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C3.ai, Inc. (NYSE:AI) JMP Securities Technology Conference March 7, 2022 6:00 PM ET

Company Participants

Thomas Siebel - Founder, CEO & Chairman

Conference Call Participants

Patrick Walravens - JMP Securities

Patrick Walravens

All right. Great. Why don't we go ahead and get started. So look, this is a huge treat. We got to change the slide. It's not Pegasystems anymore. Thank you very much. We're just delighted to have Tom Siebel, who is the Founder and the CEO of C3 AI, and is one of the longest-serving and most successful executives in the technology industry. I don't think that's an exaggeration.

And so Tom, if you would, just for anyone who doesn't know, if you can give us just 2 minutes on C3, and then we'll talk a little bit about the evolution of the business, and we'll get into some current topics.

Thomas Siebel

We started work in January 2009, and the idea was to build a software platform that would allow companies to take advantage of elastic cloud computing, big data, the Internet of Things and predictive analytics. So this is about enterprise AI. And we spent the better part of a decade and hundreds of millions, approaching $1 billion building this software stack that provides all of the software services and this is necessary for companies to design, develop, provision, operate for these very large-scale enterprise AI applications.

On top of that, we've built 42, I think, 40 or 42 turnkey enterprise applications that address the value chains of utilities, defense, intelligence, aerospace, oil and gas, utilities, manufacturing and financial services. And so that is our -- that is the game that we play.

We're addressing what IDC presents as almost a $300 billion software market this year, growing to, I think, almost a $600 billion software market in 2025. I believe we're the world's leading provider of enterprise AI applications. And the game that we're playing, similar to the game that we played for those who are with us, and I know there are some people in the room who were with us then at the early stages of Oracle and then the early stages of Siebel Systems. The game that we're playing is to see if we can establish and maintain a global market leadership position in enterprise AI.

Question-and-Answer Session

Q - Patrick Walravens

All right. And so in 2009, when you started it, you were focused on energy.

Thomas Siebel

Yes, there is...

Patrick Walravens

What was the original focus?

Thomas Siebel

The original application, that was basically ESG. Okay. So this is now 2000 -- we did the thought at leadership on this. All the thinking was done in planning with 2007, 2008. So this is the beginning of Obama administration, everybody is worried about cap and trade, carbon tax, global warming. And so we built this platform initially to address kind of very large enterprise scale ESG problems. And then we expanded it, which is basically enterprise AI applied to large enterprises and the grid. And then we -- then in 2016, we went beyond the grid to manufacturing, aerospace, defense, intelligence, financial services, et cetera.

Patrick Walravens

So when was it C3 IoT? So we started out with C3 Energy, right?

Thomas Siebel

C3 IoT was a transition. You get into like, I think, in 2016, we moved from focus on utilities to companies at large. And the big buzz word in 2016 in all the conferences as some of you will recall was about IoT. And so I think we were C3 IoT from about 2016 and 2017. But the problem with that was it was confusing to the market because many companies would think because it was the C3 IoT that we made devices. And so you'd have to spend the first 5 minutes of every conversation saying that you weren't in the device business. So when we moved beyond to C3 AI, that was just a slight repositioning, same class of problems. We just -- we didn't have to explain that we had virtually no cost of goods sold.

Patrick Walravens

All right. Great. And then so give us an example...

Thomas Siebel

Virtually no, to be clear, our cost of goods sold is about 20% of revenue in case my friends at Spruce point or one of these guys decided to make a big point of this to the news release to [indiscernible].

Patrick Walravens

So give us an idea of some of the types of customers who invested a lot in C3.

Thomas Siebel

Shell.

Patrick Walravens

And so Shell is great, but...

Thomas Siebel

Shell is a large business...

Patrick Walravens

Okay. So what year did Shell start?

Thomas Siebel

Oh, goodness. I think, Shell -- I would speculate that Shell began probably about 2016. Okay? Today, they have deployed C3 AI across 23 assets, upstream, downstream, midstream, understand an asset for them is like not a valve or a pump. An asset is like Nigeria LNG or Pernis. Pernis would be the largest refinery in Europe. They produce -- they process, I think, 0.5 billion barrels of oil a day. And so Pernis would be the size of, say, 10 aircraft carriers. So they have 23 assets of that scale in production. They're monitoring, I think, 10,500 devices. Now we're getting into pumps, valves, things like this. They have 500,000 valves alone where they have 2 million machine learning models. So this is one of the largest AI deployments on earth.

