C3.ai, Inc. (AI) Q2 2022 Earnings Report, Transcript and Summary

Good evening. Thank you for attending today’s C3 AI Second Quarter Fiscal Year 2022 Earnings Call. My name is Tania, and I will be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for ask questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Paul Phillips, with C3 AI. Please go ahead.

Good afternoon and welcome to C3 AI’s earnings call for the second quarter of fiscal year 2022 which ended October 31, 2021. This is Paul Phillips, Vice President of Investor Relations of C3 AI. With me on the call today are Tom Siebel, Chairman and Chief Executive Officer; and David Barter, Chief Financial Officer. After the market closed today, we issued a press release with details regarding our results as well as a supplement to our results, both of which can be accessed on 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 relating 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. Also during the course of today’s call, we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared comments and response to your questions, we may discuss metrics that are incremental to our usual presentations 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. With that, let me turn the call over to Tom for his prepared remarks. Tom?

Thank you, Paul. Good afternoon, everyone. I’m pleased to provide an update on our second quarter results and give you a feel for the state of the business. We finished Q2 quite strong, exceeding Company guidance and analyst expectations on almost all fronts. Top line revenue for Q2 was $58.3 million, a 41% increase over the prior year. This exceeds Company guidance and all published sell-side analyst expectations. Customer count at the end of the quarter increased to 104, up from 64, a 63% increase over Q2 of last year. GAAP RPO ended at $465.5 million, an increase of 74% year-over-year. Our cash burn for the six months -- for the first six months of fiscal year ‘22 was $19.8 million, reflecting increased investments in human capital, marketing and brand equity. We finished Q2 with $1.08 billion in cash and cash equivalents and investments, enabling us to continue to invest in growth for some time. As we entered Q3, our increased revenue visibility and improved sales processes lead us to raise revenue guidance to $62 million (sic) [$66 million] to $68 million for Q3 and $248 million to $251 million for the -- for fiscal year ‘22, representing a 35% to 37% growth rate year-over-year, up from a 17% growth rate in fiscal year ‘21. Let’s address customer momentum. We expanded and extended our strategic partnership with Baker Hughes last quarter for the second time. In June of 2020, we extended the agreement for the first time by extending the agreement for two years and increasing the cash and revenue commitments to C3 from Baker by $130 million. This October, we increased the value of the contract again this time by an additional $45 million to $495 million and extended its term from five to six years, importantly now guaranteeing a minimum of $357 million in revenue to C3 over the next 3.5 years. Now, historically, C3 AI has relied upon a high-touch white-glove service, strategic selling model to acquire and retain customers. In July of 2021 in an attempt to further accelerate revenue scalability and customer adoption, we reorganized sales as an independent unit along kind of traditional hierarchically regimented selling structures, like those in place at SAP and IPF. That proved to be a mistake. While the revenue attainment in the quarter was strong, the overall performance of the sales organization and specifically new sales activity in the second quarter was unacceptable. The management team and I have spent the past month restructuring the global sales function molded in the traditional model that we know to be effective as a high-touch classic strategic selling machine. That process is now complete, and the early indicators are quite positive. Our customer energy has increased, our sales visibility has increased. And the amount of revenue of Q3 revenue that we have closed as of the end of November gives us very high confidence levels in our Q3 revenue forecast. On a positive note, we expanded our enterprise AI footprint in a number of diverse industries, including agriculture, agricultural implements, manufacturing, oil and gas, insurance, financial services, life sciences and energy with new enterprise production deployments at Cargill, Johnson Controls, Shell, a new contract signed with CNHI, Liberty Mutual, a top 5 life sciences company; and new additional business with existing customers, including Cargill and now FIS, Mosaic and PTT Global Chemical. We substantially increased our Public Sector business in defense and intelligence with new production deployments at the U.S. Air Force, new business with the U.S. Space Force and additional business with the Missile Defense Agency. In Q2, our Public Sector business grew 33% year-over-year. We expect that growth rate in this sector to increase substantially in the last two quarters of fiscal year ‘22. Let me talk a little bit about our partner ecosystem. We are off to a strong start with our new strategic partnership with Google Cloud, making significant progress on joint product roadmaps and joint sales pipeline. Our significantly growing joint sales pipeline with Google Cloud contributes to our confidence in increased growth in the second half of this year. I think, our pipeline that we’re currently working with the Google Cloud team is over 90 transactions, totaling as of today, we identified $58 million in business that we’re working together for the second half of this year. Our significant partnership with Microsoft continues apace. I think to date, we’ve closed over I think $220 million in business with Microsoft or something like that. But if I look at the forecast that we’re -- the joint pipeline that we’re working with Microsoft in the second half of this year, looks like roughly 120 transactions that we’re working that total $140 million in business that we’re currently tracking. And all of these pipelines will continue to increase in the course of Q3 and Q4. Through our growing partnership with energy services leader, ENGIE, we advanced our position in energy and sustainability and ESG across multiple industries with deployments at a multinational packaging leader, a major hotel group and an iconic global coffee shop brand where C3 AI is helping manage energy consumption and GHG emissions at more than 12,000 sites. We are seeing huge interest in the new C3 AI CRM offering. CRM software and service