C3.ai - Q4 2023

Transcript

Amit Berry (Head of Investor Relations)

Good afternoon, welcome to C3 AI's earnings call for the fourth quarter fiscal year 2023, which ended on 30 April 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 a 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 the actual results to differ materially from expectations. For a further discussion on 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. During the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial 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 business 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. With that, let me turn the call over to Tom.

Tom Siebel (Chairman and CEO)

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. We finished the fourth quarter strong. The coming year looks stronger. I believe that it's 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 experts 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 the enterprise AI market for over a decade, as the market has developed from its roots in 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. Now, as we enter the summer of 2023, it has become a dominant theme in technology discussions, or AI has become a dominant theme in technology discussions, government discussions, media reports, defense and intelligence imperatives, and government and business imperatives. I do 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. All of this is being accelerated by the advent of generative AI. The interest in AI and in applying AI to business and government processes has never been greater. Business inquiries are increasing, the opportunity pipeline is growing, demand is increasing. C3 AI is well positioned to serve that increasing demand with our tried, tested, and proven AI platform, our applications, our global footprint, and our large global ecosystem. The world is, in many ways, now coming to us. The interest in applying AI to business processes is substantially greater than we have ever seen. In the fourth quarter, we increased our customer base, expanded our work with existing clients, saw especially strong growth in our federal business.

In the fourth quarter, our total revenue was $72.4 million, our free cash flow was $16.3 million. We ended the quarter with over $812 million in cash and cash equivalents. Importantly, we have a well-defined plan to be sustainably cash positive and non-GAAP profitable by the end of this fiscal year. For fiscal year 2024, I'm sorry, for the fiscal year 2023, okay, total revenue was $266.8 million, an increase of 5.6% over fiscal year 2022. Okay, subscription revenue was $230.4 million, representing an 11.4% increase over the prior year. Let's talk a little bit about the AI applications market. Now, as the enterprise AI market has developed, it appears that the bulk of the demand is increasingly for turnkey enterprise AI applications rather than for development tools.

This thesis is supported by an evaluation of our bookings for the past fiscal year that indicates that 83% of our bookings were driven by application sales. 17% of our bookings were driven by the sales of the C3 AI Platform. Importantly, we are seeing increasing diversity in the industries we serve. For fiscal year 23, an analysis of our bookings includes oil and gas was 34%, federal defense and aerospace was 29%, high tech was 13%, energy and utilities, 11%, manufacturing, 4%, food processing, 2%, chemicals, 2%, life sciences, 1.5%, and other industries made up the remaining 3%. An important leading indicator of our increasing industry diversity is evidenced by the trial and pilot agreements closed in Q4. Federal defense and aerospace made up almost 37%.

Manufacturing comprised approximately 16%, and high tech made up more than 10%. Oil and gas also made up more than 10%. When we look at ag, state, local, chemicals, energy, and financial services, each made up approximately 5% of our bookings. As a result of the increased demand for enterprise AI, helped by our transition to consumption-based pricing, we are seeing a substantial increase in opportunities and shorter sales cycles. In Q4, we closed 43 agreements, including 19 pilots that were initiated in the quarter. The number of qualified enterprise opportunities targeted for closure within 12 months in our sales pipeline, has increased by more than 100% in the past year. During fiscal year 2023, we closed 126 agreements, up from 83 in the prior year.

The average sales cycle for new and expansion deals was 3.7 months, down from five months in Q4 of the previous year. An examination of the composition of our pilot account profile suggests there is significant opportunity for growth as these accounts convert to consumption pricing. Of the 19 pilot accounts signed in Q4, seven were at accounts greater than $100 billion in revenue. Seven were at accounts between $10 billion-$100 billion in revenue. Four were at accounts between $1 billion-$10 billion, and 1 was an account less than $100 million in annual revenue.

