Q3 2025 C3.ai Inc Earnings Call
Good day and thank you for standing by.
Speaker Change: Welcome to the C3AI third quarter fiscal year 2025. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. Please be advised that today's conference is being recorded.
Speaker Change: I would now like to hand the conference over to your speaker today, Amit Berry. Please go ahead.
Speaker Change: Good afternoon and welcome to C3AI's earnings call for the third quarter of fiscal year 2025, which ended on January 31st, 2025. My name is Amit Berry and I lead Investor Relations at C3AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer, and Hitesh Lath, Chief Financial Officer.
Speaker Change: After the market closed today, we issued a press release with details regarding our third quarter results, as well as a supplemental to our results.
Speaker Change: Both of which can be accessed through the Investor Relations section of our website at ir.c3.ai. This call is being webcast and a replay will be available on our IR website following the conclusion of the call.
Speaker Change: 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.
Speaker Change: These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors, please refer to our filings with the SEC.
Speaker Change: Also, during today's call, as we refer to certain non-GAAP financial measures, a reconciliation of GAAP to non-GAAP measures is included in our press release.
Speaker Change: Finally, at times in our prepared remarks and 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.
Speaker Change: 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 Siebel: Thank you, Amit, and thank you, everyone, for joining us this afternoon to talk about our business results for the third quarter. Let me provide some kind of introductory comments.
Clearly, the market for what's going on in
Enterprise AI is huge and it is rapidly growing.
Tom Siebel: This has been, this interest has been clearly accelerated, okay, by
Tom Siebel: Generative AI and agentic AI, which is becoming a large and rapidly growing business for us. Now as a matter of background, some of you will
Tom Siebel: recall that we began work with generative AI in 2020 associated with some classified work that we're doing for the United States Missile Defense Agency that I believe continues today. And so when generative AI became
Tom Siebel: Most of the world became generally aware of it, I believe in November of 2022, we were well prepared to take advantage of this technology as we do.
Speaker Change: Amit Berry, Edward Abbo, Thomas Siebel, Edward Abbo, Thomas Siebel, Unknown Executive
Speaker Change: are really kind of wrestling with the problematic issues associated with these language models and agentic AI with which everybody on the call is familiar.
Speaker Change: You know, problems like hallucination, problems like unimodal or bimodal data sources, problems like data exfiltration, problems that are now being well documented where we're opening up new attacks, cyber attack vectors, IP liability, exposure, etc.
Speaker Change: Now, by combining the work that we did, you'll recall that we did
Speaker Change: Oh, really billions of dollars of software engineering associated with the C3 agentic AI platform.
Speaker Change: Okay, which where we address these issues of identity security and factor authentication
Speaker Change: Omnimodal Data Fusion, what have you. So by using these language models and agentic AI in the context of the C3 platform orchestration layer, we've really solved all those problems.
And so, as the, you know, as a result,
Speaker Change: C3 generative AI is installed today in some of the most secure installations on the planet Earth. These would include United States intelligence agencies, Department of Defense, and the U.S.
Speaker Change: Missile Defense Agency, Koch Industries, Nucor, and many others where we've solved all of these problems and so it's
Speaker Change: It is we're able to address some very interesting issues and the range of issues that we can dress is just
Speaker Change: Becoming wider and wider every day, whether it's whether we're dealing with hypersonics in space, whether we're dealing thinking about the coordination of swarms, whether we're dealing about using generative AI to help people operate large
Plants.
Speaker Change: or whether we're using, whether we use generative assistance for the delivery of government services. Think health and human services, Medicare, Medicaid, what have you. It's really very interesting. And so what I'm proposing to do something today for you that is historic.
and I believe this has never been done before.
Speaker Change: So what we have done is we have taken C3 generative AI.
Speaker Change: and we loaded, we built what is really a small language model.
and the Small Language Model consists of the
Speaker Change: Business Results and Call Strip from our second quarter, and the business results from our third quarter, and we're going to let... I'm going to let...
Speaker Change: C3 generative AI handled much of the substance of this call.
and brief you on the quarter after which Hitesh
will provide details on the
Hitesh Lath, Amit Berry, Edward Abbo, Thomas Siebel, Unknown Executive
Speaker Change: conference call ever done this way, please meet C3 Agentic AI.
