C3.ai Q1 2025 Earnings Report

C3.ai EPS Results

• Actual EPS: -$0.05
• Consensus EPS: -$0.13
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: -$0.56

C3.ai Revenue Results

• Actual Revenue: $87.21 million
• Expected Revenue: $86.94 million
• Beat/Miss: Beat by +$270.00 thousand
• YoY Revenue Growth: +20.50%

C3.ai Announcement Details

• Quarter: Q1 2025
• Date: 9/4/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, September 4, 2024
• Conference Call Time: 5:00PM ET

C3.ai (NYSE:AI) develops enterprise artificial intelligence software and applications for organizations in a range of industries. Its technology is designed to help businesses use data, machine learning and predictive analytics to address operational, financial and strategic challenges.

The company’s offerings include the C3 AI Platform, which provides tools for developing, deploying and operating AI applications, as well as prebuilt applications for use cases such as predictive maintenance, fraud detection, supply-chain optimization, customer engagement, energy management and regulatory compliance. C3.ai also provides related implementation, support and professional services.

Founded in 2009 by technology entrepreneur Thomas M. Siebel, the company was initially known as C3 and later C3 IoT before adopting the name C3.ai. It serves commercial and public-sector customers globally, with applications used across industries including manufacturing, energy, financial services, defense, aerospace, telecommunications and government. Siebel serves as the company’s chairman and chief executive officer.

C3.ai Q1 2025 Earnings Call Transcript

Key Takeaways

• 21% year-over-year revenue growth to $87.2 M in Q1, beating expectations and marking the sixth consecutive quarter of accelerating growth.
• Non-GAAP operating loss narrowed to $16.6 M versus guidance of $22 M–$30 M, with net cash from operations of $8 M and free cash flow of $7.1 M, ending the quarter with $762.5 M in cash and investments.
• Signed 52 pilots (117% YoY increase) and closed 71 agreements, including 25 state and local government deals, underscoring strong demand across the public sector.
• Partner ecosystem drove 72% of total agreements, led by AWS, Booz Allen, Microsoft and 40 Google Cloud deals (up 300% YoY), fueling robust deal flow.
• Q2 revenue guidance of $88.6 M–$93.6 M and full-year outlook of $371 M–$395 M maintained, with free cash flow expected to turn positive in Q4 FY25.

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the C3 AI's first quarter fiscal year 2025 conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during the session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I will now like to hand the conference over to your speaker for today. Amit Berry, you may begin.

[Amit Berry, Head of Investor Relations at C3 AI]

Good afternoon, and welcome to C3 AI's earnings call for the first quarter of fiscal year twenty twenty-five, which ended on July thirty-first, twenty twenty-four. My name is Amit Berry, and I lead Investor Relations at C3 AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer, Ed Abbo, Executive Vice President and Chief Technology Officer, and Hitesh Lath, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our first quarter results, as well as a supplemental to our results, both of which can be accessed through the investor relations section of our website at ir.c3.ai. This call is being webcast, and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws.

[Amit Berry, Head of Investor Relations at C3 AI]

These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors 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.

[Amit Berry, Head of Investor Relations at C3 AI]

Finally, at times in our prepared remarks, in response to your questions, we may discuss metrics that are incremental to our usual presentation to give a greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not provide—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.

[Thomas M. Siebel, CEO at C3 AI]

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We're off to a solid start for fiscal year 2025. In Q1, we exceeded all expectations for revenue, cash flow, and profitability. This quarter marked our sixth consecutive quarter of accelerating revenue growth, reflecting our high levels of customer satisfaction and increasing demand for enterprise AI applications. Our year-over-year revenue growth has accelerated from 11% in Q1 2024 to 17% in Q2, 18% in Q3, 20% in Q4, and 21% year-over-year revenue growth in Q1 of fiscal year 2025. Total revenue for the quarter was $87.2 million, exceeding analyst expectations. Subscription revenue was $73.5 million and increased 20% from a year ago. Our non-GAAP gross profit was $60.9 million, representing a 70% gross margin.

[Thomas M. Siebel, CEO at C3 AI]

Our GAAP operating loss was $72.6 million, $72.6 million. Our non-GAAP operating loss was $16.6 million and substantially better than our guidance for a loss of $22 million-$30 million. Our non-GAAP net loss per share was $0.05. Our net cash provided by operating activities was $8 million, and we generated free cash flow of $7.1 million in the quarter, both substantially exceed market expectations. We ended the quarter with over $760 million in cash, cash equivalents, and investments. I'll note that this is the 15th consecutive quarter as a public company in which we have met or exceeded our revenue guidance. In the first quarter, the company closed 71 agreements, including 72 new pilots, marking 117% year-over-year increase in our pilot count.

