C3.ai Stock

Good day and thank you for standing by. Welcome to the C3.ai Fiscal First Quarter 2027 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. And now I'd like to hand the call over to today's host, Amit Berry. Please go ahead.

Good afternoon and welcome to C3.ai's earnings call for the first quarter of fiscal year 2027, which ended on July 31, 2026. My name is Amit Berry and I lead Investor Relations at C3.ai. With me on the call today are Thomas Siebel, 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, 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 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. We advise 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, everyone, and thank you for joining us. Three months ago, I returned as Chief Executive Officer with a mandate to turn this company around. I returned as CEO because the company was candidly underperforming despite every advantage. The product offerings are exceptional. The market is huge and rapidly growing and the balance sheet is rock solid. None of that was the problem. The problem was execution. And 1 quarter into the turnaround, I believe the company is on track.

In the past 3 months, we have restored fundamental management discipline to this business. We completely restructured the company. We restructured sales. We restructured products. We restructured services. We reset the cost structure, driving massive costs out of the business and implemented rigorous cost controls. We reinstated the fundamental management practices necessary to run a business, clear ownership, hard deadlines, weekly reviews.

We rebuilt the selling motion around disciplined account management and pipeline development rather than heroics. We now have experienced executives in charge of every aspect of the business in sales, products and services, and finance and legal. This is the leadership team that will execute the turnaround. We refocused the product offerings on our Agentic AI stack, our greatest technical strength, and the largest and most rapidly growing segment of the market.

And this quarter showed meaningful progress. We came in guidance, bookings grew at 73%, and we took real costs out of the business to narrow our operating loss and generate free cash flow in the quarter. We closed 22 enterprise agreements in the quarter, including with Heidelberg Materials, Johnson & Johnson, Ford Motor Company, C-SPAN, Holcim, the U.S. Department of Defense, the Defense Logistics Agency, and the U.S. Department of Agriculture. Federal business was particularly strong, with federal bookings growing 138% year over year. These results are early evidence that the turnaround is taking hold.

The C3.ai Agentic AI platform remains the starting point of every sales engagement. It reflects over 15 years of software development in which we invested in excess of $3 billion. Last month, Forrester Research released a very significant study in which they evaluated the strengths of all the AI platform providers. And in that evaluation, they ranked C3.ai at the top of the stack.

Forrester ranked the C3.ai platform #1 in data modeling, #1 in agent development, #1 in application development tools, #1 in cohesivity, experience, #1 in governance controls, #1 in platform management, #1 in security certification, and #1 in supporting services and offerings. Other companies evaluated in the study include a who's who in software, Palantir, Google, Databricks, and 11 others. So this study is a pretty significant benchmark and really a hallmark of the technology of achievement of C3.ai in the marketplace over the last 15 years.

Our primary offerings today include the C3.ai Agentic AI Platform, C3.ai Generative AI, C3.ai Studio, and more broadly, importantly, C3.ai Code. The C3.ai Studio is our control plane for developing and operating large-scale enterprise AI applications. And C3.ai Code is our Agentic AI application builder that turns a natural language prompt into a working enterprise AI application in minutes to hours.

C3.ai Code will be at the vanguard of our growth engine going forward. This product is absolutely remarkable, and I encourage you to go onto the web, take a look at it, and take it for a try. As an example of the power of C3.ai Code, you can take a 1-hour RFP or you can take a 6-inch thick product specification. You can provide it to C3.ai Code. It assembles the data. It does the data aggregation. It autonomously builds the ontology. It develops the pipeline.

It builds machine learning models. It designs the user interface, and it autonomously delivers a working enterprise AI application without writing 1 line of manual code. This is really remarkable and you have to see it to believe it. C3.ai Code, broader platform adoption, federal systems growth, and sales discipline. At the heart of our growth engine going forward.

In closing, let me be clear about where we are going. Our priorities are clear. They are measured. The turnaround is on track. We have a well-designed plan, and this is all about execution. Return the company to quarter-over-quarter consistent revenue growth. Attain free cash flow from operations, and reach non-GAAP profitability.

Every objective in this company ties to those goals every day, every week, every month. We're not going to ask the market to underwrite a story. Our plan is to deliver results quickly, quarter over quarter, and let those results speak for themselves. And with that, let me turn the call over to Hitesh Lath to talk about the specific financial results of the quarter.

Thank you, Tom. Total revenue for the quarter was $52.4 million. Subscription revenue was $49.2 million, representing 94% of total revenue. Professional services revenue was $3.2 million, of which $1.8 million was revenue from prioritized engineering services, or PES. Our subscription and PES revenue combined was $50.9 million and accounted for 97% of total revenue. Non-GAAP gross profit for the quarter was $26.1 million and non-GAAP gross margin improved sequentially from 37% last quarter to 50%, primarily due to cost reduction actions we've taken over the last few months.

Next quarter, as we make selective investments in engineering organization, we expect a non-GAAP gross margin to moderate to mid-40s. Non-GAAP operating loss for the quarter was $36.2 million. This was $8.3 million better than the midpoint of our guidance. Non-GAAP net loss for the quarter improved to $30.7 million and 20 cents per share. Our non-GAAP expenses for the quarter were $88.5 million. This reflects a reduction of almost $40 million as compared to the actual non-GAAP expenses of $128.1 million same quarter last year, and a reduction of over $17 million as compared to the last quarter.

Free cash flow for the quarter was positive $2.1 million as compared to negative $34.3 million same quarter last year and negative $54.8 million last quarter. This was due to a significant reduction in our quarterly cash expenses as well as strong collections. We continue to be very well capitalized and close the quarter with $651.1 million in cash, cash equivalents, and marketable securities.

Quick update on our restructuring plan. Our restructuring is almost complete and we have been able to achieve annualized cost savings of approximately $135 million across our business. This includes cost savings from approximately 40% headcount reduction across all organizations, as well as from reduction in non-employee expenses. As we said on the last quarter's earnings call, some of the cost savings will be fully realized starting with the second half of fiscal year 2027.

With a substantially improved cost structure, reorganized and focused sales services and products organizations, we are well positioned to achieve revenue growth, materially improve our operating efficiency and free cash flow, and position the company for long-term success. Now, I'll move on to our guidance for second quarter and fiscal year 2027.

Our revenue guidance for second quarter of fiscal year 2027 is $51 million to $55 million. Our guidance for non-GAAP loss from operations for second quarter is $34.5 million to $42.5 million. Our revenue guidance for fiscal year 2027 is $210 million to $240 million. Our guidance for non-GAAP loss from operations for fiscal year 2027 is $123 million to $155 million. For the remainder of fiscal year 2027, we expect our free cash flow to broadly align with a guidance range for non-GAAP loss from operations. Now I'd like to turn the call over to the operator to begin the Q&A session.

Certainly. Our first question for today comes from the line of Patrick Walravens from Citizens. Your question please.

Tom, congratulations on the beginning of the turnaround here. With federal up 138%, I think I have to start with that, which is, what was sort of the biggest thing that you won? How did you win it? And what does the pipeline look like for more things like that in federal?

The pipeline in federal looks very good and I would say there's an incumbent there that has a large market share with very high levels of dissatisfaction, both with their product and their business practices. So a lot of that dissatisfaction is spinning off now in opportunities for us. So, in addition, I mean, you know, the government's spending a lot of money on these types of technologies, particularly in the intelligence and the defense sectors.

I think the defense budget's about to go from $1 billion to $1.5 billion like this month, and our next month, so there's, I'm sorry, $1 trillion to $1.5 trillion. Thank you. So there are a lot of spending there, and we're getting a lot of traction. Thank you.

Great, and then as a follow-up, Tom and Hitesh, you mentioned this in your remarks too. So you're going to invest more in a forward-deployed engineering organization. What does that mean for C3.ai? And did you have forward-deployed engineers before? And if not, what are you doing differently here?

We've always had forward-deployed engineers, I think going back to about 2014, I could be wrong by a year or 2. We've always had that function. And we need to be absolutely sure that each and every 1 of our satisfied customers are achieving what they need to achieve. And so we're going to increase our investment in people to help them with these deployments.

And I think that investment in people is going to be offset in the medium run by this C3.ai Code product that you just have to see, where it's doing all of these data aggregation, pipeline building, machine learning development, user interface, without any programmers. It is way cool. So that's going to mitigate the need for forward-deployed engineers in the medium and long run. But in the near term, we're going to overinvest in existing customers to ensure they continue to realize the returns they're looking for.

All right, great, thank you. We did see it by the way, we came in and did a demo and it was remarkable, that was a surprise. Six months ago, so I'm sure it's evolved a lot since then, but it was really pretty amazing. Thank you.

Our next question comes from the line of an Unknown Analyst from UBS. Your question please.

I guess maybe just to follow up on the Fed opportunity, I'm curious how much of that opportunity is in sort of displacing incumbents like you mentioned versus sort of greenfield work? And then what gives you confidence that you can displace that incumbent or those incumbents successfully?

Well, we've been doing it for a while and I think it accelerated last quarter. I think they're a fine company, they make a good product, but you know, there's people who want to replace them and that creates an opportunity for us, I'd say. And then there's, you know, lots of greenfield opportunity where we, you know, compete with them and win. So that federal just has been and remains a really good business sector for us.

Got it. And just 1 quick follow-up. If we think about the high end of the full year guide does imply a pretty steep acceleration if you hit that. And I guess like my question is fundamentally what needs to happen, what needs to go right for you to hit that high end of the guide? And I guess like what gives you, you know, what gives you confidence that could happen?