In fiscal year 23, we expanded our application footprint with a number of our customers, including Shell, Koch Industries, the United States Air Force Rapid Sustainment Office, PwC, Ball, ExxonMobil, Con Edison, the Defense Counterintelligence and Security Agency, Baker Hughes, the New York Power Authority, Duke Energy, ATB in Canada, Defense Innovation Unit, Roche, Cargill, and ENGIE. We also established many new relationships during the year, including the Department of Defense, Chief Digital and Artificial Intelligence Office, Daly City, California, Dow, ExxonMobil, Flex, Hexagon, Nucor, Owens-Illinois, Pantaleon, Riverside County, California, Stark County, Ohio, TELUS, Department of Defense, SOCOM, Department of Defense, TRANSCOM, and ESAD. Many of these also expanded their AI engagements with us in the course of the year. Let's address the C3 AI partner network. The C3 AI partner ecosystem is increasingly effective at opening new doors.

With our partners, we're able to provide prospects the assurance of success and the highest quality service. In fiscal year 2023, we closed 71 agreements with and through our partner network, including Google Cloud, AWS, Microsoft, Baker Hughes, and Booz Allen. C3 AI increased its qualified pipeline with AWS by over 24% in the fourth quarter, with particular focus on state and local government. With Google Cloud, our joint qualified 12-month opportunity pipeline grew from 25 opportunities at the end of fiscal year 2022 to 140 opportunities at the end of fiscal year 2023, a 460% increase. Importantly, we closed 10 new oil and gas accounts in the year with our strategic partner, Baker Hughes, with accounts including ExxonMobil, ADNOC, Eni, and others. In Q4, we released the C3 Generative AI solution to the market.

Our generative AI solution leverages the capabilities of the C3 AI Platform and is distinguished from other GPT LLM solutions in the market in several ways. Number one, it allows enterprises to access all their enterprise and open source data, ERP, CRMs, data, text, PDFs, Excel, PowerPoint, sensor data, you name it. Secondly, importantly, it provides traceable, deterministic, consistent answers. Thirdly, it enforces the corporate information access controls and security protocols that are currently in place. Fourthly, it has no risk of IP or data exfiltration caused by the large language model and importantly, it is hallucination-free. If the system doesn't know an answer, it doesn't fabricate it, which is clearly unacceptable for any commercial or serious government application.

After releasing the product in March, we rapidly closed three Generative AI applications in the quarter with large enterprises, including Georgia-Pacific, Flint Hills Resources, and the U.S. Department of Defense Missile Defense Agency. We expect these applications to be live during this current quarter. We are currently working a quite substantial pipeline of additional C3 Generative AI opportunities with large corporations. The C3 AI generative application is now available, today available, on both the AWS Marketplace and the Google Cloud Marketplace. It is difficult to estimate the size of the addressable market for these generative AI solutions, but it appears to be extraordinarily large. We saw a lot of momentum last year and in the fourth quarter with our U.S. federal business. The U.S. federal sector represented 29% of our bookings in fiscal year 2023, and it continues to show significant strength.

Our predictive maintenance solution, our Predictive Analytics and Decision Assistant, also known as PANDA, has been in production use for several years at the United States Air Force Rapid Sustainment Office. Last quarter, it was selected as the system of record for all predictive maintenance for virtually all United States Air Force assets. Okay, this important designation expands our opportunity really substantially in the US Air Force and other services. Let's talk about guidance. C3 AI has a consistent and solid track record of meeting or exceeding guidance, as we have done in every quarter since we've been public, okay. We are, at this time, we are not inclined to pout on the table regarding guidance. In general, we feel comfortable with the expectations that the sell side analysts have set for the coming year.

We are not inclined to change those expectations at this time. For Q1, fiscal year 2024, we see revenue in the range of $70 million to seventy-two and a half million. For the full year of fiscal year 2024, we expect revenue to be in the range between $295 million and $320 million. As it relates to non-GAAP loss from operations, we expect to fall between $25 million to $30 million in Q1 and $50 million to $70 million for the year. As we begin fiscal year 2024, C3 AI has never been better positioned. The addressable market is large and expanding, the overall business environment for enterprise AI is strong, C3 AI is front and center in the minds of CEOs and government leaders.

