C3.ai, Inc. (AI) Earnings Call Transcript & Summary

Good afternoon, and welcome to C3 AI's Earnings Call for the First Quarter of Fiscal Year 2026, which ended on July 31, 2025. My name is Amit Berry, and I lead Investor Relations at C3 AI. With me on the call today are Tom Siebel, Executive Chairman; Stephen Ehikian, Chief Executive Officer; and Hitesh Lath, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our first quarter results as well as a supplemental to our results, both of which can be accessed through the Investor Relations section of our website at ir.c3.ai. This call is being webcast, and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our most recent annual report on form 10-K filed with the SEC as it may be supplemented by other filings and reports we make with the SEC from time to time, including our quarterly report on Form 10-Q that will be filed for the fiscal quarter ended July 31, 2025. All financial results will be discussed on a non-GAAP basis unless otherwise noted. A reconciliation of GAAP to non-GAAP financial measures to the extent reasonably available 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 and 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 Hitesh.

Good afternoon, everyone, and thank you for joining our call today. I will share our financial results and provide additional color on our business. All figures are non-GAAP unless otherwise noted. Total revenue for the quarter was $70.3 million, a decrease of 19% year-over-year. Subscription revenue for the quarter was $60.3 million, representing 86% of total revenue. Revenue from sale of software licenses that are demonstration versions of C3 AI applications was $17.9 million during the quarter, which was sequentially lower by $15.9 million. We sell these licenses at the request of our distribution partners to enable them to demonstrate our software effectively to their customers and at the request of our large strategic customers to enable them to accelerate C3 AI application adoption across their companies. Professional services revenue was $10 million, of which $8.7 million was revenue from prioritized engineering services or PES. Professional services represent 14% of total revenue during the quarter. Our subscription and PES revenue combined was $69 million and accounted for 98% of total revenue. I'll now walk you through some of our strategic customer wins this quarter. Nucor has expanded its commitment with C3 AI in a multiyear partnership to build an enterprise-wide AI program across their facilities. We are supporting and optimizing day-to-day planning, inventory and scheduling decisions and now expanding to additional plants and use cases. Qemetica, a global leader in chemicals launched its first enterprise-scale AI program with C3 AI. After initial success improving yield in its salt business, Qemetica is now scaling to 100 assets and multiple use cases, the start of a company-wide AI transformation. HII, America's largest military shipbuilder is expanding its partnership with C3 AI to accelerate throughput at Ingalls and Newport News. Initial deployments cut complex shipbuilding time lines and we are now scaling these AI capabilities across HII shipyards to strengthen U.S. Navy fleet readiness. The U.S. Army Rapid Capabilities and Critical Technologies Office is deploying a contested logistics application built on the C3 Agentic AI platform to support frontline vehicles in high-risk environments. This system applies the agentic and generative AI to enhance sustainment, readiness and decision speed in contested environments. I'll now move on to rest of the financial results. Non-GAAP gross profit for the quarter was $36.3 million, and non-GAAP gross margin was 52%. Non-GAAP gross margin for professional services remained high at over 80%. Non-GAAP operating loss for the quarter was $57.8 million. Non-GAAP net loss for the quarter was $49.8 million and non-GAAP net loss per share was $0.37. Our net cash used in operating activities was $33.5 million. Free cash flow for the quarter was negative $34.3 million. We continue to be well capitalized and closed the quarter with $711.9 million in cash, cash equivalents and marketable securities. During the first quarter, we signed 28 initial production deployments or IPDs. At the end of the quarter, we had cumulatively signed 374 IPDs, of which 266 are still active. This means they are either in their original 3- to 6-month term or extended for some duration, or converted to ongoing subscription or consumption contract or are currently being negotiated for conversion to ongoing subscription or consumption contract. Non-GAAP gross margin declined this quarter to 52%, primarily due to a higher mix of IPD-related costs, a lower mix of demonstration license revenue and PES revenue and lower economies of scale. As compared to fiscal '25, we expect to continue to see moderated gross margins in the near term due to higher mix of IPDs, which carry a greater cost of revenue during the initial production deployment phase of the customer life cycle due to our investments in expanding our support capacity and lower economies of scale. Now I'll move on to our guidance for the next quarter. Our revenue guidance for Q2 of fiscal year 2026 is $72 million to $80 million. Our guidance for non-GAAP loss from operations for Q2 of fiscal year 2026 is $49.5 million to $57.5 million. Given the appointment of our new Chief Executive Officer and the recent restructuring of the sales and services organizations, we are withdrawing our previous guidance. We plan on providing guidance for the third quarter of fiscal 2026 and full year fiscal 2026 when we announce our financial results for the second quarter of fiscal 2026. With that, I'd like to turn the call over to Tom.

