Good day and welcome to the C3 AI’s Earnings Call for the Fourth Quarter Fiscal Year 2023, which ended on April 30 2023. My name is Amit Berry and I lead Investor Relations at C3.ai. With me on the call today is Tom Siebel, Chairman and Chief Executive Officer and Juho Parkkinen, Chief Financial Officer. After market close today, we issued a press release with details regarding our fourth quarter results, as well as the supplemental of 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. All figures will be discussed on a non-GAAP basis unless otherwise noted. And 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 the 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.

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We finished the fourth quarter strong and the coming year looks stronger. I believe that is generally agreed that the overall market for enterprise AI now appears substantially larger and is growing at a much greater rate than most analysts and expert predicted. We have been working since 2009 to develop product leadership and establish thought leadership in enterprise AI, assisting private and public sector enterprises to apply AI to improve operational processes. C3.ai has been at the vanguard of enterprise AI of the enterprise AI market for over a decade. As the market has developed from its routine IoT to supervised learning, unsupervised learning, NLP, deep learning, reinforcement learning, and now generative AI. In the past 14-years, we have developed and enhanced the C3.ai platform and now offer over 40 enterprise AI applications developed with that platform that allow our customers to rapidly take advantage of AI to improve their business processes. We have been communicating for over a decade that we believe that the market for enterprise AI solutions would be quite large. And now as we enter the summer of 2023 has become a dominant theme in technology discussions, government -- or AI has become a dominant theme in technology discussions, government discussions, media reports, defense and intelligence imperatives and government and business imperatives. I did not believe that it's an overstatement to say that there is no technology leader, no business leader and no government leader, who is not thinking about AI daily. AI chipmakers like NVIDIA are accelerating production to try to keep up with the very real demand that's out there. And all of this is being accelerated by the advent of generative AI. The interest in AI and in…

Thank you, Tom. I will now provide a recap of our financial results, add some color to the drivers of our financials, provide more detail on our first quarter and full-year fiscal 2024 guidance, and I will conclude with some additional color related to the consumption based revenue model we introduced three quarters ago. All figures will be discussed on a non-GAAP basis on this otherwise noted. Overall, the business activity is higher than we have ever seen. Our sales reps are more engaged there are more opportunities they're working on and they're more interest from our prospects. During Q4, our ability to close agreements was more consistent throughout the quarter, compared to prior quarters this fiscal year. We ended the fourth quarter with a total revenue of $72.4 million of which subscription revenue was 78.5%. As we discussed last quarter, we expected professional services would be within our historical range 10% to 20% with our actual professional services coming in at 21.5% of the mix. Gross profit for the fourth quarter was $53.9 million and our gross margin was 74.4%. We generated $27.1 million in positive operating cash flow and $16.3 million in free cash flow for the quarter. As mentioned during the prior updates, we have a short-term pressure on our gross margins, due to a higher mix of pilots, which carry a higher cost of revenue than production deployment. Operating loss of $23.5 million was improved due to more rigorous expense management. As a reminder though, the fourth quarter is when we host our C3.ai transform customer events, as such, our marketing expenses ramped up to support the successful execution of that event. Operating loss margin was 32.5% in Q4, where the sequential increase was driven by our annual conference. With the full year fiscal 2023 our…

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

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

No, I think -- thanks Kingsley. I think it's all of that. I mean, clearly, AI is on everybody's mind, the consumption based pricing model that we have makes it much easier to adopt our technology. In the old days, one and two years ago to do business with us was $5 million, $10 million, $20 million, $50 million to open the door. And now the transaction is pretty much, you know, we'll bring the application live in six months or $0.5 million. If you like it, keep it and pay $0.55 per CPU hours to be CPU hour, so we're pretty easy to do business with. And so we're seeing the number of transactions increase dramatically as we'd expect. The ease of contracting with us. As you know, we have largely reconstituted the sales organization in the last 1.5 years to a sales team that is candidly much more productive and effective than our other sales organizations. So I think all of those are contributing to increased pipeline, increased business, increased business activity by which we're quite optimistic.

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

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

Okay. Very helpful. Thank you.

Thank you. Our next question comes from the line of Pat Walravens of JMP Securities. Your line is open.

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

DoD, well, Pat, you asked kind of many times about the -- we have two basically authorities to operate contract vehicles once were $100 million and once were $1.5 billion in DoD that are associated. It could be applicable to what we're doing at RSO, that was the rapid sustainment office and the predictive maintenance application that we're doing for the United States Air Force for F-15, F-16, F-18, F-35, KC-135, et cetera. And what we made a proposal to the Secretary of the Air Force to take that into full production for all the aircraft in the Air Force, which is 5,000. I think the proposal would have increased aircraft availability for the Air Force by 25%. And I think decrease their cost of maintenance and readiness by about $6 billion. So he considered that as did his Chief of Staff, General Brown, and they went off on their own for a few months, while you were asking the questions, and we didn't have the answers and these guys go into their start chamber the way they do. What they came out with was not -- was a selection of C3 as the standard -- as the system of record, not only for aircraft in the United States Air Force, but for all AI-based all predicted maintenance, okay, in the United States Air Force for all assets. So this is genuinely a big deal, okay. Now we have the opportunity to make this a line item in the budget. So this is -- it's hard to over describe the impact of the - overestimate the impact of this. And then not only do we have it in Air Force, we can talk now to other services like the Army and the Navy and the Marines and the National Guard,…

Great. Thank you.