Our balance sheet is strong, with over $812 million in cash and cash equivalent, we are in a great position to expand market share. The dynamics of the enterprise AI market are developing so rapidly, we thought it appropriate to host a mid-quarter investor day in New York City on 22 June. At that time, we will provide C3 AI investors a company update, additional information about our product roadmap, product demonstrations, direct access to the C3 AI executive team, updates on our partner ecosystem, C3 Generative AI demonstrations, and additional company developing news, okay? We hope you can attend either in person or online, and that investor day event will be available to view online live, okay, for all investors via webcast.

I will now turn this call over to my colleague, Juho Parkkinen, Chief Financial Officer, for additional details regarding our financial results. Juho?

Juho Parkkinen (CFO)

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, unless 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 there are 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 of 10%-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 event.

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 customer conference. For the full year fiscal 2023, our revenue was $266.8 million, an increase of 5.6% from fiscal 2022. Non-GAAP loss from operations was $68.1 million, and free cash flow was negative $187 million. Our gross margin for the year was 77%. Our subscription revenue was 86% of total revenue, compared to 82% in fiscal 2022. We ended fiscal 2023 with $812.4 million in cash and investments. At the end of Q4, our accounts receivable, including unbilled receivables, was $134.6 million. Unbilled receivables at quarter end was $77.6 million, inclusive of $70.7 million related to Baker Hughes.

During the quarter, we collected from Baker Hughes nearly $35 million. The general health of our accounts receivable is excellent. 76% of our receivables were current or less than 30 days past due. For the entirety of our FY 2023, our bad debt expense was approximately $300,000. Turning to RPO and bookings. As consumption-based go-to-market model continues to pick up, RPO is a less important indicator of future performance. We reported GAAP RPO of $381.4 million, down 20% from last year, which is expected as a result of the transition to consumption-based pricing. Trend GAAP RPO of $186.3 million is up 9.8% from last year-end and up 5.7% on a sequential basis. We continue to see positive trends in pilot bookings diversity, as we have sold pilots to a broad range of nine different industries during the quarter.

Regarding our outlook for fiscal 2024, we're guiding Q1 revenue to range between $70 million to seventy-two and a half million. For the full year 2024, we expect revenue to range between $295 million and $320 million. As it relates to the full year, we finished the third quarter of our transition under the consumption pricing model. As a returning model, we expect flatness and somewhat of a decline in revenue during the transition, with an acceleration as consumption starts to have meaningful portion of our in-quarter revenue. As such, we expect the second half of FY 2024 to have higher growth rates on a sequential basis than the first half.

We expect our non-GAAP loss from operations to range between $25 million and $30 million for Q1, and for full fiscal 2024, we expect non-GAAP loss from operations between $50 million and $75 million. As a reminder, we expect to be non-GAAP profitable for Q4 2024 and beyond, and as it relates to full fiscal 2024, we are guiding to a range in operating loss due to the potential investments we may do for C3 Generative AI applications. We expect our cash and investments to be at its lowest at around $700 million during fiscal 2024. Turning to customer metrics. Historically, we have provided a quarterly customer count estimate as a proxy for the adoption of our products and solutions.

Due to the complexity of our contractual and pricing structures and the involvement of resellers, customer counts from quarter to quarter, based on our current methodology, does not fully convey the acceptance and adoption of our products and solutions. To help address this, we retained an external Big Four consulting firm to update our current customer count methodology consistent with best practices to be consistent, systematic, and auditable. As a result of that review and adoption of those recommendations, we believe a metric that demonstrates contracted use cases that our customers are using our solutions to solve, would provide a more meaningful understanding of the product adoption. This is defined as customer engagement.