They have announced in public forum to their investors, they call this initiative C3 -- I'm sorry, Shell AI, and Shell AI consists of C3 AI sitting on top of Azure, then some other products that they use with this like Databricks and Alteryx and Power BI and some others. But the economic benefit that they realized last year from this is EUR 1 billion, and they expect to realize EUR 2 billion in economic benefit this year. So these are -- you get projects like Shell, LyondellBasell, United States Air Force and Now, which is a little largest utility in the free world, these are massive projects.

Patrick Walravens

Yes. And how much do they pay you for their EUR 1 billion in...

Thomas Siebel

Scores of millions of dollars.

Patrick Walravens

Yes. Okay. How's business?

Thomas Siebel

Well, business is good. In Q2, we grew by 41...

Patrick Walravens

You just reported, right?

Thomas Siebel

It was just reported. So in there, we just finished Q3 and just reported on that about a week ago. Q3, I'm not -- my memory serves to be correct, ended in January. Q3, we grew by 42% top line growth. Q1, we grew by 41% top line growth. So I think we're addressing a almost $600 billion market opportunity, total addressable market, we're the largest -- I believe, we're the largest company in the space, and we're growing at about a -- the last 2 quarters, 41%, 42% compound annual growth rate. Thinks we have roughly $1 billion in the bank. Our cash balances, and I think in the last 5 quarters have varied from between $1.09 billion to $1.02 billion. So it all kind of rounds to like $1 billion to me. And we're -- so we're very well capitalized and the business is great.

Patrick Walravens

Yes. What -- so my sense was this last quarter was the best one you've had since going public.

Thomas Siebel

It was the best quarter we've had in history.

Patrick Walravens

Is that a fair assessment? What made it so [indiscernible]?

Thomas Siebel

Well...

Patrick Walravens

Some big deals, right? So what were the things that really moved the needle?

Thomas Siebel

I think we had 3 transactions between $10 million and $50 million. Those were the largest deals. Those were not the largest deals we've done in the history of the company, as you are well aware. We had 3 deals in the $10 million to $50 million range, and then they went down from there to say, $200,000 at the low end. So we had a large diversity of deals. We -- across a wide range of industries, utilities, manufacturing, agribusiness, chemicals, financial services to a diversity across a wide range of industries, good global diversity, and it was a simply outstanding quarter. So I believe that this year that ends in April, the current -- I believe, we're currently projecting that we'll grow at 38% this year, up from 17% growth last year.

Patrick Walravens

Yes. And this thing was growing in the 70s before the pandemic, right?

Thomas Siebel

It was. I think it was...

Patrick Walravens

Explain to me what happened.

Thomas Siebel

Well, we -- I think it was growing at a 68% compounded annual growth rate coming into about January and February of -- the first half of 2020. And understand at this time, we were doing large transactions. All of our transactions back then were very large. These were all tended to be $5 million, $10 million, $15 million, $20 million, $30 million, $40 million transactions with large industrial, chemical companies, utility companies, what have you. And then we get into the first and second quarters, as you will recall, of 2020 for those of you who remember those days, I mean, come on New York closed, London closed, Paris closed, Rome closed, the world closed. And that was something that we got [indiscernible].

So business came almost to a screeching halt, okay, in the first 2 quarters of the calendar year 2020 associated with COVID. And so our growth rate in the last fiscal year, slowed down to 17%. And I think it was -- this is from memory, so this could be wrong, I believe it was 68% the year prior to that.

Patrick Walravens

And then since then, what have we started to see?

Thomas Siebel

Well, business has been accelerating. In Q2, it was...

Patrick Walravens

I guess, five quarters in a row, let me say.

Thomas Siebel

It's been consistently...

Patrick Walravens

Fifth quarter in a row, yes.

Thomas Siebel

It's been accelerating. Two quarters ago, it was 41%, I think. Last quarter, I believe our topline growth was 42%. And I think that business is looking very promising.

Patrick Walravens

So I'm okay with you just closing big deals. Is that not the right way to think about things?

Thomas Siebel

Yes, what would you like me to talk about? We just closed 1 today. We closed -- I think, we issued a release about a [indiscernible] we published with LyondellBasell. LyondellBasell is a large chemical company in Houston. And this is our second or third transaction with them. The overall transaction, okay, was order of $50 million. The revenue associated with it was less than that because it was a extension of a current deal, okay? It was -- they basically renewed early. And so Myer's team, Chief Financial Officer, who is right there, can explain to us as much as we would like to get $30 million of revenue over it, it was less than that, okay? But that was 1 transaction that we did that was quite large. And we're -- and I think we'll be announcing very shortly 2 other transactions that we did last quarter that were quite large that are expansions with existing customers.