[Thomas M. Siebel, CEO at C3 AI]

We entered into new agreements with GSK, Eletrobras, Valero, SWIFT, SmithRx, Sanofi, the U.S. Intelligence Community, the U.S. Department of Defense, Dolce & Gabbana, Ingersoll Rand, and others. Additionally, we significantly expanded our footprint across state and local government. In Q1, the company signed 25 agreements with state and local governments, with municipal, county, and state agencies in Texas, California, New Jersey, Georgia, Washington, Connecticut, Virginia, Rhode Island, Maine, New Mexico, and Florida. State and local government is a large and underserved market that we're rapidly penetrating. Our solutions increase efficiency while maintaining the highest standards for accuracy, transparency, and security. They drive substantial cost savings, and the combined benefits result in improved public services and improved customer experience. In short, C3 AI is enabling government agencies to do more with less, ultimately benefiting the public.

[Thomas M. Siebel, CEO at C3 AI]

To quote from the assessor, the assessor of Riverside County, and I quote, "We set the bar high for C3 AI, and they delivered with over 90% model accuracy in our property valuations. This technology is letting our staff do the mundane tasks faster and easier.".. so they can concentrate on the very complicated properties, and our employees are starting to see the fruits of this effort translating into better customer service. Overall, we are seeing incredible results with C3 AI, end quote. The proven benefits of C3 AI and so the C3 AI State and Local Government Suite, combined with our partner-supported and concentrated sales strategy, resulted in accelerated sales cycle within the sector.

[Thomas M. Siebel, CEO at C3 AI]

The growth was fueled by a highly collaborative joint sales and marketing campaign with C3 AI and Google Cloud to promote the C3 AI State and Local Government Suite, including C3 AI Property Appraisal and C3 Generative AI for Public Benefits. Through these efforts, we saw high adoption, with state and local government closing 24 agreements in the quarter. Let me give you a feel for the speed of these sales cycles. In Q1, we closed an agreement with a county in the Northwestern United States. County decision-makers got introduced to C3 AI at an industry conference, and within 24 hours, we were in contract negotiations. Just 12 hours later, we were in contract for C3 AI Property Appraisal. Another example is with a county in the Southeast United States. This customer attended our annual users group conference, C3 Transform, in March of 2024.

[Thomas M. Siebel, CEO at C3 AI]

Then, four weeks later, we held an executive briefing for the county leadership, and now, after three months of contract discussion, the county has signed a seven-year, seven-figure, five-year subscription deal for C3 AI Property Appraisal. Our state and local business has grown more than 500% year over year, and we are excited about the traction, the potential for expansion, and the customer advocacy for C3 AI. As we now take these public sector solutions to market in Europe, the addressable market more than doubles. Turning to the C3 AI federal business, this sector continues to experience sustained momentum, representing over 30% of our bookings for the quarter. We entered into new and expansion agreements with the United States Air Force, the U.S. Navy, the U.S. Marine Corps, and the U.S. Intelligence Community, among others.

[Thomas M. Siebel, CEO at C3 AI]

These agencies trust C3 AI to provide secure and innovative applications that help them modernize. The U.S. Marine Corps and C3 AI continue their successful collaboration to digitally transform the branch's legacy software systems. The Marine Corps is using the C3 AI Defense and Intelligence Suite to improve the efficiency of personnel management systems by accelerating critical processes and time to decision support. This work with C3 AI is backed by Manpower IT Systems Modernization Program and aligns with the Marine Corps multiyear roadmap and goals. C3 AI's customer base continues to expand both within and across industries, while maintaining exceptional levels of customer satisfaction by our continued focus on delivering measurable, significant enterprise value. At Eletronuclear, the largest power generation transmission company in Latin America, we partnered to enhance their grid resiliency and availability.

[Thomas M. Siebel, CEO at C3 AI]

Brazil's grid is among the world's most complex due to its diverse generation profile, variability, expansive service territory, and challenging regulatory environment. With C3 AI, Eletronuclear can effectively and efficiently process and analyze real-time data, surfacing low-latency AI insights to mitigate network disturbances. Nucor Corporation is seeing significant success in improving manufacturing outcomes with the C3 AI Supply Chain Suite. This deployment includes three distinct C3 AI applications: C3 AI Demand Forecasting, C3 AI Inventory Optimization, and C3 AI Production Schedule Optimization, working together to support and optimize daily decision-making across multiple facilities. As we enter Q2, we are focused on expanding sales capacity, expanding in North America, expanding in Europe, and expanding in the public sector. Our partner network continues to generate opportunities and open new deal flow.