You know, I'll be honest with you. I'm less interested in hitting the high end of that guide that I am making sure that we built the pipeline and we have the sales organization in place to demonstrate consistent quarter-over-quarter revenue growth, you know, from, you know, Q3 on into perpetuity.

And I think that if we're able to demonstrate consistent revenue growth, if we ever get to the point where we're running free cash flow operations and get the company to non-GAAP profitability, I think it's highly likely this company will not be trading at a revenue multiple of like 3.5x, it'll be trading at a revenue multiple of 10x, 15x, 20x, or 25x, and I think that will bode well for our investors.

Thank you. Our next question comes from the line of Michael Latimore from Northland Capital Markets. Your question, please.

Yes, the C3.ai Code obviously sounds really interesting. Is that a meaningful part of the pipeline? Are you still kind of in early stages of marketing that?

Honestly, Mike, we're in the early stages of marketing that, but hold on to your socks because it doesn't have to be a multi-million dollar acquisition. And so people could start small and then grow and grow. The initial customers who are using it just love it.

And I used it here to replace a pretty substantial piece of enterprise software that we have in place that will remain unnamed. And these guys, and we pay a lot of money for this application. It's in the kind of HR management space. And these guys built an application in 1 day that replaces an enterprise application in 1 day. I mean, it's unbelievable.

Yes, that was great. And I mean, in the past, you've sort of promoted selling enterprise AI applications. It feels like you're maybe moving more towards a little bit of a platform strategy here, or is that the wrong interpretation?

I think you nailed it, Mike, and we weren't that explicit about it. So in the past, we have sold the AI platform, and then we have used the AI platform to build enterprise AI applications, which are kind of big applications that do things like predictive maintenance or demand forecasting or fraud detection or supply chain optimization.

Going forward, all these applications have been broken down into their atomic particles. And atomic particles are, if you will, are embedded in the AI platform. And if you want to build 1 of these applications for predictive maintenance for aircraft or process optimization in oil refining, whatever it might be, you could assemble those atomic particles in real time that become that application.

So it's not, they're just there and there are thousands of those elements that kind of reassemble on demand either because you asked them to do it or you did it through C3.ai Code. So it is, what's going forward is a little bit different. It's a good, you know, insightful what you caught there.

Great, thanks. And then just last on customer concentration, any kind of metric you can provide there? Do you have any customer, you know, over 5% or over 10% of revenue or, you know, what are your top 10 customers or percent, anything like that?

Yes, Mike, not a meaningful change from before. We will disclose that to the extent appropriate in our 10-Q, which will be out in a few days. I don't think there's any 1 customer.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. Siebel for any further remarks.

Thank you everybody for your time. We appreciate it and keep your eye on the ball. We're very focused here. All of these executives have their eye on the ball. I think if they continue to execute their plans as they have been, this will bode well for C3.ai investors and that's the game we're playing.

Thank you for your interest. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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 claim 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 to 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 cost or the business structure.

C3 AI Federal has been entirely reorganized for 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 boom. We have new leadership throughout the organization. We have restructured the company. We have restructured C3 AI Federal 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, 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 redesigned under a new senior leader who's been with the company for more than 7 years. We've taken 4 layers out of that organ 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 and tell 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 branding contract relationship.

As I look at the performance of the company in recent quarters and particularly the sales performance, I mean, it is just unspeakableble 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 I'm entirely unfamiliar with. I think just the fundamental hygiene and fundamental sales protocol, fundamental just the basics will take this company a long, long way towards increasing their holder 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 our 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 when we're going to have an edge 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're 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 genic technologies focused on penetrating territories, penetrating large accounts within 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 earn 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 we established 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 kick in will be available to answer questions you 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 of $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 $0.30 per share. 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, [ up $139 million ] same quarter last year.

Free cash flow for the quarter was negative $54.8 million. We continue to well capitalize and closed the quarter with $575.4 million in cash, cash equivalents and marketable securities.

During the quarter, we signed 9 initial production deployments for 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 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 Citizen.

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, 230 at the midpoint. So just fundamentally, what happened? Where did the revenue go?

Well, Thanks, Pat, for the question. And 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 a 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 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 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, and 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 standby.

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 without -- I'm not sure that's true that. I think it really is sales execution.

But yes, we have not experienced a significant loss of production customers. I'm not sure that's true but I think it really is sales execution, market is huge, products 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 a performance that is just completely unacceptable, laughably unacceptable. And we're going to, we're going to take that and the 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, I 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 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 been 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 I'm sorry.

It got increased after.

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 to touch maybe on the fiscal '27 guidance, you calibrate our models. Could you just help us understand the moving parts around license and PES embedded in the guide this year or 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, expected to be between 10% to 15% of total rev.

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 ratio, 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're going to 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 services, the 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 for Mike Cikos at Needham. Tom, welcome back and great to hear that your health issues have largely resolved. You mentioned in your prepared remarks that you're going to look at penetrating territories in 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. Okay. When we looked into it, in a way that territories in hits have worked, okay, 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 higher 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 other 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. We like a large deal, I would say, $15 million to a couple of billion that'll be focused on mid-sized deals, which might be $5 million to $50 million, and that will be focused on smaller deals. We 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 is 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% comp annual growth rate, which it's -- people are fine on 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 quality of IPDs as 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 in 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 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, get 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, look at $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, you know they do, and you believe 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 rolling.

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.

All right. I'll keep the train rolling. The next presentation we have, we're super happy to have Stephen Ehikian, new Chief -- I will say new Chief Executive Officer, C3.ai. We're going to look into the opportunity that C3.ai has in front of them. There's been a bit of a turnaround, so we'll get the update on that.

Before we kick off the conversation, let me just go through some disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures.

Stephen, welcome to the TMT conference. Thank you very much. Awesome. So congrats on the new role. And to start, maybe you can give us a sense of what attracted you to the C3.a opportunity to start with.

Yes. Nice to be here. So right before this, I was leading a government agency, the General Service Administration. I came in to help fight fraud waste and abuse and part of that effort within the GSA, if you don't know it, is really the intersection of all government spend, procurement, common goods and services, IT shared services, real estate portfolio of the government. So it was an incredible opportunity, and we spent first 6 months slimming down the government headcount contracts.

And then the next phase was the build back phase. And there I was kind of doing a lot of work investigating like what are the other AI platforms that we want to look at across the government I knew the most common players, but then I saw a demo from C3, and it just jumped off the page. I'm like, what's this? I spent more time understanding the underlying technology and the use case in the federal government, and I saw a huge opportunity. And for me, I'm very mission-driven.

And there's a couple of big themes that I was really passionate about. One was driving the AI adoption like we helped draft the AI action plan a big part of winning that race is driving adoption through the federal government and through the major industries. Number two was this reindustrialization of America and have for national security, how do you bring back manufacturing, how do you think about supply chains. And the third big piece was how you -- and this is more existential question, how do we get out of this debt crisis of the government. And I can tell you it's really freaking hard to cut costs in the government, so the only chance we have is to grow productivity. And I think that's going to be AI, automation and robotics. So I wanted to go to a company that can actually affect those big themes and C3 was a perfect fit for that.

Yes. That's a great introduction. So with about 6 months under your belt CEO, what insights can you share about C3 from an organizational standpoint? The technology, the product capabilities, market positioning, how has that shaped your strategic priorities going forward? We'll talk about like the plan in terms of the restructuring and what to focus on. But just in terms of just your customer conversations, what stood out to you?

So I've been here 6 months. And I spent all that time on the road talking to our customers, partners, employees. And what resoundingly I heard across the board was that when we actually focus on the right customers, industrial customers, the federal government, we demonstrate huge economic value. right? This isn't like my last company, we're solving a customer support bot. This is solving major core operations, supply chains, asset reliability for some of the biggest companies in the world, I think managing the contested logistics for the Navy to 10,000 critical infrastructure assets for Shell. These are a massive scale where AI can actually have a huge impact. So I kept on hearing resoundingly, we demonstrate huge economic value, okay? Awesome.

Number two, the density of talent at C3. The best I've been -- I've been in start-ups. I've been in government, this is the highest concentration of smart people who actually -- who deeply care. We're in the office 5 days a week. It's an intense culture that deeply focused on like how do we help our customers win in AI. And so those are the general theme.

The other theme I heard, there's a lot going on in the market. There's a lot of noise. If I ask everybody in this room, what is an AI agent? What's an LLM? What's AI? What's machine learning. You're going to get all different responses. If you talk to our customers, they're confused. They're like there's so much being thrown at them. They've been piloting for the last 1.5 years. They're in pilot purgatory. They want to move beyond that. So they're looking for trusted partners that have actually done this at scale. So that's a critique on us but also the opportunity that I kind of was going to double down into, which if I can go to the next stage, I've learned all this, but I'm like, cool. We're not performing the way we should be. Like you know this, I know this from North America, EMEA, terrible, like I'm just looking at the performance, not acceptable. Federal has been growing.

And I'll tell you what, when I landed, I immediately just plot my butt in D.C. and said, I have probably the best chance of affecting change in D.C. given my background. And so what do I do? I removed layers of management. I had the sales team report directly to me. I'm deeply involved in the deal flows. I'm reducing the cycle times from showing value before it would take months to show value in a sales cycle, I'm like what can get done in a day, in a week. So that's the mentality right now, especially the new technologies we're building, and that's what customers want to see.

