C3.ai, Inc. (AI) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K. You should review the disclosure under the heading “Risk Factors” under Part I, Item 1A in this Annual Report on Form 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Unless the context otherwise requires, all references in this report to “C3.ai,” “C3 AI,” the “Company”, “we,” “our,” “us,” or similar terms refer to C3.ai, Inc. and its subsidiaries.
Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years ended April 30 and the associated quarters, months and periods of those fiscal years.
A discussion regarding our financial condition and results of operations for the fiscal year ended April 30, 2024 compared to the fiscal year ended April 30, 2023 is presented below. A discussion regarding our financial condition and results of operations for the fiscal year ended April 30, 2023 compared to the fiscal year ended April 30, 2022 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2023, filed with the Securities and Exchange Commission, or SEC, on June 22, 2023.
Overview
C3 AI is an Enterprise AI application software company.
We have built a family of software applications that enable our customers to rapidly develop, deploy, and operate large-scale Enterprise AI applications. Customers can deploy C3 AI solutions on major public cloud infrastructures, private cloud or hybrid environments, or directly on their servers and processors. We provide three primary families of software solutions, which we collectively refer to as our C3 AI software:
•The C3 AI Platform, our core technology, is a comprehensive, end-to-end application development and runtime environment that is designed to allow our customers to rapidly design, develop, and deploy Enterprise AI applications.
•C3 AI Applications, built using the C3 AI Platform, is a portfolio of pre-built, extensible, industry-specific and application-specific Enterprise AI applications that can be rapidly installed and deployed.
•C3 Generative AI, combines the utility of large language models, or LLMs, generative AI, reinforcement learning, natural language processing, and the C3 AI Platform to rapidly locate, retrieve, and present information, disparate data stores, applications, and enterprise information systems.
These solutions, and our patented model-driven architecture, enable organizations to simplify and accelerate Enterprise AI application development, deployment, and administration. We significantly reduce the effort and complexity of the AI software engineering problem.
The Evolution of C3 AI
Like many of the world’s leading technology companies, C3 AI has changed and expanded its branding and product portfolios to achieve market leadership.
In January of 2009, we founded C3, Inc with the purpose of developing and marketing a software platform and family of software products that would enable companies to exploit the power of elastic cloud computing, big data, IoT, and predictive analytics.
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When we founded C3 AI, we believed the market for elastic cloud computing, IoT, big data, and predictive analytics software was destined to be large. That proved true. However, in 2009 the market was nascent, and the specific applications and markets were unknown. Based on Forrester’s report on the Public Cloud Market Outlook, in 2008, the global public cloud market was less than $20 billion; in 2023, it was expected to approach $500 billion. In 2008, there were less than 1 billion IoT devices worldwide;1 in 2023, that number was expected to exceed 55 billion based on the IDC report. In 2008, AI software - as we think about it today - did not exist. This year the AI software market is expected to exceed $450 billion based on the IDC report. We believe that by any standard that constitutes explosive growth.
When we consider mega-market developments like the internet, the smartphone, and AI, it is impossible to anticipate a priori exactly how these markets will develop. With the advent of the Mosaic internet browser in 1993, who could have anticipated Amazon and Google? With the founding of Apple Computer Company in 1976, who could have anticipated the iPhone? The Apple Store? Apple TV? iTunes? These mega-markets develop in unanticipated ways.
We believe that Enterprise AI is a mega-market event. As this market has developed, C3 AI has done a fine job of continually expanding its market offerings and continually expanding its market position to address the ever-expanding opportunity.
C3: 2009 - 2012
We founded C3 in January of 2009 and developed some of the core components of what is now the C3 AI Platform within the first year. There was much discussion and interest in the 2008 – 2011 timeframe about what we now consider sustainability initiatives, including clean tech, energy management, LEED certification, and cap and trade vs. carbon offsets; and as a result, we decided to focus our first use case on energy management. That proved to be a good decision.
In 2010 we released our first product, C3 Energy Management.
From 2010 – 2012, we closed several large agreements with a large global industrial company, one of the world’s largest chemical companies, two large utilities, and one of the world’s largest high-tech companies.
C3 Energy: 2013-2015
In 2012, C3 engaged McKinsey & Co. to conduct a study and make recommendations for maximizing growth including optimal company positioning and an associated pricing and product strategy. In the first two decades of the 21st century, utility companies were in the process of spending $2 trillion globally to upgrade their grid infrastructures with IoT devices, enabling the advent of the smart grid. Utilities were early adopters of IoT.
The McKinsey analysis recommended that there was a significant opportunity for C3 to expand its business by applying its energy management and energy efficiency solutions to utilities at grid scale in addition to selling to enterprises.
Adopting the McKinsey recommendations, C3 expanded its market position, rebranded as C3 Energy, and in addition to its prior solutions, C3 Energy offered a family of predictive analytics solutions - which were reliant on emerging AI techniques including machine learning, supervised learning, and unsupervised learning. Built to address the utility value chains of power generation, transmission, distribution, and consumption, these solutions optimize the operation of large and complex power grid infrastructures. The C3 Energy utility software products expanded to include C3 AMI Operations, C3 Revenue Protection, C3 Predictive Analytics, C3 Revenue Production, and C3 Reliability.
Many customers also licensed our core C3 Platform that they could use to develop their own predictive analytics application and/or to develop derivative works of the C3 Energy applications.
It was during this period that the company formed its data science division to develop and apply AI techniques to our applications including machine learning, predictive analytics, supervised learning, and unsupervised learning.
During this period, the company began to offer its products to the oil and gas industry including its AI Predictive Maintenance application for oil pumps, offshore oil rigs, LNG production facilities, etc. The company continued to offer its products for energy management and energy efficiency to utility companies based on per customer pricing and to enterprises based on expected value pricing.
1 https://www.statista.com/statistics/764026/number-of-iot-devices-in-use-worldwide/
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This expansion into energy markets proved successful as the company booked2 approximately $83 million in contracts and recognized $63.9 million in revenue during this period.
C3 IoT: 2016 – 2018
By 2016, we were seeing significant expansion in the cloud computing market and the proliferation of IoT sensors was expanding dramatically across many industries. We were increasingly approached by manufacturing companies, financial services companies, oil and gas companies, and the U.S. Department of Defense to deploy the same types of AI applications that we had successfully deployed in enterprises and utilities including AI Predictive Maintenance, AI Fraud Detection, AI Inventory Optimization, and C3 Energy Management.
At that time, the common expression for these types of applications was “IoT,” and we appropriately rebranded the company as C3 IoT to communicate to the market that we were again expanding our market offerings from primarily one vertical market (energy) to a broadening range of markets.
In response to this increased demand, the company tailored its core applications to meet the needs of those industries. As such, in addition to the C3 Platform, we offered market-specific versions of all our applications including AI Predictive Maintenance, AI Inventory Optimization, and AI Energy Management for the utility, oil and gas, defense, and financial services industries. In addition, the company introduced the concept of 4-to-16-week product trials as part of the sales process.
This market and product line expansion again proved successful as the company booked2 approximately $203 million in contracts and recognized $120.4 million in revenue from 2016 – 2018.
