Executive Summary

C3.ai delivered a strong Q2 FY25: revenue rose 29% YoY to $94.3M and exceeded the high end of prior Q2 guidance; non-GAAP operating loss was meaningfully better than guided as revenue acceleration continued for the seventh straight quarter .
Management raised FY25 revenue guidance to $378–$398M (from $370–$395M) but widened the FY25 non-GAAP operating loss range to $(105)–$(135)M as it ramps investments behind a deepened Microsoft alliance; Q3 revenue guided to $95.5–$100.5M .
The expanded five-and-a-half-year Microsoft partnership (preferred enterprise AI application provider on Azure, Azure sales quota credit/commissions, MSFT paper, subsidized pilots) is the key catalyst expected to shorten sales cycles and scale go-to-market leverage; management said it has already provided a tailwind in Q2 .
Near-term trade-off: margins and FCF will moderate as pilot mix rises and the company invests to capture share; management now targets FCF positivity in Q4 FY25 only and expects FY25 FCF not positive, with a likely crossover to sustained FCF positivity in FY26, given higher near-term spend .

What Went Well and What Went Wrong

What Went Well

Revenue acceleration and beat vs guidance: $94.3M (+29% YoY) vs Q2 guide $88.6–$93.6M; non-GAAP operating loss $(17.2)M vs $(26.7)–$(34.7)M guided; seventh consecutive quarter of accelerating revenue growth .
Strategic Microsoft alliance: “All C3 AI solutions are sellable by the entire Azure sales organization globally,” with MSFT quota credit/commissions and orders on Microsoft paper; “It is difficult to overstate the potential of the Microsoft–C3 AI strategic alliance” .
Partner momentum and federal traction: 62% of agreements closed with/through partners; 58 agreements including 36 pilots; new/expanded wins with ExxonMobil, Shell, Dow, Duke Energy, Defense Logistics Agency, and $23M U.S. Army award with ECS .

Quotes:

“We had an outstanding quarter… seventh consecutive quarter of accelerating revenue growth.” — Tom Siebel .
“This will dramatically shorten C3 AI sales cycles… Microsoft will subsidize C3 AI pilots and C3 AI production deployments.” — Tom Siebel .

What Went Wrong

Margin/FCF pressure near term: management expects gross margin and operating margin moderation due to higher pilot mix and stepped-up investment; Q2 free cash flow was $(39.5)M vs $(55.1)M LY .
FY25 profitability objective dialed back: no longer targeting full-year FY25 FCF positivity, though still targeting Q4 FCF positive; sustained positivity more likely in FY26 as spend ramps into the Microsoft alliance .
Higher stock-based compensation dilutes GAAP results: SBC was $57.0M in Q2, contributing to GAAP net loss per share of $(0.52) despite non-GAAP net loss per share of $(0.06) .

Financial Results

Key P&L, Margins, and Cash Flow

Metric	Q4 FY24	Q1 FY25	Q2 FY25
Revenue ($M)	$86.6	$87.2	$94.3
GAAP Gross Margin (%)	70%	60%	61%
Non-GAAP Gross Margin (%)	70%	70%	70%
GAAP Net Loss/Share	$(0.11) non-GAAP loss/share; GAAP not disclosed in transcript	$(0.50)	$(0.52)
Non-GAAP Net Loss/Share	$(0.11)	$(0.05)	$(0.06)
Non-GAAP Operating Loss ($M)	$(23.4)	$(16.6)	$(17.2)
Free Cash Flow ($M)	$18.8	$7.1	$(39.5)
Cash, Cash Equivalents & Mkt Secs ($M)	$750.4	$762.5	$730.4

Notes: Q4 FY24 GAAP EPS not cited in transcript; non-GAAP EPS reported as $(0.11) .

Q2 FY25 vs Prior Year, vs Prior Quarter, vs Company Guidance

Measure	Q2 FY24 (YoY)	Q1 FY25 (QoQ)	Q2 FY25 Actual	Q2 FY25 Company Guidance	Delta vs Guidance
Revenue ($M)	$73.2	$87.2	$94.3	$88.6–$93.6	Above high end
Non-GAAP Op Loss ($M)	$(25.0)	$(16.6)	$(17.2)	$(26.7)–$(34.7)	Better than guidance
Non-GAAP Gross Margin (%)	69%	70%	70%	n/a	n/a

S&P Global Wall Street consensus estimates were unavailable at the time of analysis due to data access limits; estimate comparisons are therefore not shown.*

Revenue Mix and KPIs

Metric	Q2 FY24	Q1 FY25	Q2 FY25
Subscription Revenue ($M)	$66.4	$73.5	$81.2
Professional Services Revenue ($M)	$6.8	$13.8	$13.2
Subscription % of Revenue	—	84%	86%
Subscription + Prioritized Eng. Services ($M)	$71.3	—	$90.8
Agreements Closed	—	71	58
Pilots Closed	—	52	36
Partner-Closed Agreements (%)	—	72%	62%
A/R ($M)	—	$140.1	$160.0 (incl. $97.5 unbilled)

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue ($M)	Q3 FY25	—	$95.5–$100.5	New
Non-GAAP Op Loss ($M)	Q3 FY25	—	$(38.6)–$(46.6)	New
Revenue ($M)	FY25	$370–$395	$378–$398	Raised
Non-GAAP Op Loss ($M)	FY25	$(95)–$(125)	$(105)–$(135)	Widened