And so I'm going to take that same playbook that's clearly working in federal and take that to North America and EMEA. And exactly what is that, that is going to be focused on fewer applications. And I think C3 started in the space of enterprise AI. I mean, they started the term the category of enterprise AI, the awesome, a decade ago. but they're not the only players today.

You got Databricks. You got Anthropic, you got OpenAI, you got the hyperscalers talking about it. And I think that's validating, but also is going to put pressure on us to say, where do you deserve the right to win? Like you can't be a horizontal solution in this environment. So for me, the big opportunity was I know we've done 130 applications in the past, but we have the right to win in a very few number in the industrial space in the federal space. And so the most obvious thing for a beginner's mind coming in is like double down to where you actually have deserve the right to win, and you have the proof points. So all the actions we've taken are based on that focus.

Yes. No, there's a lot of things that I wanted to unpack there. you unfortunately had to do a 26% headcount reduction just given where the cost structure was. Can you talk to us about the details of the turnaround plan. But more importantly, beyond the details, like -- what do you want C3.ai to look like coming out of this latest restructuring or reorganization?

Again, what led to this restructuring? There's -- I come in 6 months observing, there's a lot of goodness. There's a lot there. The market is changing. The desire of focus is immediate. So okay, what are all the things that are tangential that aren't actually where we're #1 in the market we have to downsize. So immediately, what I said is any product lines that are going to be the -- where we're going to be #1 in the market, we're going to -- we'll maintain it for now, but we're not going continue to invest in that. And then there's associated sales teams associated with those products.

But overall, I took a step back, we're burning too much cash. Like I think a big part of my experience with the government and before start-ups, cash is critical. Having a path to profitability is critical. I want that as much as you want that. And so getting the cash burn, restructuring cost was number one.

Number two was flatten the organization. I feel like I've come from start-ups, I've seen governments, and we're probably somewhere around here. I want to get closer to the leanness of a start-up and the execution speed because when I saw in federal, removing layers gets me closer to the customer and the reaction time from our engineering team is critical. So the layers reduced was part of that restructuring as well.

And the third is the focus, product focus, fewer industrial applications where we solve the deliver AI and automation across the value chain, think manufacturing, oil and gas, energy, public sector. Anything outside of that is not a core focus anymore. So that is how we're going to -- from a product perspective and a go-to-market perspective, the other thing is playing bigger. When federal, we're playing at a secretary level. We're playing bigger transformations for the government because they need it. They don't have an alternative, they can't hire people back. We're going to do the same thing on the commercial side. Instead of just focusing on entry point, getting the door we're going to get in the door with our prebuilt applications but paint a much broader transformation story that the CEOs are asking for, how do I have a 0 back office supply chain. How do I maintain like tens of thousands of critical infrastructure without humans drowning in data? So that's the focus right now.

And the biggest thing -- the last thing I would highlight is changing how you build with C3.ai. We have all the components. I can go into details of this, all the components to build a world-class enterprise AI application. How you build this, and this is where the speed of change in the last, I don't know, 6 months, it's probably been more in the last 30 years. how you build these is moving fast, I can highlight that, but I'm extremely excited for the ability to -- for companies to go from a mission-critical idea to a mission-critical app with very little downtime.

Understood. In terms of like the general time line because I know it's hard to pinpoint this. But in terms of, one, getting back to top line growth and then two, that ultimate path to profitability, how are you thinking about those 2 objectives?

Well, we're trying to do as fast as possible. So the headcount reduction was enacted, that's done. We have the cost reduction for non-payroll happening in the next couple of quarters. We'll provide more guidance in 90 days. But the goal for operating margins is to get back to what we've done historically. We'll come back with a time line, 30 days have been -- or 90 days, we haven't given guidance on that yet, but I want what you want. That is immediate. I think we have $620 million in the bank. We have a rock solid balance sheet, no debt. Preserving that is like critical in a time when things are changing and the ability to like double-click into what we do great is going to be the focus.

One of the things that stuck out to me in this period of turbulence, I would say, is just the velocity of the deceleration. And that kind of goes to how like the goal of building more durable recurring revenue streams into the business models. I think as a portion of the revenue that was coming from demo licenses and engineering services, which is great in the quarter, but not necessarily recurring. How are you thinking about building more of a recurring revenue stream in your model?

It's a top priority. Like when I think of what's important to me right now, it is focused on total bookings, RPO growth and revenue. But thinking about long-term durability, like everything I've done, starting a company, even government is like thinking 10 years at a time. And so my mindset is long-term durable growth, getting the right customers on the right journey. But those are the 3 metrics I focus on now.

There's been a -- in terms of like the go-to-market, it's been like the pilots, converting pilots into production customers. Is that still the sort of go-to-market play? Or do you see that changing as well?

I want to meet the customer where they want to start, meaning like we're going to paint and provide a road map for how you can transform your business, whether it's supply chain, asset reliability or contested logistics in the federal government. But I want to also get -- allow them to get started fast if that's a pilot, if that's a 2-day exercise if it had a 6 month, we'll accommodate them. But the key is we're painting a much broader transformation story to the CEO because that's what's being asked for today, us trying to solve for the initial use case only. I think that's something in the past, we get so focused on just trying to get deals through the door. You kind of miss that longer arc for the transformation that I feel like that is what's required today to win.

You mentioned this multiple times already, but a place that I 100% agree with you is that C3 has been objectively doing very well in federal. A couple of quarters ago, I think your bookings grew 89% year-over-year. It's been a big proportion of your total bookings. And the backdrop is positive here. We got commercial off-the-shelf mandates. You mentioned the AI action plan and other sort of initiatives. Maybe high level, talk about what's so appealing -- what is about C3 that makes -- what is about C3 that is still appealing to the federal government? And which of these various initiatives do you see as the most capitalizable opportunity?

What's happened in the backdrop. There's -- obviously, there's a slimming down the government to control spend. There's a build back stage happening right now. There's pressure from the top to drive AI adoption to win this AI race and geopolitically. But there's also a big push to move away from GO solutions to COTS. So there's term commercial off-the-shelf versus government off the shelf. Are you buying a commercial product that's repeatable? Are you asking SI to custom code a product or even building in-house even worse because the government is not a software company.

So there's a huge mandate away from that to a commercial off-the-shelf. C3 is one of the unique providers that actually has commercial off-the-shelf applications, right? So this is a big motivation as the government is literally forcing these agencies to adopt this.

The other piece is for these contractors, the SIs. Their business was got custom applications. We have a strategic integrator program where they can actually take our platform and build a cost solution on top of that. So that's a huge opportunity right now that we're realizing. And I think just third, the scale of government deploying in some of the most complex environments in the world, on-prem in their environments, on device, the highest security. That's really hard, and that's something we've been doing for years. So I think that's another accelerant for us. But ultimately, to answer your question, I think these are secretary level initiatives now. These aren't just like individual agencies.

Secretaries are asking, what are my AI road map they're really putting KPIs in place to drive AI adoption. So it's really -- it's a one place where probably the government is moving faster than commercial to adopt AI. And I think for us, we started in the Defense Department of intelligence. We most recently got pulled into the civilian side. HHS was as an example of that. I see civilian as a huge opportunity to continue to expand. This is my focus, make each one successful. But our success in HHS got us the DOE. DOE got us the USDA. And there's no competition other than ourselves these moments in time, but I got to make them successful. And I think there are opportunities to grow those accounts. I mean you can solve HHS, reduce the cost of health care in the country, how much is that worth as an example.

I mean you guys have also won like, I think $450 million Air Force contract expansion, which it sort of brings to the point that you obviously have a competitor that does really, really well in Palantir and federal. Do you sense a need to -- for the DoD or the Department of War or Fed more broadly to diversify away or not put too many eggs in one basket? And what does that -- what kind of opportunity does that represent for C3?

Yes. I don't see us -- I mean, it's not like the government is asking for that at all. It's not been explicit. But you enter a market where clearly they're doing exceptionally well. Clearly, the demand for the product. Always inherently, you want to see the other players in the market to have optionality. And I think you are seeing that in the government today. I think we are a clear option today and provide the ability to not be overly dependent on any one vendor. Now we can both win, that's fine. But clearly, I think what's been shown is the government wants enterprise AI. They want large-scale transformations using AI, and we have an opportunity to deliver on that.

When we think about government overall, there's also the state and local, which I think also has been an area of strength. Is that still an area of focus of the company? Or is it going to be primarily a fed and industrial opportunity? Do you see a place for state and local as well?

Public sectors -- overall public sector is a focus. And I think a lot of things we're doing in federal directly applies to the state and local level a lot of the work around broad, waste and abuse reduction, health care initiatives we're doing are going to directly apply. And we have a property appraisal application. So yes, very much so.

So talk about the partner ecosystem and the go-to-market strategy. You guys are going into year 2, of the relationship with Microsoft. I think it delivered $130 million in bookings and 100-plus customer agreements. During -- in the first year. Give us the state of the relationship with that Microsoft partnership. And we think about those bookings, what's the time line of those bookings converting into revenue?

So the relationship is incredibly strong, like it's an incredibly strategic relationship for C3. I think where we are complementary ourself,, it's very complementary. Microsoft provides very horizontal services for AI. We provide very vertical-focused applications. That combination in a world that's getting more focused is an accelerant. There -- a majority of our bookings today is through this partnership. In terms of conversion, we provide guidance, we don't break that out, but that will accelerate in the future.