C3 AI: 2019 – Present
As the market for cloud computing, big data, IoT, and predictive analytics continued to expand, the market perception of IoT - as expressed in the literature, technical conferences, the academy, and in customer expectations - changed. While IoT had previously been considered at the confluence of sensor devices and AI applications, it was clear that IoT was becoming a concept increasingly centered on the devices - the IoT sensors themselves - with the AI applications considered a separate category. As this developed, the C3 IoT brand became confusing to the market, as many customers had the impression that the company was primarily in the business of manufacturing IoT sensors and devices.
To eliminate this market confusion, we rebranded the company C3 AI, clearly communicating that we were in the computer software business.
In addition to the products and services that the company offered since its inception, C3 AI again expanded its product offerings that now include over 90 AI production applications for the utility, oil & gas, state and local governments, financial services, manufacturing, health, and communications industries, and U.S. defense and intelligence sectors. Across industries, we introduced a number of AI application products that serve all vertical markets including C3 AI Ex Machina to address the needs of the growing citizen data science market, C3 AI CRM, C3 AI Data Vision, C3 AI ESG, and C3 Generative AI.
Again, this market expansion proved successful, enabling C3 AI to book2 over $1.4 billion in additional contracts and recognize $1.3 billion in revenue from 2019 – 2024.
C3 AI was well ahead of its time in predicting the scale of the opportunity in enterprise AI applications. We began when the market was nascent, and as the market has developed and expanded, we have expanded our branding and our market offerings to meet market expectations.
How We Generate Revenue
We generate revenue primarily from the sale of subscriptions, which accounted for 90%, 86% and 82% of our total revenue in the fiscal years ended April 30, 2024, 2023 and 2022, respectively. Our cloud-native software offerings allow us to manage, update, and monitor the software regardless of whether the software is deployed in our public cloud environment, in our customers’ self-managed private or public cloud environments, or in a hybrid environment.
2 Unaudited
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We primarily recognize revenue from subscriptions on a ratable basis over the contract term or on a usage basis for consumption-based arrangements. In addition, customers typically pay a usage-based runtime fee for production use of our C3 AI Software for specified levels of capacity. We also recognize revenue upon delivery to the customer for software licenses that do not require maintenance and support services. Customers who choose to run the software in our cloud environment pay the hosting costs charged by our cloud providers. In the first quarter of fiscal year 2023, we announced a consumption-based pricing model, beginning with a pilot phase which may include access to the C3 AI Platform, one C3 AI Application or C3 Generative AI, and C3 AI Center of Excellence, or COE, support services. Following the pilot period, customers either pay a monthly fee and consumption charges using vCPU and vGPU hours as the metric to calculate payment or enter into a time-certain multi-period commitment that may include consumption charges. Our subscriptions also include our maintenance and support services. Additionally, we offer premium stand-ready support services through our C3 AI COE which is included as part of the subscription when purchased.
We also generate revenue from professional services, which primarily include implementation services, training and prioritized engineering services. Professional services revenue represented 10%, 14% and 18% of our total revenue for the fiscal years ended April 30, 2024, 2023 and 2022, respectively. Our professional services are provided both onsite and remotely, and can include training, application design, project management, system design, data modeling, data integration, application design, development support, data science, and application and C3 AI Software administration support. Professional services fees are based on the level of effort required to perform the specified tasks and the services are typically provided under a fixed-fee engagement with defined deliverables and a duration of less than 12 months. We recognize revenue from our professional services over the period of delivery as services are performed.
Our total revenue was $310.6 million for the fiscal year ended April 30, 2024, representing a 16% increase compared to the prior fiscal year. Our subscription revenue grew to $278.1 million for the fiscal year ended April 30, 2024, representing a 21% increase compared to the prior fiscal year.
Consumption-based Pricing Transition
We believe the transition from a primarily subscription-based pricing model to a consumption-based pricing model brought us in line with industry-standard cloud software pricing standards, making it easier and less costly for new customers to initially acquire our solutions and then increase their spending if their usage and adoption increased. We anticipated and announced that this transition would have a short-to-medium term negative effect upon revenue growth, as the average sales price was significantly reduced and the contracts often lacked a time-certain multi-period commitment. We are still in the process of working through the transition to the new pricing model.
As shown below, revenue growth initially decreased and then increased as the consumption-based pricing model went into effect. Average selling price, or ASP, and RPO have generally decreased. Customer Engagement has increased.
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| July 31, 2022 | October 31, 2022 | January 31, 2023 | April 30, 2023 | July 31, 2023 | October 31, 2023 | January 31, 2024 | April 30, 2024 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total revenue (in thousands) | $65,308 | $62,408 | $66,669 | $72,410 | $72,362 | $73,229 | $78,401 | $86,590 | ||||||||
| % growth year-over-year | 25% | 7% | (4)% | —% | 11% | 17% | 18% | 20% | ||||||||
| Average selling price (in thousands) | $1,426 | $825 | $1,899 | $1,156 | $755 | $665 | $1,206 | $894 | ||||||||
| Customer Engagement | 223 | 223 | 247 | 287 | 334 | 404 | 445 | 487 | ||||||||
| % growth year-over-year | 35% | 50% | 81% | 80% | 70% | |||||||||||
| RPO (in thousands) | $458,209 | $417,320 | $403,159 | $381,437 | $334,560 | $303,552 | $286,867 | $244,304 | ||||||||
| Subscription Revenue % growth year-over-year | 24% | 26% | —% | 1% | 8% | 12% | 23% | 41% |
Remaining Performance Obligations
As it relates to our legacy subscription-based pricing agreements, we monitor remaining performance obligations, or RPO. RPO is not necessarily indicative of future revenue growth because it is not applicable to pay-as-you go consumption pricing agreements. Moreover, RPO is influenced by several factors, including the timing of renewals, the timing of purchases of additional capacity, average contract terms, and seasonality. Due to these factors, it is important to review RPO in conjunction with revenue and other financial metrics disclosed elsewhere in this Annual Report on Form 10-K. RPO was $244.3 million and $381.4 million as of April 30, 2024 and 2023, respectively.
RPO represents the amount of our contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancellable contracted amounts that will be invoiced and recognized as revenue in future periods. Our RPO as of April 30, 2024 is comprised of $39.0 million related to deferred revenue and $205.3 million of commitments from non-cancellable contracts. Our RPO as of April 30, 2023 is comprised of $47.9 million related to deferred revenue and $333.5 million of commitments from non-cancellable contracts.
RPO excludes amounts related to monthly usage-based runtime and hosting charges.
As we continue our transition to consumption-based pricing model, and lower ASP subscription contracts, we expect RPO to decline.
Go-to-Market Strategy
Our go-to-market strategy has been historically focused on large organizations recognized as leaders in their respective industries or public sectors that are attempting to solve complicated business problems by digitally transforming their operations. These large organizations, or lighthouse customers, include companies and public agencies within the oil and gas, power and utilities, aerospace and defense, industrial products, life sciences, and financial services industries, among others. This has resulted in C3 AI powering some of the largest and most complex Enterprise AI applications. These lighthouse customers serve as proof points for other potential customers in their respective industries. As a result, we have a customer base of a relatively small number of large organizations that generate high average total subscription contract value, but we expect that, over time, as more customers adopt our technology based on the proof points provided by these lighthouse customers, the revenue represented by these lighthouse customers will decrease as a percentage of total revenue. As our C3 AI Platform and much of our other C3 AI Software are industry agnostic, we also expect to expand into other industries.