[Thomas M. Siebel, CEO at C3 AI]

We had a very active first quarter in alliances, working closely with our partners to close 51 new agreements. Net-net, 72% of our total agreements were closed with and through our partner ecosystem. This was an increase of 155% year over year and 82% quarter over quarter. Our partner-supported bookings grew 94% year over year, and our activity levels with our partners that include AWS, Booz Allen, Google Cloud, and Microsoft, continues to increase substantially. In the first quarter, we closed 40 agreements with Google Cloud. This is an increase of 300% year over year. This growth was largely driven by the joint campaign between C3 AI and Google Cloud that I just discussed earlier, focused on the public sector.

[Thomas M. Siebel, CEO at C3 AI]

C3 AI continues to be an attractive partner for the hyperscalers, as our ninety enterprise AI applications rapidly drive substantial workload in their compute and storage clouds, while adding immediate value to our joint customers. As you can see from our supplemental deck, our bookings continue to be increasingly diverse. Our generative AI business is surprisingly diverse, with many candidly unanticipated use cases across the board in a wide range of industries. In addition, our total non-Baker Hughes revenue grew 37% year-over-year in Q1. Now I'll hand it over to Ed for an update on our products and generative AI. Ed?

[Ed Abbo, CTO at C3 AI]

Thank you, Tom. Let me first recap where C3 AI fits in the AI tech stack. Starting at the bottom, the four layers include silicon, cloud infrastructure, foundation models, and at the top, harnessing all this innovation to deliver business value are AI applications. This is where C3 AI plays with prebuilt AI applications that can be deployed very quickly. In contrast, the offerings you're seeing in the AI software market today fall into two distinct categories. First, legacy software companies that are scrambling to keep up with AI. To try to stay relevant, these companies are rebranding their twentieth-century software stacks with AI on the box. The technical debt to rewrite their software to take advantage of a modern, scalable AI tech stack is simply insurmountable.

[Ed Abbo, CTO at C3 AI]

For them, AI is just a bolt-on, constrained to a small fraction of the enterprise data managed by their legacy software. Second, we see a few more modern software companies that were designed primarily for data integration, data management, or data engineering, now claiming to be enterprise AI platforms to build and operate AI applications. Basing an enterprise AI application plan on these incomplete tech stacks requires customers to undertake significant protracted software development projects where minimal customer value is realized. This is clearly reflected in the customer satisfaction scores of these vendors. The C3 AI platform is unique in that it was a clean sheet design, providing all the services necessary and sufficient to design, develop, provision, and operate real-world enterprise AI solutions.

[Ed Abbo, CTO at C3 AI]

This provides users with rich, workflow-enabled AI applications operating on an application platform with advanced data fusion and governance and scalable AI ML operations capabilities. We leverage all layers of the AI tech stack, silicon, cloud infrastructure services, and foundation models. The C3 AI platform was purpose-built and hardened over fifteen years to rapidly deliver robust customer AI applications. Now, let me take a moment to unpack what we mean by prebuilt applications, as this is a key differentiator for C3 AI. As a customer, if you buy a prebuilt application, you don't need to define what the application does, design and develop the ontology, the business logic, the AI or Gen AI model pipelines, or the user interface. We've done all that.

[Ed Abbo, CTO at C3 AI]

C3 AI prebuilt applications are tried, tested, and proven in the market, so the application can be rapidly configured to the customer data sources, AI ML models tuned to customers' data, and the user interface tuned for the customer. This allows customers to quickly configure, deploy, onboard, and train users, scale out their enterprise, scale out across their enterprise, and rapidly realize enterprise value. Let me give you an example. Holcim, which is a large global building solutions manufacturer, scaled out C3 AI Reliability, our prebuilt AI-based predictive maintenance application, to most of its plants in just eight months after a successful pilot. The application monitors several hundred critical plant assets, such as vertical roller mills and ball mills, to accurately predict potential problems well in advance of failure.

[Ed Abbo, CTO at C3 AI]

It does so by continuously ingesting data from over 9,500 sensors and other systems, and analyzes those data using 850 machine learning models. The C3 AI Reliability application allows Holcim to avoid significant operational disruptions and high-cost remediations. Today, we have prebuilt AI applications with turnkey ontologies that address entire value chains across industry verticals. These applications don't operate in silos. They're designed and built to work in concert, all running on the C3 AI Platform. Each new application can deploy faster than the last, thanks to the ability to reuse data integrations, ontologies, AI ML pipelines, workflows, and user interface components. And as more C3 AI applications are deployed, enterprises accrue business benefits faster, and the pace of their AI transformation accelerates.

