“`html

Image source: The Motley Fool.

C3.ai (NYSE: AI)
Q2 2025 Earnings Call
Dec 09, 2024, 5:00 p.m. ET

Table of Contents:

• Company Overview
• Earnings Highlights
• Management Insights

Company Overview:

Operator

Thank you for standing by, and welcome to C3 AI’s second-quarter fiscal year 2025 earnings conference call. Please be advised that today’s conference is being recorded. I would now like to hand the call over to Amit Berry. Please go ahead.

Amit Berry — Investor Relations

Good afternoon, and welcome to C3 AI’s earnings call for the second quarter of fiscal year 2025, which ended on October 31, 2024. My name is Amit Berry, and I lead Investor Relations at C3 AI. Joining me on the call today are Tom Siebel, our chairman and chief executive officer, and Hitesh Lath, our chief financial officer. After the market closed today, we issued a press release detailing our second-quarter results, which you can access 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 after the conclusion of the call. During today’s discussion, we will make statements that may be viewed as forward-looking under federal securities laws. These statements represent our views as of today, and we do not guarantee that they will reflect our views in the future. We also do not assume any obligation to update these forward-looking statements.

Investment Considerations for C3.ai

Before considering C3.ai as an investment, take note of this:

The Motley Fool Stock Advisor analyst team has selected what they consider the 10 best stocks for investors right now—and C3.ai did not make the list. The stocks included could yield significant returns in the years ahead.

Reflect on how Nvidia was highlighted on April 15, 2005… if you had invested $1,000 at that time, you’d now have $872,947!

With Stock Advisor, investors receive a straightforward roadmap for success, including portfolio-building strategies, timely analyst updates, and two new stock picks each month. Since 2002, Stock Advisor has consistently outperformed the S&P 500, generating returns that have more than quadrupled the market’s performance.

View the 10 stocks »

This advisory is subject to various risks and uncertainties that could lead actual outcomes to differ significantly from our expectations. For a detailed discussion regarding potential risks, please review our SEC filings. All financial figures released today will be discussed on a non-GAAP basis unless stated otherwise. A reconciliation of GAAP to non-GAAP measures can be found in our press release. We may also share additional metrics for better insight into our quarterly results, although we cannot guarantee similar detail will be available in the future. Now, I will pass the call to Tom.

Tom Siebel — Chairman and Chief Executive Officer

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. This quarter has showcased strong growth, marking our seventh consecutive increase in revenue. We saw our year-over-year revenue rise from 11% in Q1 2024 to 29% in Q2 2025, with total revenue for the quarter reaching $94.3 million, which surpassed our revenue guidance.

Subscription revenue climbed to $81.2 million, up 22% from last year. Notably, combined subscription and prioritized engineering services revenue accounted for 96% of total revenue, a 27% increase from $71.3 million last year. Additionally, revenue outside of our partnership with Baker Hughes surged by 41% year-over-year. Our non-GAAP gross profit stood at $66.3 million, representing roughly a 70% margin. We recorded a non-GAAP operating loss of $17.2 million, significantly better than our anticipated loss of $26.7 million to $34.7 million. Our non-GAAP net loss per share was $0.06.

We closed the quarter with over $730 million in cash, cash equivalents, and investments. Remarkably, this marks the 16th consecutive quarter since becoming a public company where we have met or surpassed our revenue projections. I attribute much of this performance to our newly expanded alliance with Microsoft.

Our growth momentum continues to strengthen quarter after quarter. A key factor in this success has been our expanding partner ecosystem, which is vital for maintaining our market leadership. Notable partners include Google, AWS, Microsoft, and Baker Hughes. In this quarter, 62% of our agreements involved collaborations with major cloud providers like Google Cloud, AWS, and Azure.

As of October 2024, we noted that 51% of our contracts were with Google Cloud, 21% with Azure, 24% with AWS, and 5% remained on-premises. The standout moment of the quarter was undoubtedly our major expansion with Microsoft Azure. On September 30, 2024, we entered a new strategic alliance with Microsoft, effective for an initial term of 5.5 years ending in March 2030. This partnership is set to be transformative for C3 AI and the enterprise AI sector.