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In the first quarter of fiscal year 2023, we announced a change to our go-to-market strategy including a way for new customers to subscribe for our products at smaller initial contract sizes and pay for services based on their monthly consumption of vCPU and vGPU hours. Customers generally begin with a one to two-quarter-long pilot which includes the necessary resources required to deploy the C3 AI Platform and/or C3 AI Applications and receive necessary training to operate and maintain the software in production use. Following the pilot period, customers either pay a monthly fee and consumption charges using vCPU and vGPU hours utilized as the metric to calculate payment or enter into a time-certain multi-period commitment that may include consumption charges.
Acquiring new customers and expanding our business with our existing customers is the purpose of our go-to-market effort and drives our growth. Making new and existing customers successful is critical to our long-term success. After we help our customers solve their initial use cases, they frequently identify incremental opportunities within their operations and expand their use of our products. The increased engagement is measured by a combination of increased vCPU/vGPU usage, increased C3 AI Software subscriptions and subscriptions to the C3 AI Platform for in-house AI application development.
The size and sophistication of our customers’ businesses demonstrate the flexibility, speed, and scale of our products, and maximize the potential value to our customers. To be a credible partner to our customers, who often are industry leaders, we deploy an experienced and highly educated team of C3 AI personnel and partners. We also complement and supplement our sales force with a number of go-to-market partners.
•Industry Partners. We have developed an alliance program to partner with recognized leaders in their respective industries, such as Baker Hughes, and Booz Allen, to develop, market, and sell solutions that are natively built on or tightly integrated with the C3 AI Platform.
•Hyperscale Cloud and Infrastructure. We have formed global strategic go-to-market alliances with hyperscale cloud providers including Amazon Web Services, or AWS, Microsoft Azure, and Google Cloud Platform, or GCP. In addition, we have strategic alliances with leading hardware infrastructure providers to deliver our software optimized for their technology. These partners include Hewlett Packard Enterprise and Intel. These partners supply infrastructure solutions, data management and processing services, or hardware and networking devices (e.g., IoT gateways) to support C3 AI product implementations and complement C3 AI’s products.
•Consulting and Services Partners. We partner with a number of systems integrators specializing in Enterprise AI implementations.
•Independent Software Vendors. We partner with Independent Software Vendors who develop, market, and sell application solutions that are natively built on or tightly integrated with the C3 AI Platform.
Customer Engagement and Product Adoption
We define a Customer-Entity as each entity that is the ultimate parent of a party contracting with us. We commonly enter into enterprise-wide agreements with Customer-Entities that include multiple operating units or divisions. Our customer composition is diverse and includes various customer segments with discrete purchasing decisions and pricing models. We offer a wide range of products and services, which results in a complex sales tapestry.
Over the course of our history, we have continued to innovate our product offerings, expand our market reach, and evolve our business model to better serve the needs and use cases of our ever-growing customers. Today, our relationships with customers take a myriad of different forms, ranging from free trials of C3 Generative AI on the AWS and GCP Marketplaces, $25 licenses of C3 AI Ex Machina to individual data scientists, to enterprise-level limited time trials and pilots, to multi-million-dollar long-term enterprise-wide agreements for C3 AI Applications and/or the C3 AI Platform. The number of individual departments and divisions within our customer base using our applications and/or applications they have built on our platform continues to expand. The move to our new consumption-based pricing model, while being the right model for our business evolution, adds yet another permutation to our customer relations. While the bulk of our new business volume consists of pilots followed by consumption-based pricing or time-certain multi-period commitments that may include consumption-based pricing, we continue to employ our historic pricing models in certain circumstances, including the expansion of existing agreements and renewals. We also have reseller relationships that sell our solutions to their end customers.
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While this may seem inordinately complex, it is in fact appropriately complex. Our flexibility in customer arrangements speaks to our agility in working with our customers and providing value-add products and solutions through those contractual agreements and pricing arrangements most convenient to our customers, while also enabling profitability and growth for C3 AI.
Over time, we have done our best to provide a quarterly customer count as a proxy to highlight the adoption and acceptance of our products and services by customers.
That being said, there is so much variety in the C3 AI sales tapestry, the types of customers, the broad range of products and solutions, the disparity in contract terms, our relations with resellers, and the range of prices that, to add them together into numbers that are meaningful to compare from one quarter to the next does not fully articulate the depth and breadth of the use cases and the value-add our products and solutions provide.
To help us better articulate the growth in our customer base and use cases, we retained external consultants during the fiscal year ended April 30, 2023 to recommend a best-practice customer count methodology that is consistent and relies on system data and is reproducible. As a result of that review, we previously decided to change our definition to better reflect the number and level of activity of our customers, which we now define as Customer Engagement:
1.For products and services including paid trials, one-time, subscription, and professional service offerings, we count unique contacting customers by SKU that generate revenue in a given period (i.e., if a contracting customer generates revenue across four SKUs in a period, that would be counted as four Customer Engagements).
2.For products that are priced based on unique assets to which the customer is applying our solutions, we count distinct production applications by customer asset for which the product is used.
3.For resellers and federal customers, we count the number of reseller end customers and the number of federal departments utilizing our solutions.
Our best estimate of Customer Engagement was 487 and 287 as of April 30, 2024 and 2023, respectively.
Key Business Metric
Pilot and trial count
Historically, our go to market strategy has focused on enterprise-wide, multi-period, large-value subscription contracts that entailed a long sales cycle, considerable sales effort and protracted negotiations. Our transition to a consumption-based pricing model for new customers helps us to better meet the needs of customers and align us with the model that is becoming common for enterprise software companies.
Our transition to a consumption-based pricing model is designed to increase the number of customers and accelerate growth by making it easier and less costly to adopt C3 AI solutions.
A consumption-based pricing model begins with a paid “Pilot” phase of up-to six months that may include developer access to the C3 AI Platform, one C3 AI Application or C3 Generative AI and COE support services. Trials are limited period agreements where a defined business problem or use case is addressed with C3 AI software and the customer is presented with the resulting insights and a working application showcasing the utility, benefit and economic value to be gained from a production deployment. Following the pilot and trial periods, customers either pay a monthly fee and consumption charges using vCPU and vGPU hours as the metric to calculate payment or enter into a time-certain multi-period commitment that may include consumption charges.
We consider the Pilot and trial count as a key business metric, as it reflects trends in market penetration and customer acquisition.
We count an agreement as a pilot or trial when an agreement meeting the characteristics of a pilot or trial as described above is executed with the customer.
Since we announced the transition to consumption-based pricing model, we have executed 123 and 49 pilots and trials in fiscal year 2024 and 2023, respectively.
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Factors Affecting Our Performance
We believe that our future success and financial performance depend on a number of factors that present significant opportunities for our business but also pose risks and challenges, including those discussed below and in the section of this Annual Report on Form 10-K in Part I, Item 1A titled “Risk Factors”, that we must successfully address to sustain our growth, improve our results of operations, and establish and maintain profitability.
