 'twenty, five is going to be $84 million to $90 million for the fiscal year, we're looking at $370 million to $395 million.
Our non-GAAP loss from operations.
We're expecting to be for Q1 between.
A 22% to $30 million loss and for the year $125 million to $95 million loss and now I'll turn the call over to al.
Most competent CFO cash for additional color and detail.
Thank you Tom.
I will now provide a recap of our financial results and additional color on our business.
al: All figures are non-GAAP unless otherwise noted.
As Tom mentioned total revenue for the fourth quarter increased 20% year over year to $86 $6 million.
Subscription revenue increased 41% year over year to $79 9 million and representing 92% of total revenue.
Professional services revenue was $6 $7 million.
This represented 8% of total revenue in the fourth quarter of fiscal 'twenty four.
That's compared to 21, 5% of total revenue in the fourth quarter of fiscal 'twenty three.
Demonstrating an improved mix of subscription revenue.
Gross profit for the fourth quarter was $60 9 million and gross margin was 70%.
Gross margin for professional services was higher this quarter due to a greater mix of higher margin professional services like prioritize engineering services.
Operating loss for the quarter was $23 $4 million, our operating loss was lower than guidance due to continued focus on expense management as well as the timing of additional investments, we are making to capture market share.
al: As we discussed last quarter, we expected fourth quarter free cash flow to be positive.
Free cash flow for the quarter was $18 $8 million.
We continue to be very well capitalized and closed the quarter with $754 million in cash cash equivalents and marketable securities.
Please note that the professional services mix in our revenue depends upon the nature and size of revenue deals in any given quarter.
However, we expect the professional services revenue to generally stay within 10% to 20% of total revenue.
As a reminder, we continue to expect short term pressure on our gross margins due to higher mix of pilots, which carry a greater cost of revenue during the pilot phase of the customer lifecycle.
We also expect short term pressure on our operating margin due to additional investments we are making in our business.
Including in our sales force.
Research and development.
And marketing spend.
Yeah.
At the end of Q4, our accounts receivable balance was $130 million.
Including Unbilled receivables of $62 3 million orders.
Total allowance for bad debt remains low at less than 400000 and.
And we do not have concerns regarding collections.
al: The general health of our accounts receivables remain strong.
During the fourth quarter, we signed 34 pilots.
A 79% increase from last year.
Up 17% from last quarter.
At quarter end, we had cumulatively signed 172 pilots.
<unk> hundred 57 are still active.
This means they are either in their original three to six months.
Our extended for some duration.
<unk> converted to a subscription or consumption contract.
Or are currently being negotiated for conversion to subscription or consumption contract.
al: Seven quarters ago, we announced the transition from subscription based pricing to consumption based pricing a standard in the industry.
We also announced that this transition would have a short to medium term negative effect on revenue.
al: Accordingly, our GAAP our view at the end of Q4 was $244 $3 million.
Which is down 36% from last year.
al: And our current GAAP ARPA was $163 $8 million.
Which is down 12% from last year.
Now I would like to turn the call over to the operator to begin the Q&A session operator.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
Jay Your question. Please press star one again, one moment, while we compile the Q&A roster.
Okay.
And our first question will come from the line of Timothy Horan with Oppenheimer. Your line is open.
Thanks, guys congratulations.
Talk a little bit of how did you get the twentyfold increase and improvements in <unk> and <unk>.
How sustainable are those type of improvements so how long did it take to get.
And then secondly, obviously the sales inquiries are charts.
How scalable are these inquiries at this point.
I guess the.
Deal with the sales operations and the implementation.
Wow.
These inquiries thank you.
Hi, it's Tom.
Version eight was a four year engineering effort I mean, it was a very large scale effort.
And we basically gutted the product, we reengineered kind of the very core of it.
And so it was a.
Yes.
This was a major release of the product.
al: And it's hard to be difficult to get into all the specifics, but we were heads down for four years on this.
Major architectural revamp and now <unk>.
And.