[Ed Abbo, CTO at C3 AI]

We also offer a suite of prebuilt and extensible C3 Generative AI applications that can be used as standalone solutions or deployed alongside other C3 AI applications. This quarter, we deployed C3 Generative AI for Industrial Asset Inspections at a large manufacturer. This application unifies data across unstructured inspection reports and structured data on asset performance, such as risk reports, corrosion analyses, work orders, et cetera, which makes these data easily and quickly accessible to plant operators. Some of these inspection reports include scans of handwritten text and engineering diagrams that are over 50 years old. Using this application, the company has been able to streamline the day-to-day work of inspectors, reduce costly operational mistakes and risk, and accelerate their turnaround efforts and time.

[Ed Abbo, CTO at C3 AI]

In Q1, we launched C3 Generative AI for Government Programs, which has immense potential for federal, state, or local government agencies by eliminating service delays, reducing wait times, enhancing the effectiveness of contact centers, and improving the citizen experience. We've already signed a pilot with a state on the U.S. East Coast, and look forward to supporting public sector agencies across the board. It's important to understand that the C3 Generative AI applications are unique in the market. We provide the ability to interact with omni-modal data, that is, structured sensor data, databases, unstructured documents, images, embedded tables, leverage any LLM available in the market, for example, GPT-4o, Gemini, Claude, Llama, Mixtral, to name a few, and multiple specialized LLMs in the same application, offering full source traceability for both structured and unstructured data and granular enterprise access controls.

[Ed Abbo, CTO at C3 AI]

We also provide tools to enable data scientists to tune system responses for high accuracy and production with minimal hallucination, perform chain-of-thought reasoning, author and execute mathematical functions, offer state-of-the-art LLM guardrails and protections, and orchestrate and chain together AI agents to perform high-value tasks. For example, to initiate workflows or write summaries. We provide out-of-the-box pipelines to synthesize results across AI agents, automatically detect and surface inconsistencies in underlying data, capture engine logs for auditability and traceability, provide tools for our customers, developers, and data scientists to configure their own custom generative AI pipelines, and offer fine-tuning services for embedding models and LLMs. C3 Generative AI is also unique in its enterprise-grade support for operating in highly secure air-gapped environments. This is a prerequisite for defense, intelligence, and financial services customers. I'll now turn it over to Hitesh to cover the financials.

[Hitesh Lath, CFO at C3 AI]

Thank you, Ed. I will now provide a recap of our financial results and additional color on our business. All figures are non-GAAP, unless otherwise noted. As Tom mentioned, total revenue for the quarter increased 21% year over year to $87.2 million. Subscription revenue increased 20% year over year to $73.5 million, representing 84% of total revenue. As a reminder, our subscription revenue is comprised primarily of software licenses, software as a service offerings, standard CoE support services, pilots and trials of our C3 AI applications for generative AI, and consumption-based pricing, for which revenue is recognized over time. Our subscription revenue also includes revenue from software licenses for which ongoing maintenance and support is not required, and in accordance with ASC 606, the revenue is recognized when the license is made available to the customer.

[Hitesh Lath, CFO at C3 AI]

Professional services revenue was $13.7 million. This represents 16% of total revenue in the first quarter of fiscal 2025, as compared to 15% of total revenue in the first quarter of fiscal 2024. We expect the professional services revenue to generally stay within 10%-20% of total revenue for fiscal 2025. Gross profit for the quarter was $60.9 million, and gross margin was 70%. Gross margin for professional services remained high at over 90%. Operating loss for the quarter was $16.6 million. Our operating loss was better than guidance due to continued focus on expense management. Our net cash provided by operating activities was $8 million. Free cash flow for the quarter was positive $7.1 million.

[Hitesh Lath, CFO at C3 AI]

We were able to generate positive free cash flow during the quarter because of continued focus on cash management. We continue to be very well capitalized and closed the quarter with $762.5 million in cash, cash equivalents, and marketable securities, an increase of $12.2 million compared to Q4. At the end of Q1, our accounts receivable balance was $140.1 million, including unbilled receivables of $81.5 million. Total allowance for bad debt remains de minimis at less than $400,000, and we do not have concerns regarding collections. The general health of our accounts receivable remains strong.

[Hitesh Lath, CFO at C3 AI]

During the first quarter, we signed 52 pilots, a 117% increase from last year and up 53% from last quarter. At quarter end, we had cumulatively signed 224 pilots, of which 191 are still active. This means they are either in their original three to six-month term or extended for some duration, or converted to a subscription or consumption contract, or are currently being negotiated for conversion to subscription or consumption contract. 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 life cycle. 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.