Customer Acquisition, Retention, and Expansion
We are focused on continuing to grow our customer base, retaining existing customers and expanding customers’ usage of our C3 AI Software by addressing new use cases across multiple departments and divisions, adding users, and developing and deploying additional applications. All of these factors increase the adoption and relevance of our C3 AI Software to our customers’ business and, as an outcome, increases their runtime usage.
We have built a high-performance, customer-focused culture and have implemented proactive programs and processes designed to drive customer success. These include a robust customer support and success function. For example, as part of our subscription offerings, we provide our customers with the ability to establish a COE utilizing our experienced and specialized resources in key technical areas like application development, data integration, and data science to accelerate and ensure our customers’ success developing applications on our C3 AI Platform. We closely monitor the health and status of every customer account through multiple activities, including real-time monitoring, daily and weekly reports to management, as well as quarterly reviews with our customers.
We intend to attract new customers across multiple industries where we have limited meaningful presence today, yet represent very large market opportunities such as telecommunications, pharmaceuticals, state and local government, smart cities, transportation, and healthcare, among others.
Historically, we have had a relatively small number of customers with large total subscription contract values. As a result, revenue growth can vary significantly based on the timing of customer acquisition, changes in product mix, and contract durations, renewals, or terminations. We expect the number of customers to increase compared to prior fiscal years as organizations address the importance of digital transformation. The average total subscription contract value as well as the revenue represented by our lighthouse customers as a percentage of total revenue is decreasing and we expect them to continue to decrease as we have restructured our sales organization and expanded our market-partner ecosystem to effectively address small, medium, and large enterprise sales opportunities.
Going forward, we expect we will attract new customers who prefer to subscribe to the C3 AI Platform and C3 AI Applications with our consumption-based pricing model. For further discussion, see the section titled “Overview - Go-to-Market Strategy” included in Part II, Item 7 of this Annual Report on Form 10-K.
C3 Generative AI
Investing in generative AI positions us as leaders in the enterprise AI space. It allows us to offer innovative solutions, improve operational efficiency for our customers, and address a broader market with our Enterprise AI applications. As the AI landscape continues to evolve, staying at the forefront of generative AI technologies is crucial for us for sustained growth and relevance in the industry.
In the first quarter of fiscal year 2024, we announced the launch of the C3 Generative AI Suite including 28 new domain-specific generative AI offerings available to address the unique needs of industries, business processes, and enterprise systems. These new offerings combined C3 AI’s deep enterprise domain and industry expertise with the latest innovations in generative AI.
In the third quarter of fiscal year 2024, we announced the AWS Marketplace listing of our no-code, self-service generative AI application in AWS Marketplace. C3 Generative AI: Marketplace Edition offers a simple self-service setup that allows users to begin asking questions about their data in minutes. This new application is designed with an intuitive search and chat interface that allows users of all levels to easily and quickly find information with high precision, perform data analysis, and discover insights from documents and data.
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In the fourth quarter of fiscal year 2024, we announced the C3 Generative AI: Standard Edition, our no-code, self-service generative AI application on GCP Marketplace supporting Google’s newest and most advanced LLM, Gemini. With a simple, self-service, no-code onboarding flow that takes minutes to complete, C3 Generative AI: Standard Edition allows users to easily access insights from documents and unstructured files across their enterprise.
We expect to invest heavily in generative AI to leverage these advanced technologies to enhance our existing offerings and create innovative solutions that cater to the evolving needs of the enterprise AI market.
Technology Innovation
We intend to continue to invest in our research and development capabilities to extend our C3 AI Software, to expand within existing accounts, and to gain new customers. Our investments in research and development drive core technology innovation and bring new products to market. Our model-driven architecture enables us and our customers to rapidly address new use cases by building new applications and extending and enhancing the features and functionality of current C3 AI Software. By investing to make it easier to develop applications on our C3 AI Platform, our customers have become active developers. With our support, our customers have developed and deployed almost two-thirds of the applications currently in production and running on the C3 AI Platform. Research and development spending has fueled enhancements to our existing C3 AI Platform.
We expect to maintain high levels of investment in product innovation over the coming years as we continue to introduce new applications which address new industry use cases, and new features and functionality for the C3 AI Software. As our business scales over a longer-term horizon, we anticipate research and development spend as a percent of total revenue to decline.
Brand Awareness
We believe we are in the early stages of a large and expanding market for AI enabled digital transformation. As a result, we intend to continue to invest in brand awareness, market education, strategic paid media, and thought leadership, particularly as it relates to generative AI. We engage the market through digital, radio, outdoor, airport, and print advertising; virtual and physical events, including our C3 Transform annual user conference; and C3 AI Live, a series of livestreamed events featuring C3 AI customers, C3 AI partners, and C3 AI experts in AI, Machine Learning, or ML, and data science.
We anticipate continuing to make significant investments in marketing over the next few years. Over the long term, we expect marketing spend to decline as a percent of total revenue as we make ongoing progress establishing C3 AI’s brand and reputation and as our business scales.
Grow Our Go-to-Market and Partnership Ecosystem
In addition to the activities of our field sales organization, our success in attracting new customers will depend on our ability to expand our ecosystem of strategic partners and the number of industry verticals that they serve. Our strategic go-to-market alliances vastly extend our reach globally. Some of our most notable partners include Baker Hughes, AWS, Microsoft, and GCP. Each strategic partner is a leader in its industry, with a substantial installed customer base and extensive marketing, sales, and services resources that we can leverage to engage and serve customers anywhere in the world. Using our C3 AI Platform as the development suite, we leverage our model-driven architecture to efficiently build new cross-industry and industry-specific applications based on identifying requirements across our customer base of industry leaders and through our industry partners. Our strategy with strategic partners is to establish a significant use case and prove the value of our C3 AI Platform, C3 Enterprise AI Applications, and C3 Generative AI with a flagship customer in each industry in which we participate. We have done this with our strategic vertical industry partner in oil and gas, Baker Hughes, as well as with our iconic global customers, some of whom are deploying C3 AI technology to optimize thousands of critical assets globally across their upstream, midstream, and downstream operations. We establish formal sales and marketing plans with each partner, including specific sales goals and dedicated budgets, and we work closely with these partners to identify specific target accounts. We intend to grow the business we do with each partner and to add more partners as we expand the vertical markets we serve. We also offer revenue generating pilots of our applications as part of our customer acquisition strategy.
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In June 2019, we entered into a three-year arrangement with Baker Hughes as both a leading customer and as a partner in the oil and gas industry. This arrangement included a subscription to our C3 AI Platform and C3 AI Applications for their own operations (which we refer to below as direct subscription fees), the co-exclusive right for Baker Hughes to resell our offerings worldwide in the oil and gas industry, and the non-exclusive right to resell our offerings in other industries. Under the arrangement, Baker Hughes made minimum, non-cancellable, total revenue commitments to us of $50.0 million, $100.0 million, and $170.0 million, for each of the fiscal years ending April 30, 2020, 2021, and 2022, respectively. Baker Hughes’ revenue commitments were inclusive of their direct subscription fees of $39.5 million per year with the remainder to be generated from the resale of our solutions by the Baker Hughes sales organization. During the fiscal year ended April 30, 2020, we recognized as revenue the full value of the first year of the direct subscription agreement and the value of deals brought in by Baker Hughes through the reseller arrangement. This arrangement was revised in June 2020 to extend the term by an additional two years, for a total of five years, with an expiration date in the fiscal year ending April 30, 2024 and to modify the annual amount of Baker Hughes’ commitments to $53.3 million, $75.0 million, $125.0 million, and $150.0 million, over the fiscal years ending April 30, 2021, 2022, 2023, and 2024, respectively.
