Thank you for standing by, and welcome to the C3 AI First Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Reuben Gallegos, Vice President, Investor Relations. Please go ahead, sir.

Thank you, and good afternoon, and welcome to C3 AI's earnings call for the first quarter of fiscal year 2023, which ended July 31, 2022. My name is Reuben, and I'm the Vice President of Investor Relations. With me on the call today is Tom Siebel, Chairman and Chief Executive Officer; and Juho Parkkinen, 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. 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. Also during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared remarks, in response to your questions, we may discuss metrics that are incremental to our usual presentation to give greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. And with that, let me turn the call over to Tom.

Okay. Thank you, Reuben, and thank you all for joining the call today. I will apologize in advance for the unusual length of my comments today, but there are a number of initiatives, some of which have been in planning for years, some for a few quarters, that are converging at C3 AI, that some of which you will want to understand to fully appreciate the gestalt of the business operations at CI. It is clear that the commentary that we have all been hearing in recent earning announcements about market uncertainty, budget cuts and lengthening sales cycles as the market anticipates economic downturn is real. This was our experience in the last quarter also. Our customers and prospects appear to be expecting a recession, and we are seeing customer purchasing behavior consistent with that expectation. It appears to us that this market downturn could be significant. So we have put into place a combination of measures that will allow us to not simply weather this downturn, but to emerge a stronger, more rapidly growing company with greater market share and greater market presence. The measures that we have implemented include a restructured, more productive enterprise sales function, an enhancement of our strategic partnering model, several new product offerings, a new consumption-based pricing model and an acceleration of our path to profitability. These measures, in aggregate, will allow us to accelerate sales cycles, accelerate product adoption, increase market share, increase revenue growth and increase profitability. I will explain each of these actions in some detail. But first, I will comment on the financial results and significant developments during the first quarter. Our total revenue of $65.3 million grew 25% year-over-year. This was in line with our guidance. I will comment also that this is the seventh consecutive quarter as a…

Thank you, Tom. I want to provide a brief recap of our financial results. All figures will be discussed on a non-GAAP basis unless otherwise noted. As Tom mentioned, we ended the quarter with revenue of $65.3 million, which represents a 25% year-over-year growth. Subscription revenue increased by a solid 24%, contributing 87% of total revenue. Gross profit increased 29% to $52.6 million, and gross margin increased 260 basis points to 80.6%. Operating loss improved $7.3 million year-over-year, while operating loss margin improved from negative 42% to negative 22%. Our customer count increased by 27% year-over-year to 228, and we closed 31 deals during the quarter. This reflects a nice increase in our band of less than 1 million deals, which grew at 44% year-over-year. We made progress on our path towards lower average total contract value, or TCV, with an average TCV of $1.4 million in the first quarter, down from $2.9 million in the sequential fourth quarter. This gives us further conviction that transitioning to smaller contract sizes and expanding our go-to-market strategy to include smaller deal values is the right way to engage new customers. Now turning to our RPOs and bookings. We reported non-GAAP remaining performance obligations of $496.8 million, which is up 39% from last year. We were especially happy to see further diversity in our bookings by industry. Hi-tech increased to 46% of bookings. Turning to cash flow. Free cash flow for the quarter was an outflow of $54.8 million, about $15 million was used for the build-out of our new headquarters. In addition, we had a commission payment to Baker Hughes of $16 million. Normalizing for these two payments, our adjusted free cash flow was an outflow of $23.8 million. As a reminder, this will not be a meaningful factor impacting our path to profitability because the impact will be amortized over the term of the lease. Regarding our transition to a consumption pricing model, we have provided a set of assumptions that are intended to assist you in modeling the future potential revenue for the company. Please refer to the attachment that is downloadable on our website after the call. We're keenly focused on executing against our path to profitability as the creator of the enterprise AI space. We have made significant investments in branding and marketing from the start. As we have now successfully built a strong brand in the marketplace, we're comfortable reducing our investments there. We have always been focused on delivering long-term sustainable profitable growth for our shareholders, and we're pleased to be able to accelerate our path to profitability with our transition to a consumption-based model. With these remarks, I would like to open this up for questions. Operator?

[Operator Instructions] And our first question comes from the line of Pat Walravens from JMP Securities.

So if you look at fiscal '23, you took revenue down $50 million at the midpoint. How much of that is because of the consumption model and how much of it is because the business is slower?

Good question, Pat. First of all, there is no question that business is slowing out in the market. But it doesn't matter if we made this change at any growth rate, okay, revenue would have flat, just like when -- as companies switch from professional licensing models to subscription model. So the growth rate is absolutely -- the change in growth rate is absolutely driven by the change in pricing models. Instead of doing $5 million, $10 million, $25 million, $50 million transactions, a few of them were out doing a lot of $0.5 million transactions, okay? But when you run the model, there is no way this does not flatten revenue for a few quarters.

