C3.ai, Inc. (NYSE:AI) Barclays Global Technology, Media and Telecommunications Conference December 8, 2022 4:20 PM ET
Company Participants
Raimo Lenschow – Analyst
Conference Call Participants
Tom Siebel – Chairman and CEO
Question-and-Answer Session
Q – Raimo Lenschow
Yeah, perfect. I am kind of like I think people are probably to come — going to come in, Tom, good to have you here, connect in person. Just you had really good solid results yesterday. Maybe we start a little bit like on a quick summary of that one and then kind of we go into kind of deeper into C3 more from an industry perspective like to get everyone on the page like what were the highlights for you from yesterday’s results?
Tom Siebel
What’s kind of a big picture? I guess we’re about a roughly a third of a billion dollars business. We’re a computer software company. We’re growing at a — the idea was to build a platform and a set of applications that would allow organizations to apply elastic cloud computing, big data, internet of things and predictive analytics to build enterprise applications.
So we built a family of 42 enterprise applications that provide predictive analytics for their own gas industry, the utility industry, health care manufacturing, aerospace, defense, intelligence and we started in January of 2009. Today we employ about 900 people and operate in any number of cities around the world and in this space of building turnkey enterprise AI applications, I think we might be the largest company in the world.
Raimo Lenschow
Yeah. And then if you think about the — like everyone is asking about macro, where do you see customers and customer’s priorities around like what you’re offering, how high is that on their kind of mindset at the moment?
Tom Siebel
Well, if we look at enterprise application software, so I was there when we started that industry, okay and what we did is we took relational database systems. We built tools on top of relational database systems, so we could build forms and reports and then we built ERP and manufacturing and supply chain and CRM and that is roughly a half a trillion dollar business today and turned out to be a pretty good idea that would be Oracle, PeopleSoft, SAPC and what have you.
Now, we use those applications. Without those applications, it would be impossible to operate enterprises and we use those applications to report both for managerial purposes and regulatory purposes with perfect 20-20 hindsight what happened 30 days ago or 180 days ago, what inventory levels were, what customer churn was? Ok. What cash levels were, what was what — what was a failure rate of devices okay.
Now enter this idea of predictive analytics okay, that promises to be a $600 billion software market in a few years. All that is, it’s really simple, but when we take this large installed base of SAP, Oracle PeopleSoft and what have you and we make these applications predictive, which is what we do.
Okay, in addition to telling Boeing, how many parts they have in their supply chain from Bremerton, Washington or South Carolina, all the way to Shenzhen and a Boeing 777 got a million parts and then we got 7767. 757, 747, 737, 707, etcetera, so there’s a lot of parts and a lot of bins and you need to report what they all are very, very accurately.
So rather than report, so this is for a roughly last time I checked a $60 billion aircraft manufacturer or we can tell them what their customer churn was or we can tell them what the failure rate of their equipment was. Now, when we make these applications predictive, we can tell Boeing, Dave Calhoun exactly how many parts he needs in each bin in the next six months to meet his demand function, which oh, by the way, Boeing is not doing a very good job of that’s why they’re not shipped in airplanes, or we can tell them rather than simply tell them what they’re — where their breakdowns in the supply chain were, we can predict breakdowns in the supply chain, so it can mitigate, get the right part of the right place, the right time in Renton or South Carolina wherever it is and deliver the product OTIF on time in full to Southwest Airlines or me or whoever it might be, rather than to report to him what the — what his customer churn was, in the last period, we can tell him which customers are going to leave in the next year, so you can do something the same.
This is what happens when we make these company — when we make these applications predictive and I will argue that this is in five years there is no board of directors that is going to tolerate a CEO standing up and tell them where the supply chain broke down. Okay, not okay or what our customer churn was. I’m sorry that’s not going to be that CEO will be gone.
So it’s not a 100% replacement market for enterprise applications, but it addresses all of the problems that we addressed in enterprise application software and we’re making them predictive and that’s what we do at C3.ai.
Raimo Lenschow
Yeah. Okay, perfect. And then when I first looked at you, I kind of forward like, is this like a AI platform or if you talked about all the applications that you have, like when you started out the business where — how did you think about it. Was that like as it was the idea to build a platform business or was the idea to have like, help customers with kind of solutions.
Tom Siebel
Great question. The first application we started in January 2009 and the idea was to build an application okay, and the application was what you can think of today is like ESG on steroids. So we wanted this is — this was like the ultimate clean tech play. We want to take an organization the size of a General Motors without chemical, United States Army and be able to characterize their energy and carbon footprint in real time and report on it any number of formats.