The customer engagement increased from 247 to 287, comparing Q3 2023 to Q4 2023. Our traditional customer count metric went from 236 to 244 for the same periods. There will be additional detail included in the supplement, which is available on our website. We are on track with our plan for profitability for Q4 2024 and expect to have cash positives quarter starting Q4 2024 on a consistent go-forward basis. The entire executive team is managing the business to have detailed budgets on our plan for profitability. We are expecting to invest aggressively to generative AI initiatives during the first half of the year, which is reflected in the operating income guidance.

As it relates to the model assumptions that we provided 3 quarters ago for our consumption-based pricing, our preliminary analysis of the actual results suggest we are on that model. Overall, we're very excited about the business momentum as we start FY 2024. As a go-forward KPI for the investing community to assess our performance, we believe good KPIs to focus are the number of pilots started during the quarter, the conversion of those pilots to production, and finally, the actual vCPU consumption fees generated. With that, I would like to open this up for questions. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment for our first question. Thank you. Our first question comes from the line of Kingsley Crane of Canaccord. Your line is open.

Kingsley Crane (Managing Director)

Hi. Thanks for taking the question. Tom Siebel, 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?

Tom Siebel (Chairman and CEO)

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. I mean, in the old days, you know, one and two years ago, to do business with us was, you know, $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 6 months for half a million dollars. If you like it, keep it, and pay $0.55 per CPU hour, vCPU hour. We're pretty easy to do business with. We're seeing the number of transactions increase dramatically as we'd expect. The, you know, the ease of contracting with us.

As you know, we have largely reconstituted the sales organization the last year and a half to a sales team that is candidly, you know, much more productive and effective than our other sales organizations. I think all of those are contributing to increased pipeline, increased business, increased business activity, which we're quite optimistic.

Kingsley Crane (Managing Director)

Thanks, Tom. That's really helpful. One for Juho. One, thinking about the timing of the transition, 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, particularly in the back half? I think that you said, you know, revenue could accelerate as consumption increases in mix.

Juho Parkkinen (CFO)

Yeah, Kingsley, thanks for that question. As we sign and initiate more pilots within the quarter, the pilots are generally two quarters long, 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 at 17 pilots as well. You can start seeing those layer on to the revenue by Q3 and Q4 of this fiscal year. 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.

Kingsley Crane (Managing Director)

Okay. Very helpful. Thank you.

Operator (participant)

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

Pat Walravens (Managing Director)

Great. Thank you. Tom, can you talk some more about the opportunity with national security and the Department of Defense? 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.

Tom Siebel (Chairman and CEO)

DoD. Well, Pat, you've asked kind of many times about we have Two, basically, authorities to operate contract vehicles, one's for $100 million, and one's for half a billion in DoD that are associated, and 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-15, F/A-18, F-35, TC-135, et cetera. Well, 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 decreased their cost of maintenance and readiness by about $6 billion.

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 them the questions, and we didn't have the answers, and these guys go into their star chamber the way they do. What they came out with was not 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 predicted maintenance in the United States Air Force for all assets. This is genuinely a big deal. Now we have the opportunity to make this a line item in the budget. You know, it's hard to, you know, over describe the impact of this or overestimate the impact of this.

Not only do we have it in the Air Force, we can talk now to other services like the Army and the Navy, okay, and the Marines and the National Guard, what have you. This is a big one. The second one has to do with generative AI. One of the problems with generative AI is, you know, you're limited to the number of data sources that you can use with these large language models. Typically, it's text, HTML, or sometimes code. The large language model will, you interact directly with the data. One of the problems is you get kind of random answers. You know, every time you ask the question, you get a different answer. If two people ask the same question, you get a different answer. And there's no traceability.

It doesn't tell you where the answer came from, okay? Finally, if it doesn't know the answer, it makes one up. This is what they call hallucination. It doesn't know, so it just kind of wings it and makes up an answer. We're using the entire C3 platform, and the way that we do that is we incorporate, as you, I think, all know, we're very good at aggregating enterprise data, extra price data, code, images, text, sensor data, what have you, into a unified federated image. When we do that, those data are read by a deep learning model, and they happen to be stored in a vector database. We have a kind of a firewall between that and the large language model.