We and Baker Hughes revised this arrangement in October 2021 to extend the term by an additional year, for a total of six years, with an expiration date in the fiscal year ending April 30, 2025, to modify the amount of Baker Hughes’ annual commitments to $85.0 million in the fiscal year ending April 30, 2023, $110.0 million in the fiscal year ending April 30, 2024, and $125.0 million in the fiscal year ending April 30, 2025, and to revise the structure of the arrangement to simplify the sales process for Baker Hughes. Beginning in the fiscal year ended April 30, 2023 and until the agreements were further revised in January 2023 as described below, Baker Hughes’ annual commitments were reduced by any revenue we generated from certain customers between October 2021 and January 2023. We acknowledged that Baker Hughes had met its minimum annual revenue commitment for the fiscal year ended April 30, 2022 and recognized $16.0 million of sales commission as deferred costs during the fiscal quarter ended October 31, 2021 related to this arrangement, which will be amortized over an expected period of five years.
We and Baker Hughes further revised and further expanded this arrangement in January 2023. Pursuant to this revised arrangement, the frequency of payments due from Baker Hughes is accelerated, Baker Hughes obtained expanded reseller rights and we will provide additional products and services. This resulted in an increase of $32.5 million in the transaction price by eliminating potential variable consideration attributable to any revenue we generated from certain customers. The amount of consideration may increase if Baker Hughes exceeds certain thresholds. We also provided Baker Hughes the option to extend the subscription term upon payment of a renewal fee.
We purchase services from Baker Hughes from time to time to support our end customers in relation to our contracts with those customers. These costs are recorded as cost of subscription revenue in the consolidated statement of operations.
International Expansion
The international market opportunity for Enterprise AI software is large and growing, and we believe there is a significant opportunity to continue to grow our international customer base. We believe that the demand for our C3 AI Software will continue growing as international awareness of the benefits of digital transformation and Enterprise AI software grows. We plan to continue to make investments to expand geographically by increasing our direct sales team in international markets and supplementing the direct sales effort with strategic partners to significantly expand our reach and market coverage. We derived approximately 14%, 21% and 22% of our total revenue for the fiscal years ended April 30, 2024, 2023 and 2022, respectively, from international customers.
Impact of Macroeconomic Conditions
Our business and financial condition have been, and may continue to be, impacted by adverse macroeconomic conditions and uncertainties, including labor shortages, supply chain disruptions, inflation, higher interest rates, and fluctuations or volatility in capital markets, which are causing customers to optimize consumption, rationalize budgets, and prioritize cash flow management.
We will continue to evaluate the nature and extent of the impact of general macroeconomic conditions on our business. For further discussion, see the section titled “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.
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Components of Results of Operations
Revenue
Subscription Revenue. Our subscription revenue is primarily comprised of software licenses, software-as-a-service offerings, stand-ready COE support services, pilots and trials of our C3 AI Applications or Generative AI, and hosting charges. Sales of our software licenses grant our customers the right to use our software, either on their own cloud instances or their internal hardware infrastructures, during the contractual term. We also offer a premium stand ready service through our COE. Sales of our software-as-a-service offerings include a right to use our software during the contract term. In addition, customers pay a usage-based runtime fee for our C3 AI Software for specified levels of guaranteed minimum consumption. Our subscriptions also include our maintenance and support services, which include critical and continuous updates to the software that are integral to maintaining the intended utility of the software over the contractual term. Our software subscriptions and maintenance and support services are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. We currently have a small number of customers that license our offerings under a perpetual license model, and we expect that may continue for the foreseeable future for certain customers due to their specific contracting requirements.
Professional Services Revenue. Our professional services revenue primarily includes implementation services, training and prioritized engineering services. We offer a complete range of professional service support both onsite and remotely, including training, application design, project management, system design, data modeling, data integration, application design, development support, data science, and application and C3 AI Software administration support. Professional services fees are based on the level of effort required to perform the specified tasks and are typically a fixed-fee engagement with defined deliverables and a duration of less than 12 months. In certain cases, customers seeking increased utility from their C3 AI Suite or C3 AI Application subscriptions can procure prioritized engineering services to develop and modify software features, which are typically part of our product roadmap, but on an accelerated basis.
Cost of Revenue
Cost of Subscription Revenue. Cost of subscription revenue consists primarily of costs related to compensation, including salaries, bonuses, benefits, stock-based compensation and other related expenses for the production environment, support and COE staff, hosting of our C3 AI Software, including payments to outside cloud service providers, and allocated overhead and depreciation for facilities.
Cost of Professional Services Revenue. Cost of professional services revenue consists primarily of compensation, including salaries, bonuses, benefits, stock-based compensation and other related costs associated with our professional service personnel, third-party system integration partners, and allocated overhead and depreciation for facilities.
Gross Profit and Gross Margin
Gross profit is total revenue less total cost of revenue. Gross margin is gross profit expressed as a percentage of total revenue. Our gross margin has fluctuated historically and may continue to fluctuate from period to period based on a number of factors, including the timing and mix of the product offerings we sell, size or nature of customer, size of contract, industry, and the geographies into which we sell, in any given period. Our subscription gross margin may experience variability over time as we continue to invest and continue to scale our business. Our professional services gross margin may also experience variability from period to period due to the use of our own resources and third-party system integration partners in connection with the performance of our fixed price agreements.
Operating Expenses
Our operating expenses consist of sales and marketing, research and development, and general and administrative expenses. We expect our operating expenses as a percentage of total revenue to increase as we continue to invest to grow our business. Over the long-term, we expect those percentages to stabilize and then move lower as our business matures.
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Sales and Marketing. Sales and marketing expenses consist of expenditures related to advertising, media, marketing, promotional events, brand awareness activities, business development, customer success and corporate partnerships. Sales and marketing expenses also include employee-related costs, including salaries, bonuses, benefits, stock-based compensation, and commissions for our employees engaged in sales and marketing activities, and allocated overhead and depreciation for facilities.
We expect our sales and marketing expenses will increase in absolute dollar amounts as we continue to invest in brand awareness and programmatic spend to generate demand. We also expect to hire additional sales personnel to increase sales coverage of target industry vertical and geographic markets. Consequently, sales and marketing expense as a percent of total revenue will remain high in the near-term. As our business scales through customer expansion and market awareness, we anticipate that sales and marketing expense as a percent of total revenue will decline over time.