In order to do that, we had to build a platform. So he spent a billion dollars in 10 years a billion. This is not like some sequoia dollars or government dollars. This is like real money. Okay, this not Sand Hill Road dollars. This is real money, and building a software platform that basically allows us to build any kind of predictive analytics application for any industry.
First, we applied it to energy, then we applied it to oil and gas and then we applied it to oil space — or aerospace, financial services, health. So we do have a platform and people do license the platform from us, but on top of that, we have 42 turnkey applications that address the value chains of oil and gas utilities, manufacturing, banking, what have you.
Now we’ve seen something so in the last 10 years, our primary competitor was some combination of the hyperscalers, cloud era, pivotal, the apache open source tax, data tricks, robot blocks and all this kind of crip crap that’s out there where people wanted to some CIO was going to take 20,000 programmers in Bangalore and try to build this himself with some these huge science experiments.
I think my friend Jamie Diamond is spending a billion dollars right now trying to do this. Well, no way, no how, he’s going to fail. Everybody fails and we had a kind of a secular change in this market in the last month when all of the hyperscalers, Google, Thomas Korean, AWS, Adam Selipsky, okay? And Azure Scott Guthrie came out and said our customers are telling us loud and clear, they don’t want tools anymore. They don’t want tool goods. They want turnkey application.
So if you want turnkey applications that address supply chain, demand chain, supply chain optimization, customer churn, predictive maintenance, that run on the Google Cloud, AWS, Azure, Oracle or Bare Metal or on the Edge on the Video Box, this is exactly one doorbell in the world that you can ring on that, you can ring, that’s right down the road in Redwood City and it says right above it’s a C3.ai, that’s what we.
Raimo Lenschow
You talked about the 42 so…
Tom Siebel
42 today.
Raimo Lenschow
Like so how do you see that evolving over time? Like do we — is there like a critical loss? Is there like diminishing returns at some point, like how do you think about that number?
Tom Siebel
Well, you have supply chain, you have supply network risk, you have demand chain, you have a customer churn, you have fraud detection. Now that’s pretty much applied to all industry. Supply chain to get into the DOD they call logistics, okay. Fraud, they call it fraud okay, now — but these applications applied to telecommunications, they apply to pharmaceutical or chemical, oil and gas and so it becomes a pretty big matrix of probably 300 turnkey applications before we’re done, Sibyl I think when we built Sibyl Systems, I think we had almost 300 different applications that we brought to market, different variants of CRM. for call center, field service, customer service, internet self-service, sales automation for all the industry segments. And so it was it was — it was about 300 products in the matrix.
Raimo Lenschow
And then if you think about that building and out of like, where the SI is fitting in there? Like, on the one hand, like, it is — I’m an old SAP guy like to so if you want to go deeper into certain verticals and kind of understand the process better and kind of work on that, you kind of need it as part of that. Where are you working with them? How many…
Tom Siebel
We are in Washington, DC we work with Raytheon. We announced this morning of strategic partnership with Booz Allen, we do work with PWC, we do work with Accenture. So we kind of work with everybody.
Raimo Lenschow
And what’s there — how are they building all their practices around you?
Tom Siebel
Well, in the case of Booz Allen, Brazilians building kind of a very large practice to serve the needs of the defense intelligence community. I expect that, PWC and Accenture will be doing the same thing.
Raimo Lenschow
Okay, perfect. Then the — we talked about the — you’re building an application like the other change that where that happened was that you kind of — we kind of went from a kind of there we went to a different pricing model like a consumption. Can you talk about kind of realization of maybe actually the world’s moving consumption and I need to change that about that a little bit.
Tom Siebel
Well, historically, we sold on a subscription-based model where we would have three, four, five year commitments. So our average transaction value might be any given quarter $20 million. So for that to be true, we had to be doing — our deals were five, 10, 20, 50, $100 million at a time. Now that’s good work if you get it and it is — and it makes you to see you can finance the business without having to bring any door bells up sand hill road and I particularly enjoy bringing doorbells on sand hill road.
So that enables this to build a base very, very viable business without walking around hatman and begging for money all the time. And now — but then as our product became more mature and we had a partner ecosystem and a developer community and much richer documentation, online training and whatnot, that enable us to transition to a consumption-based pricing model and in the cloud in the 21st century, a consumption-based pricing model just is the standard, is the standard GCP, AWS, Azure, Snowflake, you name it.
