C3.ai, Inc. ($AI)

Good day and thank you for standing by. Welcome to the C3 AI Fiscal Fourth Quarter and Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Amit Berry. Please go ahead.

Good afternoon, and welcome to C3 AI's earnings call for the fourth quarter and full fiscal year 2026, which ended on April 30, 2026. My name is Amit Berry, and I lead Investor Relations at C3 AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer; Stephen Ehikian, President; and Hitesh Lath, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our fourth quarter results, which can be accessed through the Investor Relations section on 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 filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. Also during today's call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP 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 or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. And with that, let me turn the call over to Tom.

Good afternoon, everybody. This is Tom. And just when you thought it was safe, I'm back. We have an enormous opportunity before us, and the opportunity is to create enormous value for our shareholders. The performance of this company has been staggeringly disappointing. We're looking at a turnaround opportunity. And the fundamental nature of this turnaround opportunity is to change everything about the way we manage this business. In the process, we're going to create enormous financial returns for our shareholders. Along these lines, I've been working with the senior executive leadership and the Board for the last couple of months. We have restructured the company. We have restructured sales. We have restructured products. We have restructured services. We have put together a strategic plan. We have put together the objectives, and we have a clear plan in place to turn this company around and create value for our shareholders. The restructuring of the company, first introduced by Stephen Ehikian in February has been expanded and accelerated by my return. Headcount has been reduced from 1,075 to roughly 700. We have taken almost $135 million in annual operating costs out of the business structure. C3 AI Federal has been entirely reorganized under a new and highly experienced leader. The sales organization has been completely restructured globally under, again, a very highly experienced, seasoned chief revenue officer. In the past weeks, we have reorganized the company top to bottom. We have new leadership throughout the organization. We have restructured the company. We have restructured C3 federal under new leadership. We have restructured C3 sales under new leadership. We have restructured products under new leadership. We have brought together in products the platform group, the applications group, the product marketing group and the customer services group all in one organization under senior seasoned leadership. We have restructured the service team, the objectives in place, the strategy is written and we are now going to talent. Just like the company, just like sales, the products group has been completely redesigned and reengineered. We brought together under 1 senior leader who's been with the company for 14 years, 4 functions, including the platform team, the applications team, the product marketing team and the services team in 1 place. So we have 1 organization basically responsible for designing the product, coding the product, quality assuring the product and delivering the product to make sure that customers are successful. The services organization has also been completely reengineered and completely designed under a new senior leader who's been with the company for more than 7 years. We've taken 4 layers out of that org structure from 7 to 3. The organization has been redesigned so that for every one of our customers, where we're working on pilots or production deployments, we have a dedicated team assigned to the customer, they move in with the customer and they stay with the customer until the project is done and the customer is successful. I am absolutely satisfied that the new structure is going to result in higher levels of customer satisfaction, more successful customer deployments and more rapid expansion of our customer deployments into large enterprise, expanding contract relationship. As I look at the performance of the company in recent quarters and particularly the sales performance, I mean, it is just unspeakably horrible and it's surreal, okay? This is resulting in market multiples for the company that are candidly well earned and scathing analysis from analysts and sell-side analysts that are candidly well deserved. I am here to fix that. And as it relates to enterprise sales, this is not an area which I think I'm entirely unfamiliar with. I think just to return to fundamental hygiene and fundamental sales protocol, just the basics will take this company a long, long way towards increasing shareholder value. And the company is sufficiently well capitalized to basically obviate any question of the need for a financing event. We have enough capital there to meet the mission that is before us. I want to give you an update on the restructuring that Stephen introduced last quarter. We have expanded those objectives, and we have accelerated those objectives. We have reduced headcount by approximately 35% across all organizations. The workforce actions are in place. They are done. The cost controls are in place. The budget is in place. The plans are in place. The costs have been reduced by order of $135 million a year. And we are well on our way to becoming a fully agentic enterprise, adopting these agentic tools to fundamentally change the way we do business across the enterprise and to dramatically increase the productivity in every aspect of our business. The products organizations today are largely leveraging AI tools for all programming activities. These agentic tools have been adopted across the organization: legal, finance, sales, marketing, wherever it may be to increase productivity really dramatically across the enterprise. Sales, in particular, are leveraging these agentic tools to focus on market development, business development and strategies to increase their penetration of existing customers and large global new customers. Across every function, our people in the organization are operating with an agentic AI-first mindset increasing productivity across all business functions. This is now all about execution, and we're going to have our heads down every hour, every day, every month, every quarter. And the early indications are that this is moving in the right direction. Our priorities are clear. They are well understood. They are articulated. The objectives are distributed and they're understood. If we look at sales, for example, our go-to-market activities have changed significantly. We're focusing on using technologies and agentic technologies focused on penetrating territories, penetrating large accounts with the campaigns that will develop over multiple quarters and multiple years rather than the narrow focus that was in place before, focused on relatively small opportunities that might be in place for any given quarter. The executive team, all of the employees at C3 AI are laser focused. I'm doing whatever it takes with the objectives in place to turn the company to significant quarter-to-quarter top line revenue growth to establish the company as one that generates free cash flow every quarter and to establish the company as a company that generates non-GAAP profitability quarter after quarter after quarter. The opportunity to increase shareholder value and C3 AI is enormous, and that is exactly what we're going to do. Talk is cheap. And rather than rain forth with idle promises that everybody will largely ignore, we're going to accept the challenge to deliver acceptable financial results to deliver growth, deliver cash generation, non-GAAP profitability generation and let the results speak for themselves. Game on. With that, let me turn this over to my colleagues. Our CFO, Hitesh Lath is going to talk about the results of the quarter. And Hitesh and Stephen Ehikian will be available to answer questions they may have. Thank you very much for your interest, and I look forward to updating you as this develops at the end of Q1 and the end of Q2. Thank you. Thank you. Thank you.