[Hitesh Lath, CFO at C3 AI]

As we continue to make significant investments in the business, we expect to be free cash flow negative for Q2 and Q3, but remain on track to be free cash flow positive for Q4 and also for the full fiscal year 2025. Now I'll move on to our guidance for the next quarter. Our revenue guidance for Q2 is going to be $88.6-$93.6 million. We are maintaining our previous guidance of $370-$395 million for fiscal 2025. This implies a year-over-year growth rate of 19%-27%, making C3 AI one of the fastest growing companies in the software public company universe. Our guidance for non-GAAP loss from operations for Q2 is $26.7-$34.7 million.

[Hitesh Lath, CFO at C3 AI]

We are maintaining our previous guidance of $95-$125 million for fiscal twenty-five. Now, I'd like to turn the call back over to Tom.

[Thomas M. Siebel, CEO at C3 AI]

Thank you, Hitesh. Let me address path to profitability. Our cost of goods sold is substantially less than our cost of generating revenue, and as such, C3 AI is a structurally profitable business. Our year-over-year revenue growth in Q1 was 21% and accelerating. Our year-over-year expense growth rate was 12%. In the coming years, we expect our revenue to generally grow at a greater rate than our expense growth rate. It follows that non-GAAP profitability is now simply a function of scale. While we continue to invest in market share, we believe our revenue growth rates will generally exceed our expense growth rates. The expense and revenue lines will converge, crossing over to consistent non-GAAP profitability. At this time, we expect to be cash flow positive in Q4, fiscal year 2025, and for the entire year, fiscal year 2025.

[Thomas M. Siebel, CEO at C3 AI]

Now, let's talk about the general enterprise AI market, and I want to talk about customer success. Okay. At C3 AI, we really are partners to our customers, often on speed dial, engaging with them multiple times a day to make them successful and self-sufficient. We're not working from home. We are out there on the site with our customers every day, every week. We sit shoulder to shoulder, and we get into the details of their business to make sure that everything is running smoothly as it relates to their enterprise AI applications. We hold weekly executive reviews to track progress at the highest levels. This proactive, boots on the ground approach is what drives the customer satisfaction reflected in our net promoter scores. This commitment to close, hands-on collaboration is demonstrated in our partnership with Shell.

[Thomas M. Siebel, CEO at C3 AI]

Shell has over 100 C3 AI applications in development and deployment for everything from asset integrity to production optimization. We started working with Shell initially on predictive maintenance back in 2018, and now they monitor over 15,000 pieces of equipment with C3 AI. They estimate that this program alone generates this whole C3 AI program that they have writ large, that they call Shell AI, okay, is generating annual benefits Shell of $2 billion. And we're not done. We continue to collaborate, expanding into new use cases, including subsurface reservoir management and oil condition monitoring. These applications, we expect to be all scaled out across multiple assets. This approach is also evident in our work with Con Edison. We began our partnership with Con Ed in 2017, initially focusing on the advanced metering infrastructure project.

[Thomas M. Siebel, CEO at C3 AI]

This is a project that enhances the operational efficiency, public safety, and customer satisfaction of their smart grid infrastructure, and it continues to scale. Annual cost reduction uncovered is over $45 million. The project is exceeding expectations with a projected benefit of more than $3.2 billion over twenty years, $500 million more than originally projected. Now, Con Edison is deploying generative AI for meter management and asset mapping, which addresses billing discrepancies and reduces mismappings on the electric grid, and reduces cost and increases customer satisfaction. Customer success is at the core of why we built this company. Now, let's take a moment here and think back, okay? For those of you who've been around, okay, for a few decades, and they've got very in touch with what's going on. Hey, people, C3 AI is the original enterprise AI company.

[Thomas M. Siebel, CEO at C3 AI]

Hard stop, okay? We began C3 AI in January of two thousand and nine. January of two thousand and nine. Think about that with a vision to develop a software platform and enterprise applications that would allow organizations to exploit what we believed would be the computing platform of the future, and that included elastic cloud computing, the Internet of Things, big data, and predictive analytics, and we did this during the depth of the AI winter. This was well before the advent of the GPU, before Azure existed, before GCP existed, and when AWS was nascent. We invested thousands of person-years and over a decade, okay, building the C3 AI platform, the first, okay, reference architecture, platform architecture for enterprise AI. Hard stop, the first, okay?

