Thank you for standing by and welcome to C3.ai's Second Quarter Fiscal Year 2025 Earnings 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, today's conference is being recorded. I would now like to hand the call over to Amit Berry. Please go ahead.

Good afternoon, and welcome to C3.ai's earnings call for the second quarter of fiscal year 2025 which ended on October 31st, 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; and Hitesh Lath, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our second 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 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 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 had another outstanding quarter with strong top and bottom-line performance. This quarter marked our seventh consecutive quarter of accelerating revenue growth. Our year-over-year revenue growth has accelerated from 11% in Q1 '24 to 17% in Q2 '24 to 18% in Q3 '24, 20% in Q4, 21% in Q1 '25, and Q -- first quarter of '25, and now 29% in the second quarter of fiscal year '25. Total revenue for the quarter was $94.3 million, exceeding the high-end of our revenue guidance. Subscription revenue was $81.2 million and increased 22% from a year ago. Subscription and Prioritized Engineering Services revenue combined was $90.8 million and accounted for 96% of total revenue, an increase of 27%, compared to $71.3 million one year ago. I will also note that our non-BakerHughes revenue grew by 41% year-over-year. Our non-GAAP gross profit was $66.3 million, representing approximately a 70% gross margin. Our non-GAAP operating loss was $17.2 million and substantially better than our guidance for a loss of $26.7 million to $34.7 million. Our non-GAAP net loss per share was $0.06. We ended the quarter with over $730 million in cash, cash equivalents, and investments. I'll note this is -- that this is the 16th consecutive quarter as a public company in which we have met or exceeded our revenue guidance. While I would describe our performance as generally on track with the plan we provided, there is no question that our new Microsoft alliance provided a tailwind. Our growth continues to gain traction, with increasing revenue momentum quarter after quarter. A significant driver of this success is our expanding partner ecosystem, which plays a critical role in driving our leadership in the market. Our partner market ecosystem today…

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 quarter increased 29% year-over-year to $94.3 million. Subscription revenue increased 22% year-over-year to $81.2 million, representing 86% of total revenue. Professional Services revenue was $13.2 million. This represents 14% of total revenue in the second quarter of fiscal '25. As we've said in prior quarters, we expect the Professional Services revenue, which includes Prioritized Engineering Services revenue, to generally stay within 10% to 20% of total revenue for fiscal '25. As a reminder, our Professional Services revenue includes service fees and Prioritized Engineering Services. Service fees include revenue from services such as consulting, training, and paid implementation services. Prioritized Engineering Services, or PES, are undertaken when a customer requests that we accelerate the design, development, and delivery of software features and functions that are planned in our future product roadmap. We negotiate an agreed-upon fee to accelerate the development of the software, and when the software feature is delivered, it becomes integrated to our core product offering, is available to all subscribers of the underlying software product, and enhances the operation of that product going forward. Such PES results in production-level computer software, compiled code that enhances the functionality of our production products, which is available for our customers to use over the life of their software licenses. Our Subscription and Prioritized Engineering Services revenue combined was $90.8 million and accounted for 96% of our total revenue, an increase of 27% compared to $71.3 million one year ago. Gross profit for the quarter was $66.3 million, and gross margin was 70%. Gross margin for Professional Services remained high at over 90%. Operating loss for the quarter was…

[Operator Instructions] Our first question comes from the line of Patrick Walravens of Citizens JMP. Your question please, Patrick.

Okay. Great. Thank you, and congratulations. Tom, I think two questions for me, if I may. I would love to hear the history of the relationship with Microsoft and how you got it to this point. Did you work with Judson at some point at Oracle? And then secondly, just your thoughts on how federal spending might change under the new administration.

I -- Judson and I did not overlap at Oracle, but he was at Oracle, and he ran alliances at Oracle at the time that Oracle acquired Siebel Systems in January of 2006, and many of the Siebel people went to work for him. I did -- our relationship between Microsoft and C3 has pretty much always been driven between, well, Judson and I. And this agreement was put together with Judson and I, and he and I are coordinating this very closely. Federal. I just came from the Reagan Defense Forum in Simi Valley, where all the defense contractors there, all the software companies are there, Secretaries of Defense are there, Army, Navy, Air Force, Marines, all the military leaders and acquisition professionals. And whereas in former years, the subjects were about submarines and carriers and space and aircraft, Pat, there was one subject on every panel, okay? And one subject at every speech, and that was AI applications, AI applications, AI applications, AI applications, and then cyber. That's what went on for two days. And so I think we're going to see a dramatic acceleration of AI adoption in the federal government, certainly with Elon and company, across all lines of all aspects of operating the business, whether it's CMS, HHS, Treasury, wherever, Department of Justice, but most certainly in the defense and intelligence community. And I think they're going to dramatically change the way that they acquire these technologies, where they acquire the bulk of their -- in the defense department, but as you're aware, they acquire almost everything from six vendors. I think those days are over. And I think the beltway bandit heads are going to be spinning as the private enterprise moves in to support the defense and intelligence companies in the current administration.

Great. Thank you very much and congratulations again.

Thank you.

Thank you. Our next question comes from the line of Timothy Horan of Oppenheimer. Your question please, Timothy.

Thanks, guys. Can you discuss maybe what was unique about what you can do that Microsoft couldn't do in a little bit more detail? And then, who else are you kind of competing with in these kind of contracts, or who else maybe is Microsoft partnering with, if anybody? And then secondly, does this meet the enterprise contract commitments in terms of volume, the enterprise agreements for commitments and dollars spent over the next couple of years as they bundle together services? Thanks.