Thank you, Tom. Total revenue for the quarter was $51.6 million. Subscription revenue was $48.4 million, representing 94% of total revenue. Professional services revenue was $3.2 million, of which $2.1 million was revenue from prioritized engineering services, or PES. Professional services represented 6% of total revenue during the quarter. Our subscription and PES revenue combined was $50.5 million and accounted for 98% of total revenue. Non-GAAP gross profit for the quarter was $19.3 million and non-GAAP gross margin was 37%. Non-GAAP gross margin for professional services was 78%. Non-GAAP operating loss for the quarter was $54.4 million. Non-GAAP net loss for the quarter was $48.8 million and $0.33 per share. Our non-GAAP operating expenses for the quarter were $106 million. This reflects a reduction of $33.9 million as compared to the actual non-GAAP operating expenses of $139.9 million same quarter last year. Free cash flow for the quarter was negative $54.8 million. We continue to be well capitalized and closed the quarter with $575.4 million in cash, cash equivalents and marketable securities. During the quarter, we signed 9 initial production deployments or IPDs. At the end of the quarter, we had cumulatively signed 417 IPDs, of which 251 are still active. This means they are either in their original 3- to 6-month terms or extended for some duration or converted to ongoing subscription or consumption contracts or are currently being negotiated for conversion to ongoing subscription or consumption contract. Last quarter, we launched a restructuring plan which included expense reductions across our business to produce full year cost savings of approximately $135 million. As Tom said, our headcount has been reduced from roughly 1,075 in January of 2026 to about 700 today. And we have already completed actions to realize almost $130 million of total planned savings. We are on track to meet or exceed our original cost savings target. As we said on the last quarter's earnings call, some of the cost savings associated with the nonemployee expenses will be fully realized starting with the second half of fiscal year 2027. With these actions, we are well positioned to materially improve our operating efficiency, free cash flow and position the company for long-term success. Our Founder and CEO, Tom Siebel, purchased 6.17 million shares of C3 AI stock at a price of $11.16 per share for net cash proceeds of approximately $69 million. The company has received the cash. And as of today, our total cash, cash equivalents and marketable securities balance is $673 million. Now I'll move on to our guidance for Q1 and fiscal year '27. Our revenue guidance for Q1 of fiscal year '27 is $50 million to $54 million. Our guidance for non-GAAP loss from operations for Q1 is $40.5 million to $48.5 million. Please note that the midpoint of this guidance is based on non-GAAP operating expenses of $96.5 million, which is $31.6 million lower than the actual non-GAAP operating expenses of $128.1 million same quarter last year. Our revenue guidance for fiscal year '27 is $210 million to $240 million. Our guidance for non-GAAP loss from operations for fiscal year '27 is $128 million to $160 million. Now I'd like to turn the call over to the operator to begin the Q&A session. Operator?

[Operator Instructions] Our first question for today will be coming from the line of Patrick Walravens of Citizens.

Tom, it's good to see you back, and it's good to see the insider buying. Can you just start very big picture and help us -- you can't fix something until you understand what went wrong, and you've spent a lot of time figuring out what went wrong. So in fiscal '25, this company was doing $389 million in revenue. And this year, you're guiding to $255-ish million, $230 million at the midpoint. So just fundamentally, what happened? Where did the revenue go?