Management commentary on outlook: expect near-term margin moderation due to pilot mix and added investments; still targeting Q4 FY25 FCF positive, with FY25 no longer targeted for full-year FCF positive and likely sustained FCF positivity in FY26 .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 FY24, Q1 FY25)	Current Period (Q2 FY25)	Trend
Microsoft partnership / Hyperscaler GTM	Strong GCP/AWS GTM; 91 hyperscaler agreements in FY24; Q1: 72% of agreements via partners; 40 GCP agreements; deep federal AWS presence	Expanded 5.5-year alliance with Microsoft; Azure sales force to sell C3 AI; MSFT quota credit/commissions; orderable on MSFT paper; subsidized pilots; immediate tailwind	Improving
Generative AI (agentic AI)	Q4: massive inbound interest; 30 genAI products launched; enterprise-grade features; Q1: diverse pilots; new gov programs app	15 new genAI pilots; multiple pilots converted to production; foundational U.S. patent for generative AI agents (US 12,111,859)	Improving
Federal/Defense momentum	Q4: ~50% bookings mix; RSO PANDA expansion; Navy programs; strong growth	New/expanded agreements across DoD branches; $23M Army award; DLA expansion	Improving
Margins/FCF trajectory	Q4: 70% gross margin; guided near-term GM pressure due to pilot mix; FY25 FCF positive targeted	GM at 70% non-GAAP; management no longer targets FY25 full-year FCF positivity; Q4 FY25 FCF positive still targeted	Worsening near term
Baker Hughes exposure	Q4: diversification underway; non-Baker Hughes growth	Baker Hughes as % of revenue declining (FY23 35%, FY24 27%, last quarter 18%); exclusivity up for renewal June 2025; likely extended but not critical to outlook	De-risking

Management Commentary

“It is difficult to overestimate the impact of this [Microsoft] agreement upon C3 AI and upon the enterprise AI market writ large… sales professionals… potentially order of 10,000” — Tom Siebel .
“Our non-GAAP operating loss was $17.2 million and substantially better than our guidance… We ended the quarter with over $730 million in cash” — Tom Siebel .
“We expect some moderation on our gross margins due to higher mix of pilots… and [to] be free cash flow negative for the third quarter but remain on track to be free cash flow positive for Q4” — CFO Hitesh Lath .
“We are no longer targeting to be cash flow positive for the full year of fiscal year ’25… [but] at some point [in] fiscal ’26, we should cross over into being cash positive” — Tom Siebel .

Q&A Highlights

Microsoft alliance details: C3 AI designated preferred enterprise AI application provider; Azure sales motion provides quota credit/commissions; C3 products listed on Azure price list/Marketplace and “Microsoft paper,” which should shorten cycles; alliance already contributed to Q2 revenue .
Investment vs profitability: Management prioritizing market share via hiring in sales, customer support, R&D, marketing; FY25 full-year FCF positivity removed; aiming for Q4 FCF positive and sustained positivity in FY26 .
Pilot economics/margins: Higher pilot mix carries greater CoGS; company will do “whatever it takes” to convert marquee pilots, even at near-term margin cost; professional services remain >90% margin per CFO .
Baker Hughes: Exclusive oil & gas agreement likely extended beyond June 2025 but not material to outlook given revenue diversification; non-Baker Hughes revenue grew 41% YoY .

Estimates Context

S&P Global consensus EPS/Revenue estimates for Q2 FY25 were unavailable at time of analysis due to data access limits; as such, we do not show “vs Street” comparisons.*
Company vs guidance comparison: C3.ai exceeded Q2 revenue guidance high end ($94.3M vs $88.6–$93.6M) and delivered a better non-GAAP operating loss than guided ($(17.2)M vs $(26.7)–$(34.7)M) .
Implications: Street models may need to lift FY25 revenue and adjust margin/FCF trajectories to reflect raised revenue guidance and higher investment/CF expectations .

*Estimates unavailable via S&P Global at time of analysis.

Key Takeaways for Investors

Revenue momentum is real and broad-based: 29% YoY growth with beats vs internal guidance, diversified by partners and federal wins; watch conversion of 36 Q2 pilots and expanding partner-driven pipeline .
The Microsoft alliance is a structural GTM accelerator (quota credit, MSFT paper, subsidized pilots), likely to compress sales cycles and scale distribution; this is the quarter’s principal medium-term catalyst .
Near-term margin and FCF headwinds are the cost of capturing share; management explicitly prioritizes growth over full-year FY25 cash positivity, guiding for Q4 FCF positive and likely FY26 crossover .
Mix and accounting nuances matter (PES in professional services; demo licenses; consumption vs subscription): headline services % does not necessarily imply low quality revenue, and services margins remain high .
Federal continues to be a growth engine with tangible awards (Army $23M, DLA, USAF expansions) and likely bipartisan AI tailwinds; watch execution and ramp timing .
Guidance raised for FY25 revenue but widened for non-GAAP op loss; monitor Q3 delivery ($95.5–$100.5M) and any updates on Azure-driven pipeline conversion rates .
Baker Hughes concentration risk is diminishing; exclusivity decision by June 2025 should be a manageable event given ongoing diversification .

Appendix: Additional Data

Professional Services Detail (Q2 FY25)

Component	Q2 FY25 ($000s)	Q2 FY24 ($000s)
Prioritized engineering services	9,661	4,852
Service fees	3,515	1,928
Total professional services	13,176	6,780

Balance Sheet (Selected)

Line Item	Oct 31, 2024
Cash & equivalents	$121.3M
Marketable securities	$609.1M
Accounts receivable (net)	$160.0M
Total assets	$1,046.3M
Total liabilities	$187.3M
Total stockholders’ equity	$859.0M

C3.ai, Inc. (AI)·Q2 2025 Earnings Summary