Thank you, Hitesh, and good afternoon, everyone. As Hitesh reported, the financial results of the first quarter were completely unacceptable and completely unacceptable in virtually every respect. I've given this a lot of thought as to what the root cause in this is, okay? Is there a market? The market is huge. Is there some new competitor that changed the competitive dynamics of the space? There is not. Is there some secular change in the market that we haven't seen before? There is not. The fact of the matter is this boiled down to poor sales execution and poor resource coordination. It's clear that the new leadership that we brought into the organization in globally in sales and service, in the service organization in EMEA, in federal, in North America kind of mid-quarter caused confusion in the sales process. As I have previously announced, I ran into some unanticipated health issues. And as a result of these health issues, I was unable to participate as actively as I used to in the sales processes and the coordination of resources necessary to make these sales processes successful and come to closure. In hindsight, it's clear that my active involvement in that sales process had a greater impact than any of us knew. The good news is that we have completely restructured our sales and service organizations globally. We have brought in new, highly experienced leadership across the board, okay, to drive growth and to drive customer satisfaction. Even better, consistent with our announcement last July, we have completed the search, and we have appointed a new Chief Executive Officer in the person of Stephen Ehikian, who is highly experienced and well equipped to drive the details of this business to coordinate resources and to accelerate growth. In the sales and service organizations, we have combined these organizations under a new leader and the person of a Chief Commercial Officer to bring a more seamless experience focused on delivering value for each and every one of our customers. In addition to a Chief Commercial Officer, we brought in a new General Manager of EMEA, we brought in a new Group Vice President for North American operations, and we brought significant leadership into the federal business operations. By combining the sales and service organizations into a cohesive whole, we are ensuring a focus on delivering rapid economic benefit to each and one of our customer engagements to ensure their continued success. As we entered Q2, we have installed new leadership across the board. We have reorganized our sales and service organizations with a tightly integrated detailed execution plan going forward where everybody knows where they sit, what their job responsibilities are, and we've assured that everybody has the resources to do their job. We have a product that is unmatched in technical sophistication and functionality. We have over 131 turnkey Enterprise AI applications in the market. I believe we have the highest levels of customer satisfaction as measured by Net Promoter Scores in the application software industry. We have a huge and rapidly growing addressable market opportunity. We have the leadership in place, and we are positioned to grow. We are in a position to gain market share, and we are in a position to assure the success of each and every one of our customer engagements. An important development in Q1 was the introduction of our Strategic Integrator Program. This is a software OEM program, whereby we are licensing the C3 Agentic AI platform to others, enabling them to design, develop, provision and operate the industry and domain-specific applications for their markets. We're finding that the Strategic Integrator Program is being well received by OEMs, systems integrators, service providers into the defense, intelligence and civilian government communities, and we expect this to be a large and rapidly growing line of business for C3 AI going forward. The use of the Agentic AI platform enables them to use all of the assets that they've developed in the last couple of decades, be these machine learning models. And so it's an entirely open architecture that allows them to use any of the capabilities that they have, any new capabilities that the market may bring going forward. So it's an entirely open model-driven architecture, enabling complete flexibility going forward and avoiding vendor lock-in. It's difficult to overestimate the scale of the generative AI and agentic AI opportunity that is before us. As of the end of the first quarter, we're involved in approximately 60 large-scale customer engagements in state and local government, in manufacturing, in federal government, in defense, intelligence, manufacturing, what have you. Many of you are familiar with the MIT report that shows that order of 95% of these LLM projects running into a dead end and are unsuccessful. Our experience is that the majority of our LLM deployments are successful across industries and across use cases. The reason for the success is the combination of these generative free chain transformers with the C3 Agentic AI platform solves all the hobgoblins that are associated with generative AI. These hobgoblins include data exfiltration, cybersecurity risk, hallucination, the inability to enforce data access controls, the inability to take advantage of omnimodal integration. All of these problems are solved by C3 Generative AI, resulting in a very, very high success rate associated with our projects. Q1 2025 was our 19th quarter operating as a public company. This is the first quarter in which we have missed our revenue guidance. We know that we take that very seriously, and we will take that seriously going forward. Candidly, there is no excuse for the economic results that we delivered in the first quarter. That being said, going forward, our objective remains the same. We are here to establish and maintain a market leadership position globally in Enterprise AI applications, not in infrastructure, not in semiconductors, not in machine learning models, not in professional services implementations, okay? We're here to establish a market leadership position in Enterprise AI software, both with the C3 Agentic AI platform and with the Enterprise AI application footprint that we have in place and will be expanding. We have tried, tested and proven products. We have incredibly sophisticated architecture in the agentic AI platform. We're establishing clear leadership in agentic AI, a concept for which you know that we hold the patents. We have tried, tested and proven executive leadership in place. We have highly satisfied customers. We have a large and expansive addressable market opportunity before us that some estimate approaches the $2 trillion a year, okay? And we are geared up to grow our product footprint, to grow our market share, and increase our market penetration and operate a rapidly growing cash positive profitable business. Going forward, I will continue to remain actively engaged in the business, now in the role as Executive Chairman. In that role, I will particularly focus on strategic partner relationships, strategic customer relationships and keep an eye on direction and product strategy going forward. I am most enthusiastic to announce the appointment of Stephen Ehikian, as the new Chief Executive Officer of C3 AI. Stephen brings a superlative educational background, a wealth of industry experience, having started and built and grown 2 successful AI companies that he sold to Salesforce. Stephen is also an experienced and accomplished public sector leader, having served as President Trump's appointee as the acting administrator of the General Services Administration where Stephen was responsible for reforming the General Services Administration, reforming the acquisition activities of all the divisions of the federal government and driving President Trump's AI strategy across the federal government. On behalf of the Board of Directors of C3 AI, the executive leadership of C3 AI and the, I don't know, 1,100 or 1,200 employees of C3 AI, whatever that number may be, I can tell you we're all enthusiastic about working closely with Stephen in his new leadership role to ensure that he is successful in bringing more creativity to the process, more energy to the process, more drive to the process as we accelerate growth, accelerate market penetration and accelerate market leadership in Enterprise AI. Ladies and gentlemen, thank you so much for your time. And now I'll turn this back to Hitesh to field your questions.

