C3.ai, Inc. (AI) Piper Sandler Growth Frontiers Conference Transcript

C3.ai, Inc. (NYSE:AI) Piper Sandler Growth Frontiers Conference September 14, 2022 12:30 PM ET

Company Participants

Tom Siebel – Chairman and Chief Executive Officer

Conference Call Participants

Arvind Ramnani – Piper Sandler

Arvind Ramnani

Hi, everyone. I’m Arvind Ramnani, Vertical Software and FinTech Analyst at Piper Sandler. And as the pleasure of having – to introduce Tom Siebel, who many of you know from C3, also from priorities, Tom, thanks for taking the time.

Tom Siebel

Thank you.

Arvind Ramnani

So just to get us kicked off, so C3 is a leader in the AI market, which is a fairly large market, expected to be about $600 billion by 2025, lots of opportunities but among the opportunities, what are you most excited about?

Tom Siebel

Well, it’s huge, you get in there, it is huge related to manufacturing, you have optimization supply chain, supply network risk, demand forecasting. When we get into the oil and gas business is huge for us and that happens to be one of the few healthy sectors of the economy right now. And but companies like Shell, what we’re doing, Shell AI upstream, downstream, midstream, predictive maintenance for offshore oil rigs, integration of renewables, hydrocarbon loss accounting, production optimization wells, a single application there will have maybe two million machine learning models in the pipeline. They will generate $2 billion in economic benefit this year from what they call Shell AI, which is C3 on top of reserve, 2 billion. The work we’re doing with government defense industry happens to be kind of have a blank check right now.

And so there’s a lot going on there, not only in the United States, but in the UK, France and some other allied countries, but some of the work that we’re doing in the defense and intelligence industry is fascinating. For example, we do AI predictive maintenance for the air force, something called Rapid Sustainment office. And the average age of an aircraft, the United States Air Force about 28 years. And the average rate of deployment of some of these like an F-18 is about 50%. So pilot goes into 0-dark-thirty pushes the button, some light comes on and says you’re not flying.

So we have aggregated all the data in the United States Air Force today for 22 platforms, F-15, F-16, F-18, F-35, Joint Strike Fighter, KC-135, B1 Bomber, et cetera, et cetera, et cetera. And that’s no mean check. And now we’re adding the telemetry in addition to all the mission records and maintenance records and flight records and what have you, we have now the telemetry and we just added the telemetry to the B1B. If you look it up on the internet, I didn’t know what a B1B Bomber was. You look it up on the internet, it’s pretty cool. And we used to have – they used to use this to deliver nuclear weapons. Now they don’t, but it’s a pretty cool aircraft flies about 1.2 times the speed of sound.

And we can increase the availability on any given day for the B1B, we were just did Wright-Pat last week, Wright-Patterson Air Force Base, demonstrating by adding the telemetry, we can then identify device failure before it fails, say auxiliary power unit propulsion and igniter for the after burn or whatever it might be. And then if you can identify a 50 or 100 flight hours before it fails, provided evidence package to the analyst, he pushes the button, parts and personnel get launched to go discipline, to do go intersect the aircraft on its normal flight platform. You have no unscheduled maintenance.

So for that aircraft alone, we’re able to increase availability by 25%. I mean, you can’t put a number on that. So defense and intelligence look good. Government’s pretty big. I mean, how – people think defense budget’s big in the United States, the defense budget in the United States, a rough number is $700 billion. Health and human services is $1.7 trillion, okay. So health and human services is I think like based largest economy in the world or something, some staggering number like that.

So defense government looks like a big business. Health will be our largest business in the long run. It looks very exciting.

Arvind Ramnani

Yes. No, certainly last week, you hosted a couple of days of meetings in DC and thanks for the invite, I couldn’t make it, but just curious to see, what did you learn from those, from the day, day and a half?

Tom Siebel

We had a C3 AI Defense Forum, I think there were, I think over 200 people in attendance and we were – then it was hosted by General Hyten, who just stepped down as the Vice Chair of the Joint Chiefs of Staff; General Cardon, who recently stepped down as the Head of the U.S. Cyber Command. And then we had our large deployments like Missile Defense Agency, Space Force, Rapid Sustainment Office, DCSA handles clearance adjudication and insider threat. And they were kind of presenting what they did. So it was a pretty good event. And you would’ve enjoyed it. Sorry, mostly you would’ve enjoyed it.