Well, thanks, Pat, for the question. And if you look at this scenario, I mean, the company used to do $90 million, $100 million in a quarter. It used to do 43 deals. It used to do bookings for very large numbers. If you look in the last 5 quarters, I mean, sales just fell off the cliff. And the product is great. The customers are happy. There's no question of market size. I mean, come on, I've been talking about enterprise AI since 2010, and I was the only person in the world talking about it until probably 2022, when -- until November 2022 when we had an inflection point there. And now Tom is not the only person in the world who thinks there's a market enterprise AI. So we have a great product. We have a huge market. We have satisfied customers, and the sales discipline has just been surreal, Pat. I mean this is -- that's where the revenue numbers come from. That's where the RPO comes from. That's where the profitability or the lack thereof comes from. It's basically sales execution. It's been miserable. It's reflected in all the operating results. It is completely unacceptable, and it's not that hard to fix. It is -- I accept all the criticism the company has received. I think it's well deserved, okay? I really do. I think the revenue multiple is well earned. It is. But the good news is it's not that hard to turn around. And so I think we fixed the sales problem. It fixes revenue growth. It fixes RPO. It fixes cash generation. It fixes everything. And so for those, Pat, you know me a little bit, and I'm not entirely unfamiliar with enterprise sales, maybe I have a little experience in that. So I think this is definitely a turnaround situation. We know how to fix it. The plan is in place and stand by.

Great. And then as a follow-up, so I totally hear you on the sales side. But for the company, churn must have been bigger than you wanted to, and nonrenewals must have been bigger than you wanted. What did you learn about that? Like what was causing the existing customers to spend so much less with you than they did before?

No. There's a number of issues there. I'm not actually sure that this churn issue is really true. Could somebody help me with that -- I'm not sure that's true, Pat. I think it really is sales execution.

Yes, we have not experienced a significant loss of production customers.

I'm not sure that's true, Pat. I think it really is sales execution. Market is huge. Product is great. Customers are happy. I think this is pretty fundamental. No question, we see this as a turnaround situation, and that's what we're focused on. We're coming off of -- and we're coming off of performance that is just completely unacceptable, laughably unacceptable. And we're going to take a bat and a teeth for that. We deserve it. And now we're focused on turning this business around and focused on return to shareholders. And I think we can do that in a pretty big way.

And our next question will be coming from the line Radi Sultan of UBS.

Tom, good to see you back in the saddle. I wanted to start on the federal side, just like your comments on C3 AI Federal. How is the ramp of the $450 million contract ceiling with the U.S. Air Force tracking relative to your expectations? And how is sort of the restructuring of C3 AI Federal impacted that?

Wasn't the RSO $100 million contract ceiling? The honest answer is I am not -- I have not batten that in touch with the operating details of the business in the last 4 quarters. And I haven't looked into that. I think the RSO contract was $100 million. But honestly -- I'm sorry.

They got increased after.

Oh, did it? Okay. I'm sorry. It's a legitimate question, and I don't know, and I'll find out and we'll get back to you.

No problem, Tom. Yes. No problem at all. Just Hitesh, maybe on the fiscal '27 guidance as we calibrate our models. Could you just help us understand the moving parts around license and PES embedded in the guide this year? And maybe just post-restructuring, how would we be thinking about the role demonstration licenses and the growth strategy post restructuring?

Yes. Radi, as you know, we guide to total revenue. And as it relates to PES or prioritized engineering services, we expect PES to continue to contribute a wallet share of our total professional services revenue. And in terms of professional services mix, expect it to be between 10% to 15% of total revenue.

Including PES.

Including PES. And as it relates to revenue from demo licenses...

Let me try this, okay? It's a very legitimate question. Ladies and gentlemen, I think it's I don't know. I mean we have changed everything about the sales organization. We have changed everything about go-to-market. And I think that while it's a very legitimate question, how much is going to be professional services, how much was demo license, how much is going to be PES, I don't think we really know, okay? We have a plan to grow revenue, but we're really -- and I'm sorry that this doesn't work in helping you fill out your spreadsheet, but we don't know. All we can assure you is that it's going to be -- the revenue will be properly accounted for. And we can't really tell you what that mix is. Make no mistake, we are focused on software revenue, guys, not service, ladies and gentlemen, software revenue. We understand the difference, and that's what we're focused on. But it's hard to tell how this is going to shake out. And I know that's not the answer you want to hear, but it's true.