And so we made that transition beginning last quarter where rather than selling multi-year subscriptions, we just allow people to buy the product and kind of pay as you go, let’s say, $0.55 per CPU hour without having a gut wrenching conversation about the $50 million or $75 million or $100 million upfront licensing agreement. That makes a lot easier to do business where you do business within any given quarter with say an order of magnitude more customers.
And if you look at the revenue that we’ll get from any given customer over say, 10 quarters, 12 quarters, it’s actually revenue neutral without having to go through what is an unnatural act today in cloud computing, no question. The cloud computing standard is this consumption based pricing, it’s really gone well.
Raimo Lenschow
It’s like, like because you have been in the industry and I admire you like for so many years, if you think about the evolution towards that consumption model, when you back then obviously, with Siebel it was like seat-based, etcetera, if you think about that…
Tom Siebel
Oracle is perpetual.
Raimo Lenschow
Right, yeah, exactly, that was all, that was perpetual as well. If you think about that, that consumption model, do you think there is certain parts of the industry or is that like something that the whole software industry probably have.
Tom Siebel
I think it goes — we need to be able to be the standard in all industry segments. Now that being said, if somebody was to say they really want to go big like Shell, the United States Air Force, as somebody likes wants to go all in, they’re going to drive up in their Mercedes and send of the guys and like cut and they’re going to want some sort of enterprise license agreement. It’ll be on whatever terms they want and it’ll be for a sufficient amount of money that a reasonable person will agree to their terms and that just happens. That’s the black swan. You can’t model it, but you guys could work what happens.
Raimo Lenschow
You take — on that node you had, what’s the baker use is like one of the big guys for you their commitment rewards towards you, but also like, changing themselves as a company has been amazing. If you look at the dollar amount there…
Tom Siebel
To me was order of a $0.5 billion. So that was a reasonably large software transaction.
Raimo Lenschow
That is very large. And where do you see I remember when that deal happened, it was like a big wake up moment for a lot of the other guys like, oh shit, this is like over equipment or equipment company that just kind of spend that much on definitely…
Tom Siebel
It repositioned them in the oil services market, there are gas services market, their competitors are Slumber J and Halliburton and as it relates to Digital, they look like dinosaur as compared to baker heels.
Raimo Lenschow
And did you notice like a pick up like in terms of other segments that you have they are you kind of focusing on lighthouse customers that kind of could be that next speaker used for a different industry or was that just you need at the time?
Tom Siebel
The honest answer is it wasn’t very sophisticated. It was really coin operated. When a CEO walks in the door with a management team, a mandate and check that CEO is an aerospace business, we’re in the aerospace business okay, if you happen to be running a large year in the European utility, we’re in the utility business and we’re having a world of shell or the oil and gas business or if Lorenzo and walks in from Baker Hughes with roughly a $0.5 billion offer, we’re in the oil and gas business.
Now in the long run, there is no industry that’s not going to — no board that’s not going to mandate that their CEO see around corners and identify problems in the supply chain before they happen, not wine to the board about why you can’t ship cars because war broke out in Southeast Asia. I’m sorry, not an excuse. We got to ship cards.
Raimo Lenschow
No fair enough. And last few minutes, I wanted to talk a little bit about the like one of the focus areas for this conference was that people realized I need to think about more returns and think about more about my growth profile and how I’m growing. How profitable I’m growing. Talk a little bit about your mindset in terms of like growth, profitable growth. Where are you on that life and then.
Tom Siebel
Our internal business. Okay. Well, we went public in December of 2020. We raised about a $1 billion and the purpose of that was and back in December of 2020, all of the analysts from all of the banks, it all went to the Massachusetts School of Management, okay, and I would come in and explain that you’re not spending enough money time. You’re not spending enough money. You’re not investing in a market. You’re not investing in the market.
And honestly, Raimo, between you and I, almost all of them, graduated from business school after 2008 okay, and they’ve never seen anything but market that went up every day. So we didn’t pay a lot of attention to that. That being said, when we went public, the purpose that we — for which we raised the money was to build market share and to invest in technology and that’s what we did.
Now clearly the pendulum has swung okay and again, the markets are demanding that companies like us have a path towards profitability. Now we operate at an 80% gross profit margin. So come on, we’ve been in the software business and operating 80% gross margin, how hard is it to run a profitable business.