Thank you, Tom. Operator, could you please open the line for questions?

[Operator Instructions] And our first question will come from the line of Radi Sultan with UBS.

Awesome. First for Tom, your involvement in the sales process has obviously been very critical here. I mean is there any way to more concretely understand how involved you're planning on being in the sales process going forward and what you're doing to ensure a smooth handoff to Stephen and the new sales leadership?

I am here to do everything I can to ensure that Stephen is successful, okay? And so we have a new -- an entire new layer of senior leadership in the company who are tried, tested and proven at selling Enterprise AI globally. And I suspect with Stephen's leadership, they're going to be enormously successful. That being said, okay, I will continue to be involved as necessary in monitoring that process and assisting that process to ensure that this transition goes very smoothly. And we dramatically ramp up the sales and service capacity globally.

Awesome. And then second for Hitesh. Obviously, a lot of moving parts in the quarter. What are you seeing that's giving you confidence in the Q2 guide? And then as we think about Q3 and Q4, like what is the right starting point to think about that sort of back half outlook? Any sort of building blocks would be helpful as we calibrate numbers.

Yes. Sure, Radi. Our Q2 guidance is based on the sales activity we've seen in the month of August as well as our review of sales pipeline for rest of the quarter with the new sales leadership. As it relates to period beyond Q2, while we're not providing any guidance at this point, we note that most analysts who have updated their revenue forecast for the year are forecasting fiscal '26 revenue ranging from $290 million to $300 million. And at this point, I would not argue against any number within that range. As it relates to path to profitability, we acknowledge our performance in Q1 has put us behind but we remain committed to achieving non-GAAP profitability and free cash flow. We are still bullish about the business, as Tom said, and we will get to profitability and free cash flow with the right scale, and that is a matter of time.

One moment for our next question. And that will come from the line of Patrick Walravens with Citizens.

This is Nick on for Pat. Tom, one quick one for you. You guys closed 40 partner-led deals this quarter. How do you see the mix of partner-led versus direct sales evolving?

That's a great question. I think something like -- Amit, correct me, is it 80% or 90%?