And our next question is coming from the line of Matthew Calitri of Needham & Company.

This is Matt Calitri on for Mike Cikos over at Needham. Tom, welcome back and great to hear that your health issues have been largely resolved. You mentioned in your prepared remarks that you're going to look at penetrating territories and large accounts rather than the more narrow focus on relatively small opportunities that was put in place. In the past, you guys had sort of run like a small amount of deals that were large in size, and then we pivoted over to the pilot model. What exactly do you have in mind going forward? Is there sort of a sweet spot in the middle there? Or how are you thinking about that balance?

How do I describe this? There was kind of a very funny issue -- I'm sorry, your first name one more time.

Matt.

Matt. This is kind of a funny issue, Matt, when we looked into it, and the way that territories assignments have worked in the last year. And the truth of the matter is they had to focus on a limited number of major accounts rather than looking at the entire market opportunity. So I would say, if you look at Europe or North America, they might have been only focused on, really -- I know this is hard to believe, but the sales organization might have been focused on a total of 100 to 150 accounts in each of those organizations. And so I know it's hard to believe, but it really is true. And so now you will see those North American and federal and European sales organizations focused on order of 1,000 account opportunities rather than -- maybe even more than that rather than order of 100. So I mean it's hard to believe that's the way it was set up, but it really was set up and we've -- that way, and we fixed it. Now within that, they'll be focused on large deals. What's a large deal? I would say $50 million to a couple of billion. They'll be focused on medium-sized deals, which might be $5 million to $50 million, and that will be focused on smaller deals, which might be $0.5 million to $2 million. I know there's a big gap there, but you get the idea.

Got it. Yes, that's very helpful. And then just broadly, like where are you seeing customers find budget for AI initiatives? And are you seeing any change in sales cycles or just the pace of adoption as organizations race to capture ROI and push AI initiatives?

Well, as you do your market analysis, as I'm sure you've done, Matt, on the pure kind of enterprise AI market, which would include Palantir, C3 and others, it was about a $6 billion market in 2025. It's about a $10 billion market in 2026, and it's projected to be about a $15 billion market in 2027. So it doesn't look like these people are being too starved for opportunities. It's a $10 billion market growing at a 50% compound annual growth rate, which it's -- people are finding the budgets, that's for sure.

And our next question is coming from the line of Koji Ikeda of Bank of America.

This is George McGreehan on for Koji Ikeda. And I kind of wanted to ask maybe kind of a 2 in 1. And when we think about IPDs and kind of over time how the quantity of IPDs has kind of trended downwards, where would you say -- are there use cases or customer profiles that have been kind of harder to get recently? And then conversely, which type of customers or use cases are you most excited about kind of driving and capturing over the next few quarters?

Well, it's -- as evidenced from Palantir and others, and Palantir as a go-to-market motion is very much analogous to an IPD, I mean the idea that the market opportunity is big is, I think, inconsistent with the performance you've seen out of Palantir. The market is clearly there, and the execution is pretty damn good. I mean pretty impressive. So I don't know there's the question of the market being there. Where do we see market being there? Do I think the execution on the behalf of C3 has been acceptable? It has been completely unacceptable, George. And if you want us to like fall on our sword or eviscerate ourselves in a public audience, put me on stage, give me the stage, give me a sword, and I'll do it, okay? But the opportunity going forward -- look, the pure enterprise AI market, which enterprise AI application market, which we are most certainly in, looks like a $10 billion market, growing at a 50% compound growth rate. We're not even growing, okay? And so we're not growing off a small base number, and we're growing at a level smaller than the market at large. I mean that's just unacceptable. Do we think we know how to fix it? Yes. Where is the market opportunity? It's international services? Okay, is it a consumer packaged goods? It is. Is it in defense and intelligence? It is. Is it an agribusiness? It is. Is it in aerospace? Yes, sir, it is. So I don't think as we get into '28, '29, '30, I don't think there's anybody who believes that all of those markets don't address enterprise AI. You know they do. And you believe and even Bank of America probably believes that today, okay? And you didn't in 2016, '17, '18, '19, '20 or '21. I think even Bank of America believes that today. And we just intend to play our full role in.

Thank you. And that ends the Q&A session for today. I would like to turn the call back over to Mr. Siebel for closing remarks. Please go ahead.

Ladies and gentlemen, thank you for the courtesy of your time. We really appreciate it. We hope we used it effectively. I hope you have a feel for the plan, and we will look very much forward to reporting on you -- to you in the progress in the next 3 months and 6 months. Thank you very much.

Thank you for your participation today. You may now disconnect.