Research and Development. Our research and development efforts are aimed at continuing to develop and refine our solutions, including adding new features and modules, increasing functionality and speed, and enhancing the usability of our C3 AI Software. Research and development expenses consist primarily of employee-related costs, including salaries, bonuses, benefits, and stock-based compensation for our employees associated with research and development related activities. Research and development expenses also include cloud infrastructure costs related to our research and development efforts, and allocated overhead and depreciation for facilities. Research and development costs are expensed as incurred.
We expect research and development expense to increase in absolute dollars as we continue to invest in our existing and future product offerings. We may experience variations from period to period with our total research and development expense as a percentage of revenue as we develop and deploy new applications targeting new use cases and new industries. Over a longer horizon, we anticipate that research and development expense as a percent of total revenue will decline.
General and Administrative. General and administrative expense consists primarily of employee-related costs, including salaries, bonuses, benefits, stock-based compensation and other related costs associated with administrative services such as executive management and administration, legal, human resources, accounting, and finance. General and administrative expense also includes facilities costs, such as depreciation and rent expense, professional fees, and other general corporate costs, including allocated overhead and depreciation for facilities.
We expect our general and administrative expense to increase in absolute dollars as we continue to grow our business. We have incurred, and expect to continue to incur, additional expenses as a result of operating as a public company, including expenses necessary to comply with the rules and regulations applicable to companies listed on a national securities exchange and related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, as well as higher expenses for general and director and officer insurance, investor relations, and professional services. We expect that general and administrative expense as a percent of total revenue will decline over the long-term as we benefit from the economies of scale of our overall business.
Interest Income
Interest income consists primarily of interest income earned on our cash, cash equivalents, and available-for-sale marketable securities. It also includes amortization of premiums and accretion of discount related to our available-for-sale marketable securities. Interest income varies each reporting period based on our average balance of cash, cash equivalents, and available-for-sale marketable securities during the period and market interest rates.
Other (Expense) Income, Net
Other (expense) income, net consists primarily of foreign currency exchange gains and losses, losses from impairment of marketable securities, and realized gains and losses on sales of available-for-sale marketable securities. Our foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than the U.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
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Provision for Income Taxes
Our income tax provision consists of an estimate of federal, state, and foreign income taxes based on enacted federal, state, and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. We maintain a full valuation allowance on our federal and state deferred tax assets as we have concluded that it is not more likely than not that the deferred tax assets will be realized.
Results of Operations
The following tables set forth our consolidated statements of operations for the periods presented:
| Fiscal Year Ended April 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (in thousands) | ||||||||||
| Revenue | ||||||||||
| Subscription | $ | 278,104 | $ | 230,443 | $ | 206,916 | ||||
| Professional services | 32,478 | 36,352 | 45,843 | |||||||
| Total revenue | 310,582 | 266,795 | 252,759 | |||||||
| Cost of revenue | ||||||||||
| Subscription(1) | 128,469 | 78,423 | 45,838 | |||||||
| Professional services(1) | 3,553 | 7,914 | 17,875 | |||||||
| Total cost of revenue | 132,022 | 86,337 | 63,713 | |||||||
| Gross profit | 178,560 | 180,458 | 189,046 | |||||||
| Operating expenses | ||||||||||
| Sales and marketing(1) | 214,167 | 183,121 | 173,584 | |||||||
| Research and development(1) | 201,365 | 210,660 | 150,544 | |||||||
| General and administrative(1) | 81,370 | 77,170 | 61,040 | |||||||
| Total operating expenses | 496,902 | 470,951 | 385,168 | |||||||
| Loss from operations | (318,342) | (290,493) | (196,122) | |||||||
| Interest income | 40,079 | 21,979 | 1,827 | |||||||
| Other (expense) income, net | (641) | 350 | 3,019 | |||||||
| Net loss before provision for income taxes | (278,904) | (268,164) | (191,276) | |||||||
| Provision for income taxes | 792 | 675 | 789 | |||||||
| Net loss | $ | (279,696) | $ | (268,839) | $ | (192,065) |
__________________
(1)Includes stock-based compensation expense as follows:
| Fiscal Year Ended April 30, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| (in thousands) | ||||||||||
| Cost of subscription | $ | 34,032 | $ | 21,417 | $ | 8,638 | ||||
| Cost of professional services | 1,288 | 2,220 | 2,710 | |||||||
| Sales and marketing | 71,751 | 71,389 | 40,344 | |||||||
| Research and development | 72,036 | 90,217 | 39,200 | |||||||
| General and administrative | 36,654 | 31,299 | 22,549 | |||||||
| Total stock-based compensation expense | $ | 215,761 | $ | 216,542 | $ | 113,441 |
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The following table sets forth our consolidated statements of operations data expressed as a percentage of revenue for the periods presented:
| Fiscal Year Ended April 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||
| Revenue | ||||||||
| Subscription | 90 | % | 86 | % | 82 | % | ||
| Professional services | 10 | 14 | 18 | |||||
| Total revenue | 100 | 100 | 100 | |||||
| Cost of revenue | ||||||||
| Subscription | 41 | 29 | 18 | |||||
| Professional services | 1 | 3 | 7 | |||||
| Total cost of revenue | 43 | 32 | 25 | |||||
| Gross profit | 57 | 68 | 75 | |||||
| Operating expenses | ||||||||
| Sales and marketing | 69 | 69 | 69 | |||||
| Research and development | 65 | 79 | 60 | |||||
| General and administrative | 26 | 29 | 24 | |||||
| Total operating expenses | 160 | 177 | 153 | |||||
| Loss from operations | (102) | (109) | (78) | |||||
| Interest income | 13 | 8 | 1 | |||||
| Other (expense) income, net | — | — | 1 | |||||
| Net loss before provision for income taxes | (90) | (101) | (76) | |||||
| Provision for income taxes | — | — | — | |||||
| Net loss | (90) | % | (101) | % | (76) | % |
Comparison of the Fiscal Years Ended April 30, 2024 and 2023
Revenue
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Revenue | ||||||||||||||
| Subscription | $ | 278,104 | $ | 230,443 | $ | 47,661 | 21 | % | ||||||
| Professional services | 32,478 | 36,352 | (3,874) | (11) | % | |||||||||
| Total revenue | $ | 310,582 | $ | 266,795 | $ | 43,787 | 16 | % |
Subscription revenue accounted for 90% and 86% of our total revenue for the fiscal years ended April 30, 2024 and 2023, respectively. Subscription revenue increased by $47.7 million, or 21%, for the fiscal year ended April 30, 2024, compared to the prior fiscal year. Approximately 13% and 9%, respectively, of the total subscription revenue for the fiscal year ended April 30, 2024 and 2023, respectively, was attributable to revenue from new customers, and the remaining 87% and 91%, respectively, was attributable to revenue from existing customers.
Professional services revenue decreased by $3.9 million, or (11)%, for the fiscal year ended April 30, 2024, compared to the prior fiscal year, predominantly due to decrease in revenue from prioritized engineering services.