[Thomas M. Siebel, CEO at C3 AI]

And today, now over 90 C3 AI enterprise applications that address the value chains of energy, government, defense, manufacturing, financial services, agribusiness, pharma, and others. We deploy these applications today in Europe, Asia, South America, North America, okay, and in governments around the world. Now, 15 years later, the elastic cloud, the Internet of Things, big data, and predictive analytics have become ubiquitous. Enterprise AI is broadly recognized as one of the largest and fastest-growing markets in the history of enterprise software. It is a mandate for every corporate and government leader today to harness the power of enterprise AI, and C3 AI is extraordinarily well-positioned to serve this large and rapidly growing market demand.

[Thomas M. Siebel, CEO at C3 AI]

C3 AI is today one of the fastest-growing companies in the public software universe, and most importantly, in this current cacophony of AI market hype, C3 AI is achieving among the highest levels of customer satisfaction for value realized, okay, in the enterprise software world. Okay, I refer you to our earnings supplemental deck today, okay, where we're showcasing, okay, C3 AI's net promoter scores, benchmarking C3 AI against other leading enterprise software companies, okay? Many of which purport to be, almost all of which purport to be, okay, AI companies. And this is a report that's published by a third party called Comparably. The bottom line is, our enterprise software companies are the most satisfied in the software industry, consistently deriving unmatched value from our solutions. Achieving this level of customer satisfaction doesn't just happen.

[Thomas M. Siebel, CEO at C3 AI]

It's the result of relentless dedication, unwavering commitment, a thorough understanding of our customer needs, superior software technology, and deep, deep expertise in enterprise AI, honed over many years of excellence. In the final analysis, customer value realized will be the only criterion that will determine the leader, the leader in enterprise AI, and C3 AI is exactly on track. Now, I'd like to turn this over to the operator to begin our QA session. Thank you all.

[Operator]

Thank you. Ladies and gentlemen, as a reminder to ask the question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Patrick Walravens with Citizens JMP. Your line is open.

[Patrick Walravens, Analyst at Citizens JMP]

Oh, great. Thank you very much, and congratulations. Hey, Tom, can you start out by just sort of characterizing what the tone of business was like for you guys in Q1? And specifically, I'm looking at your deal band chart, where you had 71 deals, and the average TCV is 700. So if you multiply those together, you get, like, almost, you know, $50 million, which is up a lot. Just if you could just comment on the tone of business, that would be great.

[Thomas M. Siebel, CEO at C3 AI]

It's pretty wild out there. I mean, I'd say, particularly with the advent of generative AI, I mean, I think it's very difficult for people who are assessing these companies to really understand the complexity of what's going on in the AI market, okay? Where we have, you know, 41 different flavors of enterprise AI. We have these generative AI applications that go from very kind of small, low-priced use cases to very high-priced, high-value use cases. And you can't honestly, it's difficult to model, Pat. I mean, this is not a simple business. We're in this...

[Thomas M. Siebel, CEO at C3 AI]

You know, as we enter this kind of new world of AI, I mean, it's really complex, and we can't simply multiply, "Gee, we did this many widgets this quarter, and we're gonna do that many widgets next quarter, and this is the growth rates of widgets, and this is the gross margin, and therefore, you know, this is what the" - I mean, the, you know, we continue to be just amazed by the broad range of applications that we're finding for enterprise AI, and I would say in generative AI, many of which we just couldn't have anticipated. I would say, like, public sector, we could-- didn't anticipate that, and we just fell into a goldmine there, okay? Law firms, medical diagnostics, it's just fascinating.

[Patrick Walravens, Analyst at Citizens JMP]

Awesome. And Hitesh, if I could ask a follow-up for you. Did you, I think people are probably wondering, given how strong the bookings seem to be, why the guidance didn't go up? How did you think about that?

[Hitesh Lath, CFO at C3 AI]

You're talking about the guidance for the Q2 revenue guidance?

[Ed Abbo, CTO at C3 AI]

No, for the year, you kept it the same.

[Hitesh Lath, CFO at C3 AI]

Yeah. That still represents 19%-27% revenue growth, which still makes us one of the fastest growing companies in this public software company universe.

[Patrick Walravens, Analyst at Citizens JMP]

Okay. Thank you, guys.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Timothy Horan with Oppenheimer. Your line is open.

[Timothy Horan, Analyst at Oppenheimer]

Oh, thanks, guys. The subscription revenue's been a little lumpy here on professional services. I know, Tom, you know, basically just said it's very difficult to model out. But can you give us some color on the trends? Like, is this a good jump-off point for the rest of the year? And then maybe just on the expenses, you know, where should we, you know, be modeling in the expenses to increase the most the next, you know, quarter or two? Thank you.