Patrick Walravens

Great. My point on that was like during the IPO, there was a lot of discussion, I think, about sort of diversifying the revenue streams and having smaller deals and more deals and...

Thomas Siebel

I think we were...

Patrick Walravens

I'm okay with you just landing big 1 is that -- you can't do that?

Thomas Siebel

Well, I think it was good when we're a private company, when we're focused on big deals because we didn't have to ring any doorbells on Sand Hill Road to finance the business. And the -- that being said, when you're dependent upon deals that large and something moves from 1 quarter to the next, you have lumpiness that public markets don't feel very comfortable with. And so we've been focused for the last 2 years on getting a much greater diversity in our revenue mix. And I wish I had the data before me, but it was really quite diverse last quarter in terms of the number of deals that we closed less than $1 million, $1 million to $10 million and then $10 million to $50 million.

So it was -- but we had 3 in kind of the larger $10 million to $50 million range. Fortunately -- unfortunately, they were not in the $0.5 billion range. If I had done one of the $0.5 billion range, I would have gotten my teeth kicked in by the public markets. But it -- so I don't know whether it's fortunate or unfortunate, but we didn't do any of those. We've done them before.

Patrick Walravens

All right. So the bear case on C3 is that it's not really a platform. It's a lot of services and you're losing deals to Palantir. What would you say?

Thomas Siebel

Well, our services revenue, very -- I mean, it's unlike Palantir, where you guys allow them to conflate, okay, services and licenses into 1 line and call it revenues. So here, we have a services company masquerading as a software company. We disclosed, as companies properly should, I think our services last quarter was a little higher than normal at 18%, okay? So we were -- you know that's correct, right? 18%. Thank you. So it's 80 -- so hard stop, it's 82% licenses. So how can you argue with that? And that was the highest it's ever been in terms of services. So it's impossible to argue that it's a services company. What was the other part? We're going to...

Patrick Walravens

It's not a platform and that you're losing business to Palantir.

Thomas Siebel

It's not a platform. Well, that is -- I mean, it's just not arguable. When I'm selling these platform transactions to Shell, to LyondellBasell, to the United States Air Force, to Baker Hughes and to others for $10 million, $20 million, $50 million, $100 million, $300 million at a time, it's pretty difficult to argue that it's not a platform, but that's what I'm selling. About 50% of our bookings in recent quarters have been applicated from applications and 50% from the platform.

But Shell is probably working on 100 projects using our platform to build their own applications. They put these applications on their marketplace, and they sell them to other oil and gas companies. And Now is probably working on 100 applications using a -- my platform, it's called the C3 AI Suite. That was the bulk of our business historically, we're selling the platform. And now the mix is about evenly turnkey AI applications. And it varies from quarter-to-quarter. But it's about evenly between applications and platform. I think prospectively, I would expect it to see be tilting more and more towards turnkey applications.

Patrick Walravens

Okay. And then the last one is that you're losing share to Palantir. What would you say to that?

Thomas Siebel

It's just not arguable, [indiscernible] the only place that Palantir plays is in the federal space, and they are pretty effective there. They are a competitor in the federal space, okay? And they -- so we do compete with them in federal, and they have been very effective there, we don't see them much in the private sector.

Patrick Walravens

Okay.What's the opportunity? So you -- I forget when you announced it before Christmas, the $500 million [indiscernible].

Thomas Siebel

$0.5 billion deal, yes, it's a big opportunity.

Patrick Walravens

So explain...

Thomas Siebel

So there were two ATOs, authority to operate, with the federal government. One was sponsored by [indiscernible] RSO, Rapid Sustainment Office, which has to do with our doing AI-based predictive maintenance for aircraft, primarily in the Air Force. So today, we do AI-based. So the idea is -- and that some of these aircraft cost $100 million a copy and some of them, like an F-18, on any given day, 50% of those will not deploy. Pilot goes out at our dock 30, pushes the button, some red light comes on and says you're not flying because some system is failed. We can use AI to look at all the telemetry in real-time and identify device failure before it happens, say, it's propulsion, ocular power unit, flight controls, what have you. And so we can identify that this system is going to fail, maybe 50 flight hours in advance.

And then we use prescriptive maintenance to look at the flight profile for that aircraft and dispatch the personnel and the material so they can fix it on its scheduled flight profile, increasing aircraft availability by, say, 50%, which is a big deal in a week like this. Now the -- so the first aircraft we did there was the E-3 Sentry. That's the AWACS. We brought the entire fleet of AWACS live, 31 of them, in 6 months for the Air Force. Then we did the C-5 Galaxy, and then F-15, F-16, F-18, F-35 Joint Strike Fighter, B-2, B-52, Black Hawk helicopter. We will have 22 platforms in production by May of 2022.