Juho, do you have anything to add?

No, I think Tom summarized it perfectly.

Okay. So I mean, let's say you stuck with the old model, what would guidance have been like?

Honestly, I think trying to sell $10 million, $20 million, $30 million, $50 million, $60 million transactions in the next year could be pretty tough, Pat. I mean, large chemical companies, manufacturing companies, food companies, I mean these guys are all going to the bunkers, okay? They're preparing for a recession.

Okay. And what drove RPO? I mean, RPO is actually, I think, we were looking for 420, it was 458. What drew that? Or what drove that?

I mean, we still had pretty good -- we still had lots of deal activity during the quarter, and that's a natural increase on the total RPO every time we do one of those bookings. But I think, Pat, one of the things that we're very excited about is the current RPO increase sequentially. So that further highlights...

What drove is basically 66 deals out of the quarter, okay? That's why RPO is less of a number that we've got. I mean, if you close them, it'd be in our...

Yes, on the non-GAAP RPO, yes.

Non-GAAP RPO.

Yes. Yes, he's right on that.

So I'm just wondering, was there something big with Google or something that had a 10-year term or something like that that helped drive that number?

No. I mean, we had normal business activities.

Juho, go back and show the deal. I think it's really -- there's no big -- just go back show the -- there it is at.

So most of what you see here, Pat, we have lots of activity in the $1 million range, which we're very excited about, and we only had one larger view in the quarter in excess of $7 million.

Okay. And then last question. So are there any layoffs as part of the cost reductions?

No.

No.

Our next question comes from the line of Sanjit Singh from Morgan Stanley.

This is Jian for Sanjit. So I wanted to dig a little bit into the shift to consumption pricing and especially sort of on the installed base side. So I mean, you talked a lot about kind of the new customers. But I was wondering about the adoption with existing customers and sort of what you're expecting over what period of time the installed base would transition to a consumption model. And especially for long-term contracts, could we see those transitions during contract terms or just upon renewal? And then maybe a second one for Juho. So what really are the metrics to track here going forward to understand how demand is or how the business is executing among the shift to consumption pricing? If you could maybe shed some light into sort of what KPIs become more or less relevant as we're moving to the consumption model, that would be great.

Regarding -- let me handle the existing contracts. I think that the existing contracts will not be shifting to this model. And most of these contracts are so big now -- some of them are now in aggregate over $100 million. And when you look at all the collections in terms of conditions that they have, they're actually more favorable than this pricing model, okay? And so I don't think they're going to want to switch to this. As they renew, when they come up for renewal, they can switch to this if they want to work this out at the time. Juho, you want to talk about KPIs, certainly, new customers is going to be an important one.

Yes, absolutely. So thank you, Jian, for the question. I think one of the things that should give you a lot of guidance on this is that you look at our slide deck and we listed some of the assumptions. Those would be good things to track, but certainly new customers and then revenue because, of course, consumption itself will be recorded as revenue for those periods. So that will be one of the most important KPIs that we'll be providing in the future, of course.

Our next question comes from the line of Pinjalim Bora from JPMorgan.

This is Rachit on for Pinjalim. Can you update us on what you are seeing with respect to Ex Machina? And is that resonating with the customers?

I'm not sure what Ex Machina data that we have. We did a couple of large -- we did one large agreement with Ex Machina. It’s -- I just don't have this data before. Do you have data for Ex Machina?

No, no specifics like that. I think the one deal that large during the quarter was a more important one. So the large insurance company that licensed it. Let us do this. So let's prepare some detailed information and follow up on this. We just don't have it here. We will follow that with you and we'll get you all the details.

Okay. Got it. And then Q3 is your largest federal quarter considering alliance with your fiscal year end? Are you seeing the pipeline build on that? And is there any sign of slowdown on the federal side that you are noticing?

You're really breaking up. I think, how do we see the pipeline. Okay. The pipeline is longer than it's ever been. I can tell you that was one of the partners were discussed, we're currently, I think, this number is right, okay, that we're currently in active discussion on 100 co-sell opportunities, okay, with one of the currently -- 100, that's just with one partner. So the pipeline now gets dramatically longer, the number of new customers we expect to increase pretty dramatically. And the pipeline is very long. That being said, in the -- as we get into the fall of 2022 with war, famine, inflation and all the weird stuff that's going on, if you have a $10 million, $20 million, $30 million, $40 million or $50 million deal in the pipeline, it's hard to handicap it. It really is. So that's why we're -- we've been anticipating in doing this for some years. And now with Version 8, we're ready. And so we're pulling the trigger and we're going.

Our next question comes from the line of Brad Sills from Bank of America.