represents $120 billion market in 2021. Our best guess is that the total installed base of CRM has to exceed $1 trillion. Okay? Many companies have hundreds of millions of dollars invested in their CRM installations that have been highly customized by their systems integration partners, and they are not seeing returns from those investments. Now, we are seeing substantial interest from the larger CRM systems integrators in leveraging C3 AI CRM as a complementary adjunct to their customers’ existing installed CRM systems, so they are on top of their existing CRM systems and on top of the customizations and modifications they have made, adding a modern simple, intuitive user experience and making their existing CRM investments instantly predictive, including precise AI revenue forecasting, precise AI product forecasting, AI-enabled customer retention, next best product, next best offer, predictive interrelationship management, customer service optimization, AI-based predictive maintenance and service, et cetera. This will be a very large market and a huge growth opportunity for C3 AI. Let me talk a little bit about product innovation. We continue to advance our product leadership in enterprise AI. In Q2, C3 AI announced the launch of C3 AI Data Vision. We believe that C3 AI Data Vision represents a fundamental paradigm shift in the enterprise application user experience model, from today’s rather clunky forms and table-based metaphor to a highly visual, interactive, dynamic knowledge graph experience. Go take a look at it at the website. It’s really exciting. C3 AI introduced two new applications last quarter to serve the needs of county tax assessors. The new C3 AI application’s AI Residential Property Appraisal and C3 AI Commercial Property Appraisal will be marketed nationally and have broad applicability for state and local governments and countries as well as financial service institutions engaged in mortgage lending and related services. This basically dramatically accelerates the time to generate a highly accurate, highly defensible property appraisal with a complete evidence package to basically support that appraisal should be adjudicated. We think this represents a significant growth opportunity to company. This along with C3 AI CRM, C3 AI Ex Machina and other initiatives further our efforts to increase revenue diversity. C3 AI production applications showed expanded industry diversification in the quarter, growing now to 14 industries in Q2 of fiscal year ‘22 compared to 7 industries a year ago, including notable expansions in financial services, life sciences, healthcare, manufacturing, agriculture and agricultural instruments. Let me address company leadership. We significantly strengthened our leadership team this quarter. And we did so in our federal business with the addition of Lieutenant General H.R. McMaster, U.S. Army retired, to the C3 AI Advisory Board. A graduate of the U.S. Military Academy and a veteran of the Gulf War Operation Enduring Freedom, and Operation Iraqi Freedom, Lieutenant General McMaster served as the United States National Security Advisor from 2017 to 2018. He has held multiple roles in the United States Central Command and is a senior fellow at the Hoover Institution and lecturer at the Stanford Graduate School of Business. I’m also most pleased to announce that Adeel Manzoor has joined the Company in the role of Senior Vice President and Chief Administrative Officer. Adeel has a rich history in information technology, formerly serving as Chief Financial Officer at Telenav, a wireless location-based services corporation. Prior to that, he served as a Vice President and Business Unit CFO of the Storage, Big Data and Value Compute business at Hewlett Packard Enterprise. He also served as Vice President and Business Unit CFO of the Converged Infrastructure business unit at HPE. Effective December 3rd, Adeel will also assume the role of CFO at C3 AI. I’m disappointed to announce that David Barter will be retiring from C3 AI for personal reasons effective later this month. David has made many substantial contributions to the success of the Company, and he will be missed. Let me touch a little bit about university relations, because I think this is a particular area of strength for C3 AI. We continue to support our powerful university ecosystem through the C3 AI Digital Transformation Institute. This is a public-private partnership that consists of C3 AI, Microsoft, Lawrence Berkeley Labs, the National Center for Supercomputing Applications, UC Berkeley, the University of Illinois-Urbana, MIT, Carnegie Mellon, Princeton, Stanford, and KTH in Sweden The C3 AI DTI sponsors advanced primary research in AI for digital transformation, sponsors industry colloquia, and has awarded significant research funding to develop advanced AI techniques in precision medicine, COVID, pandemic mitigation and energy and climate security. I’ll touch a little bit about human capital. We continue to attract exceptional talent to the Company. The company received, believe it or not, over 18,000 employment applications in the course of Q2. We ended the quarter with 668 full-time employees, an increase of 39% year-over-year. So, in summary, what we have at C3 AI is a high-growth story, and we are laser-focused on growth attainment. We’ve established a substantial leadership position in the nascent stage of the enterprise AI market. The addressable market opportunity in enterprise AI is staggering, promising to exceed a $300 billion software market by 2025. Our purpose is clear. We are here to establish a clear global market leadership position, to establish and maintain clear technology and product leadership, to continue to attract and retain the highest quality human capital, to operate a high-performance global enterprise, to maintain the highest levels of customer satisfaction, to establish thought leadership in enterprise AI, and importantly in ethical AI. I believe our technology foundation is without compare. Our human capital is exceptional. Our brand equity is increasingly positive, the enterprise AI market is large and rapidly growing. We have the technology, we have the leadership, we have the human capital, we have the capital, and we have a huge market opportunity. I believe the market growth opportunity facing C3 AI has never been greater than it is today, and the Company has never been in a better position to establish a global market position, and that is what we intend to attain. So, with that, I will conclude my comments and turn it over to my colleague, David Barter, to drill down further into the financial details. David?