When we think about the partner contributions to bookings. That's been a pretty high percentage. I think a couple of quarters ago, it was like 90% flowing through your partners. How do you balance like driving a lot of partner source revenue versus kind of building the muscle of your own sales team? I think you mentioned here that you're involved in deals, which is great because of your background and the focus in Fed. In terms of building a durable sales motion, what's -- what initiative you have in place to improve like AE performance included in a...

so the partnerships are an accelerant, does not replace the -- to be able to directly sell our product internally. That is the #1 focus right now, organic growth through our sales team. And so how am I doing this, replicating what's doing in federal getting much more involved in executive leadership to the customer, reducing the sales time, reducing the time to demonstrate value or demonstrate insights.

This is a fairly new motion we're implementing in Federal, we started doing this in Q2. We can take the same playbook into North America and EMEA, but it's the -- how you take from the first meeting, can we show value within 30 minutes because I think, a year ago, we were having these conversations, what about hallucination risk? Can we trust our data in these models. Those conversations are not happening at all anymore. It's now -- it's not an if, it is how fast we get started.

So this is our mindset has got to shift. We did this since federal. We're able to go from literally a first conversation to a closed deal in less than 30 days. How to replicate that in North America and EMEA. So it's a mindset shift, maybe a skill reenablement shift, but that is my 100% focus because the partners will be an accelerator on top of that. But we've got to figure out the actual sales motion at C3.

Yes, makes a ton of sense. Let's talk a little bit, this sort of financial questions, but it's really around getting back to profitability and building a durable business. So gross margins once upon a time used to be in the 70s. Now it's in the mid-50s, which kind of reflects the ramp of initial production deployments and to support some investments. How do we get the gross margins back up to where you want them to be? Because yes, if you have more gross margins, it increases your ability to invest. And so when you think about where you are today on gross margins and where you'd like to be, what's the path?

Yes. growth. You got to drive revenue. So it's some good bookings growth, RPO growth and revenue. How you do this is going to be the focus for the sales, which is larger AI transformations, larger deal sizes. The IPDs motion, how we've done this historically, is still important, but the quality IPD is the most important thing. IPDs initial production deployments. These are almost not proof of concepts, but actually production-grade deployments for the customer. That's incredibly important. But I think before we focus on volume, now to be quality. And then higher quality will convert at a much bigger number. So growth is the only answer to that question. I want to get back to the historical thing means. We haven't provided a guidance for when we do this, but I want -- you want on this.

Yes. But I think you made an important point is that the last couple of years, we've been talking about the number of initial production deployments, the metric that I track in my model and looking at on a year-over-year basis, your point is, is that not all for volume but for quality. And so what's the profile? What is a good IPD and what -- is it a specific type of use case that C3 can only do? Is it a particular industry focused? Is the size of customer? What defines a good IPD?

Yes. So let's take the customer profile. I think that the world is the Fortune 1000 in the public sector, that's defined. It's use cases, we have deserved the right to win, industrial applications, think asset reliability, predictive maintenance, supply chain optimization, core back office for some of the biggest companies in the world, solving value across the business value chain.

Think for manufacturing, oil and gas, energy, health care and federal. So if I can just focus, we have clear abilities. We're #1. Now it's just like say no and everything else because there's so much opportunity when you get into a deal cycle, how do you qualify the pipeline just being that size the company, use cases and be able to kind of get started fast. So that's by the IPD, I define as...

Yes, that makes sense. Let's move the conversation to how AI impact C3's businesses. So software analysts in 2026. Every single company that I cover, whether they're a seat-based model or a consumption model or a data platform, all of that's being questioned now given the concerns around potential disintermediation from AI. So when we think about potential competition, whether it's from start-ups or the model providers or the research labs or the hyperscalers, what should investors keep in mind about what C3.ai offers? And what prevents competitors or customers using Agentic solutions from model providers from replicating what C3.ai does the...

The number one thing everyone is looking for is economic value. That is a term you can be hearing more and more, I'm hearing Anthropic talking about it, Databricks talking about it with AI, it's a pricing like pricing hasn't been nailed in terms of it's a seat or usage. But I can concretely say, everyone is saying, what economic value do you deliver? You have proof points to show that, and you can back into the value based on this. So how do you go do this and who can deliver economic value -- because in this valley, in Silicon Valley, there's a belief that you can buy code these solutions that LLMs are going to commoditize enterprise AI. And I think that just fundamentally misunderstates or misunderstands the difference between predicting the next word of a sentence or next line of code and predicting financial and physical outcomes for business.

Our LLMs, our competitors, absolutely not. We partner with the LLMs, we're agnostic to them. We actually orchestrate them. And so where I feel like these LLMs, these models are phenomenal describing the world beautifully and the reason beautifully. But they don't actually affect the outcomes, right? We operationalize these models. And so I think that's the biggest thing when I package, what is C3 is taking this beautiful reasoning and world knowledge and applying domain-specific experience with the integrations, with the toolings, with the domain change management to actually transform a global supply chain or manage a critical assets for one large E&P companies or they contested logistics for the Navy. So these are areas where I feel it's very complementary. I think there's a lot of confusion, as I said earlier. I think CEOs are confused, CFOs are confused. They've been doing pilots for a year. You've been hearing about the whole pilot purgatory. But ultimately, if you can show actual economic value, if you have customers that can reference that, that is where you're going to be able to drive growth.

And when I think about C3, we have a select area, we have clear lighthouse accounts Shell, Cargill, Dow, federal government. I'm like, leverage that, tell that story and repeat it. It's back to foundational principles.

I mean I 100% agree with you in terms of we're not going to vibe code, a supply chain optimization solution that's really complicated stuff. The other new -- well, actually, guys actually ask in this room, who's bought a Mac mini in the last 30 days. Right, okay.

How easy was that to set up?

Not easy -- so there's this perception that you can just over the weekend. By the way, what's happening? You can buy a Mac mini. You download a current model. You have supercomputer-level capabilities in the hands of somebody who's smart to construct this and you can build the conversations.. That's the vision, the pitch. But it's not that easy. And also, you're going to connect this to all your files, your e-mails, as your personal information. There's no security. These are open source models. But you're seeing how fast it's evolving.

Now I'm thinking now take that same approach, but if you have the, I don't know, enterprise alignment and guardrails you're going to want that same capability to launch inside the enterprise. But it's going to take somebody who is a trusted partner that actually is able to protect your data, have audibility and do this at scale. That's a really frequent hard problem. So I'm going to say the market is evolving quickly, you're seeing where it's going. But I think it does not discount what it takes to go from a nice proof of concept of a weekend or a pilot to actually production-grade enterprise. It's also a hard one that SaaS providers block access to the APIs.

That's real also can be a roadblock. The angle where it's going is thaat like I think we both agree that the sort of buy coding disruption risk is probably overstated. The nuance angle that I get from a lot of institutional investors like we get that, a lot of systems of records are going away, a lot of software is going to stick around. But the potential proliferation of alternatives more broadly, does that just sort of erode on pricing power and put more pressure on business models. And I think that's kind of where the conversation at least I've had with my companies that sort of evolved to. I'd love to get your perspective on that.

So when I was building a CRM and customer support solutions, there was a big obsession around being the single pane of glass, being the interface where humans sales reps, marketers, service agents are interacting with. That was the power grab, having everything in one place.

Now the question is, what is the primary interface. If it's an agent or the primary interface, how important is that single pane of glass. And the question is, if that's being questioned, what's the value of a CRM or an ERP system or an ITSM. And so I think that's all evolving. I think concretely, there's going to be applications in the past have been mapped to departments, CRM for sales. You have marketing automation. Where is the future going? There's going to be much more orchestration of work across departments, right? We have these agents thinking. You have humans definitely on the loop of all this, but there's going to be work done across departments. So I think that's going to question the moat of some of these legacy providers, but also reinforce because they see the same thing. They're going to be installing agents. They're going to be promoting themselves cross-functionally as well.

So I think it's going to be a disaggregation in terms of the value I think there's a graph in terms of who can orchestrate work. And I think where our thesis is we want to be the enterprise application layer for specific industrial workflows where we can help orchestrate work across the value chain for specific use cases.

Makes sense. In the last couple of minutes, I wanted to sort of get your perspective on C3 versus some of its closest competitors, whether it's Palantir or Databricks, I mean these companies have proven that they can grow incredibly fast at multibillion-dollar scale in the enterprise AR market. Some of them have also achieved incredible levels of profitability. And so I guess the question is like, what are your competitors doing that C3 is in? But maybe more importantly, when you look at your competitors, what are things that you can you take away from them that you can incorporate into the plan into the operating model that can set you on a similar path?

Yes. So when I see what's -- and the answer is yes. There's -- these companies are successfully, very successfully proven the road map and go do it. For me, it's going to be about focusing on playing bigger, right? What's working in federal, playing at the secretary level of a broad AI transformation story using AI and automation across the value chain. Having a methodology how to go do that, number one. Playing bigger at C-suite conversation.

Number 2 is speed of execution. How do you go from an idea of the first conversation to value or insights. That is something -- it doesn't -- it shouldn't take 6 months. What can get done in the first conversation, what can get done in the first day or the first week that's the mindset I'm going to have and bring back to the company, which is the speed of execution and delivery of value. Because again, everyone is looking for economic value. We have the proof points, how do we condense or compress that time window. That's why I feel like our competitors are doing a great job of. I think we have a huge opportunity to do this very similar. But also, let's not lose sight of where do we win. I don't want to be everything to everyone industrial applications, federal government, this is where I think we have a clear opportunity focus. First principle of thinking, folks, focus, all you know this. You know this, I need to execute on this. That's my job.