Under this partnership, all of our AI solutions are now accessible on the Azure marketplace. Furthermore, the entire Azure sales team will sell C3 AI products globally and receive various incentives for sales made, significantly accelerating our sales process. The alliance with Microsoft is expected to bring substantial benefits to our growth trajectory.

“`

C3 AI Partners with Microsoft to Expand AI Capabilities

New Collaboration Promises Greater Reach and Enhanced Enterprise AI Solutions

C3 AI and Microsoft have announced a strategic alliance that aims to enhance production deployments of AI technologies on Microsoft Azure. This partnership includes a comprehensive set of joint marketing and sales initiatives to create a robust pipeline of customer accounts. Both companies will have mutual sales leadership sponsors, defined customer acquisition goals, and a solid governance framework to facilitate collaboration effectively. Furthermore, they plan to produce training materials through webinars to educate their respective sales teams about joint offerings. Also, C3 AI’s software will be fully accessible on the Microsoft commercial cloud portal.

An integrated marketing fund will support the promotion of their combined solutions, with both organizations actively participating as platinum sponsors at Microsoft conferences and industry events. Key executives, including C3 AI’s CEO Tom Siebel and Microsoft’s Chief Customer Officer Judson Althoff, will oversee quarterly collaboration meetings to review progress.

Importantly, C3 AI has committed to recommending Microsoft Azure as its preferred cloud provider, while Microsoft will recognize C3 AI as a leading provider of enterprise AI applications. With 15 years of experience in enterprise AI, C3 AI has developed over 100 applications that yield tangible benefits for customers worldwide. The alliance considerably expands C3 AI’s sales workforce, projecting a rise from around 100 professionals to potentially 10,000 worldwide across various sectors.

Microsoft, the largest software company globally, boasts that approximately 95% of Fortune 500 firms utilize its products. The partnership allows C3 AI to benefit from Microsoft’s extensive reach and reputation, facilitating the fast-tracking of enterprise AI adoption on Azure.

In its bold vision, both companies aim to transform business operations. They plan to deliver industry-specific AI solutions that enhance sectors such as federal, defense, intelligence, manufacturing, pharmaceuticals, and others. By integrating C3 AI’s applications with Microsoft’s robust cloud infrastructure, they aim to drive improvements in efficiency, innovation, and economic performance for organizations.

Looking back at recent successes, C3 AI completed 58 agreements in the last quarter, including 36 pilot projects. New and expanded contracts were established with notable clients such as ExxonMobil, Coke, and Shell, among others.

In addition to corporate successes, C3 AI has established a strong presence in state and local governments, securing agreements in states like California and Texas. The company has also made significant progress in its federal sector, winning contracts with agencies like the U.S. Department of Defense and U.S. Air Force.

For instance, the U.S. Army awarded C3 AI and ECS Federal a $23 million contract to modernize its intelligence gathering with a new application that streamlines operations and enhances decision-making capabilities. This innovation supports the Army in providing timely predictive intelligence to its leadership. Similarly, the U.S. Air Force continues to expand its use of C3 AI’s offerings to boost maintenance and operational efficiency.

Additionally, the Defense Logistics Agency consistently utilizes C3 AI’s technology to improve efficiency in its supply chain management. These collaborations highlight C3 AI’s role as a trusted partner for various federal agencies, offering innovative and secure technological solutions.

Now, addressing the ongoing relationship with Baker Hughes, it has served as a cornerstone of revenue for C3 AI. However, its significance appears to be declining as illustrated by revenue contributions: 35% in FY23, 27% in FY24, and just 18% in the last quarter. Despite the diminishing share of Baker Hughes in the revenue mix, C3 AI has successfully increased its revenue by 41% year-over-year in the second quarter of FY25. Their exclusive marketing agreement is set to expire in June 2025, and while C3 AI is inclined to renew, they are contemplating the best strategies moving forward. Given the new partnership with Microsoft and established relationships in the oil and gas sector, they are weighing the advantages of remaining exclusive to Baker Hughes against potentially broader partnerships.