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Cost of Revenue
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Cost of revenue | ||||||||||||||
| Subscription | $ | 128,469 | $ | 78,423 | $ | 50,046 | 64 | % | ||||||
| Professional services | 3,553 | 7,914 | (4,361) | (55) | % | |||||||||
| Total cost of revenue | $ | 132,022 | $ | 86,337 | $ | 45,685 | 53 | % |
The increase in cost of subscription revenue for the fiscal year ended April 30, 2024 compared to the prior fiscal year was primarily due to higher personnel-related costs of $31.4 million as a result of increased headcount and overall costs to support the growth in our business, and increased stock-based compensation primarily related to additional equity awards granted to current and new employees, higher data center costs of $9.0 million, higher third-party outsourcing costs of $4.7 million, increased depreciation costs of $1.6 million, higher facilities costs of $1.4 million, and higher overhead costs of $0.8 million.
The decrease in cost of professional services revenue for the fiscal year ended April 30, 2024 compared to the prior fiscal year was primarily due to lower personnel-related costs of $2.9 million as a result of a decrease in the number of service projects, lower facilities costs of $0.5 million and lower overhead costs of $0.4 million, and lower third-party outsourcing costs of $0.1 million.
Gross Profit and Gross Margin
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||
| (in thousands) | ||||||||||||
| Gross profit | $ | 178,560 | $ | 180,458 | $ | (1,898) | (1) | % | ||||
| Gross margin | ||||||||||||
| Subscription | 54 | % | 66 | % | ||||||||
| Professional services | 89 | % | 78 | % | ||||||||
| Total gross margin | 57 | % | 68 | % |
The decrease in gross profit in the fiscal year ended April 30, 2024 was primarily driven by a decline in subscription margin, offset by an increase in professional services margin.
The subscription margin for the fiscal year ended April 30, 2024 decreased due to higher personnel-related costs as a result of increased headcount and overall costs to support the growth in our business, and increased stock-based compensation primarily related to additional equity awards granted to current and new employees, compared to the prior fiscal year.
The professional services margin for the fiscal year ended April 30, 2024 increased primarily due to lower personnel-related costs due to a decrease in the number of service projects, compared to the prior fiscal year.
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Operating Expenses
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Operating expenses | ||||||||||||||
| Sales and marketing | $ | 214,167 | $ | 183,121 | $ | 31,046 | 17 | % | ||||||
| Research and development | 201,365 | 210,660 | (9,295) | (4) | % | |||||||||
| General and administrative | 81,370 | 77,170 | 4,200 | 5 | % | |||||||||
| Total operating expenses | $ | 496,902 | $ | 470,951 | $ | 25,951 | 6 | % |
Sales and Marketing. The increase in sales and marketing expense for the fiscal year ended April 30, 2024 compared to the prior fiscal year was primarily due to higher advertising spend of $9.0 million, higher marketing costs of $8.9 million, higher personnel-related costs of $5.8 million as a result of increased headcount and overall costs to support the growth in our business, and increased stock-based compensation primarily related to additional equity awards granted to current and new employees, higher marketing events costs of $5.1 million, and higher data center costs of $0.9 million.
Research and Development. The decrease in research and development expense for the fiscal year ended April 30, 2024 compared to the prior fiscal year was primarily due to lower personnel-related costs of $20.5 million, partially offset by higher cloud computing costs of $10.5 million.
General and Administrative. The increase in general and administrative expense for the fiscal year ended April 30, 2024 compared to the prior fiscal year was primarily due to higher personnel-related costs of $3.7 million as a result of increased stock-based compensation primarily related to additional equity awards granted to current and new employees, higher professional services costs of $1.9 million, partially offset by lower corporate insurance costs of $1.7 million.
Interest Income
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Interest income | $ | 40,079 | $ | 21,979 | $ | 18,100 | 82 | % |
The increase in interest income for the fiscal year ended April 30, 2024 compared to the prior fiscal year was primarily the result of higher prevailing interest rates on our marketable securities portfolio.
Other Income (Expense), Net
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Other (expense) income, net | $ | (641) | $ | 350 | $ | (991) | (283) | % |
The decrease in other (expense) income, net for the fiscal year ended April 30, 2024 compared to the prior fiscal year was due to foreign currency losses on the remeasurement of Euro-denominated cash and accounts receivable balances.
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Provision for Income Taxes
| Fiscal Year Ended April 30, | $ Change | % Change | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||||||
| (in thousands) | ||||||||||||||
| Provision for income taxes | $ | 792 | $ | 675 | $ | 117 | 17 | % |
The increase in provision for income taxes was primarily related to foreign and state tax expense.
Non-GAAP Financial Measure
In addition to our financial results determined in accordance with generally accepted accounting principles in the United States, or GAAP, we believe free cash flow, a non-GAAP financial measure, is useful in evaluating liquidity and provides information to management and investors about our ability to fund future operating needs and strategic initiatives. We calculate free cash flow as net cash used in operating activities less purchases of property and equipment and capitalized software development costs. Free cash flow has limitations as an analytical tool, and it should not be considered in isolation or as a substitute for analysis of other GAAP financial measures, such as net cash used in operating activities. This non-GAAP financial measure may be different than similarly titled measures used by other companies. Additionally, the utility of free cash flow is further limited as it does not represent the total increase or decrease in our cash balances for a given period. The following table below provides a reconciliation of free cash flow to the GAAP measure of net cash used in operating activities for the periods presented:
| Fiscal Year Ended April 30, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (in thousands) | ||||||
| Net cash used in operating activities | $ | (62,362) | $ | (115,691) | ||
| Less: | ||||||
| Purchases of property and equipment | (25,256) | (70,518) | ||||
| Capitalized software development costs | (2,750) | (1,000) | ||||
| Free cash flow | $ | (90,368) | $ | (187,209) | ||
| Net cash (used in) provided by investing activities | $ | (66,615) | $ | 59,946 | ||
| Net cash provided by financing activities | $ | 11,294 | $ | 621 |
Liquidity and Capital Resources
Since inception, we have financed operations primarily through sales generated from our customers and sales of equity securities. As of April 30, 2024 and 2023, we had $167.1 million and $284.8 million of cash and cash equivalents and $583.2 million and $527.6 million of marketable securities, respectively, which are available for use in current operations. Our marketable securities generally consist of high-grade U.S. treasury securities, certificates of deposit, U.S. government agency securities, commercial paper and corporate debt securities. We have generated operating losses from our operations as reflected in our accumulated deficit of $1,089.9 million as of April 30, 2024. We expect to continue to incur operating losses and generate negative cash flows from operations in the next few quarters due to the investments we intend to make in our business, and as a result we may require additional capital to execute on our strategic initiatives to grow the business.
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We believe that existing cash and cash equivalents and marketable securities alone will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. We also believe we will meet expected future cash requirements and obligations through a combination of cash flows from operating activities and available cash balances. Our principal uses of cash in recent periods have been funding our operations and investing in capital expenditures. Our future capital requirements will depend on many factors, including our revenue growth rate, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, expenses associated with our international expansion, the introduction of C3 AI Software enhancements, and the continuing market adoption of our C3 AI Software. In the future, we may enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. If we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition.