We won't see performance increases like that again for a while.
Sales inquiries well, it's just been overwhelming whats been going on in generative AI.
You I think we raised 10500 in February Okay, and then.
Almost 50000 last quarter.
How scalable is it right now we can believe that we can generate order of 90000, a quarter and now is that going to measure at some point, we really don't know but.
But this is all brand new territory, but every time, we look at this generative AI market it looks bigger than it did before so there is a huge opportunity and we really do have it's important to note. We have a highly differentiated product there because all of these issues associated with hallucination. This new thing they call <unk>.
Ram.
IP liability access controls to.
Catholic responses.
We've solved all of those problems by coupling the learning models with the.
The capabilities of the <unk> AI platform, so omni modal data ingestion I mean, it will have that nailed identity. We have it nailed access control, we have that nailed and so the marriage of the work we did in the first 15 years of the company with the with these new innovations and generative I and.
Tables is to solve the problems.
That all of the harp guidelines that are preventing these large named risk models from being installed in many corporations around the world.
Thank you.
Thank you one moment for our next question.
And that will come from the line of Pat Wall Ravens with JMP Securities. Your line is open.
Oh, great. Thank you and congratulations that's really what it is.
Really impressive.
So I mean, 50% of bookings Tom from <unk>.
Federal defense and aerospace.
And if you could drill into that more and talk about what you see for the.
The pipeline for that vertical for this coming year that would be great.
Federal looks like or a growth engine Pat business is good.
And we've had.
A lot of inroads in the Air Force Navy and the intelligence community and we are investing in the federal business in a big way.
The federal community is investing in AI in a big way. This is kind of an existential issue, where a little bit of a war going on with AI.
The United States, and China and.
We're on the side of the good guys and were on the team so.
I'm not sure how big it is but it's big.
Yes, and as a follow up on that so.
Your partnerships with.
al: AWS, Microsoft Google Boot.
Speaker Change: Booz Allen I guess what.
Whats bearing the most fruit in federal.
AWS is probably that would be accompanied by far that has the most tentacles into federal and I would say more properly.
Speaker Change: 11 out of 12 of our applications are running on AWS Gov cloud.
And so on.
Our relationships with the federal AWS Federal group and the international Federal group that deals with the with the allies NATO five eyes. What have you is very deep and rich and so that's as it relates to Hyperscale or is that's where we're seeing the most action and AWS is.
Just as the dominant itself platform.
Alright, great Thanks, and congratulations again.
Thank you.
Thank you one moment for our next question.
And that will come from the line of Sanjay <unk> with Morgan Stanley. Your line is open.
Yes. Thank you for taking the questions and congrats on a strong close to the year, Tom I'd love to get a like.
An example of your favorite example, one of the customers sort of coming out of.
The jet AI <unk> pilot program and the rule that Q3 AI.
In terms of getting them into production I think that's a.
A clear debate in the industry about are a lot of these project experimental and can they actually get their production. It seems like you guys are getting your customers into production.
And so I don't know if there is one of the 58 pilots that you signed this year that sort of catches your eye and.
Now provides a like an example, or a model if you will of how <unk> <unk> I get to the customers into production for jet AI use cases.
It's really what changes it's very interesting I mean, they are incredibly diverse.
One example would be there is a large law firm that we all know that's very active in taking companies public and what we did for them is that we ingested the corpus of SCC that Gov, Edgar Okay, Andrew and enterprise learning model. This would be while the S ones all of the 10-K.
Speaker Change: All the 10-Qs that ever been published and know what they're going to use this for their first use is when they are taking the next company public whatever that might be okay, and then wanted to generate there.
Speaker Change: Type in the name they type in the financials, okay. They hit the carriage return and generating the first draft of the S. One and it does it in an hour rather than two weeks and this would happen.
It would be applicable to your business.
Or should come beta gamma.
It lives you my offer to you is I'll have the system live and in production for a quarter million 12 weeks. So give me a call center made Jack you don't have a lot.
Another one is.