Thank you, Tom. We delivered strong second quarter results that again exceeded our guidance ranges for revenue and operating income. At the same time, our notable increase in backlog helps improve our revenue visibility and provides us with confidence in our outlook for the full year. Revenue was $58.3 million, which is above the high end of our guidance, and it represented an increase of 41% from the prior year. Within revenue, subscription revenue was $47.4 million, up 32% from a year ago. Professional services revenue increased to $10.9 million. Despite the higher proportion of professional services revenue in the second quarter, we continue to target our subscription revenue mix in the high 80% range. Our revenue continues to be well diversified across industry verticals and geographies. Five industry verticals each contributed over 10% of our revenue this quarter. Revenue growth from oil & gas and financial services led the way in Q2. We’re also excited about the growth being generated by sales to federal government agencies, and we expect growth in this vertical to increase meaningfully in the second half of the year. Geographically, we also are well diversified. APAC continues to perform particularly well with revenue up 77% in the second quarter. Revenue from customers in EMEA and APAC represented 28% of our first half revenue. The amendment of our JV with Baker Hughes, which Tom referenced in his remarks, enhances our backlog and our revenue visibility. The amendment includes several noteworthy improvements. One, it increased the total contract value by $45 million; two, it extended the JV term by one year; and three, a new pricing model makes it easier for Baker Hughes to further accelerate the sales of C3 AI software. Since future revenue from Baker Hughes is now contracted and committed, the majority of the future revenue related to the JV agreement is now included in GAAP RPO. With this in mind, at the end of the second quarter, current RPO was $179.4 million, up 34% from a year ago and 24% from last quarter. Total GAAP RPO was $465.5 million, an increase of 74% from a year ago and 60% from last quarter. Our cancelable backlog, which is not included in GAAP RPO but has historically converted to revenue, was an additional $63.8 million. Combining our GAAP RPO to cancelable backlog leads to a non-GAAP RPO of $529.3 million, up a meaningful 74% from a year ago and 48% from the prior quarter. We believe these are very healthy metrics which further raise our confidence and visibility. As a reminder, revenue associated with the Baker Hughes JV consists of related party revenue contracted directly with Baker Hughes for their own use or as sell-through to their end customers in oil & gas. The related party revenue in the second quarter was $15.9 million. Nonrelated party revenue derived from transactions assisted by Baker Hughes but the end customer contracted directly with C3 AI was $4.7 million. In total, this produced $20.6 million of revenue from our JV in the second quarter. With the Baker Hughes JV amendment executed in the second quarter, we expect a related party disclosure to be less relevant due to the change in sales model going forward. Turning to expenses and profitability, I will be referring to non-GAAP metrics, which excludes stock-based compensation expense and the employer portion of payroll tax expense related to stock transaction. A GAAP to non-GAAP reconciliation is provided with our earnings press release. Gross margin in the second quarter was 77.8%, up 150 basis points from a year ago, reflecting leverage in our operating model as our business continues to scale. Subscription gross margin in the quarter was 81%, consistent with a year ago. And professional services gross margin was 63.8% compared to 47% a year ago. Operating expenses were $67.9 million, up 66% from last year as we continue to focus on executing planned strategic investments to drive our long-term growth. Operating loss was $22.6 million in the second quarter, better than our guidance of a loss of $37 million to $30 million. Turning to our balance sheet and cash flows, we ended the quarter with $1.08 billion in cash, cash equivalents and investments. Operating cash flow was an outflow of $18.9 million in the second quarter. And after capital expenditures of $0.9 million, free cash outflow was $19.8 million. Deferred revenue was $72.9 million at the end of the quarter compared to $82 million in the prior year. Turning to our guidance for the third quarter and the full year. Our amended Baker Hughes JV agreement reinforces our confidence as we look forward. In Q3, we expect total revenue in the range of $66 million to $68 million, representing growth of 34% to 38% from a year ago. We expect to invest thoughtfully in headcount and initiatives that will drive our continued growth and anticipate a non-GAAP operating loss in the range of $30 million to $26 million. For full fiscal year 2022, we are increasing our revenue guidance to the range of $248 million to $251 million, representing growth of 35% to 37%. We now anticipate a non-GAAP operating loss in the range of $108 million to $100 million, which also represents an improvement from our prior guidance. In summary, we’re pleased to deliver second quarter results that exceeded our guidance ranges. We are optimistic about the momentum we are generating in the marketplace, which further supports our outlook for fiscal year 2022. Finally, I’d like to add that it has been a privilege to have been a part of the C3 AI team. I’m very appreciative of the opportunity Tom provided to me and for all his support. We have a strong finance and accounting team, and I’m looking forward to supporting Tom and Adeel with a smooth and thoughtful transition. Before opening up the call for questions, I’d like to invite Adeel Manzoor, our new Chief Financial Officer, to say a few words. Adeel?