Thank you.
Speaker Change: Here is the analysis summarizing the major themes across Q2 and Q3. In Q2, C3 AI demonstrated strong financial performance and strategic growth, setting the stage for further advancements in Q3.
Speaker Change: Our revenue growth accelerated to 29% year-over-year in Q2, reaching $94.3 million, with subscription revenue increasing by 22% to $81.2 million.
Speaker Change: This growth was supported by a robust partner ecosystem, including Microsoft, AWS, Google, and others, which played a critical role in driving our market leadership.
Speaker Change: The most significant development in Q2 was the expansion of our strategic alliance with Microsoft Azure, which we believe will be an inflection point in the enterprise AI industry.
Speaker Change: This partnership not only expanded our sales reach, but also shortened our sales cycles, positioning us for accelerating growth.
Speaker Change: Building on the momentum from Q2, Q3 total revenue reached 98.8 million dollars, a 26% increase year over year.
Speaker Change: Subscription revenue grew by 22% to $85.7 million, and our non-GAAP gross profit was $68.2 million, representing a 69% gross margin.
Speaker Change: Our non-gap operating loss improved to $23.1 million, better than our guidance of $38.6 million to $46.6 million. These results underscore our continued financial strength and operational efficiency.
Speaker Change: A key theme across both quarters has been the expansion and deepening of our strategic alliances, particularly with Microsoft, AWS, and McKinsey Quantum Black. In Q3, our partnership with Microsoft yielded significant results.
Speaker Change: Since the announcement at Microsoft Ignite, we closed 28 agreements across 9 different industries, marking a 460% increase quarter over quarter. Our sales cycles with Microsoft shortened by nearly 20% thanks to an effective co-sell motion.
Speaker Change: We have integrated with Microsoft's global sales infrastructure, running numerous partnership onboarding and joint enablement sessions.
Speaker Change: These efforts have led to a 244% year-over-year surge in our joint qualified sales pipeline with Microsoft as we pursue 621 target accounts recognized as eligible customer opportunities.
Speaker Change: This disciplined, data-driven approach is already showing measurable outcomes, and we are excited about the enthusiasm we see in the field.
Speaker Change: Our expanded strategic alliance with AWS in Q3 deserves particular mention. Under the new agreement, C3 AI and AWS will focus on offering advanced enterprise AI solutions together, further enhancing our global reach and execution speed.
Speaker Change: And our alliance with McKinsey Quantum Black, announced in Q3, is another pivotal development. This partnership leverages McKinsey Quantum Black's expertise in modern business transformation with our leadership in enterprise AI.
Speaker Change: McKinsey's track record in advising top enterprises and driving large-scale transformations complements our AI solutions, bridging the gap between strategic foresight and operational impact.
Speaker Change: In Q3, 71% of our agreements were delivered in collaboration with our partners, highlighting the importance of our ecosystem in driving our business forward.
Customer success remains a cornerstone of our strategy.
Speaker Change: In Q3, we secured new and expanded agreements with clients such as Flex, Whirly, New York Power Authority, Sanofi, Nucur Corporation, Wholesome, Shell, ExxonMobil, GXK, Quest Diagnostics, and Swift, among others.
Speaker Change: In the federal sector, we closed agreements with the U.S. Department of Defense, the U.S. Air Force, the U.S. Navy, and the Missile Defense Agency.
Speaker Change: Our focus on generative AI continues to drive innovation and customer traction.
Speaker Change: In Q3, we closed 20 C3 generative AI pilots with clients including Mars, Liberty Coca-Cola Beverages, the U.S. Department of Defense, and various government agencies.
Speaker Change: Our success with C3 generative AI demonstrates our ability to deliver safe, secure, and reliable AI solutions that drive measurable business outcomes. A significant highlight of Q3 was our continued leadership in agentic AI.
Speaker Change: We made further advancements in agentic AI in Q3, including high-quality agentic planning and orchestration, as well as agentic retrieval and reasoning over omnimodal data. These innovations enhance the autonomy, accuracy, and efficiency of AI models.
