Good day and welcome to the C3.ai’s Fourth Quarter Fiscal Year 2024 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Amit Berry. Please go ahead.

Good afternoon and welcome to C3.ai's earnings call for the fourth quarter fiscal year 2024, which ended on April 30th 2024. 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 Hitesh Lath, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our fourth 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 the 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 on material risks and other important factors that could affect our actual results, please refer to our filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. Also, during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared remarks, in response to your questions, we may 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.

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. Hitesh and I are pleased to share with you our results for the fourth quarter and for the entire fiscal year of 2024. Q4 was a great quarter and the end of a huge year for C3 AI. We exceeded all expectations for revenue, cash flow and profitability. Let me be clear, there were no expectations that we did not exceed. This was our fifth consecutive quarter of accelerating revenue growth. Our quarterly year-over-year revenue growth has accelerated from 11% in Q1 to 17% in Q2, 18% in Q3, and now 20% in Q4 of fiscal year '24. Our quarterly subscription revenue has also significantly accelerated, going from 8% in Q1 to 12% in Q2, 23% in Q3, and 41% in Q4 on a year-over-year basis. We finished the quarter with $86.6 million in revenue, exceeding the high-end of both our guidance and analyst expectations. I'll note that this is the 14th consecutive quarter as a public company in which we have met or exceeded our revenue guidance. For the quarter, subscription revenue was $79.9 million, accounting for 92% of total revenue and increasing 41% from a year ago. Our non-GAAP gross profit was $60.9 million, representing a 70% gross margin. Our GAAP operating loss was $82.3 million. Our non-GAAP operating loss was $23.4 million, better than our guidance for a loss of $43.5 million to $51.5 million. Our non-GAAP net loss per share was $0.11. We generated a free cash flow of $18.8 million, down the quarter with $750.4 million in cash, cash equivalents and investments, again exceeding analyst consensus. Full year results exceeded both the high-end of our guidance and analyst expectations with record revenue of $310.6 million, a 16% increase over last year.…

Thank you, Tom. 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 fourth quarter increased 20% year-over-year to $86.6 million. Subscription revenue increased 41% year-over-year to $79.9 million and representing 92% of total revenue. Professional services revenue was $6.7 million. This represented 8% of total revenue in the fourth quarter of fiscal '24 as compared to 21.5% of total revenue in the fourth quarter of fiscal '23, demonstrating an improved mix of subscription revenue. Gross profit for the fourth quarter was $60.9 million and gross margin was 70%. Gross margin for Professional services was higher this quarter due to a greater mix of higher margin Professional services like Prioritized Engineering services. Operating loss for the quarter was $23.4 million. Our operating loss was lower than guidance due to continued focus on expense management as well as the timing of additional investments we are making to capture market share. As we discussed last quarter, we expected fourth quarter free cash flow to be positive. Free cash flow for the quarter was $18.8 million. We continue to be very well-capitalized and closed the quarter with $750.4 million in cash, cash equivalents and marketable securities. Please note that the Professional services mix in our revenue depends upon the nature and size of revenue deals in any given quarter. However, we expect the Professional services revenue to generally stay within 10% to 20% of total revenue. As a reminder, we continue to expect short-term pressure on our gross margins due to higher mix of pilots which carry a greater cost of revenue during the pilot phase of the customer life cycle. We also expect short-term pressure on our operating margin due to additional…

[Operator Instructions] And our first question will come from the line of Timothy Horan with Oppenheimer. Your line is open.

Thanks, guys. Congratulations. Can you talk a little bit how did you get the 20-fold increase in improvements in Version 8? And how sustainable are those type of improvements? How long did that take to get? And then secondly, obviously, the sales inquiries are off the charts. I mean, how scalable are these inquiries at this point? Both, I guess, to deal with the sales operations and the implementation of these inquiries. Thank you.

