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 in a listen-only mode. After the speakers’ 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 for today, Amit Berry, you may begin.

Good afternoon, and welcome to C3.ai's earnings call for the first quarter of fiscal year 2025, which ended on July 31, 2024. 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. 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. 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 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.

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We are off to a solid start for fiscal year '25. 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 '24 to 17% in Q2, 18% in Q3, 20% in Q4, and 21% in Q1 year-over-year revenue growth in Q1 of fiscal year '25. 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. Our GAAP operating loss was $72.6 million. Our non-GAAP operating loss was $16.6 million and substantially better than our guidance for a loss of $22 million to $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 a 117% year-over-year increase in our pilot count. 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…

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 pre-built 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 20th century software stacks with AI on the box. The technical depth to rewrite their software to take advantage of a modern, scalable AI tech stack is simply insurmountable. 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 not 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. 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…

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 ECoE (ph) support services, pilots and trials of our C3 AI applications or 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. Professional services revenue was $13.7 million. This represents 16% of total revenue in the first quarter of fiscal '25 as compared to 15% of total revenue in the first quarter of fiscal '24. We expect the professional services revenue to generally stay within 10% to 20% of total revenue for fiscal '25. 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. 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…

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 would 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 '25 and for the entire year of fiscal year '25. Now let's talk about kind of the general area of the -- I want to talk about the general enterprise AI market, and I want to talk about customer success, okay? In 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. Shell has over 100 C3 AI applications in development and deployment…

Thank you. [Operator Instructions] Our first question comes from the line of Patrick Walravens with Citizens JMP. Your line is open.

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 $50 million, which is up a lot. So just if you could just comment on the tone of business, that would be great.

Pat, it's pretty wild out there. I mean, I would 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 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 honestly, it's difficult to model that. I mean this is not a simple business. We're in this -- as we enter this kind of new world of AI, I mean, it's really complex. And we can't simply multiply, we did these many widgets this quarter, and we're going to that many widgets in the next quarter. And this is the growth rates of widgets. This is the gross margin. And therefore, this is what the -- I mean the -- 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 didn't anticipate that, and we just fell into a gold mine there, okay? Law firms, medical diagnostics is just fascinating.

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?

You're talking about the guidance for the Q2, revenue guidance.

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

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

Okay. Thank you, guys.

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

Thanks, guys. On the subscription revenue has been a little lumpy here. On professional services, I know, Tom, you 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, where should we be modeling and the expenses increased almost in the next quarter or two? Thanks.

Thanks. Let me address subscription versus services under ASC-606, it's a little complex. Certain things that used to be called software and now are 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. And so we're well within our guidance there. Before we kind of bemoan the fact the services were a little higher than they expected to be, let's remember what services margins are at C3 AI. While our software certification margins are quite high 66%, okay, our services margin, everybody, you'll recall, is in excess of 90%. So services is a pretty darn good business. And while we continue to be focused, I mean, we're a licensing company, okay? We're not one of these services companies pretending to be a software company. They're one or two of them out there, okay? We're not bad, but we continue to be focused. But it will continue -- for the next year or two, you can expect our services to bounce around in the 10% to 20%. It will probably average about 15%. But remember, our services margins are greater than 90%. I think 93% is that the number I got. So it's good work if you can get it.

So was there any reclassification this quarter or onetime items or should the midpoint of 15% is kind of a good run rate going forward?

No, no reclassification.

Okay. Great. And expense line items, anything to focus on the next quarter or two where we should -- see if they've got.

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.

Okay. Great. Pretty much across the board. And just lastly, any change in the competitive dynamics out there? I mean who do you run up against the both these days?

Hi. This is back to Tom. Well, Ed, what is the competitive environment? You're closer to it than I.

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 prospects is ones that have tried to 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 is the de facto competition in the market for us.

And those are just prospects a couple of years down the road because they all come crashing down because -- we have this the CIO with 10,000 people in Bangalore, trying to build this thing out of piece/parts from hyperscalers and invariably comes crashing down around him. And so they're just -- we just put them in the pipeline two or three years down the road and they come back.

That’s great. Thank you. Thanks, Ed.

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.

Hi, team. Thanks. The pilot growth was very strong sequentially year-over-year. Are the size of the pilots, the value of the pilots for standard and generative AI kind of as expected?

The size -- the value of the pilots, the kind of the middle of the road, and I could be off here by 10% or 15%. But in the middle of the road pilot for enterprise AI application is $0.5 million, the middle of the road for a generative AI application is about $0.25 million. The value of the pilot -- and generative AI pilot usually takes three months to complete, enterprise AI pilot will take six months to complete, okay? And then we go into contract negotiated and they go live. We've given guidance before that we expect about 70% of our pilots convert to production contracts. I think that's about right. And honestly, the 30% that don't convert, it's not because many of these are enormously successful projects. It's not going to convert -- they will be not convert because the pilot wasn't successful, they can't convert because some genius CIO decides he's going to try to build this itself out of some piece parts of a hyperscaler and they'll be back.

Got it. Okay. So no change in 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 -- 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?

Using kind of the best professional judgment we have, okay, the confidence we gave is what we think is going to happen. Now we've been public, I think, for 15 quarters, and we've been right 15 out of 15 quarters. And I can -- I know that many of you are trying to model this business if you can model it, you're better than I, because there is a lot of moving parts here. And I think the most -- the best indicator of what we're going to do is what we guide you to. I mean, you could pretty much take to the bank for each of the last 15 quarters. We've been pretty spot on with that. So right now, that's what we think we'll do, that's our best professional judgment. And you're going to be sure we're going to be working diligently to meet or exceed that.

Okay. Thanks.

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

All right. 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.

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 relationship with GCP is great. The relationship with AWS is great. We're doing a lot of good work with AWS, 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 CPU resources or consuming GPU resources or consuming storage. And they're all great partners, they're great companies. They're wonderful to work with, and it's a privilege for us to be able to partner with them.

All right. Okay. That's very helpful. And then last one, just to clarify. For the [indiscernible] state and local agreements, were most of those pilots?

They all kind of started as pilots. Yes. I'm not sure which number you're referring to. Did we refer to how many pilots that were and how many converted in the quarter, we said this?

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

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

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

Thank you. Thank you, everybody. I think this is the end of our call. We really appreciate your attention. This is quite an adventure. I think we're breaking ground in enterprise AI. I know we're breaking ground in enterprise AI. And I could just tell you, for those of you who have visited us or those of you who have a chance to visit, it's so exciting and it's just palpable. And so we're going to 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.

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