Speaker Change: further strengthening our market position. Our latest work includes a foundational time series embedding model which unifies and simplifies the development, deployment, and maintenance of AI use cases involving time series data.
Speaker Change: This model has enabled new systems for deep integration between C3 generative AI's agents and time series data, significantly speeding up scaling and adoption.
Speaker Change: The emergence of new, more efficient models like DeepSeek is another trend that bodes well for C3 AI. The lower cost of inference and proliferation of foundation models will accelerate AI adoption across enterprises.
Speaker Change: As the cost of inference decreases, the focus shifts from building advanced models to translating AI into applications that deliver tangible business outcomes.
Speaker Change: C3 AI is uniquely positioned to capitalize on this shift, with over 130 AI applications that are enterprise ready.
Speaker Change: Specific customer wins in Q3 further illustrate our growth potential. GSK, for instance, is leveraging our AI solutions to better predict demand and respond to market fluctuations.
Speaker Change: While SmithRx is using C3 generative AI to streamline member support and improve customer service.
Speaker Change: Looking ahead, the foundation we have built over Q2 and Q3 positions, C3 AI for sustained growth. Our strategic alliances with Microsoft, AWS, and McKinsey Quantum Black have dramatically increased our global sales reach and execution speed.
Speaker Change: As we enter Q4, all our solutions are now immediately orderable on the Microsoft, AWS, and Google Cloud portals, and we can contract rapidly using their contract vehicles. This significantly shortens our sales cycles.
Speaker Change: Our partner ecosystem, combined with our leadership in agentic AI and generative AI, sets the stage for continued acceleration in the coming years.
Speaker Change: As we enter Q4, our focus will be on ensuring the company is properly organized to expand both direct sales and services and provide support capacity to our dramatically enlarged distribution ecosystem.
Speaker Change: Fiscal years 2026 and 2027 will be about realizing continually expanded growth and market share.
Speaker Change: The market has never been larger, the opportunity has never been greater, and our product family has never been stronger. The company has never been better positioned to capitalize on all of this.
Speaker Change: In conclusion, we made amazing progress last quarter, laying the groundwork to substantially increase our global distribution capacity for all our enterprise AI applications.
Speaker Change: We now have a legion of experienced enterprise cloud sales and service professionals.
Speaker Change: at Microsoft, AWS, McKinsey, and Google Cloud, distributing and servicing our solutions globally. This inflection point for C3 AI is a growth accelerator. I am confident we have the people, the leadership, and the execution plans to achieve these goals in the coming quarters and years.
Tom Siebel: Thank you, C3 Agentic AI. And now let me turn this over to my colleague, Hitesh Lath, Chief Financial Officer at C3 AI, for additional commentary on our business results. Hitesh. Thank you, Tom.
Hitesh Lath: I will now provide a recap of our financial results and additional color on our business.
All figures are non-GAAP unless otherwise noted.
Hitesh Lath: Total revenue for the quarter increased 26% year-over-year to $98.8 million.
Hitesh Lath: Subscription revenue increased 22% year-over-year to $85.7 million, representing 87% of total revenue.
Hitesh Lath: Revenue from sale of software licenses that are demonstration versions of C3 AI applications was $28.6 million during the quarter.
Hitesh Lath: We sell these licenses to our distribution partners to enable them to demonstrate our software effectively to their customers.
Hitesh Lath: and to large strategic customers to enable them to accelerate AI adoption across their companies.
Thank you. Thank you. Thank you.
Hitesh Lath: I will also note that our non-Baker Hughes revenue grew by 43% year-over-year in this quarter.
Hitesh Lath: Professional services revenue was $13.1 million. This represents 13% of total revenue during the third quarter of fiscal 25.
Prioritize engineering services or PES revenue was 5.7 million dollars
Hitesh Lath: As we've said in prior quarters, we expect the professional services revenue, including PES, to generally stay within 10% to 20% of total revenue for fiscal 25.
Hitesh Lath: Our subscription and PES revenue combined was $91.4 million and accounted for 93% of total revenue.
Hitesh Lath: An increase of 18% compared to $77.5 million one year ago.