Ultimately, C3 AI’s diversification strategy has positioned it favorably, regardless of the outcome with Baker Hughes. The relationship remains strong, supported by both firms’ significant market presence and collaboration potential.

“`html

Microsoft’s $250 Billion Impact: C3 AI Poised for Growth in Generative AI

In today’s financial landscape, Microsoft stands as a colossal entity, valued at around $250 billion. Its significance overshadows many industry players, including C3 AI, with whom it maintains a pivotal relationship. While the future of this partnership looks promising, its potential extension will not alter C3 AI’s financial outlook or guidance.

Generative AI: A Crucial Moment for Enterprise Technology

Generative AI represents a turning point in enterprise technology. C3 AI leads the charge with unique products that provide businesses with safe and reliable information. Unlike many competitors still in prototype stages, C3 AI has already deployed generative AI in real-world, secure environments, demonstrating its effectiveness.

In the second quarter, C3 AI secured 15 new generative AI agreements with notable organizations such as Boston Scientific, Coke, Rolls-Royce, the U.S. Navy, and the National Science Foundation, along with several Texas, Washington, and New Mexico government agencies. Additionally, partnerships with Dow, Cargill, Norfolk Iron & Metal, and Florida Crystals transitioned pilot projects into full production agreements, showcasing C3 AI’s ability to deliver tangible results across large-scale operations.

A Program to Accelerate Business Outcomes

C3 AI’s clients select its generative AI solutions for their capability to drive measurable results safely and securely. To further enhance business outcomes, the company introduced the C3 Generative AI accelerator program, which features hands-on workshops for Fortune 500 companies. Participants tailor solutions that fit their needs and leave equipped with production-ready AI applications. Feedback from the initial workshops has been overwhelmingly positive, leading to plans for more sessions worldwide.

Strong Momentum in a Rapidly Evolving Market

Early adoption of generative AI is on an upward trajectory. According to Gartner, by 2028, 33% of enterprise AI software applications will feature Agentic AI, a substantial increase from less than 1% today. C3 AI is well-positioned to thrive during this shift, especially following the recent award of U.S. patent number 12-111-859, which covers Agentic AI. This patent enhances C3 AI’s market position, protecting technology that enables multiple AI agents to effectively collaborate and process diverse data types.

A First-Mover Advantage in AI

C3 AI maintains robust growth and a flourishing partner ecosystem, providing notable economic returns to its clients. The firm is recognized as a leader in the AI/ML space, empowering numerous enterprise applications that are reliable and proven. With more than 150 unique software solutions available, C3 AI’s revenue continues to outpace its expenses.

The alliance with Microsoft is anticipated to fuel further growth. To capitalize on this opportunity, C3 AI plans significant investments in sales, customer support, and marketing efforts, which should enhance its market presence. Due to these strategic decisions, the company has adjusted its plans regarding cash flow positivity for the fiscal year 2025. However, C3 AI expects to be cash flow positive by the fourth quarter of this year, backed by $730 million in cash reserves.

Complexities in AI Business Modeling

As the AI landscape evolves, so too does the complexity of business modeling. Understanding AI’s intricacies is crucial since traditional computing models do not apply directly. C3 AI offers a range of products with varying pricing structures, recognized over different timeframes. License and service agreements can differ significantly, requiring careful accounting practices tailored to each situation.

Successful navigation of such complexities positions C3 AI effectively for future growth. The company’s resilience, first-mover advantage, and robust partner network make it a compelling player in the enterprise AI space.

“`

C3 AI Reports Significant Revenue Growth Amid Strategic Partnerships

Key Financial Highlights and Outlook for Q3 FY ’25

C3 AI has been navigating a complex landscape in the AI realm, marked by a unique blend of products and services tailored for an evolving market. With 16 quarters as a public entity, the company consistently meets or exceeds revenue guidance. CEO Tom Siebel highlighted that the intricacies involved in forecasting their operations yield a more precise outlook compared to standard spreadsheet models. C3 AI is committed to dominating the enterprise AI sector and is poised for continued growth.