Hi, it's Tom. Version 8 was a four-year engineering effort. I mean, it was a very large scale effort, and we basically gutted the product. We re-engineered kind of the very core of it. And so it was a -- it's a -- this was a major release of the product and it's hard to be -- difficult to get into all the specifics, but we were heads down for four years on this, and it's a major architectural revamp. And now it's -- and we won't see performance increases like that again for a while. Sales inquiries, well, it's just been overwhelming what's been going on in Generative AI. I think we reached 10,500 in February. Okay. And then almost 50,000 last quarter. How scalable is it? Right now we can believe that we can generate order of 90,000 a quarter. And now is that going to diminish at some point? We really don't know, but this is all brand new territory. But every time we look at this Generative AI market, it looks bigger than it did before. So it -- that is just a huge opportunity. And we really do have. It's important to note we have a highly differentiated product there because all of these issues associated with hallucination, this new thing they call ramps, IP liability, access controls, stochastic responses, we've solved all those problems by coupling the learning models with the capabilities of the C3 AI platform. So omni-modal data ingestion, we have that nailed. Identity, we have that nailed. Access control, we have that nailed. And so the marriage of the work we did in the first 15 years of the company with the -- with these new innovations in Generative AI enables us to solve the problems that all the hobgoblins that are preventing these large language models from being installed in many corporations around the world.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Pat Walravens with JMP securities. Your line is open.

Great. Thank you and congratulations. It's really impressive. So, I mean, 50% of bookings, Tom, from Federal, Defense and Aerospace, if you could drill into that more and talk about what you see for the pipeline for that vertical for this coming year, that would be great.

Federal looks like a growth engine, Pat. Business is good. And we've had a lot of inroads in the Air Force, the Navy, the Intelligence Community, and we are investing in the Federal business in a big way. The Federal community is investing in AI in a big way. This is kind of an existential issue where a little bit of war going on with AI and -- against the United States and China and we're on the side of the good guys and we're on the team. So that's -- I'm not sure how big it is, but it's big.

Yeah. And as a follow-up on that, so if you -- your partnerships with AWS, Microsoft, Google, Booz Allen, I guess what's bearing the most fruit in Federal?

Well, AWS is probably -- they're the company by far that has the most tentacles into Federal and I would say probably 11 out of 12 of our applications are running on the AWS GovCloud. And so in our relationships with the Federal, AWS Federal group and the International Federal Group that deals with the allies, NATO, Five Eyes, what have you, is very deep and rich. And so that's -- as it relates to hyperscalers, that's where we're seeing the most action. And AWS is -- it just is the dominant-installed platform.

All right, great. Thanks. And congratulations again.

Thank you.

Thank you. One moment for our next question. And that will come from the line of Sanjit Singh with Morgan Stanley. Your line is open.

Yeah. Thank you for taking the questions. Congrats on a strong close to the year. Tom, I'd love to get a, like an example, your favorite example of one of the customers sort of coming out of the Gen AI C3 pilot program and the role that C3 AI did in terms of getting them into production, I think that's a clear debate in the industry about are a lot of these projects experimental and can they actually get into production? It seems like you guys are getting your customers into production. And so I don't know if there's one of the 58 pilots that you signed this year that sort of catches your eye and provides a -- like an example, or a model, if you will, of how C3 AI gets its customers into production for Gen AI use cases.

It's really -- well, Sanjit, it's very interesting. They're incredibly diverse. One example would be there's a large law firm that we all know that's very active in taking companies public, and what we did for them is that we ingested the corpus of SEC.gov Edgar, okay, into an enterprise learning model. This would be all the S1s, all the 10-Ks, all the 10-Qs that ever been published. Now, what they're going to use this for, their first use is when they're taking the next company public, whoever that might be, okay, and they want to generate -- they type in the name, they type in the financials, okay, they hit the carriage return and generate the first draft of the S1 and it does it in an hour rather than two weeks. And this would be applicable to your business. So we should come -- I can have it live. My offer to you is I'll have the system live and in production for $0.25 million dollars in 12 weeks. So give me a call, send me a check and we'll have it live. The -- and another one is -- let's look at the application that we have in place for this application, it's called Panda. We've talked about this a lot. This is where we've loaded all the underlying information and telemetry associated with 22 weapons systems in the United States Air Force; F-15, F-16, F-18, F-35, KC-135, F-22, et cetera. And we use this for try to identify system and subsystem failure before it happens, predictive maintenance. And so we can identify that their auxiliary power unit or the flap actuator or the igniter and the afterburner is going to fail in the next 50 or 100 flight hours. You fix it that night in Stuttgart…

No, that's great. The breadth of use cases is super compelling. I had one follow-up for Hitesh. As we're coming up on almost two years now on the transition to consumption and you guys are seeing accelerating subscription growth of 41% was a really, really nice number this quarter. What percent of that subscription revenue is now consumption? If you can sort of give us a sense. And is that what's driving that re-acceleration in revenue growth? Thank you so much.