I wanted to ask about some just color on some of those 66 deals that pushed out -- what are your thoughts on -- I know there are a lot of moving parts of the macro right now, pricing changes, partner model changes, but any visibility as to timing there, when those might close?

Well, many of them -- it's really a question, Brad. So we're now coming back to them with -- we'd basically have the new pricing model, okay? And it is being very well received. So we think they're very real. We think they're a lot easier to close at $0.5 million than they would have been at $5 million or $10 million. And so that provides a tailwind for our business. And the pricing model, and they've got a number of aspects to it that are really being well-received. We used a price per developer. We used to provide per data scientists. Now it's unlimited developers, unlimited data scientists. For the first six months, it's unlimited run time. And so we've kind of taken out all the obstacles that were there. And if you get somebody to sign up for $0.5 million pilot for six months, it's not difficult, okay? And then the decision to go forward, you keep it, you pay 35% per CPU hour, doesn't need to go to the Board, doesn't need to go to the audit committee, doesn't need to go to the CFO, any person in the line of business can sign it. So I think that looks very promising.

Got it. And then one more, if I may, please, on just the GAAP RPO, maybe this is one for you, Juho, did decline 4% this quarter from last quarter. Was that related to this change to consumption pricing from subscription. Anything you can do to help us unpack just the GAAP number quarter-on-quarter?

Well, I think that's kind of on Tom's opening remarks that it was a tough quarter. And then also the fact that we had the 66 deals that were pushed out in the quarter that definitely impacted the sequential decline in -- that's the primary driver.

Our next question comes from the line of Michael Vidovic from KeyBanc.

On the Baker Hughes relationship, did you meet targets in the quarter? And have there been any changes to the longer-term targets with that?

Did we meet targets in the quarter? I think we did. Yes, I think we did, Michael, and the relationship with Baker Hughes remains intimate. I mean, I -- and we're in discussion about any number of interesting things, one of which is the relationship that we discussed with Microsoft or Baker Hughes and C3 to build a kind of very robust industrial asset management products. So I think we announced that a couple of quarters ago, and that's -- I was just down in Houston working out the details of that. So Baker Hughes is going well.

Okay. Great. And then just last one for me. Last quarter, you talked about deals being pushed out into fiscal 1Q and fiscal but you set at the time that they were not being retired. Did that play out as you expected? And then were most of those closed this quarter? Or do you see further pushouts?

No, I mean it was -- guys, it was a tough quarter out there. I mean we saw a lot of deals move sideways. All of a sudden, those people who have approval authority to sign deals in previous quarters, all of a sudden, they didn't have the approval authority to sign deals. And so right now, doing a large multimillion dollar or tens of millions of dollars capital contracts and corporations in any industry in the world is tough. And everything that we're hearing about in every conference call on CNB or every report on CNBC in the morning, it's true guys. People are getting ready for -- they're going into a recession footing. And so we think that what we're doing here is quite timely, and it's going to allow us to power through it. Again, we have almost $1 billion of cash in the bank. I think we are well prepared for this.

Our next and final question comes from the line of Gal Munda from Wolfe Research.

The first one is just around the new model. Is there -- is it fair to assume that all new contracts, all new deals are going right away into the consumption model? Or would you still kind of allow for exceptions for if there was something already in the pipeline for it?

Great question. Number one, yes, there are a few contracts that we're closing that -- where the paper is already on the table, and we're just -- everybody is happy to move forward. Secondly, you can anticipate that we will -- like we have done kind of very large transactions in the past with companies like Baker Hughes, NG, Shell, where somebody will want to go all in, in a big way. And we're reasonable people, and we will sit down with them, and we will get negotiate a win-win arrangement that will be based upon some other terms that this consumption-based pricing model. And so no, you won't see -- we'll still see the occasional black swan that comes in here that looks like an [indiscernible] and wants to do business in a big way. And we're reasonable people, and we'll find a way to do that.

That makes sense. And then just as a follow-up, you mentioned that within the quarter, there was actually quite a bit of activity. It sounded like maybe from a linearity perspective that maybe towards the end of the quarter you saw a lot more kind of issues with closing the deals and some of that hesitance. Is that a fair assessment of the quarter the way that you've seen it? Or was it just the whole quarter was very, very hard?

No. I'll be honest with you, we're -- so July was embracing wind. I mean, it really was. I was a bracing headwind in July. And something changed. And something significant change in July in the world. And I mean, there were a number of transactions everybody that I would have bet my life on, okay, with people who I know, with whom we've done business before. And many of them existing -- some existing customers, some not. And I mean, and they move sideways. And so something happened in July out there that was significant. That's definitely not specific to us. This is a macroeconomic phenomenon that affects -- is going to affect everybody. End of Q&A:

[Operator Instructions] And this does conclude the question-and-answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.