Thanks, Tom and Dave, for the warm welcome to C3 AI. I’m incredibly excited to be part of the team. The Company has established such a strong strategic position and is off to a great start. I’m looking forward to working with Tom and the team to drive growth and realize Company goals. I’m also looking forward to working with you all. With that, I’ll turn the call over to the operator for any questions that you may have for us. Operator?

[Operator Instructions] The first question is from the line of Sanjit Singh with Morgan Stanley.

Thank you for taking the questions. And sorry to see you go, David. Best of luck with all your endeavors in the future. Tom, I wonder if you could talk a little bit about some of the motivations around the restructuring of the contract, the first go around with Baker Hughes was right smack in the middle of the pandemic. It made a lot of sense to restructure that contract, extend the life of it. What was the sort of motivation this time and sort of the contribution into in terms of our new RPO? And then, if you sort of exclude the bookings from that from Baker Hughes, if we just sort of look at the business ex Baker Hughes in the quarter, how would you sort of characterize the bookings performance in the quarter? Because it seems like -- it seemed pretty good by our numbers. But then, you sort of hinted at a sort of restructuring in the sales force. I’m trying to put these pieces together and understand like how did bookings evolve relative to your expectations in Q2.

Well, there’s a number of questions there. Let me see if I can tease this apart. The real motivation behind restructuring Baker Hughes was to basically kind of realign the sales structure. So, Baker Hughes is I think roughly a $20 billion business, and they run four central business units. And the real relationship with Baker Hughes has to do with their deep, deep energy expertise, in oil and gas, process industries and chemicals -- petrochemical business. I mean they are kind of the masters of the universe of that. And they have these unbelievably close relationships going back now I think 70 years with everybody in the world from Rosneft to Gazprom to Aramco to Shell, Chevron, you name it, okay. And those relationships and that expertise are in their four business units. When we first put together the relationship with C3 AI, Baker Hughes, they basically formed a new business unit that was called Baker Hughes C3 Ai that sat kind of outside of those organizations. And so they really weren’t the people with the relationships, and they weren’t the people with the quotas, and they weren’t the people with the deep industry expertise. And what we really did here was -- is we restructured it in a way that we put all the sales resources and the quota in the operating units of Baker Hughes, okay? And so that’s where the relationships are. That’s really whether we’re talking about the Ecopetrols, the Qatargases, the KMG, [ph] Shell, and so with the quota and the people in the operating units. That was the nature of the restructuring. But we also did this in a way that gave them kind of increased pricing flexibility, to price in a manner that’s consistent with that business segment? Be it LNG, okay, be it deep water, be it renewables, be it petrochemicals. So we gave them the flexibility in consideration, what they -- for us given them that flexibility, what they gave to us was irrevocable nonrefundable revenue commitment. So that becomes hard RPO. I think $352 million, if I’m not mistaken.

$357 million over the next 3.5 years.