Hitesh Lath: Gross profit for the quarter was $68.2 billion and gross margin was 69%.
Hitesh Lath: Gross margin for professional services remained high at over 85 percent.
Hitesh Lath: Operating loss for the quarter was 23.1 million dollars and a net loss for the quarter was 15.8 million dollars.
Hitesh Lath: Our operating loss was substantially better than guidance due to continued focus on expense management.
Hitesh Lath: In particular, we elected to reduce our marketing spend, including advertising.
Hitesh Lath: and to focus on expanding the sales organization and dramatically expanding our strategic partner ecosystem.
impact of which will manifest over time.
Our non-gap net loss per share was $0.12.
Our net cash used in operating activities was $22 million.
Hitesh Lath: Free cash flow for the quarter was negative $22.4 million as compared to negative $45.1 million in the third quarter of last year.
Hitesh Lath: We continue to be very well capitalized and close the quarter with $724.3 million in cash, cash equivalents, and marketable securities.
Thank you.
Hitesh Lath: At the end of third quarter, our accounts receivable balance was $180.4 million including unbilled receivables of $89.8 million.
Hitesh Lath: Total allowance for bad debt remains at less than $650,000, and we do not have concerns regarding collections.
The general health of our accounts receivables remains strong.
During the third quarter, we signed 50 pilots.
Hitesh Lath: At the end of the quarter, we had cumulatively signed 310 pilots.
of which 245 are still active.
Hitesh Lath: This means they are either in their original three to six-month term,
or convert it to a subscription or consumption contract.
Hitesh Lath: All are currently being negotiated for conversion to subscription or consumption contract.
Hitesh Lath: We are excited about our expanding distribution network and go-to-market initiatives with Microsoft, AWS, and McKinsey.
Hitesh Lath: We expect to continue to see some moderation in our gross margins due to higher mix of pilots in the near term which carry a greater cost of revenue during the pilot phase of the customer lifecycle.
Hitesh Lath: We also expect some moderation in our operating margin in the near term due to additional investments we are making in our business, including in our sales force, partner ecosystem, customer support, and research and development.
Hitesh Lath: As we continue to make significant investments in the business, we expect to be free cash flow negative for fiscal 25, but remain on track to be free cash flow positive for Q4.
Hitesh Lath: Now I'll move on to our guidance for the next quarter.
to $113.6 million.
Hitesh Lath: For the full fiscal 25, we are anticipating revenue in the range of $383.9 million.
to 393.9 million dollars.
Hitesh Lath: Our guidance for non-gap loss from operations for Q4 is 30 to 40 million dollars.
Hitesh Lath: And our non-GAAP loss from operations for the year is expected to be in the range of 87 to 97 million dollars.
Our guidance is predicated on the assumption of geopolitical stability.
Speaker Change: Were there to be a situation that the U.S. government closed, the budget did not pass?
Speaker Change: or we see indications of global trade war, those could have unknown and adverse consequences on the business results.
Speaker Change: With that, I'd like to turn the call over to the operator to begin the question and answer session. Operator? Thank you. To ask a question at this time, you will need to press star one one on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question simply press star 1 1 again. Please stand by while we compile the Q&A roster.
Speaker Change: Our first question coming from the line of Timothy Horan with Oppenheimer. Your line is now open.
Timothy Horan: Good morning. Thanks, guys. Great job on the relationship here with Microsoft, Amazon, McKinsey. Can you give a little bit more color what's going on with the total number of pitches that you're going on at this point and pipeline? And when do you think that'll start converting to revenue? Thank you.
It is converting to revenue.
Timothy Horan: I believe that we're involved with just one of these companies with Microsoft, we're involved with, you know, over 600 engagements today.
Timothy Horan: where we are the preferred enterprise AI solution and they are the preferred.
Timothy Horan: Platform Solutions. So I mean understand that I think this this agreement was signed September 30th, if my memory serves me correct, we announced it in a made-stage format at Microsoft Ignite in Chicago. I believe it was November 20th.
Timothy Horan: Not much happened between November 20th and the end of the year because that would be the end of the quarter.
Timothy Horan: for Microsoft. So they were focused on their business. And then you get to the first year you get to like the, you know, roughly
Timothy Horan: You know, people get back to work when like 15th of January or whatever.