Revenue Guidance Adjustments for Fiscal Year ’25

The company provided updated revenue guidance for the third quarter of fiscal year 2025, targeting between $95.5 million and $100.5 million. Additionally, C3 AI has increased its total revenue guidance for the fiscal year to a range of $378 million to $398 million. However, the non-GAAP loss for operations in Q3 is projected to be between $38.6 million and $46.6 million, which also reflects an updated forecast for the full fiscal year loss between $105 million and $135 million. Hitesh Lath, Chief Financial Officer, will delve into the detailed financial results shortly.

Financial Performance Summary

In the latest quarter, C3 AI reported total revenue of $94.3 million, marking a 29% year-over-year increase. Subscription revenue, constituting 86% of total revenue, rose by 22% from the previous year, reaching $81.2 million. The professional services segment accounted for the remaining $13.2 million, or 14% of total revenue. According to previous reports, professional services revenue is expected to remain between 10% to 20% of total revenue for fiscal 2025.

C3 AI defines professional services revenue as encompassing fees from consulting, training, and priority engineering services, which accelerate software development based on customer requests. Notably, the combined revenue from subscriptions and prioritized engineering services hit $90.8 million, representing 96% of total revenue—a striking 27% increase from $71.3 million a year prior. The company’s gross profit stood at $66.3 million with a gross margin of 70%. Notably, professional services gross margin exceeded 90%.

The company experienced an operating loss of $17.2 million and a net loss of $7.8 million for the quarter. These figures remained better than expected due to effective expense management. C3 AI’s net cash used in operational activities was $38.7 million. Free cash flow for the quarter was negative $39.5 million, an improvement from negative $55.1 million in the second quarter of the previous year. C3 AI reported a robust cash position, closing the quarter with $730.4 million in cash, cash equivalents, and marketable securities.

Future Plans and Market Trends

As of the end of the second quarter, C3 AI maintained an accounts receivable balance of $160 million and expects strong collection results. During the period, the company signed 36 pilot projects, bringing the total to 260, with 210 still active. The partnership with Microsoft remains a significant focus as C3 AI pursues joint go-to-market strategies.

Management anticipates potential adjustments in gross margins due to a higher volume of pilot projects, which traditionally carry higher costs. Some moderation in operating margins is also expected as the company continues to invest in various areas, including sales, customer support, and research and development. While they predict negative cash flow for the third quarter, they remain on track for positive results by Q4.

Questions & Answers:

Operator

[Operator instructions]

Our first question comes from Patrick Walravens of Citizens JMP. Your question, please, Patrick.

Patrick Walravens — Analyst

Thank you, and congratulations. Tom, I have two questions. First, could you share the history of your relationship with Microsoft and how it has evolved? Also, do you think federal spending will shift under the new administration?

Tom Siebel — Chairman and Chief Executive Officer

I didn’t overlap with Judson while at Oracle, but he oversaw alliances during Oracle’s acquisition of Siebel Systems in 2006, which established connections between our teams. The relationship between Microsoft and C3 AI has primarily developed through our collaborative efforts. As for federal spending, I recently attended the Reagan Defense Forum, where discussions largely centered on AI applications and cybersecurity. I anticipate an accelerated adoption of AI technologies across federal agencies, particularly in defense and intelligence, indicating substantial shifts in acquisition strategies.

C3 AI’s New Alliance with Microsoft Aims to Reshape the AI Landscape

Highlights from Analysts on C3 AI’s Growth and Partnerships

Patrick Walravens — Analyst

Thank you, and congratulations again to the team.

Operator

Next, we have a question from Timothy Horan of Oppenheimer. Please go ahead, Timothy.

Timothy Horan — Analyst

Thanks, everyone. Could you explain what makes your offerings different from Microsoft’s? Who else are you competing with, and does this align with enterprise contract commitments regarding future spending?