Awesome. And I totally agree with the focus point. My last question is, given how the share price has reacted to the performance over the last 2 or 3 quarters, how is the team planning to like restore investor confidence? It's obviously going to come through execution of the plan. But maybe just paint us the picture of hopefully, you'll join us this time next year for the TMT conference. In a year from now, like what is the landscape? And what do you hope the conversation around C3.ai will be a year from now?

So a couple of things are happening right now. Yes, we have a lot of work to do. Yes, we reduced headcount by 26%. But what's happening internally? Because I've been here 6 months, and I'm like, for a company in Silicon Valley building AI solutions. The use of AI internally was very limited, honestly. And 3 months ago, we were like, okay, coding agents are real. I've been using these for the last couple of years, wide adoption. So that was the first immediate thing we started doing adopting AI. You talk to developers, even the most seasoned developers who love the craftsmanship of coding, they don't code much anymore. And you say, how much productivity have you gotten? 10x would be the answer, right? I'm like, okay, how do I play that across every department.

Marketing, we're trying to launch a new website. That will be 9 to 12 months and millions of bucks. I said, what can get done in 48 hours. And literally the team in between planning for a user conference tomorrow, we had Davos, a couple of weeks ago that literally created a brand-new website, leveraging our brands and our positioning beautifully. So it's just when you think of the productivity, 10 to 100x, that's the achievement I want to get because if we can show how C3.ai is a glean example of how AI fire your business, we can showcase that our customers and can get all of our team understanding, our sales reps to understand the power of it. So that's number one, how we kind of change how we operate.

Number two is how our customers are building enterprise applications. That's been a big piece of the next 12 months. it's decreasing the time from this. You have a mission-critical idea and you want to launch this to a mission-critical app. That should be compressed immediately. And how you do that is all this investment we've made over the years, which is our data integration. Our ontology layers, our agentic execution layers, our interaction layer. That is where we spent years building, and that's not throw away. That is all positive in order to actually deliver the future where you have autonomous agents running around the department to automating a supply chain. So that would be the goal is how do you actually provide an autonomous operations for our customers and then how C3 actually produce headcount went faster over 12 months.

Awesome. Well, Stephen, thank you so much for giving us the update on C3. Congrats on becoming the new CEO best of luck on the customer conference and looking forward to seeing better days ahead at C3. Thank you very much. We appreciate it. Thank you.

Great job. Thank you.

Good day, and thank you for standing by. Welcome to the C3 AI Third Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Amit Berry.

Good afternoon, and welcome to CAI's Earnings Call for the Third Quarter of Fiscal Year 2026, which ended on January 31, 2026. My name is Amit Berry, and I lead Investor Relations at C3 AI. With me on the call today are 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 third quarter results, 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 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 Stephen.

Thank you, Amit, and good afternoon, everyone. Our results this quarter were clearly inadequate and well below our objectives. We failed to close business as planned and in particular, our performance in North America and Europe was disappointing. I came to this company 2 quarters ago after 12 years building AI companies, followed by a fastening tenure leading a U.S. government agency, deploying AI and fighting fraud, waste and abuse. I joined with the expectation that there is an opportunity for C3 AI to win in enterprise AI.

Over the past 6 months, I spent nearly all of my time visiting customers, prospects, government agencies, partners and our employees and dealing with market participants and investors. What I consistently hear is that every CEO is making AI a top strategic priority, and they want to realize measurable economic value from it. That is exactly what our products deliver. That said, it became clear to me that our cost structure was simply too high, and we were not organized correctly for the opportunity. I have assessed the business with the management team, and we have built an exacting execution plan with 5 strategic initiatives. First, we are immediately rightsizing our cost structure and reducing our cash burn. Second, we are flattening our sales organization, realigning our strongest sales personnel with those sales leaders who are proven who now report directly to me.

Third, in product, we are focusing on those product areas where we have clear market leadership, a demonstrated track record of success and where we deliver fast economic value to our customers. These include AI and automation across a business value chain, asset performance, supply chain optimization and procurement for industries such as energy, manufacturing, health care and public sector including defense, intelligence and government services. Fourth, we are focusing our sales motion to prioritize large-scale enterprise-wide transformations with accelerated proof of value with a concerted focus on bookings and RPO. And fifth, we are increasing the velocity of development and have fundamentally reengineered the way we design and deliver our product offerings. In the past 5 weeks, I have restructured products, engineering, sales, marketing and customer services to leverage state-of-the-art agentic AI across these business entities to dramatically increase the productivity of our people.

In many cases, by up to 100 times -- for example, in sales, we are leveraging agentic AI to generate customer-specific, product-specific benefit-specific sales proposals at an order of magnitude faster and higher quality than previous pipeline generation technologies. In marketing, we are leveraging agentic AI to design, develop and redeploy our website. This process previously took 9 to 12 months and many millions of dollars. It will now take weeks. Additionally, in products and engineering, we are now leveraging a genetic coding tools, including claude code to increase the productivity of our people and the quality of our platform, AI applications and agentic AI workflows and by up to 2 orders of magnitude. Considering these productivity enhancements, my management team and I have identified expense reductions of $135 million in non-GAAP operating expenses in the coming year.

Headcount-related changes are $60 million, which represents approximately a 26% reduction in head count. All workforce-related changes tied to this restructuring are now substantially complete and we will continue to evaluate additional nonemployee expense reductions as necessary to attain profitability. Yes, we have fewer people. By expecting productivity of our business functions to increase multifold across the board. To be clear, these actions will not impact our ability to serve our customers. And in fact, they will increase our ability to serve -- we have taken a measured approach to ensure we preserve critical capabilities while substantially improving quality and speed of execution and value delivery.

With a more agile company, we are empowering employees to execute with ownership and speed as we concentrate resources on our highest value strategic priorities. As we move forward, we'll be disciplined about taking additional costs out of the business across all functions by applying AI directly to our operations, including leveraging our own technology to automate work and simplify processes. I'm doing this in engineering. I'm doing this in marketing. I'm doing this in F&A and in all aspects of the business. I've also implemented a series of targeted changes to increase velocity across the business. In sales, I have flattened the organization with sales leadership now reporting directly to me. This change removes friction and increases accountability, allowing us to respond with greater speed to customers and more effectively align resources around market opportunities.

My goal is to instill greater sales discipline and force rigorous upfront qualification, demonstrate proof of value quickly and enable our teams to think bigger as they engage CXOs with a clear value-driven narrative. Over the past 6 months, I have been deeply engaged in the federal business and have changed the way we operate. And during this time, we I've seen firsthand is that demonstrating economic value early is a powerful accelerant. It quickly establishes trust, builds credibility and shorten sales cycles. We are now applying the same approach across our commercial business. Our goal is to solve the highest value problems for the right customers. Accordingly, we are prioritizing large-scale enterprise-wide transformation opportunities. To do this, we will rapidly demonstrate value through accelerated proofs of concept in IPD. This is how we help the world's leading enterprises master AI at scale.

We are concentrating on areas where we have demonstrable leadership, proving success and the right to win especially industrial asset performance, supply chain optimization and generative AI. In R&D, I want to fundamentally reinvent how we build with C3 AI. We are investing in the platform to dramatically reduce the time from idea to deployments, enabling both our teams and our customers to build AI-driven systems more effectively. Ultimately, this allows the focus to ship from writing code to orchestrating, validating and scaling AI-driven systems to increase velocity immediately we have increased focus on a smaller number of high priority items while enforcing tighter ownership and higher execution standards. This restructuring is a strategic reset that we believe will make the company stronger, more focused and allow us to win long term.

Notwithstanding the challenges of the past quarter, there continues to be strong customer validation. We closed 44 agreements, including new and expansion agreements with the U.S. Department of Agriculture, the U.S. Department of Energy, the NATO Communications and Information Agency, the Royal Navy, GSK, Thales, ExxonMobil, U.S. Steel, Seaspan and McLaren, among others. We saw increased strong traction in the federal business. Total bookings across federal defense and aerospace increased by 134% year-over-year, accounting for 55% of total bookings. The federal opportunity is increasingly large and important. We are leaning into this market as demand accelerates for secure commercial off-the-shelf enterprise-scale AI platforms designed to support mission-critical operations. This quarter, the U.S. Department of Agriculture selected C3 AI to deploy an enterprise scale AI solution to modernize the department's intergovernmental and public engagements.

By unifying its data environment with the C3 agentic AI platform, USDA is automating how large volumes of information are analyzed and processed enabling inquiries to be handled faster and more consistently. In addition, the U.S. Department of Energy selected C3 AI to centralize and unify data for the headquarters office of management. This solution creates an AI-enabled decision platform designed to strengthen compliance oversight, improve real-time visibility and enhance efficiency across key functions. At the same time, international demand for our solutions originally developed for U.S. federal customers continues to grow. During the quarter, the NATO Communications and Information Agency selected C3 AI to support logistics planning, and operations across its 32 member states.

Adoption is also expanding among allied defense organizations, including Japan's Ministry of Defense and the U.K. Royal Navy. In the commercial sector, we have extended our long-standing partnership under a new multiyear agreement with 1 of the world's largest E&P companies. This company has arguably built 1 of the largest and most successful enterprise AI reliability employments in any industry. It is extending the C3 AI reliability application and introducing agentic AI capabilities with C3 AI agents acting as virtual subject matter experts that continuously identify issues, diagnosed root causes and initiate corrective actions to improve safety, reliability and utilization in real time at a European provider of subsea engineering and construction services for the offshore energy industry we are applying C3 generative AI to automate complex engineering reporting, decreasing the time and effort from months and weeks to days.