357 over the next 3.5 years. So, that’s a pretty significant, roughly $100 million a year baseline that we start from, that we could build on top of. So, I’m confident that’s in the best interest of the shareholders of C3. So, it’s a win-win relationship. It allows them to accelerate their business as the oil & gas industry recovers. And it’s a good thing. As it relates to the sales organization, the attempt was and candidly, I think we did it too early, was to put together kind of your traditional, highly hierarchical, highly regimented, independent business unit sales organization, like they have at SAP, like they have at IBM, like they used to have at Oracle. And the idea is, you let a sales organization like that run kind of independently and theoretically you then scale the business at a greater rate. Now, that’s a different model than we’re used to using. Because I know many of you kind of always asked, well, how many people do we have in the sales organization. And it’s really the answer was how many people we have in the Company. That’s all the people in the sales because we always put together sales teams from engineering, from forward engineering, from product marketing, from the office of the CEO, whatever it took to take care of the customer. And I think candidly, we did too early. And the performance of the organization was unacceptable. And so, we watched it. We watched it, we watched it very carefully. It became apparent that it was not going to meet the growth needs of the Company going forward. So basically, we reverted to our old selling -- old strategic selling model, which is a tried, tested, proven technique that many companies are familiar with. It was developed in 1988 by Robert Miller and Stephen Heiman in a book called Strategic Selling, a pretty good book if you haven’t read it. And so now, we’ve gone back to what we did before is for every account, we put together a team of 4 or 5, 6 or 7 people who we think are just the best people in the Company to handle that account; be they from finance, be they from engineering organization, product marketing, from the sales organization or from the office of the CEO, to surround the customer, develop a strategic partnership with the customer, make sure their trial is successful, their implementation is successful, that their production deployments are successful. And this is what we’ve done. It took us about two weeks to actually put all that in place. It all basically has been in place since the first day of this quarter. It’s a done deal. We’re off to the races. And based about what we’re seeing now, it was absolutely the right thing to do. We have a lot of visibility into Q3 and a large pipeline for Q4. And to the extent that going to a hierarchal model was a mistake, I guess I’m the CEO, so I have to accept responsibility for that. But we’ve made course correction, and we’re back on track.

I appreciate all the color on that. That’s super helpful. One more if I might, and this is only sort of partnerships go to market. So, I think you called out a number of them, but the one that sort of perked my ears was Google Cloud and Microsoft. What’s driving the momentum behind that partnership? Is it one of the specific apps you guys did? Is it the CRM app that’s driving a lot of the go-to-market collaboration around that particular approximately, or is it the broader platform or even a whole host of other apps? If you can sort of give us some color or the momentum between with Microsoft and Google Cloud, that would be really helpful.

Well, it’s really different between the two. I would say that if you look at the DNA between the Microsoft sales organization and the C3 sales organization, they’re actually very similar. These people are really highly professional experienced enterprise sales professionals. And we just kind of understand how to approach accounts together, how to address opportunities together. They talk together in shorthand and figure out how to get the deal done to the customer satisfaction and how to make the customer succeed. That has been a hugely, hugely successful relationship. It is directly between Justin and Satya and Ed and everybody else, but it’s at the highest levels. And we -- and that is a very, very successful relationship. They look at -- their motivation is to drive Azure, okay? Now, Google approached us from a very different perspective. So, Thomas Kurian when he took over Google, and I think he had about 400 salespeople. I suspect they’re all gone, okay? And now they’ve got about 4,000 salespeople. Most of them are kind of experienced enterprise salesmen and women from SAP and other companies. He decided to approach the hyperscaler market. He’s been very clear that he wanted to approach the hyperscaler market from a different competitive edge. So, rather than approach -- rather than compete with AWS and Azure based upon CPU seconds and storage hours and with arguably a better architecture, he wanted to approach it through the application layer and deliver a family of applications for manufacturing, for consumer packaged goods, for telecommunications, for life sciences, for financial services, and for aerospace, defense and intelligence. So, he wanted to approach it by delivering applications, tried, tested, proven, enterprise AI applications that run on top of the Google Cloud that deliver solutions rapidly to the customer. Now, that’s a pretty interesting and I think defensible and creative market differentiating strategy. Now, the net effect of it is it accelerates the sale of CPU seconds to storage hours. It just gets you there a lot quicker. So, if you were in the market and you wanted to partner with somebody that they had 10, 20, 30, 40 turnkey enterprise applications that run on top of the Google Cloud, that address the value chains of oil & gas, utilities, energy, manufacturing, healthcare, financial services, manufacturing, et cetera, I would argue this is actually one door in the world that you could knock on, okay? And that’s the door right on the front of this building. So that’s the door to knock on, that’s the relationship we put together, and now we’re jointly selling these applications globally. And it’s a really interesting and productive relationship.