Timothy Horan: And so we've really been at this for a little bit over a month with Microsoft.
Timothy Horan: Amiya, what have you, in across a wide range of industries. So that's, and that's just, that's just Microsoft. Okay, and so now we have AWS, we have
Timothy Horan: This business with McKinsey Quantum Black is huge, and these relationships that we have are...
Timothy Horan: Most unusual. These are not simple distribution arrangements. These are, you know, co-selling arrangements, teaming arrangements. And it is, you know, this occupied.
Timothy Horan: A lot of our attention, okay, in the last four months, and we were, for whatever reason,
Timothy Horan: that we can talk about some other time. Okay, we were swarmed by these guys. And I think the right thing to do was...
Terrorists.
Timothy Horan: respond accordingly. The agreements are all are all inked. They are executed.
Timothy Horan: They are announced and we are open for business. So it is, you know, there's no way, no how. This is not a growth accelerator for C3 AI. This is a genuine business.
Big deal.
Timothy Horan: So the 600 engagements have only been since you've announced a deal with Microsoft and maybe just some color. How long does it usually take from initial engagement till you sign a contract?
Timothy Horan: Well, we've already closed. We said how many we closed so far. In the last quarter we closed how many? 28. We have closed 28 agreements in Microsoft already. We've closed 28 already.
Unknown Speaker
last quarter. Seven minutes, pretty quick.
Timothy Horan: Great. And then just lastly, just a little bit more color on the remaining performance obligations, you know, what's going on with the trends there.
Speaker Change: I didn't hear the question, so if one of you guys could pick it up. Can you repeat the question, please? Oh, yeah, just remaining performance obligations. Can you just talk about the trends there, what we should kind of expect going forward?
Speaker Change: Yeah, the total RPO at the end of the quarter, it was around $208 million. And as we've indicated in the past, RPO is not the leading indicator of our business. So you should continue to expect some decline in our RPO in the near term.
Thank you.
Thank you.
Our next question coming from the line of...
We cannot hear you. Please check your mute button.
Speaker Change: My apologies. So let me add my my congratulations on the all the partnership momentum.
Hamid.
Speaker Change: Would you be okay talking about the note that you published on February 18th?
Speaker Change: You bet. I'm so sorry. But if you could just talk about what the health setback was and what steps you're taking in terms of running the business, I think that would be great.
Speaker Change: The, you know, I was sick. And then that turned out was a precursor for an autoimmune disease.
I'm sorry, Giant Cell Arteritis.
Speaker Change: Okay, and so when we get into February, this autoimmune disease kicks in and attacks my optical nerve.
Speaker Change: And so my optical nerve path is kind of fried, and so my vision is impaired.
Hitesh Lath: Now, as it relates to operating the business, Tom has to learn some new skills.
Speaker Change: And we put the accommodations in place. I mean, I mean, you know, me to be intimately familiar with the details of this business. Okay. And you can imagine that we spent
Speaker Change: Exacting detail with this management team, you know, bigger, you know, how we were, you know, reorganizing this company around this new opportunity that's here. We've done the same. We have the same meeting with.
All of our sales people around the world.
Speaker Change: I spent a lot of time personally with all of the, a lot of time personally, okay, with all of the partners that we've discussed. I put the accommodations in place.
Speaker Change: But really the only thing I can't do is read email.
Speaker Change: So we put the accommodations in place, there was somebody here with a hot computer who reads the emails to me, I comment, I respond, I approve, I don't approve, what have you. I am here in the office, I am managing the business every day.
In the short term, my travel.
Speaker Change: The medical community has me on kind of a they don't want me going real far
Speaker Change: or at high altitude. And so we've, we've made arrangements for Jim Snobby, who you most certainly know or know of, and one of our more distinguished directors, Jim, of course, was the co CEO of SAP.
Speaker Change: Chairman of Maersk, Chairman of Allianz, Chairman of Siemens, and so Jim is assumed the role as Special Assistant to the Chief Executive, okay, and he's filling in
Tom Siebel: He's filling in for the events that Tom can't do. Let's say I'm supposed to do Viva Tech in Paris.
or what have you.