Yeah, Sanjit, we are still in early stages of our new business model. We haven't disclosed our consumption revenue separately before, but that is something which we continue to see a ramp in and it will be more meaningful in the future.

Thank you. One moment for our next question. And that will come from the line of Kingsley Crane with Canaccord Genuity. Your line is open.

Hi, thanks for taking the question and congrats on the traction. It's encouraging to hear. As we think about how some of the customer engagement metrics will translate to revenue growth, where would the dollar or that incremental dollar of investment be most impactful? Is it in -- for deployed sales engineers? Is it in partner sales motion? Are you capacity constrained on the application development side? Just want to get a little bit more granular on the investment profile.

Good question, Kingsley. I think as it relates to the idea of a land grab and market share, which we plan on doing, I would say the constraints that we're certainly not constrained by the market. Okay. We're absolutely not constrained by competitive dynamics. Okay. We're going to be constrained by sales capacity and service capacity to bring these pilots live. So that's the constraint, and I think that's where we would invest, okay, and -- in terms of to get the biggest impact for the next dollar. Great question.

Okay, perfect. Thanks for the clarity. And Hitesh, just on the gross margins, understand that we continue to invest, and there's a mix of pilots in there. You did improve in the quarter on the Subscription side, I mean, should we expect that we've already troughed, or is this still sort of we're feeling it out on a quarter-to-quarter basis?

Yeah. You should expect our gross margins to decline from where they were in Q4 at 70% as we plan to significantly increase the number of pilots and make additional investments.

By the way, let me -- my colleague, Amit has noted an error in my comments, okay, where when I gave guidance for revenue for Q1, I misspoke. The guidance for revenue for Q1 is $84 million to $89 million in Q1. So I made a mistake on -- I said $84 million to $90 million, and that is an error. It's $84 million to $89 million. So I'm falling on my sword and correcting the wreckage. Next question.

Thank you. One moment. And that will come from the line of Arvind Ramnani with Piper Sandler. Your line is open.

Hi. Thanks for taking my question. I wanted to ask about kind of this -- seem like an incredibly high number of inquiries for your product. Do you think that could drive, like, further upside on the revenue side in the next year or two or some of those inquiries are sort of less qualified and you think kind of -- your guidance is kind of more realistic?

You're talking about guidance beyond fiscal year '25. I don't have any comment, Arvind, on that. Right now we're being overwhelmed by the numbers. We are sorting through the numbers. We're actually using Generative AI to qualify these leads with something that sometime I'll show you. That's pretty cool. C3 Generative marketing. But we -- it's too early to tell, and I'm not prepared to give you guidance for fiscal year '26.

Yeah, yeah. But I -- what I guess kind of -- what I'm trying to understand is with this incredible amount of kind of interest you're seeing in the product, how should we kind of think about that impacting your income statement, revenue growth, or your margins? Because it seems like there's kind of some of the -- kind of languages when you're kind of staggering or -- just like 50,000 inquiries. I'm just trying to qualify to kind of take some of this commentary and can kind of mess it up to what does that mean for either growth or for margins?

It means that we're facing a staggeringly large addressable market. Okay. It means that the game that we're playing is to establish a market leadership position in this market. Okay. I don't know what the stock trades for today, $20 or $30 or whatever it is, okay? But if we establish -- let's say that we succeed like we did at Oracle, okay, like we did at Seibel, and we established a market leadership position in Enterprise AI applications, I assure you, this is not a stock trading at $20, $30 -- or $30. Okay. Okay. It's multiples of that. Okay? Maybe an order of magnitude larger than that. Maybe we fail. Maybe we fail and we end up number two or number three. Okay? Do some math on that. I know it doesn't work. There's no formula for this in your spreadsheet. But I don't think a spreadsheet is the right way to look at the opportunity. This is a large addressable market. We are -- we have first mover advantage. We have a strong technology foundation, and we are going for it, and that's -- the way to model the business honestly, I would look at what we say revenue is going to be, because what we say revenue is going to be for the last 14 quarters has been pretty accurate. I think that's the best leading indicator you can have.