Tom Siebel — Chairman and Chief Executive Officer

Sure, let’s take the last question first. Yes, our recent sales will count towards Microsoft’s commitments—where they’ve made large dollar commitments for software and services. This partnership allows us both to leverage strengths: while Microsoft offers extensive services through Azure, we create ready-to-use applications focusing on key areas like supply chain and customer analytics. Our approach complements Azure’s AI services, thus providing economic benefits to clients very quickly.

Timothy Horan — Analyst

Thanks for the insight. Your statement about being Microsoft’s preferred AI partner is significant—can you confirm that?

Tom Siebel — Chairman and Chief Executive Officer

The partnership agreement indeed states that: we will promote Azure as our preferred cloud provider, while Microsoft will position C3 AI as their recommended enterprise AI solution. This is certainly a landmark moment for our company.

Timothy Horan — Analyst

Lastly, when can we expect this agreement to start impacting your revenue? Can it accelerate growth beyond your current 30% rate?

Tom Siebel — Chairman and Chief Executive Officer

This agreement has already positively impacted our revenue, having been signed on September 30. While we can’t predict its full extent, our sales team may grow from around 100 to possibly 10,000, which could bring considerable benefits in the future, distinguishing us from competitors in the AI market.

Timothy Horan — Analyst

Thank you. Congratulations on the partnership.

Operator

Next, we have Mike Cikos from Needham. Please go ahead with your question.

Mike Cikos — Analyst

Great, I appreciate you taking my questions. I’d like to understand the implications of your free cash flow outlook for fiscal ’25.

Tom Siebel — Chairman and Chief Executive Officer

It’s vital to invest wisely now to secure our future. We raised about $1 billion in December 2020, and we have approximately $730 million left, which we are investing carefully. We anticipate turning free cash flow positive by fiscal ’26, but current spending is focused on capturing market share.

Mike Cikos — Analyst

Understood. Additionally, how does your subscription revenue relate to professional engineering services and their impact on unbilled receivables?

Tom Siebel — Chairman and Chief Executive Officer

There’s no direct linkage here. We provide prioritized engineering services to clients like Dow and Cargill, accelerating their use of our products. While recognized as professional services under ASC 606 guidelines, they primarily reflect software capabilities. This segment is substantially high-margin, contributing around 96% of our overall revenue, and we plan to expand this area moving forward.

Mike Cikos — Analyst

Thank you very much.

Tom Siebel — Chairman and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. We would now like to…

C3 AI Reports Strong Performance Amid Growing Enterprise AI Market

Tom Siebel — Chairman and Chief Executive Officer

Ladies and gentlemen, thank you for taking the time to join our call today. I appreciate your interest in C3 AI. Our company is in an exceptional position right now. The enterprise AI market is larger than ever and expanding at a pace that has surprised many of us.

We are also fortunate to have established strong partnerships, notably with Microsoft, to capitalize on this opportunity. To summarize our current status: we achieved an impressive 29% year-over-year growth in revenue within a strategic alliance with the world’s largest software company. This has set a solid foundation for our future growth, and we look forward to what lies ahead.

Thank you again for your attention.

Operator

[Operator signoff]

Duration: 0 minutes

Call Participants:

Amit Berry — Investor Relations

Tom Siebel — Chairman and Chief Executive Officer

Hitesh Lath — Chief Financial Officer

Patrick Walravens — Analyst

Timothy Horan — Analyst

Tim Horan — Analyst

Mike Cikos — Analyst

For more insights into AI, check out our additional analyses.

This article is a transcription of the conference call produced for The Motley Fool. While we strive for accuracy, there may be errors or omissions in this transcript. The Motley Fool does not take responsibility for your use of this content, and we encourage you to conduct your own research, including listening to the call and reviewing the company’s SEC filings. Please consult our Terms and Conditions for further details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.

The views expressed here belong to the author and may not reflect those of Nasdaq, Inc.