Hum.
Let's look at the at the application that we have in place for these applications called Panda, we've talked about this a lot. This is where we loaded all the underlying information and telemetry associated with 22 weapons systems in the United States Air Force at 15 F. 16 F 18 F 35, KC 135, F 22 et cetera.
Speaker Change: And we use this for to identify system and subsystem failure before it happens predictive maintenance and so we can identify that the auxiliary power unit or the flap actuator or the or the or the igniter and the afterburner, it's going to fail in the next 50 to 100 flight hours. It fits it that night and should garner mirick airplane doesn't fail.
Net net 20, 25% increase in aircraft availability at the scale of the United States Air Force now you can imagine that the human interface for this it's pretty tactical right and it's designed for use by highly technical maintenance people, who have managed sustainment and logistics at the scale of the United States Air Force. So it's technologically.
Speaker Change: Like a manufacturing application or or other applications that you've seen so here, where does generative AI play here and I think this is probably the biggest impact of generative that actually is it can be used to fundamentally change the nature of the human computer interface for enterprise applications surely put a generative AI front end up.
That it looks like a mosaic browser, we can ask any question in English or whatever or a 131 languages by the way and it gives you. The answer now for example, now is the level of the secretary of the Air force or the.
Secretary of defense or the chairman of the joint Chiefs, he or she might ask what am I read as levels of F 35 squadrons and central Europe. Okay.
Speaker Change: And then that's a grand through a lot of data, but the later it generates a map of Europe tells you where each of you have 35 quadrants are and what their readiness levels are not only that.
Speaker Change: You could see ground truth, you can see where the answer came from and then you can continue to drill down and you get the answer right now today it takes.
It takes days to weeks and the Pentagon to get answers like that now what the impact of that.
Where we can we can transfer the application from the utilization of the application from thousands of highly technical users to tens of thousands of users I mean every private on the flight line knows how to use this the chairman of the joint Chiefs had it knows how to use it the chairman of the joint Chiefs mother knows how to use it okay. So it's basically.
There is a mosaic you know it is the Google user interface I know it is mosaic, but everybody knows how to use it. So it's those are the types of applications that we're seeing in generative AI and its just staggering.
The diversity that we're seeing in the use cases, so there's a very large one of our very large customers, who basically put it has 68000 employees around the world.
It has all their HR systems in <unk>.
Service now and workday, so everybody generative AI on top of that show that any one of their 68000 employees and God knows how many countries probably.
Order of 30, 40, 50, 60, 70 countries and it may be Dubai cut or Germany, or Houston can ask any question about any of their HR policies vacation days insurance, what's in plan what's out of plan.
What our holidays it named the country in some places it's Ramadan in the other places it's Raj is China, but what are my holidays and so that's.
So we're.
We're seeing it as a front end to other enterprise applications like workday likes like service now and those are three completely different use cases.
But those would be examples and our offer is we will bring the application alive at 12 weeks for a quarter million dollar. So if any of you need it.
My email, okay, and we will be happy to do it in the organization.
No that's great that the breadth of use cases is super compelling and one follow up for us as we're coming up on.
Two years now on the transition.
To consumption and you guys are seeing accelerating subscription growth for <unk>.
31% with a really really nice number this quarter what percent of that subscription revenue is now.
I'm sure that seems sort of give us a sense. It is is that what's driving that reacceleration in revenue. Thank you so much.
Yes.
Yes.
It's still in early stages of numerous Martin.
We haven't disclosed a conjunction revenue separately before but that is something.
Rich.
Are you going to see a ramp in and it will be more meaningful in the future.
Thank you one moment for our next question.
And that will come from the line of Kingsley grain with Canaccord Genuity. Your line is open.
Alright, thanks for taking the question.
Speaker Change: Congrats on the traction.
Encouraging to hear.
Speaker Change: As we think about how some of the customer engagement metrics will translate to revenue growth.
Speaker Change: Where would the dollar that incremental dollar of investment would be most impactful is it in forward deployed sales engineers is it and partner sales motion.