Arvind Ramnani

I’m sorry but yes, we had a conflict.

Tom Siebel

The big guys all talked about what they’re doing, how they’re doing it, the value they’re getting. And it’s exciting.

Arvind Ramnani

And you suddenly have Palantir in the same space, how like it’s better playing a different thing than – how are you competing with Palantir?

Tom Siebel

I think we appeal back, again on Palantir and maybe go talk to some of the customers. You’ll maybe find that the story that customers tell are a little bit different than the story of the conference calls. And like a lot different. And so Palantir, I’m sure it’s a fine company. I mean, it’s a professional services company masquerading a software company and like they – for example, they did announced their $1 billion deal over 10 years with BP. Okay.

And I’m sorry, $1 billion deal over five years with BP, it’s a 100 full-time people. Okay, at BP in London. I mean, do some fast math on how much 100 full-time people across a year. Okay. That would be how much it costs over five years, about $1 billion, okay. Now how you book that as software revenue is why you guys let these guys get away with this? It’s pretty baffling to me, but there’s a lot of baffling things in equity markets in the last few years. Good news is it’s all getting cleaned up.

Arvind Ramnani

Perfect. And just to get into the product a little bit, you recently launched version eight of your C3 platform enhanced tools with AI and ML. What kind of feedback are you getting from developers and what kind of feedback are you getting from customers?

Tom Siebel

It’s extraordinarily positive. Our customer satisfaction scores are higher than it’s ever been. Our Net Promoter Scores are higher than it’s ever been. Basically you think of version eight as kind of 10 to 1,000 time performance improvement wrapped in a very rich infrastructure of support documentation, online help, context-sensitive help, remote learning, distance learning capability. So people can open the package and use the product without our holding their hands so much.

And so that is being extraordinarily well received. And that’s all wrapped in a new no code, low code and deep code development environment, all of which interact. So this enables us to launch this consumption based pricing model, which we just did, which is kind of really timely and helped. So it’s very well received. It’s a great product that you aware Forrester Research did a report on ML/AI platforms, I think it was a very important report, because this is the first research – this is the first group of research analysts that kind of came out upfront and recognized the importance of an ML/AI platform versus trying to cobble together Lambda and Azure and Mongo and Alteryx, all these little shiny stars try to – these huge science projects and where the people use with component parts from the hyperscalers and try to get something to work, which to our knowledge nobody has ever succeeded at.

And so I think in that report, we were ranked number one in security, number one in applications, number one in partner ecosystem, number one in development tools, number one in pretty much everything. But most importantly, I think that is going to be a bell cow for the other analyst. Now we’re seeing Gartner Group and we’re seeing Constellation getting ready to publish their reports and the importance of these AI/ML platforms.

And you’ll see that when you see this platform, there’s a lot of space between us, who’s in the upper right hand corner and the hyperscalers who are in about the middle. Okay. And the hyperscalers represent partners to us. Okay, like Google, like Microsoft, like AWS, but you’ll see their entirely complimentary technologies. And I think sometimes the market gets a little confused and things bit competitive.

Arvind Ramnani

Perfect. Certainly, from a pricing perspective, you recently announced your business –change in…

Tom Siebel

Base pricing?

Arvind Ramnani

Yes. So how do you – I mean, how is the – or what’s been the feedback from customers and do you think like this, the new industry standard that other software performs below that?

Tom Siebel

Okay. We have been for the last 13 years. Okay, we’ve been selling $5 million, $10 million, $15 million, $20 million, $50 million at a time. Okay, because we could do it. Okay. And the market would support it. We’re pretty good at enterprise sales. And we had very, very high value propositions, like company like Koch is looking for almost $1 billion this unit economic benefit lined out but sell $1 billion, sell $2 billion. Hey guys, that’s a lot. Okay. I don’t know how many SAP customers conferences you’ve been to as sales force conferences you’ve been to, Oracle conferences you’ve been to, Google conferences you’ve been to, where the customer stands up on stage. Okay. And presents the presentation that they just gave to the Bank of America analyst yesterday that said they’re getting $2 billion this year in economic benefit.