Our customer can use any large language model they want, be it ChatGPT, be it PaLM, be it Bard, be it Falcon, whatever it may, whatever comes along next. We've built a firewall between the large language model and the data. It will every time I mean, every time you ask the question, it'll give you the same answer, okay? If two people ask the same question and they have the authority, they will both get the same answer every time. Associated with the answer, it provides you traceability, so if you click on it, you can see exactly where the data came, come from, okay? Very importantly, there's no risk of LLM-caused data exfiltration. See Samsung for details, where they find out that all of their proprietary information is now published on the Internet, okay.

Finally, there's no risk of LLM-caused hallucination. If it doesn't know the answer, it tells you, "I don't know the answer," rather than making one up. You know, for these, you'd think would be kind of table stakes, and they are table stakes for any large commercial or government installation, and this is something that really distinguishes the C3 Generative AI offering, and one of the reasons that we're seeing, you know, very high levels of interest. Great. Thank you.

Operator (participant)

Thank you. One moment, please. Our next question comes from the line of Sanjit Singh of Morgan Stanley. Your line is open.

Sanjit Singh (Executive Director of Equity Research)

Appreciate you guys squeezing me in for the question. Tom, you know, earlier this week, you guys announced, had a press release about the C3 Generative AI Suite being available on the AWS Marketplace. It got me thinking about what the sales motion going forward is gonna look like. As you sort of mentioned, generative AI is permeating the boardroom, the C-suite, in a pretty substantial way. When we look at sort of, you know, converting this interest into deals and ultimately revenue, how much, you know, how much of this is gonna be like flywheel, kind of self-service, consumption-based marketplace type deals? Versus, you working with partners, taking a more consultative approach as, and helping, you know, these large enterprise customers sort of navigate the world of generative AI and actually deliver value.

Tom Siebel (Chairman and CEO)

Great question, Sanjit. Our first three engagements that are involved in now will be, are at organizations, the order of $100 billion or greater in revenue, okay. Have, you know, we'll bring the application live in 12 weeks. We're not doing it with an again, and we have, like, three people on the project, it's pretty straightforward. Now, the, you know, the issue of going from, say, 6 customers to 60 customers to 100 customers is 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 6 customers to 60 customers to 6,000? For 6,000, now we have to leverage these channels like the AWS Marketplace, where the product's available today, the Google Marketplace, where they're available today.

In terms of usability, it needs to be like the Apple iPhone. You know, you open the box, you take the cellophane off, you turn it on, and it works. Now we're, you know, the next generation, the really serious development work that we're doing now on that product kind of relates to, you know, really product design, okay, and making it like an Apple product. You open it up, you turn it on, and it works. That's the challenge that's before us. I think we're up to it, okay? If we're able to hit that note, hold on to your socks.

Sanjit Singh (Executive Director of Equity Research)

I appreciate the color, Tom. 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, you know, contextualize, like, what's really driving the guidance for next year. Because we're coming off a year, fiscal year 2021, I think you guys grew north of 30%, 33%-34%. 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.

I want to understand, like, is the acceleration you're seeing a function that you're coming off, you know, you know, a tougher year where you had a, you know, spending environment was more difficult, sales reorg, those types of things, versus, you know, you know, generative AI really coming online in fiscal year 2024, is there any way you can attribute, you know, those two things between sort of coming off of a, you know, a tougher year versus, you know, the demand that you're seeing, in pilots and out in the field?

Tom Siebel (Chairman and CEO)

Let's just, let me address the premise, okay? Before we all wring our hands about, you know, 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 announced the transition to consumption-based pricing, okay, we made it very clear that this was gonna have a short and midterm, okay, negative effect on revenue growth. It's axiomatic. Anybody who knows how to use a spreadsheet can figure this out. If we're closing half a million dollar deals instead of $10 million, $20 million, $30 million, $40 million, $50 million dollar deals, the short-term impact on revenue is to dampen revenue growth. I'm not certain that's so tough.