I appreciate all the detail, Tom. Thank you.

Thank you, Mr. Singh. The next question is from the line of David Hynes with Canaccord.

Hey, guys. This is Luke on for DJ. Thanks for taking the questions. So, you called out in your prepared remarks the fairly significant uptick in professional services revenue in the quarter. Could you just expand there and discuss what drove that dynamic? Is that just a reflection of new large customer relationships ramping, or is there anything else to call out there?

It’s a great question. There’s really nothing to call out. Our subscription revenue over time has averaged 86%, but it’s moved around 5 or 6 points in any quarter -- given quarter. And this just has to do with timing of projects and deliveries. So, nothing more to that than just timing and execution.

So, you can expect that to stay -- professional services will stay in the 14% to 20% range of revenue in perpetuity. And that’s kind of where we have it targeted.

Got it. That’s helpful. And then maybe just another on sort of the government opportunity out there. You obviously had a big quarter in terms of signing new contract value with those three agencies you called out. Do you feel like there’s fruit to be had there, or how would you characterize that opportunity going forward? Thanks.

I think that opportunity is huge. And I think we’ve had a General Ed Cardon joined us as -- in the capacity of Chairman of Federal Systems. H.R. McMaster, General McMaster has now joined us. I think you can expect some significant announcements going forward. And we’re quite confident that our business in federal, particularly defense and intel, is going to grow at a substantially increased rate in the second half of this year.

The next question is from the line of Jack Andrews with Needham.

Tom, you talked about sort of this continued need for a high-touch sales approach. And so, I was wondering if you could maybe tie that into just the overall state of the market here. I mean, there’s so much noise, it feels like, around AI in general. So, could you just maybe frame for us. I mean, do your customers, given the healthy pipeline activity, does everyone out there really understand the concept of enterprise AI and all the use cases, or do you still need to spend time sort of evangelizing the value proposition of everything that you can deliver to customers?

Great question. Right now, if you look at the pipeline that we’re working going out the next four quarters, it’s about $1.2 billion, okay. The pipeline that we’re working for the second half in what we see as qualified opportunities second half of this year is about $800 million. We are looking at a market that is in -- this is the first half of the first inning, okay, in enterprise AI. And people are just starting to figure it out. And we’re not really spending a lot of time evangelizing. We’re not spelling -- basically, there’s kind of two schools of three schools of thought as it relates to AI. One, I’m like completely confused and I don’t get it yet. That would be the largest segment, okay? The next segment is, well, I’m going to take 20,000 people in Bangalore and I’m going to build this platform myself, okay? And virtually, every one of our customers has tried to build this themselves. It’s long, it’s expensive. It never works. I mean GE, I think, spent $6 billion. Shell tried to build it, and Enel tried to build it, everyone -- Coke tried to build it. There’s no -- United States Air Force, God knows how many times they’ve tried to build it. And we don’t really fight that fight. So, we let people kind of go through that first deciding that they want -- once they get to the point that they’re going to take advantage of enterprise AI, that’s the first qualifying issue. And then, when they’ve gotten to the point where they decided they’re not going to build it themselves, that’s -- so we’re not going to stay around and talk them out of building it themselves. We’re not going to stay around to convince them why AI is good. We’re mostly in the business of just finding that customer that is number one, committed to easily transform the organization and has decided, no way are we going to build it themselves because that’s stupid, okay? When we find that customer, that’s -- we’re not -- we’re spending time qualifying, not evangelizing. It is a -- before it’s all over, everybody will be in that third sector, I’m quite confident of that. And we’ll be looking at a $300 billion addressable market. It’s just an evolution the market has to go through, and we’re -- we have no problem with that.

Got it. Thanks for the color. That’s really helpful for me. Maybe just as a follow-up question, just given the sort of the sales changes that you’ve made, could you maybe update us in terms of your hiring plans and priorities for the balance of the fiscal year here?

Well, we had 18,000 job applicants in the last quarter. So, we are very -- I mean we’re -- for some reason, we’re just -- I think the last time I looked at the last year, we had 52,000, okay? But the last -- right now, I think 18,000 annualizes to what, 72,000, okay? And -- fast math. And so, we have lots of people who want to come to work here in sales, in data science, in product marketing. You can expect that we will -- we’re very selective about who we hire, both in terms of personality type and in terms of skill set, I think something like 86% of our people have advanced degrees, right about that, Jack. It’s a huge number. I think -- or excuse me. I’m sorry, 68% of our people have advanced degrees, 10% of our people have PhDs. Rough numbers, so you give me a couple of points one way or the other on those guys. I don’t have these numbers right in front of me, okay? But it’s -- you can expect that we will hire every person that we deem to be qualified, who we think can succeed here in the next 2 quarters and in the next 2 years. And so, we are open for business. We’re hiring. We’re hiring at Guadalajara. We’re hiring in New York, in Paris, in Rome, in the UK, and New York, Atlanta, Chicago. And right here in Redwood City, we’re hiring. So, it’s -- and we feel very fortunate about the people that we’re able to attract and retain.