I know how many customers have said that. Not one. Okay. And we got a bunch of them. Now in this market, like the market kindly – I can assure you, okay. We are in a recession. Okay. And this is not a political statement. Okay. This is a fact. Okay. And there is not one of our customers in the chemical business, in oil and gas business, in the paper business, in the pharmaceutical business where their executive team is not hunkered down. Figure it out, how they’re going to deal with this? In the banking business at Goldman Sachs, just did a big layoff I think it’s going to be the last one in banking. I don’t think so. Okay. I mean, everybody, one of the things we figured out in COVID, okay, is all those white collar knowledge workers are working from home. We don’t need them anymore. Okay. And that we’re going to find that in every industry.

So these layouts are common and our customers are applying for recession. So the idea when you’re trying to get through $10 million, $20 million, $30 million, $40 million, $50 million, $70 million ticket, okay, during a recession, let me tell you, you can’t get – there’s nobody who can approve that. Okay. So now – so with the Version 7, with the expansion of our partner ecosystem, particularly what we just did with Google, now we have conception based pricing. It costs $0.5 million to use it for, I think, six months then if you like it, keep it and pay $0.50, $0.55 or something for CPU hour. It’s a tried test, improved model works for Google, works for Amazon, works for AWS, works for Snowflake.

And we model it over 10 customers – over 12 customers over 10 quarters – 10 customers, I’m sorry. Three large, three small and four medium and its revenue neutral over 10 quarters, so I don’t have to go in and ask for a $50 million order and believe me, this quarter, nobody’s closing $50 million orders. And so the timing is perfect. It works for the new sales force. It works with new partner ecosystem, it dovetails with Version 8 and its being really, really well received.

Arvind Ramnani

That’s perfect. So just on the point of recession, are you seeing kind of tech by just getting compressed just given the macro environment.

Tom Siebel

It’s budgets, okay. I mean, its real estate, it’s people, it’s paperclips, it’s travel. I mean, we have partners that can’t travel to go see customers, okay. I mean, it’s not just tech, I mean, how things go on in the investment banking business, guys, anybody in that business, anybody doing any IPOs this month? Really, really cool. Okay, good for you. Good for you. Okay. Good for you. But I would say it’d be a black swan, right?

And so it’s hey, it’s a plain vanilla recession, I mean, come on, we’ve seen these before guys. We saw them in like 1999, 2000 – 2000, 2002, 2008. These things happen just that this one’s going to be, as I think like. And you compound that with a complete freaking disaster in China. The war in Europe, people are going to be freezing to death in Europe this year. I mean, you can’t make this up. Okay. In Germany, I have a trip planned to Europe in November. I’m scared. How cold am I going to be? Do I need to put me on firewood? No, no, no, no, no. I mean, we guys read the newspaper. This is – how bad can this get?

So the good news, I think this is great. Okay. Well, once we get this whole thing over rip off the bandaid, 60% of the companies out there in technology won’t exist in two years, we’ll have got over this. What was this? What were we doing? We’ll have gotten over this pretend to work from home stuff, okay, where you working from home and your pajamas and get paid Bitcoin. We’ve gotten over the great resignation, we’ve gotten over what is now the quiet quit. Okay. People will be dealing with what, what are you think inflation is maybe 16%, 18%, sure as hell is at 6% or 8%. Okay. Everybody’s stock that they used to have is worth 10% of what it was. The groceries are going up 20% a year, fuels going up 30% a year, rents going up 30% a year. Oh, dear, I need to get a job. And so it’s all going to return to normal. It’s going to be good, world’s going to be a better place. C3, C3 is going to be stronger, bigger, better, more competitive. And we’re going to kick out.

Arvind Ramnani

Yes. That’s helpful.

Tom Siebel

I got $1 billion in the bank. Okay. $1 billion, okay and I assure you, I’m not building any buildings. Okay. And were you reusing it pretty? We will be running a cash positive business by Q4 of next year. I can’t foresee our cash balance going below $700 million unless we decide to buy something and I have no intention of buying anything, although I get offers every day. So I think we’re really well positioned to weather this, to come out stronger, more competitive, more market share, more customers, more partners, better products and in a powerful company in what is a $600 billion addressable market. That’s my story and I’m sticking to it.

Arvind Ramnani

No. Perfect. Perfect. In terms of like kind of the new pricing model, do you think that’s going lead to increased diversification among your clients?