Okay, that is basically we're executing exactly to the plan that we set. This thing is exactly on track. When you run this through your little Excel spreadsheet model, you hit the carriage return, okay, you run it out a few years, you know, a few quarters out there, you know, you can do the math and you know what happens. I'm asking you, 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. Now in 50 or 2024 and 2025, we're gonna yield the returns from that investment.

Sanjit Singh (Executive Director of Equity Research)

Great. I appreciate the thoughts.

Operator (participant)

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

John Katsingris (Equity Research Associate)

Hi, thanks for taking my question. This is John Katsingris on for Dan Ives. 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.

Tom Siebel (Chairman and CEO)

Great question, John. Well, right now, you know, I mean, in terms of applying AI to enterprises, we're in, you know, first half of the first inning and, you know, first guys at bat. Okay, this is an embryonic market. I mean, where we're seeing the biggest uptake immediately. First, it was in the smart grid. Okay, why the smart grid? Because they had invested $2 trillion, okay, upgrading the grid infrastructure globally to make all the devices in the smart grid, remotely machine addressable. It's a huge IoT constellation. That's where we saw it first. The next large, where we're seeing it in the past year, the largest market is in AI reliability, basically predictive maintenance. They can do it in the military, they call it readiness, okay, or in the private sector, they call reliability.

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, you know, CRM. I think there is no aspect of business operations that will not be, or okay, and medicine, okay, and research, and the science, and literature, entertainment, that will not be accelerated by the use of AI. It's, we're just gonna have to. We're along for the ride, and gonna see where this goes in the next few years and stay on the balls of our feet as it develops. It is a rocket ship.

John Katsingris (Equity Research Associate)

Thank you, Tom.

Operator (participant)

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

Mike Cikos (VP of Equity Research)

Hey, guys. Thanks for taking the questions here. Maybe the first would be going to Juho. I know that you guys had cited the 43 deals you closed this quarter. 19 of those are pilots. Can you further refine that for us? 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?

Juho Parkkinen (CFO)

Hi, Mike. No, these would all follow the new consumption-based approach. These are not under the older model at all.

Mike Cikos (VP of Equity Research)

Okay. 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 19 pilots that you guys closed that are, or initiated that are consumption-based this quarter, and the other pilots that we've cited in previous quarters, do we have a feel for how many of these pilots have now converted to production? Do we have a gauge for what the vCPU is for those consumption deals once they move into production?

Juho Parkkinen (CFO)

That's a great question. Mike, 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. 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. I would say that the first quarter for 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.

Mike Cikos (VP of Equity Research)

Understood. Understood on that. Thanks for that. Just one quick follow-up, if I could. Wanted to ask just on the, on the professional services revenue, I know it's huge, a tick higher versus the typical 10%-20% range we've been talking about. I just wanted to see, is 10%-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?

Juho Parkkinen (CFO)

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

Mike Cikos (VP of Equity Research)

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

Operator (participant)

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. Our next question comes from the line of Brad Sills of Bank of America. Your line is open.

Adam Bergere (Equity Research Associate)

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

Tom Siebel (Chairman and CEO)

Well, this is Tom. I mean, clearly, the investments we've made in the last 14 years are paying off, okay? You know, in that we have over 40 applications, and people want applications, and I think we're the only company in the world that has 40 applications. 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. That's a big opportunity. Now, we just came off of planning, and we decided to, you know, really invest in that, in that product category in a big way, 'cause it's, you know, it's just difficult to estimate the size of that market, but it's extraordinarily large.

Adam Bergere (Equity Research Associate)

Yep, fair enough. For, you know, kind of the generative AI use cases and solutions thus far, you know, just, I guess, the first, you know, just your first take on it, but do you see any, you know, outsized uptake, you know, or expect any outsized uptake within certain verticals over others in your view? Thank you.