That’s great to hear Thanks for the update.

The next question is from the line of Michael Turits with KeyBanc.

This is Michael Berg [ph] on for Michael Turits. You called out strength in APAC. And I was wondering if you could dive into that a little bit, and then compare that to what you’re seeing in EMEA? Thanks.

Sure. I think what we shared on the call is that APAC was up 77%. I think the strength, if I think about the deals that we’ve had in APAC and just thinking about the last couple of quarters, it’s been certainly financial services. I think we’ve seen some oil and gas, some chemicals. So I think it hits a number of industry verticals is what we’ve seen in APAC.

And then, if I could just get a quick follow-up. Is there anything you’d comment on the billings sequential change, any timing -- or just strange seasonality around that? Thanks.

I don’t think so. I think overall if you think about billings, probably the most noteworthy element is just to kind of keep in mind that sequentially, things have been very strong if you were to going to go back over 121% the -- going back to Q4, 18% sequential. So, I think sequentially when you think about it, we were kind of coming off of a higher period. So, that’s just -- I just keep in mind that there’s going to continue to be some movement around invoicing and how that percolates through the P&L.

The next question is from the line of Brad Sills with Bank of America.

I wanted to ask about some of the newer vertical industries that you’re going after: life sciences, manufacturing, IT services. Did you kind of expand into these other verticals? What kind of traction are you seeing there? Any color on perhaps applications that you’re seeing some early pilots with, and what pipelines look like potentially in those industries? Thank you.

Hi Brad. I wish I had all the pipelines in front of me. I don’t have that done. Jack, do you have a sheet by vertical that I look at? Financial service is going to be huge, Brad. That’s a big one. I mean, now we’re moving into agriculture, believe it or not, agricultural implements, insurance, telco. I mean, this is going to go everywhere. I think consumer packaged goods will be good. We’re not -- it won’t be big, we’re not there yet. The largest, unquestionably the largest where we haven’t made a lot of traction yet, will be precision medicine. No way that could not be the largest. It has to be. So, I mean, it’s just a matter of these markets will develop. For some reason in the utilities, I know why the utilities market was the first to develop. Because they -- when you remember when you used to everybody used to talk about IoT, these three guys have had all the sensors out there. Oil and gas kind of came as a complete surprise. I mean that came in the course of a gift horse who walked through in the door in the person of Baker Hughes. And then defense and intelligence. Oh my God! I mean how big will that be? I mean, these guys are -- financial services pipeline is very large in the second half of the year. Telecommunications is very large. Defense and intelligence -- defense and intel, these poor guys have to keep up with the Chinese. God knows how many scores of billions the Chinese are spending on this. And so, they have some work to do, and I think you’ll find it will be part of the solution. So, we’re just -- we’re going after the verticals in kind of very pragmatic, coin-operated fashion. And as the CEO walks you in the door and with a check and a mandate, he happens to run Boeing or the aerospace business. That’s how it works.

Great. Thanks. And then also, if I could ask about some of these vertical partnerships, FIS, ENGIE. If you could elaborate just a little bit on the commitment there, go-to-market resources, any traction you’re seeing in those partnerships would be really helpful. Thanks again.

ENGIE is pretty mature, and that’s one where we’re seeing a lot of traction. And candidly, what they’re doing is they’re using our technology to provide energy services to large organizations like Ohio State University and others. Large retailers of coffee that will remain unnamed on a number of university systems where they’re basically almost stepping in as the role of the utility, okay, where they are kind of guaranteeing them a reduction in their energy and carbon footprint over the next decade or 20 years. And they’re using our software at the heart of that service that they provide. So that is mature, growing, hugely successful. FIS is relatively new. As you’re aware, I think it was put in place a couple of quarters ago. We’re seeing slow but steady progress there. I am touch regularly with the guys who run the business. That is -- right now, I’m optimistic about it, but we have not yet generated a lot of results there. I think, over the next two quarters, we’ll know whether that’s going to succeed or not. I think it will. I spent the morning -- I have regular communication with the person who runs the kind of defense business at Raytheon, who is our partner in the defense and intelligence community. And their levels of commitment are definitely increasing. We’re involved in some very large projects with them. And you can expect to see that those projects will contribute some of the growth that we’ve -- that David mentioned and I have mentioned in the second half of this year. So, that Raytheon is a good one.