The following table summarizes our cash flows for the periods presented:
| Fiscal Year Ended April 30, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| (in thousands) | ||||||
| Net Cash used in operating activities | $ | (62,362) | $ | (115,691) | ||
| Net Cash (used in) provided by investing activities | $ | (66,615) | $ | 59,946 | ||
| Net Cash provided by financing activities | $ | 11,294 | $ | 621 | ||
| Net decrease in cash, cash equivalents, and restricted cash | $ | (117,683) | $ | (55,124) |
Operating Activities. Net cash used in operating activities of $62.4 million for the fiscal year ended April 30, 2024 was due to our net loss of $279.7 million adjusted for certain non-cash items, primarily consisting of stock-based compensation of $215.8 million, accretion of discounts on marketable securities of $17.2 million depreciation and amortization of $12.7 million, and non-cash operating lease cost of $0.7 million. The $5.2 million cash inflow related to changes in operating assets and liabilities was primarily attributable to an increase in lease liabilities of $17.3 million, an increase in other liabilities of $8.2 million, a decrease in accounts receivable of $4.5 million, and a decrease in prepaid expenses, other current assets and other assets of $3.2 million. This was partially offset by a decrease in accounts payable of $12.9 million, a decrease in deferred revenue of $8.9 million, and a decrease in accrued compensation and employee benefits of $6.2 million.
Net cash used in operating activities of $115.7 million for the fiscal year ended April 30, 2023 was due to our net loss of $268.8 million adjusted for certain non-cash items, primarily consisting of stock-based compensation of $216.5 million, depreciation and amortization of $6.1 million, and non-cash operating lease cost of $7.0 million. The $72.2 million cash outflow related to changes in operating assets and liabilities was primarily attributable to an increase in accounts receivable of $54.5 million inclusive of an increase in related party balances of $38.8 million, a decrease in accounts payable of $22.0 million inclusive of a decrease in related party balances of $16.3 million, a decrease in other liabilities of $10.6 million inclusive of a decrease in related party balances of $2.5 million, a decrease to deferred revenue of $1.3 million inclusive of an increase in related party balances of $0.1 million and an increase in prepaid expenses, other current assets and other assets of $0.6 million inclusive of an increase in related party balances of $4.7 million. This was partially offset by cash inflows related to an increase in lease liabilities of $13.6 million and an increase to accrued compensation and employee benefits of $3.2 million.
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Investing Activities. Net cash used in investing activities of $66.6 million for the fiscal year ended April 30, 2024 was primarily attributable to purchases of marketable securities of $827.9 million and capital expenditures of $28.0 million mainly related to the leasehold improvements associated with leased space, partially offset by maturities and sales of marketable securities of $789.3 million.
Net cash provided by investing activities of $59.9 million for the fiscal year ended April 30, 2023 was primarily attributable to the maturities and sales of marketable securities of $876.7 million, partially offset by purchases of investments of $745.2 million and capital expenditures of $71.5 million mainly related to the leasehold improvements associated with the new leased space.
Financing Activities. Net cash provided by financing activities of $11.3 million for the fiscal year ended April 30, 2024 was due to $13.8 million of proceeds from the exercise of stock options for Class A common stock and $10.8 million of proceeds from the issuance of Class A common stock under the Employee Stock Purchase Plan, or ESPP, partially offset by $13.2 million of taxes paid related to net share settlement of equity awards.
Net cash provided by financing activities of $0.6 million for the fiscal year ended April 30, 2023 was primarily due to $4.5 million of proceeds from the exercise of stock options for Class A common stock and $3.1 million of proceeds from the issuance of Class A common stock under the ESPP, partially offset by $6.9 million of taxes paid related to net share settlement of equity awards.
Contractual Obligations and Commitments
Our contractual obligations and commitments primarily consist of operating lease commitments for our facilities and non-cancellable purchase commitments related to third-party cloud hosting services.
For additional information, refer to Note 6. Leases and Note 7. Commitments and Contingencies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report on Form 10-K are prepared in accordance with GAAP. The preparation of consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from our estimates. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the following accounting policies involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of our operations. See Note 1. Summary of Business and Significant Accounting Policies to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K for a description of our other significant accounting policies. The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates. The critical accounting estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
Revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
We determine revenue recognition through the following steps:
•identification of the contract, or contracts, with a customer;
•identification of the performance obligations in the contract;
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•determination of the transaction price;
•allocation of the transaction price to the performance obligations in the contract; and
•recognition of revenue when, or as, we satisfy a performance obligation.
Subscription Revenue. Our subscription revenue is primarily comprised of software licenses, software-as-a-service offerings, stand-ready COE support services, pilots and trials of our C3 AI Applications or Generative AI, and consumption-based pricing. Sales of our software licenses grant customers the right to use our functional intellectual property, either on their own cloud instance or internal hardware infrastructure, over the contractual term. As part of our customer acquisition strategy, we also sell premium stand-ready COE support services, hosting services, pilots and trials of our applications, and software licenses that are prototype versions of C3 AI Applications configured for a customer that do not require maintenance and support services. Sales of our software-as-a-service offerings include the right to use our software in a hosted environment over the contractual term. Substantially all of our subscriptions offerings include our software and our maintenance and support services. Our maintenance and support services include critical and continuous updates to the software that are integral to maintaining the intended utility of the software over the contractual term. Our software subscriptions and maintenance and support services are highly interdependent and interrelated and represent a single distinct performance obligation within the context of the contract. Revenue from software licenses that do not require maintenance and support services is recognized when the control of the software is transferred to the customer.
We generate additional runtime subscription fees for the use of our C3 AI Platform, a type of consumption billing based on computing and storage resources required to run our software. Customers may purchase blocks of runtime in advance. We typically recognize the consumption or usage-based revenue in excess of committed purchased runtime upon occurrence.
Professional Services Revenue. Professional services revenue primarily consists of implementation services, training and prioritized engineering services. These services are distinct from our subscription revenue.
Professional services fees are based on the level of effort required to perform such tasks and are typically a fixed-fee engagement with a duration of less than 12 months. We recognize revenue for our professional services over time on an input or output basis as the performance obligations are satisfied.
Contracts with Multiple Performance Obligations. Most of our contracts with customers contain multiple performance obligations. Our subscriptions are sold for a broad range of amounts and a representative standalone selling price, or SSP, is not always discernible from past transactions or other observable evidence. When appropriate, we determine SSP based on the price at which the performance obligation has previously been sold through past standalone transactions. When the SSP of a license or subscription and bundled maintenance and support services is highly variable and the contract also includes additional performance obligations with observable SSP, we first allocate the transaction price to the performance obligations with established SSPs and then apply the residual approach to allocate the remaining transaction price to the license or subscription and bundled maintenance and support services. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.
Areas of Judgment and Estimates. Determining whether the software subscriptions and the related support are considered distinct performance obligations that should be accounted for separately or as a single performance obligation requires significant judgment. Management applies judgment in identifying and evaluating terms and conditions in customer contracts that may impact evaluation of performance obligations and revenue recognition.
Determining the relative SSP for contracts that contain multiple performance obligations requires significant judgement. If there is no observable SSP, it is estimated using judgement and considering all reasonably available information including but not limited to, pricing practices in customer contracts with multiple goods and services, competitor pricing strategies, internally approved pricing guidelines, and other observable inputs. If applying the residual approach results in zero or very little consideration being allocated to a performance obligation, we consider all reasonably available data to determine an appropriate allocation of the transaction price.
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