Or maybe we need to do a
Customer Review at Shell in London.
Tom Siebel: You know me a little bit, and you know I'm generally in touch with those details. My health is excellent, okay, so I'm beyond all of the infirmities that I had, I just can't see. And the, so that, that.
Tom Siebel: How is that answer acceptable or would you like to know more?
Timothy Horan: No, that is a very complete answer. Everyone on this call is wishing you a speedy recovery, Tom. Thank you so much for the details.
Thank you, buddy.
Thank you.
Thank you.
Thank you.
Speaker Change: Our next question coming from the line of Austin Tietz with UBS. Your line is now open.
Speaker Change: Yeah, Tom, best of luck on the health front. And then, yeah, question for Tom or Hitesh. Within pro services this quarter, the services fees part outperformed by I think $4 million or so relative to the first half of the year. I think it was up, you know, six and a half million dollars or so compared to the year ago quarter. Can you maybe just speak to what drove that the services outperformance this quarter?
Yeah, yeah, so this is Hitesh, our...
Speaker Change: Professional Services Revenue, it includes Prioritize Engineering Services Revenue as well as
Speaker Change: Revenue from consulting services, paid installation services, and training services. So we saw an uptick in revenue from consulting services, paid implementation services, and training services during the quarter.
Speaker Change: Okay, got it. And then, Hitesh, that was helpful, color on the demonstration licenses piece this quarter. It feels like those demonstration licenses have really been outperforming, you know, pretty considerably over the last few quarters. So I guess, like, you know, why are we seeing so much outperformance in demonstration licenses, you know, this year? Sort of what's been driving that? And how should we think about those going forward?
Speaker Change: Well, this is Tom. Let me comment on this. I mean, come on, guys. I mean, I don't know how many salespeople we just took on, okay, at Azure, at AWS, but...
Speaker Change: I believe it's tens of thousands. Okay. And the and they have a very, very complex bag of technology that they need to sell, you know, whether they're selling
Speaker Change: you know, all these fabrics or C3 buckets or, you know, all these various tools and widgets they sell. Now we're selling solutions, okay? We're selling predictive maintenance. We're selling reliability. We're selling, you know, predictive maintenance for furnaces, for polyethylene facilities. We're selling supply chain optimization for consumer packaged goods companies. And so
Speaker Change: So it is absolutely imperative, okay, that we arm these people with complete sales kits.
Speaker Change: Not only, you know, sales presentation, Q&A, a generative AI for asking, for answering questions, but also demonstration software so that they can go, you know, kick in the door and do the first demo to the customer on their own. And then we can come in.
So, I mean, we were, we were simply overwhelmed.
by interest.
Big, important people.
Speaker Change: Organizations in the last 3-4 months and for us not to arm them with demonstration licenses is just not rational.
Do not have continuing performance, ongoing performance obligations.
Speaker Change: So that the way that they work under ASC 606 is you recognize
Speaker Change: the revenue in the period in which they're delivered. But that was a must do to make these people effective. And I mean, they're not selling on their own, they're selling with us.
Okay, but...
Speaker Change: This shows them, you know, so we're there on the sales call, we're there on the demo, we're there on the statement of work, we're there working on making the pilot successful. But also they need to be able to operate independently of us and this is a.
Speaker Change: Absolute critical success factor. And so it did result in a in an increase in that form of revenue.
Awesome. Thanks, Tom. Thanks Hitesh.
Thank you.
Speaker Change: Thank you. And I would now like to turn the conference call back to Mr. Siebel for any closing remarks.
Speaker Change: Ladies and gentlemen, thank you so much for your time and continued attention. It's difficult to describe how exciting it is here and it is
Speaker Change: You know, it's we're involved in some of the the largest the most complex and most fascinating enterprise AI deployments on earth we and it's
You know, this is, this is.
Speaker Change: I assure you it's the professional experience of a lifetime, and I think we are on the verge of building one of the world's great companies. So thank you for your attention today, and we look forward to keeping you posted on our progress as we power forward.
Thank you all.
Speaker Change: This concludes today's conference call. Thank you all for participating and you may now disconnect.