C3.ai Inc

NYSE:AI

Q2-2026 Earnings Call

[Operator]

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.

[Amit Berry, executive]

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.

[Stephen Ehikian, executive]

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.

[Hitesh Lath, executive]

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]

[Operator Instructions]

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

[Patrick Walravens, analyst]

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?

[Stephen Ehikian, executive]

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.

[Patrick Walravens, analyst]

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?

[Stephen Ehikian, executive]

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.

[Operator]

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

[Matthew Calitri, analyst]

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?

[Hitesh Lath, executive]

That is correct.

[Matthew Calitri, analyst]

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?

[Hitesh Lath, executive]

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.

[Matthew Calitri, analyst]

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?

[Stephen Ehikian, executive]

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]

[Operator Instructions]

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

[Brian Essex, analyst]

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?

[Stephen Ehikian, executive]

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.

[Brian Essex, analyst]

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? .

[Stephen Ehikian, executive]

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. .

[Operator]

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

[Stephen Ehikian, executive]

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. .

[Operator]

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