After a successful IP they're now scaling the solution across additional report types, cutting report production time from weeks to hours while improving accuracy and consistency. Overall, this quarter's results fell short but contain clear areas of strength, including strong federal, defense and aerospace bookings and continued expansion in leading global organizations. From a market perspective, the demand for enterprise AI is massive and rapidly accelerating as AI CapEx approaches $500 billion. The focus is on demonstrating return on that investment. It is clear that the days of pilot purgatory are over as organizations plan to roll out AI in full enterprise scale production now. Honestly, people, the day we have been talking about over the last 15 years has arrived, but we believe it's about 1,000x bigger than we could have imagined.

After 6 months in this role, and after speaking extensively with our customers, partners and employees, what I've heard firsthand only strengthened my conviction. C3 AI is uniquely positioned to be a winner in enterprise AI. In a market crowded with fragmented point solutions and widespread stagnation of pilot programs, our differentiation is unmistakable. We operationalize AI at the core of the enterprise unifying data across systems to deliver scalable production-grade systems that drive measurable business outcomes. LMs are extremely powerful, but they will not run your supply chain, manage our most valuable assets or run contest logistics for the U.S. Navy. We have built a strong foundation and are equipped with all the assets required to win. The data fusion layer, the semantic layer, purpose-built AI workflows and applications and human capital. These capabilities work together and enable customers to translate AI investments into tangible operational impact and economic value.

This is not accidental. Tom had the foresight that enterprise AI would be a massive opportunity in over 15 years, we've invested in building proven technology that now underpins mission-critical operations at many of the world's largest organizations. The opportunity ahead is clear and we are committed to capturing a greater share of the market. As I outlined in the beginning of my remarks, we have launched an execution plan centered on 5 strategic initiatives: first, to reduce the cost structure and reduce the burn Second, restructure the sales organization; third, concentrate efforts on fewer best-in-class applications; fourth, prioritize large-scale enterprise-wide transformations. And fifth, increase the velocity of how we design and deliver our product offerings. Most importantly, we are massively infusing our AI capabilities across all functions at C3 AI. This is now complete. And we are now moving forward. C3 AI is at an inflection point. We have made deliberate decisions to reposition the company with a long-term perspective. The work ahead will require discipline urgency and exceptional execution. I am counting on all of our employees for their focus, resilience and commitment and on our customers and partners for their continued trust. I've implemented a new cost structure and implemented a path to non-GAAP profitability and a return to growth.

We're removing forward with speed enthusiasm and I very much look forward to providing the report of our progress next quarter. Thank you. And now let me turn it over to Hitesh Lath to talk about the specifics of the quarter.

Thank you, Stephen. 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 $53.3 million. Subscription revenue for the quarter was $48.2 million, representing 90% of total revenue. Professional services revenue was $5.1 million, of which $3.3 million was revenue from prioritized engineering services or PES. Professional services represented 10% of total revenue during the quarter. Our subscription and PES revenue combined was $51.5 million and accounted for 97% of total revenue. Our bookings during the quarter were $46.9 million. Non-GAAP gross profit for the quarter was $19.6 million and non-GAAP gross margin was 37%. Non-GAAP gross margin for professional services was 82%. Non-GAAP operating loss for the quarter was $63.4 million, -- non-GAAP net loss for the quarter was $56.4 million and $0.40 per share.

Free cash flow for the quarter was negative $56.2 million. We continue to be very well capitalized and closed the quarter with $621.9 million in cash, cash equivalents and marketable securities. During the third quarter, we signed 14 IPDs, including 5 Gen AI IPDs. At the end of the quarter, we had cumulatively signed 408 IPDs, of which 258 are still active. This means they are either in their original 3- to 6-month time 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.

As Stephen said, in Q4, we launched a restructuring plan to materially improve our operating efficiency and position the company for long-term success. This plan includes expense reductions across our business to produce full year cost savings of approximately $135 million. And more importantly, it also reduces the annual cash burn by approximately the same amount. We expect to substantially complete the implementation of the plan by the second quarter of fiscal year '27. And accordingly, the projected cost savings are expected to be fully realized starting the second half of fiscal year '27. Included within our plan is reduction of our global workforce by about 26% or approximately 280 employees, this is comprised of headcount reduction of 25% in cost of revenue, 36% in sales and marketing, 25% in R&D and 13% in G&A. This reduction in global workforce is substantially complete and will result in annualized cost savings of approximately $60 million.

The plan also includes eliminating approximately $75 million from nonemployee expenses, which we expect to fully realize starting the second half of fiscal year '27.

Now I'll move on to our guidance for Q4 fiscal year '26. Our revenue guidance for Q4 of fiscal year '26 is $48 million to $52 million. Our guidance for non-GAAP loss from operations for Q4 is $56 million to $64 million. Our revenue guidance for fiscal year '26 is $246.7 million to $250.7 million. Our guidance for non-GAAP loss from operations for fiscal year '26 is $219.5 million to $227.5 million.

Our guidance for non-GAAP loss from operations for Q4 and fiscal year '26 excludes pretax restructuring expenses of approximately $10 million to $12 million.

With that, I'd like to turn the call over to the operator to begin the Q&A session. Operator?

[Operator Instructions] And our first question comes from Kingsley Crane with Canaccord Genuity.

So I think you closed 8 Ginnie agreements, 5 or 6 IPDs within that segment. The quantity is down a bit from quarter -- a couple of quarters ago. So just how would you characterize the quality of those IPDs and then just sort of opportunity with those customers?

Yes. In terms of IPs, we have a much better qualification criteria in terms of our likelihood of generating enough economic customer as well as the likelihood of those IPDs converting to protection contracts. So we are being selective with the IPDs we sign up for and we expect a higher likelihood of those converting to production contracts.

Okay. And maybe just 1 for Stephen. Given you're abstracting away complexity from customers, how are you evaluating models from various providers at various price points. So whether that's OPIS 4.6 or Haiku or Gemini or Minimax both from a functionality standpoint and in a cost structure standpoint, especially as it sounds like you're leaning in towards agent coating at this point?

Yes. So there's 2 questions is what we're using internally and then what our customers are using -- maybe on the second point, we've built our architecture, so it's model agnostic. It's really driven by the customer demands. So depending on the exact use case and the capabilities they can select which model they want to drive this. The full flexibility. In terms of internally, we provide flexibility to our employees just like the model that works best for them. We did this across engineering, products, marketing, sales, and we're seeing success across the white swap of the models today.

Our next question comes from Brian Essex with JPMorgan.

Maybe start off 1 for Hitesh. 36% reduction in sales and marketing. pretty substantial. I would love to get some thoughts about how you approach that cost reduction, where those reductions kind of manifested within the organization? And what can we expect from an investment in growth versus cost efficiency mindset going forward?

Yes, sure. our cost reduction, it covers all locations and all functions across the company. And we -- when we started on this exercise, we took a hard look at our cost by function and by location. And identify opportunities where we could be more efficient. We also compared our cost structure with other comparable companies in the software industry and that reinforce our view that the cost reduction had to be across the board. And in terms of reduction in costs across sales and marketing and other areas, I provided some perspective on that from a headcount reduction standpoint. And the reduction in sales and marketing is primarily coming from a reduction in our sales force as well as marketing spend.

Very helpful. Maybe for Stephen. Maybe if you could frame out, how are your customer conversations changing with respect to adoption of the platform. Is this purely an AI conversation? Is it more of the cost management conversation or maybe conversely, is it a revenue-generating conversation? And then are there any other budgets are these AI-specific budgets? Or are these primarily projects within specific verticals and specific operations that are turning to AI to make themselves more efficient. I'd love to just get your kind of take on what you've heard so far.

It's a great question. I think the market is moving extremely fast. So let me just highlight, I've been here 6 months and spent all that time on the road talking to our customers, our partners, even our employees and so that conversation is changing in real time where every CEO is looking to make an investment in AI, but they're tired, and I kind of highlighted the pilot purgatory. They don't want to just test out AI for the purpose of testing it and doing it for 6 months. They want to move today and adopt an AI platform, not for a single solution, but they're looking for a transformational change across the departments. I think of the customers we sell into, industrial, manufacturing, federal governments. These are areas where there's massive transformation happening and it's to grow and drive revenue and really, really imagine the business.

So what I think is some of our leading companies, 1 of the largest biopharma companies in the world, they're talking with this -- we're solving a supply chain for them, but they're talking about this as a 0 back office supply chain, right? Where you have a human on the loop, it's more autonomy. You think about asset performance and we have the idea of an autonomous site manager. So this is a much bigger transformational story, which reflects the changes we're making in the organization to get started faster and be able to provide a road map to a large transformation change for our customers today. So I think those are the conversations, I think I've been impressed with the speed and urgency to adopt and move beyond 1 use case in many use cases. That's where we're seeing value today, and that's where I'm doubling down on to.

Our next question comes from Sanjit Singh with Morgan Stanley.

This is Oscar on for Sanjit. Thank you for -- we appreciate all the details around the operational restructuring and strategic initiatives. But I wanted to maybe get a bit of color or insight into as we look at the decline in the top line, sort of a a pressure on the recurring nature of the business. And so I wanted to understand more how much of the business today is recurring in nature versus onetime? And with that in mind, how should we think about guide visibility, particularly as we think about growth in fiscal year '27?