Tom Siebel (Chairman and CEO)

You know, it's a good question. It kind of seems like everybody is interested in this. They want, you know, at the level of the CEO or the person who operates manufacturing and the person who operates sales, they want basically a Google-like interface, where they get a web browser-like interface, where they can ask any question about their business. Okay, where are the problems in our supply chain? If I'm the Chair of the Joint Chiefs, what are my ready list levels? We have 35 squadrons in, okay, in Central Europe. I mean, well, that's what we call Google for DoD, but, you know, there, the open AI initiatives can provide, you know, the Secretary of Defense or the Chair of the Joint Chiefs of Staff, answers to that questions in seconds.

Right now, it actually takes weeks for him or for most people to get those answers. It's, I don't know any industry that will not be taking use of this technology. It's, it's really quite amazing.

Adam Bergere (Equity Research Associate)

All right. I appreciate the perspective, Tom. Thank you.

Operator (participant)

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

Mike Cikos (VP of Equity Research)

Hey, guys. Thanks for getting me back in. I did just have one quick follow-up, and maybe building on a question that Sanjit had asked earlier, taking a different look. Rather than looking at the revenue, let's talk profitability for a second. 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 AI is achieving its target of exiting fiscal 2024 with non-GAAP profitability?

Tom Siebel (Chairman and CEO)

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. I think our current guidance is in line with what the Street currently has. I'm pretty confident of that. Now, the other question related to, oh, how are you sure you're gonna get to profitability?

Juho Parkkinen (CFO)

Mike, one of the things that I had on the prepared remarks was our planned investments into Generative AI, which combined 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. We're pretty bullish about the Generative AI opportunity.

Mike Cikos (VP of Equity Research)

Got it. Thank you very much.

Tom Siebel (Chairman and CEO)

That being said, we don't need the generative AI opportunity. Generative AI could be 0, okay. We're still gonna run a cash positive, profitable business in Q4. Well, I mean, we have a very, very detailed plan that's been distributed to all the members of the management team. They all have their budgets. They know what's gonna operate. Even expect it to be a cash positive, profitable business and non-GAAP profitable business in Q4, hard stop.

Juho Parkkinen (CFO)

That's right.

Operator (participant)

Thank you. One moment, please.

Tom Siebel (Chairman and CEO)

One more question.

Operator (participant)

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

Pat Walravens (Managing Director)

It was great to see, you know, the average sales cycles for agreements, tick down, I think, by about, 1.3 months year-over-year. You know, what's really driving that? You know, where do you think, you know, a sustainable, you know, sales cycle, you know, basically concludes at, maybe thinking about the rest of this year? Thanks.

Tom Siebel (Chairman and CEO)

Well, I think the consumption-based pricing model is driving it, where it's pretty easy to adopt when you can have a, you know, large scale enterprise AI application live in production in 6 months for half a million bucks. I mean, that's nothing, guys, in, you know, in terms of what it costs to bring in an Accenture or an IBM or somebody to try to bring one of these things live. That's gonna be scores of millions of dollars and years. It's a pretty easy sale. It's a shorter sales cycle.

you know, so, you know, I'm not sure where it ends up, but, you know, as we move more and more of our products onto the AWS Marketplace, the Google Marketplace, and other, you know, leverage channels like this, you know, we'd expect to see it, you know, get shorter.

Pat Walravens (Managing Director)

Great. Thank you.

Tom Siebel (Chairman and CEO)

Thank you.

Operator (participant)

Thank you. At this time, I'd like to turn the call back over to Mr. Siebel for any closing remarks.

Tom Siebel (Chairman and CEO)

Ladies and gentlemen, we, you know, thank you so much for your attention today. Thank you for tuning in. I encourage you to mark your calendars for 22 June. I think you'll find that we'll talk about some interesting developments at our investor conference at that time, and we hope you'll have time to join us for that exchange. Thank you very much for your time today, and we wish you all a good night.

Operator (participant)

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