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

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

Great question, Sanjit. So our first three engagements that are evolved in now will be -- our organization is the order of $100 billion or greater in revenue, okay, and have -- we'll bring the application live in 12 weeks. We're not doing it -- and we have like three people on the project, so it's pretty straightforward. Now the issue of going from, say, six customers to 60 customers to 100 customers, it's pretty straightforward. We know how to do that, okay? The real key is, okay, in terms of blowing the doors off this thing, can we go from six customers to 60 customers to 6,000. So for 6,000, now we have to leverage these channels like the AWS marketplace where the product is available today, the Google marketplace where they're available today. But in terms of usability, it needs to be with the Apple iPhone. You open the box, you take the cellphone off, you turn it on and it works. And so now we're -- the next generation -- the next -- the really serious development work that we're doing now on that product, kind of, relates to really product design, okay, and making it like an Apple product, you open it up, you turn it on and it works. And so that's the challenge that's before us. I think we're up to it, okay? And if we're able to hit that note, hold on to your stock.

I appreciate the color, Tom. And then maybe one follow-up. Maybe this is for Juho and Tom as well. And it sort of relates to the guidance for the full-year. I'm trying to contextualize like what's really driving the guidance for next year? Because we're coming off a year, fiscal year '21, I think you guys grew north of 30%, 33%, 34%. And this past year, you guys grew sort of mid-single-digits. The initial guidance calls for growth sort of mid-teens at the midpoint sort of 20% at the high-end. And I want to understand, like is the acceleration you're seeing a function that you're coming off a tougher year where you had a spending environment is more difficult, sales reorg, those types of things versus generative AI really coming online in fiscal year ‘24. And so is there any way you can, sort of, attribute those two things between sort of coming off of a tougher year versus the demand that you're seeing in pilots out in the field?

Let me address the premise, okay? Before we all bring our hands about tougher year, tougher year, tougher year. I think we got that in 4 times in the call for all the audience. Okay, let's remember, okay? When we are now the transition to consumption-based pricing, okay, we made it very clear that this was going to have a short and mid-term, okay, negative effect on revenue growth. It's actually a mess. Anybody who knows how to use a spreadsheet can figure this out. If we're closing $0.5 million deals instead of $10 million, $20 million, $30 million, $40 million, $50 million deals, the short-term impact on revenue is to dampen revenue growth. So I'm not certain that's so tough. Okay, that is basically we're actually getting exactly the plan that we set. So this thing is exactly on track. Now when you run this three year a little extra spreadsheet model and you hit the carriage return, okay, and you run it out a few years -- a few quarters out there, you can do the math and you know what happens. But I'm not -- so I think we're exactly on plan with what we did. We made the investment. I think it was a great decision. It was a good investment. And now in fiscal year ‘24 and ‘25, we're going to yield the returns from that investment.

Great. Appreciate for that.

Thank you. Our next question comes from the line of John Katsingris of Wedbush. Your line is open.

Hi, thanks for taking my questions. John on for Dan Ives, so given the increased diversity seen, I guess, across industries served, how have you seen these use cases develop? And how do you see them playing out in the future? Thank you.

Great question, John. Right now, I mean, in terms of applying AI to enterprise we're in first-half of the first inning and the first guys that, okay. So this is an embryotic market. I mean, where we're seeing the biggest uptake media. First, it was in the SmartGrid, okay. Why the SmartGrid because they had invested $2 trillion, okay, upgraded infrastructure globally to make all the devices in the SmartGrid, remotely machine addressable, a huge IoT constellation. So that's where we saw it first. The next large -- what we're seeing in the past year, the largest market is in AI reliability, basically predictive maintenance. So they can move the military, they called readiness, okay, or in the Par average sector, they call reliability. So AI-based predictive maintenance is the largest segment today. How will this evolve? I mean, it's clear we will be applying AI to all business processes, production optimization, demand forecasting, supply chain risk okay, stochastic optimization, the supply chain CRM, either. I think there is no aspect of business operations that will not be or -- and medicine, okay, and research and the science and literature, entertainment that will not be accelerated by the use of AI. So we're just going to have to -- we're along for the ride and we're going to see where this goes in the next few years and stay on the balls of our feet as it develops, but it is a rocket ship.

Thank you, Tom.

Thank you. Our next question comes from the line of Mike Cikos of Needham & Company. Your line is open.