Yes, sure, Sanjit. As you've heard in my commentary, 90% of our revenue this quarter came from subscription and the remaining 10% came from professional services. And as it relates to subscription revenue, there was no nonrecurring subscription revenue in the quarter.

Got it. Okay. And then maybe as a follow-up, in terms of the performance in the quarter, you noticed some weakness in North America and Europe. Maybe some more detail on what -- how particularly went wrong there?

I would just say simply it sales execution, full stop, and we're going to fix that. as part of as I mentioned, we're going to flatten the organization. I did this in the federal space in Q2 with the sales team reporting to me. We were able to drive faster execution there. I'm going to take that same playbook and applied to North America and EMEA -- so I think sales position, first and foremost, that falls on main full stop. I own that. And I'm going to fix that.

Thank you. I would now like to turn the call back over to Stephen for any closing remarks.

Well, thank you all for joining us today and for your continued engagement. We appreciate your questions and look forward to updating you on our progress next quarter.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to the C3 AI's Second Quarter 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 today, Amit Berry. Please go ahead.

Good afternoon, and welcome to C3 AI's Earnings Call for the Second Quarter of Fiscal Year 2026, which ended on October 31, 2025. My name is Amit Barry, and I lead Investor Relations at C3 AI. With me on the call today are Stephen Ehikian, Chief Executive Officer; Hitesh Lath, Chief Financial Officer; and Tom Siebel, Executive Chairman.

After the market closed today, we issued a press release with details regarding our second quarter results as well as the 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 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 Stephen.

Thank you, Amit. Good afternoon, everyone, and thank you for joining our call today. Our results in Q2 were solid. Revenue grew 7% sequentially and bookings increased by 49% sequentially to $86 million. High-value deal activity was particularly strong. We closed 17 agreements over $1 million and 6 agreements over $5 million. You'll remember that we previously warned that a government shutdown would have an adverse effect on our business. No one could have predicted that the shutdown would last 43 days. However, challenging we thought it could be it was far worse. It created headwinds across our federal business in both the Department of War and in civilian and also affected related markets, including shipbuilding, health care, manufacturing and industrials. .

Despite these headwinds, we delivered a fine quarter, and I'm proud of the company's execution. We saw significant traction in the federal business. Total bookings across federal, defense and aerospace increased by 89% year-over-year and accounted for 45% of total bookings. We signed new and expansion agreements with the U.S. Department of Health and Human Services, the U.S. Department of War, the U.S. Intelligence Community, the U.S. Army, the Naval Air Warfare Center Aircraft division, Naval Sea Systems Command, the U.S. Marine Corps and Los Alamos National Laboratory, among others.

The federal market continues to be a large growth vector for us. The opportunity there is huge across government agencies are focused on moving away from bespoke government-built solutions and towards commercial off-the-shelf solutions that can deliver production AI quickly and securely Virtually every agency is now reevaluating its technology stack, executing the administration's AI action plan and driving the revitalization of America's industrial base and technology leadership.

For example, this quarter, the Department of Health and Human Services selected C3 AI to establish a unified, secure and scalable data foundation for enterprise AI. Across the National Institutes of Health and the Centers for Medicare and Medicaid services, HHS will use the C3 Agentic AI platform to consolidate solid data environments, improve data quality and governance and enable new research, analytics and applications while enforcing strict privacy and security requirements. The department will also use C3 Agentic AI to automate complex, labor-intensive administrative workflows.

We also significantly expanded our contracts with the U.S. intelligence community. For decades, fragmentation and Intelligence Systems has limited analysts' ability to form a complete operational picture. Intelligence information required by analysts has been historically accessed through siloed legacy applications, where each application is tied to a unique data type and where the source data is fragmented across disparate systems. This data includes signal intelligence, electronic intelligence, human intelligence, imagery intelligence, open source intelligence and geospatial intelligence. Using C3 AI, all types of intelligence contained in those sources are aggregated into a common generative AI application, providing one pane of glass to all Intel analysts. This provides a common application for the analysis of all data source and in addition, accounts to the intersection, incumbent torics of all data types across space and time.

Importantly, this dramatically facilitates communication and coordination among and across intelligence analysts. Our federal opportunities further accelerating through our partner ecosystem. Government mandates require our partners to provide solutions as commercial off-the-shelf technology, known as COTS rather than legacy custom-built government off-the-shelf solutions or guts. By enabling our partners to sublicense the applications that they develop using the C3 Agentic AI platform, our federal integration partners are able to easily meet the federal COTS mandate.

In Q2, Booz Allen, amongst others, join the C3 AI strategic integrator program for this exact reason. In the private sector, I'm encouraged by the progress made this quarter. exemplified by the big customer wins with category-leading companies, including AMD, GSK, Signature Aviation, Air Products, U.S. Steel, Duke Energy, Cargill, BAE Systems, La Poste, Holcim and more. These wins are with organizations looking to operationalize AI across the core other businesses. from finance and R&D to production and supply chain.

GSK is a prime example. They are standardizing on the C3 genic AI platform using it as their enterprise AI operating system across the company to drive critical decisions. after seeing strong results in vaccine demand forecasting accuracy, they are now scaling these benefits enterprise-wide to drive better decisions, greater efficiency and faster delivery of critical mentions. Signature Aviation advanced to full production across 20 facilities after seeing strong results in their IPD or initial production deployment. They operate some of the busiest private aviation facilities in the world. We're predicting demand, optimizing aircraft movements and ramp space utilization is the key to increase revenue and EBITDA.

Their teams can adjust and as operational questions and natural language through CI generative AI. C3 AI has built a formidable partner ecosystem, including with Microsoft, AWS, McKinsey, Baker Hughes, Booz Allen and more. This ecosystem is operating at increasing scale, and we're moving decisively to ensure we realize the full potential of these partnerships. As an indication of progress, 89% of our bookings in Q2 were closed with and through this partner ecosystem. Our joint 12-month qualified opportunity pipeline with partners grew by 108% year-over-year.

The Microsoft partnership is scaling rapidly. We celebrated the first anniversary of our strategic alliance. And in that time, we jointly closed more than 100 customer agreements across 17 industries, generating over $130 million in C3 AI bookings. In Q2 alone, we closed 24 joint agreements and the expanded activity contributed to a 146% year-over-year increase in joint qualified pipeline. We're also seeing strong activity with AWS, closing 9 joint agreements in the quarter, and hosting multiple C-suite level events that helped drive a 172% year-over-year increase in joint qualified pipeline.

Now turning to products. This quarter, we launched C3 AI genetic Cross automation. This release materially changes how enterprises will run their operations and expand the scope of what customers can accomplish with our platform. This innovation enables our customers to encapsulate full business and industrial processes through autonomous AI agents. They can describe complex workflows and natural language and a system builds and deploys the result in AI agent in minutes. This substantially increases our addressable market opportunity, allowing us to serve entire robotic process automation market with agenetic AI software agents rather than rigid and deterministic RPA routines.

The functional and technical leadership of the C3 Agentic AI platform and its associated applications, was recognized as the leading AI software platform in industrial AI by Verdantix, awarding us the highest scores of all vendors as measured by techno capabilities and market momentum. Having spent the last quarter at nonstop meetings with customers, partners, investors, prospects and employees, it is clear to me that the opportunity at C3 AI is bigger than I had imagined. The fundamentals of our business are strong: a large and expanding addressable market, a proven market-leading platform with a growing suite of AI native applications, highly satisfied customers and our leadership team focused on execution.

I've worked closely with my management team to craft a detailed execution plan to return the company to a rapid growth and a path towards free cash flow positive and non-GAAP profitable. To do so, I'm focused on 2 things: first, drive sales execution with relentless discipline and focus on delivering rapid economic value to our customers; and two, double down on the products and industries where we have demonstrable leadership and success.

On sales, I am raising the bar of execution with sharper qualification and rigorous deal reviews. IPDs remain our primary landing motion many of our major wins, including Dow, Holcim, HII and GSK started IPDs, and this continues to be the most efficient and scalable way to introduce customers to our platform and expand enterprise-wide deployments. I've implemented a comprehensive program to focus on delivering economic value with every engagement and to elevate both the quality and volume of IPDs with our partners. I have established an exacting execution model to ensure each IPD is set up for success.

I am personally driving these reviews and focus on increasing conversions and accelerating production scale-outs. Beyond IPDs, we will prioritize expansions of our strategic lighthouse accounts. On products, I'm sharpening the focus by doubling down on areas where we have demonstrable leadership, clear customer success, and the right to win, including industrial asset performance, supply chain optimization, supply network risk, demand forecasting, production optimization and generative AI.

On vertical markets, I am concentrating our efforts on our fastest-growing sectors, federal, state and local, energy, health care, manufacturing and other select commercial markets where we are best in class. Enterprise AI is moving from experimentation to full-scale deployment. Customers want to move faster, scale sooner and embed AI as a core operating capability that delivers measurable economic value. And our platform is built for this moment. Our product road map, including C3 AI Data Fusion, C3 AI Vision, C3 AI Agentic Everywhere, C3 AI Agentic Automation and a C3 AI Developer Hub will dramatically increase both the speed with which customers can develop and deploy applications and the rate at which these applications can be broadly deployed across the enterprise.