You're capacity constrained on the application development side, just wanted to get a little bit more granular on the investment profile.
Good question occasionally.
<unk>.
As it relates to the idea of a land grab in market share, which we plan on doing I would say the constraints that we're certainly not constrained by the market. Okay. We're absolutely not constrained by competitive dynamics, Okay, we're going to be constrained by sales capacity and service capacity from these pilots live.
So that's.
That's that's the constraint and I think that's where we would invest okay in terms to get the biggest impact for the next dollar.
Question.
Okay perfect. Thanks for the clarity and.
Just on the on the gross margins I understand that we continue to.
Invest and Theres a mix of pilots in there you did improve in the quarter.
On the subscription side I mean should we expect that we've already trough or is it still sort of we're feeling it out on a quarter to quarter basis.
You should expect our gross margins to decline from where they were in Q4 at 70%.
As we plan to significantly increase the number of pilots and make additional investments.
By the way let me.
My colleague MIT has.
Noted an error in my comments okay.
When I gave guidance for revenue for Q1, I misspoke the guidance revenue for each one is $84 million to $89 million in Q1.
I made a mistake.
I said, 84% to 90 and that is that is an error. It's 84 to 89. So I'm following on my sword and correcting the record.
Next question.
Thank you one moment.
And that will come from the line of Arvind <unk> from.
Hey, Thanks for taking my question.
I wanted to ask about.
Kind of.
Yes.
Incredibly high number of inquiries for your product.
Do you think that could drive further upside on the revenue side in the next year or two.
Are some of those inquiries are sort of less qualified than you'd think panels.
Guidance is kind of more motor elastic.
Okay.
You're talking about guidance beyond beyond fiscal year 2005, I don't have any comment.
I haven't done that.
Right now.
<unk>.
Speaker Change: No.
We're being overwhelmed by the numbers, we are sorting through the numbers were actually using generative AI to qualify.
Speaker Change: These beasley.
These leads with something that sometimes I'll show you that's pretty cool C. III.
Generative marketing.
We.
We it's too early to tell and I'm not prepared to give you guidance for fiscal year 'twenty six.
Yeah, Yeah, but what I guess, what I'm trying to understand is does.
Incredible amount of.
Kind of interest you're seeing in seeing the product.
How should we kind of think about that impacting.
Speaker Change: Our income statement revenue growth of your margins.
Yes.
It seems like those.
Yeah kind of some of the kind of language is when you kind of staggering.
No 50000 inquiries.
Just trying to quantify kind.
Kind of take some of his commentary.
Mess it up to two what does that mean for either growth.
Margins.
It means that we're facing a staggeringly large addressable market. Okay. It means that the game that we're playing is to establish a market leadership position in this market okay.
I don't know what the stock trades for today, or 20, or 30 bucks or whatever it is okay, but if we establish.
Speaker Change: Let's say that we succeed like we did at Oracle, Okay. Like we did it at Siebel and we establish a market leadership position in enterprise applications. I assure you. This is not a stock trading at $2030 $30. Okay. Okay.
It's multiples of that Okay, maybe an order of magnitude larger than that maybe we fail, maybe we fail and we ended up number two or number three.
Okay do some math on that I know it doesn't work there is no. There is no formula for this in your spreadsheet, but I don't think a spreadsheet is the right way to look.
The opportunity. This is this is a large addressable market. We are we have first mover advantage. We have a strong technology foundation and we are going for it and that's that.
The way to model the business honestly.
I would look at what we say revenue is going to be because what we say revenue is going to be for the last 14 quarters has been pretty accurate I think thats the best leading indicator you can have.
Terrific and then.
If you can maybe just double click on.
Margins right.
Margin degradation by kind of next year because of.
The number of pilots how does that work.
When you do pilots.
Charge less odor the professional services.
What drives lower margins.
Bye.
Right and making that choice.