Hey, guys. Thanks for taking the questions here. Maybe the first would be going to Juho. So I know that you guys have cited the 43 deals you closed this quarter, 19 of those are pilots. Can you further refine that for us? And maybe it's just the classifications or names we're using for this. But like how many of those pilots are purely consumption-based versus maybe pilots that are still coming in under the old pricing model?

Mike, these are all -- these would all follow the new consumption-based approach. These are not under the old model at all.

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

That's a great question. So Michael, on the first quarter, we announced this would have been Q2, which obviously, you take six months from that, we get towards the end of Q4. So we are very early in that in the conversions. We are standing by with the model assumptions, i.e., whatever we provided three quarters ago where it is, each pilot is expected at 70% likelihood to convert into a follow-on consumption deal. But I would say that the first quarter before consumptions, we really will start seeing more of that this quarter since it was late in Q2 as we entered into those original pilot arrangements.

Understood. Understood on that. Thanks for that. And then just one quick follow-up, if I could. But I wanted to add just on the professional services revenue. I know it's you just a tick higher versus the typical 10% to 20% range we've been talking about. And I just wanted to see, is 10% to 20% still the appropriate range we should be thinking through? Or is there maybe more handholding for these pilots as you guys engage in them? Or is it maybe handholding of potentially federal sector customers? Like how do we think about the higher pro-serve revenue generation in Q4 versus what you guys are thinking about over the next year?

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

Thank you for that. I’ll turn it back to my colleagues. Appreciate the time.

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

Hey, great. Thank you. This is Adam Bergere on for Brad Sills. So you're pretty well positioned in the current market, just given AI use cases are coming into focus. So kind of curious if it's changed your cadence for R&D investments at all?

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

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

It's a good question. It kind of seems like everybody is interested in this. They want -- at the level of the CEO or the person who operates manufacturing and the person to operate sales they want basically a Google-like interface where they got to a web browser like interface where they can ask any question about their business, okay? Where the problems in our supply chain? If I'm the Chair of the Joint Chiefs, what am I ready to less levels, they have 35-ish quadrants and okay, in Central Europe. I mean that's what we call Google for DoD, but their open initiatives can provide the Secretary of Defense or the Chair of the Joint Chiefs of Staff answers to that question in seconds. Right now, it actually takes a week for him or most people to get those answers. So it's I don't know any industry that will not be taking use of this technology. It's really quite amazing.

Alright. I appreciate the perspective, Tom. Thank you.

Thank you. Our next question comes from the line of Mike Cikos of Needham Company. Your line is open.

Hey, guys. Thanks for getting back and I did just have one quick follow-up. And maybe building on the question that Sanjit had asked earlier, but taking a different look rather than looking at the revenue, let's talk profitability for a second. But obviously, you guys are issuing guidance now, which is below street and below what you guys had initially flagged if we go back a quarter ago, maybe for Juho. Can you help us think about the additional levers you have to pull on to ensure that C3 is achieving its target of exit fiscal ‘24 with non-GAAP profitability?

Before we answer it, Mike. I do want to poke at the premise a little bit, okay. I think our guidance is pretty much in line with what the Street expectations are once you take out like one outlier or two outliers. So our current guidance is in line with what the Street has. I'm pretty confident in that. Now Juho the other question related to how are you sure you're going to get to profitability?

Right. So Mike, one of the things that I had on the prepared remarks was our planned investments into generative which combine that and vendor expenses, I think we can control spending towards the end of the year, if for whatever reason, the expected revenue would not occur from those. But we're pretty bullish about the generative AI opportunity.

Got it. Thank you, very much.

Let me. Said, we don't need the generative AI for purity to be generally, generative AI could be zero, okay? And we're still going to run a cash profitable business in Q4. Well, you have a very, very detailed plan that's been to all the members and the management team. They all have big budgets. They know that's going to operate and you can expect it to be in cash positive profitable business non-GAAP pro-business in Q4, hard stuff.

That’s right.

Thank you. One moment, please.

One more question?

Thank you. Our next question comes from the line of Noah Harman of JMP Securities. Your line is open.

It is great to see the average sales cycles for agreements ticked down, I think, by about one, three months year-over-year. What's really driving that? And where do you think a sustainable sales cycle basically concludes that maybe thinking about the rest of this year?

Well, I think the consumption-based pricing model is driving it where it's pretty easy to do. We're not going to have a large-scale enterprise AI application live in production in six months for $0.5 million. I mean that's nothing guys in terms of what it costs to bring in an Accenture or an IBM or somebody to try to bring one of these things, that's going to be scores of millions of dollars in the years. So it's a pretty easy sale. It's a shorter sales cycle. And so I'm not sure where it ends up, but as we move more into more of our products, onto the AWS marketplace, the Google marketplace and other leverage channels like this. So we'd expect to see it get shorter.

Great. Thank you.

Thank you.

Thank you. At this time I’m going to turn the call back over to Mr. Siebel for any closing remarks.

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