Tom Siebel

Absolutely, smaller clients now we’re doing business with counties like the counties, we have a tail, we have a great product out there, relatively low price product that brings AI and automation to the process of property appraisal. It’s really labor intensive in place like the Harris County, Maricopa County, Cook County to like aggregate all the data that they need to do to do property appraisals. And then they need to defend the appraisals. We’ve automated all of that. We have a way cool product in residential and commercial property appraisal, law enforcement, something that could spun-out some of our efforts in one of the three letter agencies. Okay, that we built for a law enforcement application that allows these guys when they’re doing investigations and they need to integrate data from jail records, court records, okay, social media, news, okay, body cameras, various sorts of associations, so they can do all these investigations.

And then there’s all this ad tech data where you can track guys in real time. I don’t if you’ve seen this. But the 17,000 law enforcement agencies in the United States, so absolutely we’ll be seeing smaller clients, medium clients, larger clients, a lot more industry diversification, diversification in size, more visibility, less lumpiness. It’s all good.

Arvind Ramnani

Perfect. Just last couple of questions. I do want to touch on profitability. I think you have talked about getting profitability by fiscal 2024?

Tom Siebel

End of fiscal 2024.

Arvind Ramnani

End of fiscal 2024. Are there any risks you perceive or nothing?

Tom Siebel

So we run an 80% gross margin business, right? How hard is it to run a profitable business when you have 80% gross profit margin? I mean, really, I mean, a monkey could do this. Okay. And now we went out, we raised money. We said, exactly – we did exactly what we said we were going to do. We invested in market, we invested in branding, we invested in market share. So we’ve been spending like order of 29% on marketing, who spends 29% on the market. That would be nobody, but we did a pretty good job of establishing a brand in enterprise AI. We own it.

With 23% on sales, that’s the penny in the box from enterprise software company. We were spending 44% on R&D, who spends 44% on R&D. That would be nobody. I mean, what does Salesforce spends on R&D like nothing, although it was a acquire company, right. I’m not saying it isn’t a good company, but they don’t do R&D there. Okay, 44%. And so basically, what’s the model, we take marketing from 29% to 11%, which is reasonable. Okay. We take sales from 23% to 26%. Okay. Take R&D with just through scale will now go from order of 44%, I think over the last 12 months, but I give you wrong on that to 29%, G&A goes from 15% to 12%. So in fact it’s a profitable company, non-GAAP.

Arvind Ramnani

Perfect. And then…

Tom Siebel

And cash positive. I mean, it’s not that hard. You got be – with an 80% gross margin, guys, it’s not that hard. Okay. We had $1 billion cash in a market where every investment banker, who graduated from Harvard Business School in 2009, okay or after, would come in and said, you can’t spend enough on marketing and branding. Well, we didn’t follow that advice, but we did. Clearly that sentiment has changed in the investment community and we’re responding accordingly.

Arvind Ramnani

Just the last question for me. If you look over the next 12 to 18 months, what are you most excited about?

Tom Siebel

Defense intelligence, the CRM product is going to be a big deal. Okay. I mean, but I think applications, today, we have 42 applications. I think I suspect in 24 months, we’ll have close to a 100 turnkey enterprise AI applications for banking, for manufacturing, for oil and gas, for automotive, for travel transportation. So much, much more of our revenues coming from turnkey applications rather than providing tools, so people who can build their own. But I think that the technology is great. The people are great. We have an unusual work ethic. People will actually come to work at our company, in London and Rome and Paris and Chicago and Redwood City. I have only a full parking lot in Silicon Valley come and visit it. Okay. You have to walk like five rows to get to the front door every day.

And by the way, we adopted that policy in June of 2021. We had a voluntary work from home policy, work from the office policy. We began in June of 2021, either voluntarily be to the office or voluntarily go to work for Facebook. Okay. And we have a very high performance environment. It’s an unusual place. Okay. But now you can’t do that, because Facebook is laying off. They’re not hiring anymore. So that option isn’t there. You’ve been there. You can see it, the parking lots full, right? How many rows did you have to walk? You showed up at about 11. How far did you have to walk to get to the front door?

Arvind Ramnani

Yes. The parking lot is full. And I saw that back actually in 2020 when we met. Yes. Perfect. Thanks everyone for listening. And Tomas, thanks for taking the time to the conference.

Tom Siebel

Thank you.

Arvind Ramnani

Thanks.

Question-and-Answer Session

Q –

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