Okay, happy -- first, happy birthday, Tim. Let's ask the last question first. So, yes, as it relates, these sales do apply against customer commitments to Microsoft. So, where they've made these large hundreds of millions, and in some case, I suspect billions of dollars commitments to buy Microsoft software services in the years to come, the C3 AI sales do burn down those commitments. What is the difference between what Microsoft -- I mean, how does this differ from what Microsoft sells? Microsoft sells a vast array of services in Azure. A lot of them AI services like AI Studio and whatnot that allow us to, persistence technologies, machine learning model technologies, all of which we take advantage of in building turnkey applications. And so rather than providing services that you can use to build applications, we're using those services to provide the turnkey application that does things like supply chain optimization, demand chain optimization, okay, forecasting, customer churn, fraud, what have you. So, we're entirely complimentary with the Azure AI services. We use all of the Azure AI services, but we deliver those services packaged in a turnkey application that offer economic benefit in a very short period of time.

Thanks for the well wishes, Tom. And so, I mean, it's a pretty big statement that you're going to be their preferred AI application partner. Is that -- I mean, is that correct?

That, I read that from the agreement. Yes, that is the agreement, Tim. So, as all these, where we're going to market together in this alliance, which is all around the world, where we're going to market together and we partner together, okay, we're going into that customer positioning Azure as our preferred cloud provider and Microsoft is going into the customer positioning C3 AI is their preferred Enterprise AI solution. Yes, that is a big statement. And yes, that is a big day for C3 AI.

And lastly, when do you think this will start contributing to revenue and maybe can give us some color how meaningful it could be to overall revenue growth? I mean, you're already growing at 30%. Can this accelerate that at some point?

It already has contributed to revenue growth. The agreement was signed on September 30th. It already has contributed to our revenue growth. And I think while the extent to which this might contribute is unknowable, we have gone from order of 100 salespeople around the world to potentially order of 10,000. And so I don't think there's any question that this provides a tailwind in the years ahead that could be quite substantial and offers us a substantial differentiator from anybody else in the enterprise who either is in the Enterprise AI application business or purports to be in the Enterprise AI application business.

Thank you. Congratulations.

Thank you.

Thank you. Our next question comes from the line of Mike Cikos of Needham. Your question please, Mike.

Great. Thanks for taking the question too, guys. Totally understand on the investment that you guys are making behind partnerships and in this opportunity here. Just wanted to get a better understanding with the pre-cash flow pushout that we had previously anticipated for fiscal '25, should we now expect that the Company can turn free cash flow positive in fiscal '26 or how far out is that timeline been pushed now?

Well, how far has it been pushed out? I mean, Mike, to not invest in this is like kind of crazy, right? I mean, we did raise this money in a public, in December 2020 for exactly this purpose, to invest in market share and invest in growth. We have been using those resources very carefully. I think we raised $1 billion and we have, what, $730 million in the bank. So, I realized, I love to read from sell-side analysts' reports about how we're hammering it in cash. And seems like every time I have a quarterly customer call, I still have like three-quarters of $1 billion cash left. So, I can't quite resolve those two issues. I think if you look out into fiscal '26, we should be crossing -- at some point there, we should cross over into being cash-positive. But right now we're investing in market share. We're investing in leadership. And I have the largest software sales organization in the world, okay, selling with me and for me, and we're going to take advantage of it.

Understood. Thanks, Tom. And maybe just one follow-up, if I could. I know that you guys are obviously discussing the Subscription revenue tied into the Professional Engineering Services in that pro-serv line. With the discussion that we have today, is this relationship with the Professional Engineering Services, can you help explain, does that in any way have a linkage to the unbilled receivables on the balance sheet?

No. No. Professional engineering, basically, these Prioritized Engineering Services, the way -- this is a -- when somebody wants us a Dow, a Cargill, a Baker Hughes, a Shell, wants to take something that we have planned in our roadmap to do it now, to accelerate it, and we agree to do it, we write the spec, we write the code, we do the quality assurance, we do the performance testing, and we deliver them object code that they use over the life term of the agreement, looks like software, smells like software, is incredibly high-margin business, okay, but under the current accounting guidance of ASE 606, it has to be recognized, it's called a Professional Service. I don't know, that's just the language they use, but it looks like software, is like software, smells like software, is in fact software, and I think something like 96% of our revenue consists of Subscription revenue and Professional Engineering Services, so we will be doing more of it going forward, is in the best interest of our shareholders, it's great business, and there's nothing that isn't good about it.

Thank you very much.

Thanks, Mike.

Thank you.

Thank you. I would now like to turn the conference back to Mr. Siebel for closing remarks. Sir?

Ladies and gentlemen, thank you for joining our call today. Thank you for tracking the progress of C3 AI. We -- there is no question, the Company has never been positioned in a better position than it is today. There is no question, I think in anybody's mind on this call, that the market for Enterprise AI is larger than it ever has been today, and growing at a faster rate than any of us anticipated. I think that we are extraordinarily well-positioned with our many partnerships, including Microsoft to seize this opportunity. I mean, let's net this out, okay, guys. There's two stories to the quarter. Okay, 29% top-line growth, okay? Okay, and a very close strategic partnership with the largest software company on the planet Earth. That's the beginning, that's the end, and we're going to take it from here and see what we can do with it. Ladies and gentlemen, thank you very much for your time.

And this concludes today's conference call. Thank you for participating. You may now disconnect.