Terrific. And then, if you can maybe just double click on kind of margins. Right? There's some margin degradation by kind of next year because of the number of pilots. How does that work? Like, when you do pilots, you charge less or do the professional services go up more? Like, what drives lower margins by making a choice?

Good question. What drives lower? Essentially, our market offering today is for an Enterprise application, let's say Stochastic optimization of supply chain, let's say demand forecasting for a large agribusiness or predictive maintenance for a large manufacturer. We'll bring that application live at a multi-billion dollar corporation, basically in one of their facilities for half of -- we'll do it -- bring it live. Not a proof of concept, live, okay, in six months for $0.5 million. Okay? Now the -- and by the way, the alternative is to do this with Accenture, Deloitte, who'll charge them $100 million to do it or $30 million to do it in two years. We'll have it live in six months. Okay. Now, the -- my application, as I mentioned in Generative AI, is to have the application live in 12 weeks for $0.25 million. Now, we will do, honestly, Arvind, whatever it takes to make that customer live. Okay. And do I really look at what the profitability level of every one of these pilots is? I do not. Okay. And I'm -- if I'm looking with a Fortune 50 company about bringing their first Enterprise AI application live, I'm going to invest whatever it takes, even at a loss if necessary, to make sure the customer is successful. So that's what drives the margins degradation. Are these, in aggregate, profitable? I'm sure they are, okay, and I'm sure they're enormously profitable. But at any given one, we'll do -- I mean, we are not going to fail. And we have the resources to back that up.

Thank you very much.

That's where the margin degradation is coming from. And I realize it's hard to model, but it's just -- you just -- we know that's who we are and that's what we are.

Yeah, yeah. Terrific. Thank you so much. Really appreciate it.

Thank you. One moment for our next question. And that will come from the line of Mike Cikos with Needham & Co. Your line is open.

Hey, guys, this is Matt Calitri on for Mike Cikos over at Needham. Thanks for taking our questions. I wanted to ask how have newly converted customers ramp consumption versus customers who adopted the consumption model in previous quarters? Are you seeing consistency across cohorts?

Yeah, I'm not sure I understand the question. I think we provided very specific guidance on that last quarter. Okay. In the -- okay, Matt, okay, in the supplemental last quarter, we provided very specific guidance on what we're seeing, okay, in revenue consumption in -- basically the first quarter they go to production to the tenth quarter they go production. And if I am mistaken, this is from memory, but I think the first quarter they go production, they consume about 400,000 -- 300,000 or 400,000 GPU hours. And by the time you get to the tenth quarter, I think it's 1.4 million. Yeah. What is it? How's my memory? I wish the initial assumptions, actual usage. First quarter they go production, 370,000, and it ramps up to 1.3 million in the tenth quarter. And -- so, if you look at our supplemental from last quarter, it is in this quarter too.

No, we did not…

Last quarter. It's provided there in great detail and that -- these are empirically accurate data.

Got it. Okay, I'll take a look there. Thank you. And then how are sales cycles compared to a year ago? Are customers demonstrated in a positive as they identify benchmarks and TCO to secure budget, or has it been pretty static?

Did we talk about sales cycle this quarter?

No, not this quarter. Last quarter we...

Last quarter we said it was what?

3.5 months.

3.5 months. I don't have the hard data before me, Matt, but I don't think it's changed appreciably.

All right, appreciate it.

Thank you. We do have time for one final question, and that will come from the line of Pinjalim Bora with JPMorgan. Your line is open.

Great, thanks for taking the question. This is Jaiden Patel on for Pinjalim Bora at JPMorgan. Just a quick one on our end. Last quarter you had mentioned that you expected positive free cash flow for the full-year -- fiscal year '25. Just wanted to get any update on that commentary. If there's anything more this quarter. Thanks.

As we have the business plan right now, we are expecting positive free cash flow for fiscal year '25.

Great, thanks.

Thank you.

Thank you. I would now like to turn the call back over to Mr. Siebel for any closing remarks.

Thanks, everybody, for your time. Appreciate your continued attention. And stay tuned. I think we're just getting started here. And -- so next year is looking good and we look forward to communicating with you and keep you posted on what's going on. We appreciate your interest and the courtesy of you following us. So we wish you all a great day and thank you for your time.

This concludes today's program. Thank you all for participating. You may now disconnect.