The final question is from Mark Murphy with JPM.

So, Tom, I was curious. When you look back on it with a few more quarters under your belt, what is your preferred route to market, or what is more efficient? Is it selling direct and letting companies build their own machine learning and AI models, or is it weaponizing the older applications by working the way you are with Microsoft and Adobe and Infor and other application vendors?

Great question. I’d tell you, it’s a lot years [ph] here, Mark, to weaponize existing systems okay? It really is, or just go take in account, say it Shell, say it Enel, say it Coke, say, the Missile Defense Agency, take an account and make them successful. Build the first half and the second half. And I think for example there for us, we must have 22 applications live in readiness, or will be live, I think, in March. And so, that’s preferred. It’s easiest, okay. It’s highly certain, because you have control over the situation. You’re dealing directly with the customer. You can -- you not only set their expectations, you could influence what they’re going to do first and second and third. And very much about succeeding at this is picking the right project, as you know. The reason that I think a lot of these companies fail at these projects is because of the big projects that are, A, either impossible. Like let’s say, somebody wants to build an AI application to like predict the price of pork bellies next month. Well, if we can predict the price of pork, if AI were that sophisticated, we can predict the price of gold next month, and we could predict the price of Google stock next month. And if we could do that, then obviously would be in the software business, would we, okay? People actually do try to do these applications, believe me. One was explained to me yesterday. So, either people choose applications that are impossible or people to choose applications that are of low value. Now when you’re dealing with them directly, you can push them and keep them on high-value applications where AI is an appropriate tool. Now, that being said, if you want to establish and maintain a market leadership position, as you know we do, you need to think about market leverage, okay? And this is when you’re going through, you’re going through a much larger scale, through distribution partners like Microsoft, like Google, like FIS, like Baker Hughes. The advantage is your own scale. We have 12,000 people with Baker Hughes, 4,000 people at Google, I think 60,000 people at Microsoft. I don’t know what the number is but it’s some staggering number like that. So, the good news is there, you have leverage. It’s harder. You need to be much more sophisticated about the way you’re doing it. You need to be willing to allow people to make mistakes. You’re going to have higher rates of failure. At the same time, you do have market leverage. And if you -- and if the goal is to establish and maintain a clear market leadership, you need to do it through a partner ecosystem. So, as much as I would prefer to do it the easy way, it’s not going to achieve the desired objective. Sorry to go full circle on it, but I mean it was a really good question.

Yes. Okay. Yes. Thank you, Tom. I appreciate that insight into the strategies. But my other question is just observing what has happened with commodity prices. And they’re up so much year-over-year. You have this chunk of business in oil & gas and utilities, although you’re diversifying very rapidly. Is the commodity price creating more budget there for that end market? Would you head into 2022? And I guess, I was just curious, if that’s benefiting Baker Hughes, has that given them more confidence to kind of make this stronger commitment to you?

Well, there’s no question that as it relates to that segment of our market, it’s a lot easier to do business there when oil prices are like above zero. When oil prices were I think negative $37 a barrel, I mean all these companies were thinking about is how fast they can lay people off, right, and how fast they can slash budgets. They were all in shock. Now with -- I don’t know where oil is today. You probably do. But I suspect it’s something like $86 a barrel, but I don’t know. I don’t really check it. But it’s significantly non-zero, and they’re all investing. They’re all investing in the future. Interestingly enough, most of them -- their investment in becoming non-hydrocarbon companies. Certainly Aramco is, certainly Shell is. I mean, they’re all investing and reinventing themselves. When you talk about reinventing, say, a $300 billion business, that’s entirely to that hydrocarbon to be entirely dependent on operating on clean energy, it’s a pretty significant transformation. But there’s no question, they are looking up. And now, there are budgets and they are investing. And I suspect this is one of the reasons that motivated Baker Hughes to restructure agreement the way they did.

Okay, I understood. Thank you very much. I appreciate it.

Thank you, Mr. Murphy. There are no additional questions waiting at this time. I will now turn the conference back over to Tom for any closing remarks.

Okay, ladies and gentlemen, thank you so much for your time and attention. And we look forward to keeping you posted on the progress of our business, make - we’re very clear on what the mission here is here. And that is to establish and maintain market leadership position globally in enterprise AI. If we do that, I suspect this will be a pretty successful company and more successful than that. And we appreciate your time, courtesy and attention, and we look forward to staying in touch. Thank you all very much.

That concludes the C3 AI Second Quarter Fiscal Year 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.