[Thomas M. Siebel, CEO at C3 AI]

Thanks. Let me address subscription versus services. You know, under ASC 606, it's a little complex. Certain things that used to be, you know, used to be called software are now called services under the new guidance, and we comply with what the guidance is. That being said, we've guided that our services revenue would be 10% to 20% of revenue in any given quarter. Our services revenue was 16% in this quarter. Now, and so we're well within our guidance there. But before we kind of bemoan the fact that services were a little higher than they expected to be, let's remember what services margins are at C3 AI. While our software subscription margins are quite high, at 66%, okay, our services margin, everybody, you'll recall, is in excess of 90%.

[Thomas M. Siebel, CEO at C3 AI]

Services are a pretty darn good business. And, you know, while we continue to be focused on, you know. I mean, we're a licensing company, okay? We're not one of these services companies pretending to be a software company. There's one or two of them out there. Okay, and we're not that, but we continue to be focused. But, you know, it'll continue. For the next year or two, you can expect our services to bounce around in, you know, in the 10-20%. It'll probably average about 15%. But remember, our services margins are greater than 90%. I think 93% is out there, the number like that. So it's, you know, it's good work if you can get it.

[Timothy Horan, Analyst at Oppenheimer]

So was there any reclassification this quarter or one-time items? Or, you know, should the midpoint of 15% is kind of a good run rate going forward?

[Hitesh Lath, CFO at C3 AI]

No, no reclassification.

[Timothy Horan, Analyst at Oppenheimer]

Okay, great. And, expense line items, you know, anything to focus on the next quarter or two, where we should be seeing if they go?

[Hitesh Lath, CFO at C3 AI]

Yeah, so in terms of our expenses, we plan to continue to make investments in our sales force, R&D, as well as marketing efforts.

[Timothy Horan, Analyst at Oppenheimer]

Okay, great. Pretty much across the board. Just lastly, any change in the competitive dynamics out there? I mean, who do you run up against, you know, the most these days?

[Thomas M. Siebel, CEO at C3 AI]

Hi, this is back to Tom. Well, Ed, why don't you comment? What, what's the competitive environment? You-

[Ed Abbo, CTO at C3 AI]

Okay.

[Thomas M. Siebel, CEO at C3 AI]

You're closer to it than I.

[Ed Abbo, CTO at C3 AI]

Yeah. I think the default or de facto competition is the information technology, the IT organization, the CIO, trying to build these applications themselves. And those are our best, you know, prospects, ones that have tried to, you know, do data science and then scale that up across a large enterprise, typically figure out how difficult that is without the right data and AI platform. So that's, that is the de facto competition in the market for us.

[Thomas M. Siebel, CEO at C3 AI]

Those are just prospects a couple of years down the road.

[Ed Abbo, CTO at C3 AI]

Correct.

[Thomas M. Siebel, CEO at C3 AI]

Cause they all come crashing down across the board. You know, we have this CIO with 10,000 people in Bangalore trying to build this thing out of piece parts from, you know, the hyperscalers, and it invariably comes crashing down around them. And so they're just. We just put them in the pipeline two or three years down the road, and they come back.

[Ed Abbo, CTO at C3 AI]

That's right.

[Timothy Horan, Analyst at Oppenheimer]

Thank you. Thanks, guys.

[Operator]

Thank you. Please stand by for our next question. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

[Mike Latimore, Analyst at Northland Capital Markets]

Hi, guys, thanks. Yeah, the pilot growth was very strong, sequential year over year. Are the size of the pilots, you know, the value of the pilots for standard and generative AI, kind of as expected?

[Thomas M. Siebel, CEO at C3 AI]

Well, the size, the value of the pilots, you know, the kind of the middle of the road, and I could be off here by mid-10 or 15%, but in the middle of the road pilot for an enterprise AI application is $500,000. The middle of the road for a generative AI application is about $250,000. The value of the pilot, and a generative AI pilot usually takes three months to complete. An enterprise AI pilot will take six months to complete, okay? And then we go into contract negotiation, and they go live. We've given guidance before that we expect about 70% of our pilots to convert to production contracts. I think that's about right.

[Thomas M. Siebel, CEO at C3 AI]

Honestly, the 30% that don't convert, it's not because, I mean, many of these are enormously successful projects. It's not they don't not convert because the pilot wasn't successful. They convert because some genius CIO decides he's gonna try to build this himself out of some piece parts from a hyperscaler, and they'll be back.