Good question, what drives Laurie essentially our market offering today is for an enterprise application lets say stochastic optimization of supply chain, let's say demand forecasting for a large agribusiness or or predictive maintenance for a large manufacturer will bring that application live at a multibillion Corporation.
Basically in one of their facilities for haven't bring.
Bring it life not I'm not I'm not a proof of concept life, okay in six months or half a million bucks, okay, now and by the way. The alternative is to do this with Accenture, Deloitte, who charge of a $100 million to do it or $30 million due in two years. We went live in six months. Okay. Now the my application as I mentioned in January of AI is they have they have.
Capex is alive and 12 weeks for a quarter million dollars now we will do honestly arvind.
Ever it takes.
To make that customer lives, okay, and do I really look at what the profitability level of every one of these pilots is I do not okay, and if I am looking with a fortune 50 company about bringing their first enterprise AI application live I'm going to invest whatever it takes even at a loss if necessary to make sure the customer is successful.
So that's what drives the margin degradation are these in okay.
In aggregate profitable I'm sure. They are okay, and I am sure they are enormously profitable, but at any given one.
Will do.
Not going to fail.
Yeah.
And.
We have the resources to back that up.
Now I'll turn it back thank you very much.
That's where the mortgage and degradation is coming from Adam I realize it's hard to model, but it's just.
That's who we are and Thats what we are.
Yeah perfect. Thank you so much.
Really appreciate it.
Thank you one moment our next question.
And that will come from the line of Mike <unk> with Needham <unk> Co. Your line is open.
Hey, guys. This is Matt <unk> on for Mike Chico's over at Needham. Thanks for taking our question.
I wanted to ask how our newly converted customers ramp consumption versus consumption versus customers, who have adopted that can come from out of previous quarters.
Are you seeing consistency across cohorts.
Yes, I'm not sure I understand the question I think we've provided very specific guidance on that last quarter. Okay.
Okay, Matt Okay in the supplemental last quarter very very specific guidance on what were seeing okay and revenue consumption.
And basically the first quarter. They go to production to the 10th quarter did they go production. If I'm mistaken. This is from memory, but I think the first quarter. If they go to production they consume about 400000.
Three or 400000, GPU hours and by the time, we get to the 10th quarter I think its one 4 million. Yes. What is the how is my memory. Obviously, the initial assumptions actual usage first quarter, they've got production 370000, and it ramps up to one three.
<unk> 3 million in the 10th quarter, and let's say if you look at our supplemental from last quarter is it in this quarter to Amit nobody to notch I mean last quarter. It gets provided they are in great detail and that these are empirically accurate data.
Got it okay I'll take a look there thank you.
And then Oh, how are sales cycles compared to a year ago, our customers demonstrating a pauses identified benchmarks and TCT order secured budget or is.
Has it been pretty apparent so can we talk about every single cycle this quarter.
This quarter last quarter, we last quarter, we said it was what three and half months three and a half months I don't have the hard data before me, Matt, but I don't think it's changed appreciably.
Alright I appreciate it.
Thank you we do have time for one final question.
Speaker Change: And that will come from the line of pendulum Boyle with Jpmorgan. Your line is open.
Great. Thanks for taking the question. This is Jacob <unk> J P. Morgan.
Just a quick one on our end last quarter, you had mentioned that you expected positive free cash flow for the full year fiscal year 'twenty five.
Just wanted to get any update on that commentary.
Anything more this quarter. Thanks.
As we have the business plan right now, we're expecting positive free cash flow for fiscal year 'twenty five.
Great. Thanks.
Thank you.
Thank you I would now like to turn the call back over to Mr. <unk> for any closing remarks.
Thanks to everybody for your time I appreciate your continued attention and.
So stay tuned I think we're just getting started here and.
So next year is looking good.
We look forward to.
Communicated with you and keep you posted on what's going on and we appreciate your interest in the courtesy of you following us so.
We wish you all a great day and thank you for your time.
This concludes today's program. Thank you all for participating you may now disconnect.
Okay.
Okay.
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