And then in the process of that, they awarded an authority to operate, which is a $100 million award, shows that anybody can buy our product in DoD without an RFP and without a competitive bid for basically predictive maintenance for aircraft. Similarly, we did...

Patrick Walravens

How much of that $100 million has been pulled down?

Thomas Siebel

That's a good question, Pat. I don't know the answer.

Patrick Walravens

Okay.

Thomas Siebel

Okay. A lot of it. I would speculate...

Patrick Walravens

But a lot of it.

Thomas Siebel

No. No, I'd speculate like $20 million.

Patrick Walravens

That was not all, no?

Thomas Siebel

Okay. And again, I'm wrong on this number, okay, so I'm just...

Patrick Walravens

Rought estimate.

Thomas Siebel

So this is the -- but that's my best guess. Then we did some work with Missile Defense Agency. Missile Defense Agency is interested in hypersonics. So they have all the stuff coming at us from space, and hypersonic would made say, say, 5x to 9x the speed of sound, the stuff is like booking, okay? And the question is, they want to be able to predict, this is landing fast when it's moving that fast. And the question is, is this going to land in the Pentagon? Or is it going to land in the middle of the Pacific Ocean? So we did all that work for them very, very successfully. I was just there. Okay. And based upon that, we got an award that was sponsored by the Missile Defense Agency, MDA, that basically allows anybody in the Department of Defense -- this is a $0.5 billion award, okay?

For any purpose within DoD related to AI to purchase our applications or our platform, this is for intel, insider threat, logistics, stochastic optimization, supply chain, readiness, all of those sorts of things that they do with AI in the military. But any department in DoD can purchase our product without an RFP and without a competitive bid up to $0.5 billion. So this is a big deal.

The third thing that I will address that is, I think, a secular change in the way the government procures software as is part of the Defense Authorization Act that the President signed into law, a [indiscernible] Act for 2022 that the President signed into law on December 27th, section 227, which is 3 pages long, directs the secretary.

Today, they have 600 projects going on in DoD that are all custom built projects with systems and integrators, and they're all kind of amass -- equally amass. And this orders the Secretary of Defense to take all actions necessary and sufficient to assure that commercial off-the-shelf platforms are given primary consideration for every DoD AI project, and he has given 120 days to report to the Senate Armed Services Committee and the House Armed Services Committee and how he's achieved that objective.

That being said, we're not a defense contractor. I see that U.S. defense and intel will probably be 15% of our business in the long run.

Patrick Walravens

Okay. All right. So 25 minutes is definitely not enough time.

Thomas Siebel

So bottom line, we have a $600 billion market, we have $1 billion cash in the bank, we're doing about $0.25 billion, yes, $250 million a year in revenue. And we're -- our enterprise value, I think, is trading at about 4x revenue. And so it looks to me like this would be a valued stock. I mean, come on.

Patrick Walravens

Usually, I have to pull that out, but no...

Thomas Siebel

This is a valued stock.

Patrick Walravens

All right. We have two minutes. Any questions from our audience?

Thomas Siebel

C.J., you got nothing?

Patrick Walravens

What do you do for banks? We are now partisans at banks. What do you do for banks?

Thomas Siebel

I'm sorry.

Patrick Walravens

What do you do for banks? We are now partisans...

Thomas Siebel

Banks is a big business for us. So things like cash management, Bank of America. Anti-money laundering for a standard chartered bank, where we have applications...

Patrick Walravens

What's your single best -- your single best, you think use case -- if you're going to start with something in the bank where you're going to get the quickest return...

Thomas Siebel

Anti-money laundering. A big bank...

Patrick Walravens

So what would you [indiscernible]?

Thomas Siebel

A bank the size of Citicorp will spend $1 billion a year on AML. And the problem of getting it wrong is, CEO -- now aside from the fine, CEO has to rewrite his resume, okay? And so see like UBS for details. Now the -- so a large bank will spend $1 billion to $1.5 billion a year trying to comply with AML, and we reduced the cost of compliance by, say, order of 85%, okay, and increase the probability of getting the right answer of them being compliant with the regulatory regimes on that by a factor of 10. So I think anti-money-laundering, fraud detection, those are the big hits in banking.

Patrick Walravens

Great. So I need to introduce you to right after this. Tom, thank you so much for coming. It's nice to be able to meet in person again, isn't it 2 years later?

Thomas Siebel

Great to see you. I really appreciate this.

Patrick Walravens

We are really happy for having you.

Thomas Siebel

Thank you for being here, everybody.

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