I can be profitable this quarter okay, I only have one cost, but it’s human capital. So I do a big laugh and I’m cash positive and profitable. Would that be — would that be in the best interest of our shareholders, no freaking way okay. We be training our future growth to make some analysts a one shareholder happy.
Now, but if you look at what we’re doing, last year I spent 29% on marketing and branding. Who spends 29% of revenue on marketing. That would be nobody okay. 46% on R&D. Who spends 46% on R&D to Salesforce, does Oracle, does SAP, no way. no how, we were not even close okay.
We spent a 23% on sales okay, that’s reasonable. We spent 15% on F&A, maybe that’s a little hot, okay, but so our model is very simply we take — we’re operating a roast browser of 80%. We keep marketing down to 11%, sales will go up to about 24%, R&D will kind of come naturally down to scale to about 23% of revenue, which is a big number for R&D already F&A down to 12%. I haven’t done the fast math, but the net of that should be like about a $1 profit okay, in the fourth quarter of ’24 and then we grow up from there.
And so I see this as basically a 20% operating margin business. It’ll be throwing off cash, I think as this consumption model kicks in, in the next few quarters and about the same time and I don’t know whether this happens in four quarters, you can tell me when the fed decides to take a foot off the break, you’re going to looking at a company that’s going to be a leader, if not the leader in enterprise AI software, growing at north of a 30% compound annual growth rate, operate at a cash positive profitable business with a ton of cash in the bank and so I think that’s probably a product that equity markets will find quite attractive when equity markets kind of recover from the current state of kind of chronic depression.
Raimo Lenschow
From you, you’ve seen this game before and you saw, we had it at Sibyl and Oracle before. Like if you think about the noise coming from the financial markets in terms of like, oh no, you need to grow. No, you need to be like, the guy that needs to kind of show me profitability, etcetera. Like for you as someone needs to take more longer term, like what’s your north star in terms of like that balance between growth and margins?
Tom Siebel
I don’t know how to tell you this, Raimo, but I’ll still be here when that analyst has gone, okay? I’ve seen them all come and go and I’ll still be here. And so our North Star is run a cash positive, but yes, at Siebel, ran a cash positive profitable business from the day we shipped a product okay? And we had 80% market share in CRM. We created the CRM market, right? 80% market share globally.
When I sold the company to Oracle, I think our revenue at the time was roughly $2 billion. Marc Benioff, a guy who I hired at Oracle, okay, out of USC, studied business administration, okay, and have never seen a computer in his life. Their sales was about — were about — it’s true, okay.
They’re just $180 million, we’re here about $2 billion. But — so same story. I am committed to run at a cash positive profitable business, okay? We’re committed to running a rapid growth business, and our goal is establishing a maintain a market leadership position in this market.
The market leader is going to have about 50% market share. Number two, we’ll have 15% market share. Number three, we’ll have 10% market share. And then in expansive markets like a few years ago, there’s another 20 companies out there once the market — the music stops, all those guys kind of go out of business.
So I think a lot of these guys are about to be gone. But that’s our North Star. We’re going to be a leader in the field, will be a great place to work, have satisfied customers, establish and maintain market share in Asia aerospace, banking, telecommunications and that’s the game.
Raimo Lenschow
It’s kind of funny, like the — how do you think about these investment levels? Because I just interviewed the sales first guy and the they’re like, “Oh, we could get sales of marketing below 35%. It was like, dude, you’re only growing 10. Like how does that work? Like — so if you think about the likes — putting the foot down more on sales versus not putting the foot down like, is there a healthy level in terms of growth?
Because the other thing is also, if you grow overinvest and the wheels are coming off all the time, you lose the culture in the organization, etcetera. Like is there like — I’m asking you because you’ve been around for longer than most of the other guys that are meeting there. Like is there a level that you think is like a healthy level?
Tom Siebel
I think that we will be investing about 40% in sales and marketing, okay? I’m confident we can be — we can grow it. We can do that while growing the top line okay, north of 30%. And in a steady state, be drawing off, okay, 20% operating margins. So that is exactly where we’re going with the model. We’ve done it before. We know how to do it. It’s not rocket science. When — if you have 80% gross margin business, it’s not that hard to make money.
Raimo Lenschow
Yes. Tom, that’s actually a great closing statement. Hey, good to meet you in person again. Thank you.
Tom Siebel
Thank you, Raimo.
Raimo Lenschow
Thank you.
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