As we enter Q3, I have completed an exhaustive and detailed planning process with the C3 AI leadership team. We have crafted a detailed financial model that precisely allocates every human resource, measures and meters every overage pens and details every revenue source by line of business by market. I believe the execution of this plan will facilitate our return to growth and provide a clear pathway to cash generation and non-GAAP profitability. I and the extended management team have written clear and precise operational objectives that fully account for the performance of each business unit and their independencies the execution which will result in the attainment of our financial plan.

These company and departmental business objectives, the attainment of which will be measured weekly have now been assigned across every department to all managers and employees, each of whom have written and published their own respective objectives in our company performance management system. All performance incentives and compensation opportunities for every employee and management are now tied to the attainment of these objectives.

We have a clear and attainable financial model, a clearly articulated detailed execution plan, every manager and every employee understands the resources they have available and the obligations for which they are responsible. The market opportunity is huge. The management plan and team is in place, and we are focused on heads down assertive execution with clear accountability.

In closing, I will again acknowledge the outstanding efforts of the C3 AI team in attaining fine economic results, and I want to thank you for your time.

Now let me turn it over to our CFO, Hitesh Lath to provide more specifics on the operating results of the quarter.

Thank you, Stephen. 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 $75.1 million, a quarter-over-quarter increase of 7%. Subscription revenue for the quarter was $70.2 million, a quarter-over-quarter increase of 16.5% and representing 93% of total revenue. Revenue from sale of software licenses that do not require maintenance and support services and for which revenue is recognized upon delivery to the customer was $21.9 million during the quarter.

Professional services revenue was $4.9 million, of which $3.9 million was revenue from prioritized Engineering Services or PES. Professional services represented 7% of total revenue during the quarter. Our subscription and PES revenue combined was $74.2 million and accounted for 99% of total revenue. Our bookings during the quarter were $86.4 million, an increase of 49% from last quarter. Non-GAAP gross profit for the quarter was $40.9 million, and non-GAAP gross margin was 54%. Non-GAAP gross margin for professional services was 72%.

As compared to fiscal '25, we expect to continue to see moderated gross margins in the near term primarily due to high mix of IPDs, which carry a greater cost of revenue during the initial production deployment phase and due to our investments in expanding our support capacity and lower economies of scale. Non-GAAP operating loss for the quarter was $42.2 million. Non-GAAP net loss for the quarter was $34.8 million and $0.25 per share. We remain focused on expense management and improving operational efficiency without compromising our strategic investments, primarily in the sales and customer services organizations.

During the quarter, we reduced our non-GAAP expenses by $10.7 million quarter-over-quarter. This was through a combination of reduction in personnel cost, cloud infrastructure costs, sales and marketing and through improvements in overall operational efficiency. Free cash flow for the quarter was negative $46.9 million. We continue to be very well capitalized and closed the quarter with $675 million in cash, cash equivalents and marketable securities.

During the second quarter, we signed 20 IPDs including 6 Gen AI IPDs. At the end of the quarter, we had cumulatively signed 394 IPDs, of which 269 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.

Now I'll move on to our guidance for the next quarter. Our revenue guidance for Q3 of fiscal year '26 is $72 million to $80 million. Our guidance for non-GAAP loss from operations for Q3 is $44 million to $52 million. Our revenue guidance for fiscal year '26 is $289.5 million to $309.5 million. Our guidance for non-GAAP loss from operations for fiscal year '26 is $180.5 million to $210.5 million.

Our guidance for Q3 and fiscal year '26 reflects sequentially higher sales and marketing expenses in Q3 and Q4 due to major marketing events, including World Economic Forum and Transform.

With that, I'd like to turn the call over to the operator to begin the Q&A session. Operator?

[Operator Instructions]

And our first question today comes from the line of Patrick Walravens of Citizens.

Great. And Stephen, nice job stepping in here and driving the bookings. I thought it might be helpful if you could just sort of take a step back. I mean 2 quarters ago, this company was growing in the mid-20s and the gross margins were closer to [ 70 ] and now the business is shrinking and the gross margins are down, the losses are big. And I think some of us understand sort of the setup that you walked into. But if you could just take a minute and explain why the business fell off by so much? And then the steps you're taking to bring it back, big picture, I think that would be really helpful?

The biggest thing I would say is sales execution, and Tom hit on this last quarter fell off. It was totally unacceptable, and Tom would probably acknowledge that his health contributed towards that. So I think he spoke at that at length on the last call. That was attributed towards the poor performance. But I can say this, being in here for 90 days now, the demand for C3 and enterprise AI is only accelerating. I've been actually surprised coming in here how much bigger the opportunity was than when I first came in so that the market is there. The product itself, I've spent catalyst meetings with customers and prospects and partners. We have a world-class product.

And I hear this. I see that the NPS scores, but also see us in the amount of economic value we've been delivering. And I think that was maybe lost sight earlier this year when we actually focus on delivering real value the actual results come. I think GSK is a great example of that. That started off as an IPD to do like demand forecasting accuracy. They saw real value and that converted into an enterprise-wide agreement.

So from my perspective, we need to focus on more of those opportunities, be very disciplined. I can tell you what I'm seeing going forward. We have the plan in place and the operational rigor to go deliver on this. And the last thing I'll highlight is we have the talent density. I've been part of a lot of great teams. This is the best team I've been a part of, not just pure intelligence but people who truly care about the customer. And I see that every day, I hear that from our customers how much they love, not just the technology, but the people.

And the last thing on my side, I would say, Tom Siebel, obviously, everyone knows Tom is a phenomenal businessman, entrepreneur, philanthropist. He's also been a phenomenal mentor in support of our mines. So I was on to say thank you, Tom. It's been incredible 90 days and very excited for Greg.

All right. Fantastic. And then just a follow-up, and I know you're not guiding to it, but just in general, how your confidence in getting this business back to growth and profitability?

I would say Q2 execution was very strong. It was solid results. I'm confident in the opportunity ahead of us. We got to execute, Pat. I mean, there's work to be done. So I'm not going to say it's easy, but I know the market's there, the technology can deliver. It's purely like I got to drive this business is what you're hearing from me. And I believe we have the plan of [indiscernible] do so.

And our next question will be coming from the line of Mike Cikos of Needham & Company.

This is Matthew Calitri, on for Mike Seacoast over at Needham. I wanted to start with the clarification. Hitesh, you mentioned $21.9 million during the quarter. I forget exactly how you described it. Was that from demo licenses? Was that what that was?

That is correct.

Okay. Great. And then sticking on the revenue line, it was quite a big change in mix between Subscription and ProServe. I know you've talked about professional services generally staying within 10% to 20% of revenue long term? Any changes to that outlook? Is there any reason it should stay at these levels or anything that's about there?

Yes. I would say in the long term, we would expect our gross or mix to continue to stay between 10% to 20%. Our professional services mix this quarter was on the lower side. That was primarily due to lower PES revenue. And PES, we sell these prioritized engineering services on an opportunistic basis to some of our large customers. So that is -- we had a lower PES revenue just because of the low demand this quarter. But on a go-forward basis, we would generally expect to be between 10% to 20% closer mix, as I mentioned.

Got it. Okay. And then maybe on the public sector, pretty strong bookings growth despite some of the headwinds you guys spoke about. Just wondering what your view is there for the rest of the year going forward? And obviously, any lingering impacts of this extended shutdown?

The strength of the federal business is going to be a durable growth engine for C3. There's multiple factors, and I'm kind of late in my time in government and on the other side of this, there's a big push within the government to buy more commercial off-the-shelf solutions. So moving away from government built. So that's one big tailwind. The other is this push to drive AI adoption for the AI action plan, and I think there's -- every single almost virtually every agency is reevaluating their AI plan of which solutions are in place and they're doubling down on areas where they can actually get real value. .

I would say the third big piece is the reindustrialization of such things as the maritime industrial base. These are multiple years generational changes in terms of investments to prepare ourselves. And we are benefiting from all 3 of those trends. Cost focus, the AI Action Plan adoption and the reindustrialization of the Maritime Industrial base.

[Operator Instructions]

Our next question will be coming from the line of Brian Essex of JPMorgan.

Steven, great to see the color that you provided on how you're approaching maybe getting the company back on its feet. I guess if we think about facilitating a pathway to better growth, and I think you gave some nice detail around incentives or initiatives that you've done with the management team to maybe drive accountability. Are there a few more stars that you could point to where you're setting expectations and holding management accountable for delivering better execution going forward?

Yes. Honestly, it's starting the small things. And a big driver of our growth is going to be the IPD motion. That is the most efficient way for us to deliver value to the market and our customers. So it's the qualification IPDs. It's the rigorous evaluation in setting milestones and working very closely with our customers. If I just say the 1 thing we need to do better, is to continue to drive a rigorous evaluation and delivery of value as fast as possible. I find when we actually deliver economic value quickly, it converts much faster. .

So I think the direct correlation, you can expect my focus will be on that going forward. The technology is there, it's literally demonstrating value as fast as possible in these sales cycles. So that's my north star.

Are these initiatives tied back to, I guess, discrete metrics that we can see conduct looking from the outside, whether it's like bookings or subscription revenue? Or how might we kind of evaluate progress as you kind of execute on your plan over the next number of quarters? .

I would say bookings is going to be the leading indicator of how to evaluate C3 as well as the growth in the IPD in production revenue. .

At this time, I would like to turn the call back to Mr. Ehikian for closing remarks. Please go ahead.

Thank you all for joining us today and for your continued engagement. We appreciate your questions and look forward to updating you on our progress next quarter. Thank you. .

Thank you all for joining today's conference call. You may now disconnect.