[Mike Latimore, Analyst at Northland Capital Markets]

Yeah. Got it, got it. Okay. So no change in the pricing or value, it sounds like, on pilots. And then in terms of the second quarter guidance, the midpoint is about 24% revenue growth, which is a pretty big step up from the growth you had this quarter. I guess, and I think the biggest step up in the last four quarters, I believe, but is the, you know, what gives you confidence in that improvement? Is it these pilots you just landed, or is it professional services growth or big deals getting deployed? Just what gives you confidence in that acceleration?

[Thomas M. Siebel, CEO at C3 AI]

Yeah, using kind of the best professional judgment we have, okay, the confidence we gave is what we think is gonna happen. Now, we've been public, I think, for 15 quarters, and we've been right 15 out of 15 quarters. And I can, you know, I know that many of you are trying to model this business. If you can model it, you're better than I, because this is a lot of moving parts here. And I think the most. The best indicator of what we're gonna do is what we guide you to. I mean, you Can.

[Thomas M. Siebel, CEO at C3 AI]

.

[Thomas M. Siebel, CEO at C3 AI]

You can pretty much take that to the bank for each of the last fifteen quarters. We've been pretty spot on with that.

[Mike Latimore, Analyst at Northland Capital Markets]

Okay.

[Thomas M. Siebel, CEO at C3 AI]

So right now, that's what we think we'll do. That's our best professional judgment, and, you can be sure we're gonna be working diligently to meet or exceed that.

[Mike Latimore, Analyst at Northland Capital Markets]

Okay, thanks.

[Operator]

Thank you. Ladies and gentlemen, we will take our last question from the line of Kingsley Crane with Canaccord. Your line is open.

[Kingsley Crane, Analyst at Canaccord]

Hi, thanks for taking the question. 40 agreements with GCP. That's spectacular. 51 agreements with the partner network overall. So could you speak to the partner efforts outside of GCP? What's working well? What would you like to improve? And then, is the GCP partnership as dominant from a bookings contribution perspective as it is in deal frequency? Thanks.

[Thomas M. Siebel, CEO at C3 AI]

I'm not sure, Kingsley. I don't think I have the bookings contribution data here, so I can't correctly answer that one. I would say that the, you know, the relationship with GCP is great. The relationship with AWS is great. We're doing a lot of good work with AWS, obviously, with Microsoft Azure, and, I mean, we're great partners for these guys. I mean, what we do when they partner with us, we have the application up fast, the customer gets value. I mean, they don't make money when companies are building applications using their platforms. They get money, they make money when people are running their applications. So we're consuming, you know, CPU resources, we're consuming GPU resources, we're consuming storage, and they're all great partners.

[Thomas M. Siebel, CEO at C3 AI]

They're great companies, they're wonderful to work with, and it's a privilege for us to be able to partner with them.

[Kingsley Crane, Analyst at Canaccord]

All right. Okay. That's, that's very helpful. And then last one, just to clarify, for the SLED or state and local agreements, were most of those pilots?

[Thomas M. Siebel, CEO at C3 AI]

They all kind of start as pilots. Yeah, yeah. In other words, I'm not sure which number you're referring to. Did we refer to how many pilots there were or how many converted in the quarter? Did we say this?

[Hitesh Lath, CFO at C3 AI]

No, we don't talk about the conversions. We, we have the number for how many pilots closed in the quarter, 52, out of which.

[Thomas M. Siebel, CEO at C3 AI]

Kingsley, they almost all began as pilots, okay? They all began as pilots that go from, let's say, one to three months, and then the great majority of them convert to production.

[Kingsley Crane, Analyst at Canaccord]

Makes sense. Yeah, understood in this context. All right. Congrats on the quarter. Thank you.

[Thomas M. Siebel, CEO at C3 AI]

Thank you.

[Operator]

Thank you.

[Thomas M. Siebel, CEO at C3 AI]

Thank you, everybody. I think this is the end of our call. We really appreciate your attention. We, you know, this is quite an adventure. I think we're breaking ground in enterprise AI. I know we're breaking ground in enterprise AI, and you know, I can just tell you, for those of you who have visited us or those of you who have a chance to visit, it is, it's so exciting, it's just palpable. And so we're gonna continue to get after it, and we thank you for your time, we thank you for your attention, and wish you all a good day.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• Thomas M. Siebel, CEO
• Hitesh Lath, CFO

Analysts

• Mike Latimore, Analyst at Northland Capital Markets
• Timothy Horan, Analyst at Oppenheimer
• Ed Abbo, CTO at C3 AI
• Patrick Walravens, Analyst at Citizens JMP
• Amit Berry, Head of Investor Relations at C3 AI
• Kingsley Crane, Analyst at Canaccord