C3.AI, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedApril 30, 2020 included in the final prospectus for our initial public offering ("IPO") dated as ofDecember 8, 2020 and filed with theSecurities and Exchange Commission ("SEC"), pursuant to Rule 424(b)(4) onDecember 9, 2020 (the "Final Prospectus"). 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 About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q 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 toC3.ai, Inc. and its subsidiaries. Overview C3 AI is an Enterprise AI software company. We provide software-as-a-service, or SaaS, applications that enable the rapid deployment of enterprise-scale AI applications of extraordinary scale and complexity that offer significant social and economic benefit. The C3 AI Suite, C3 AI Applications, and our patented model-driven architecture enable organizations to simplify and accelerate Enterprise AI application development, deployment, and administration. Our software C3 AI Suite enables developers to rapidly build applications by using conceptual models of all the elements required by an Enterprise AI application instead of having to write complex, lengthy, structured programming code to define, control, and integrate the many requisite data and microservices components to work together. We significantly reduce the effort and complexity of the AI software engineering problem. We have built an integrated family of software applications that enables our customers to rapidly develop, deploy, and operate large-scale Enterprise AI applications across any infrastructure. Customers can deploy C3 AI solutions on all major public cloud infrastructures, private cloud or hybrid environments, or directly on their servers and processors. We provide three primary families of software solutions: •The C3 AI Suite, our core technology, is a comprehensive application development and runtime environment that is designed to allow our customers to rapidly design, develop, and deploy Enterprise AI applications of any type. •C3 AI Applications, built using the C3 AI Suite, include a large and growing family of industry-specific and application-specific turnkey AI solutions, ready for installation and deployment. •C3 AI Ex Machina, our no-code solution that provides secure, easy access to analysis-ready data, and enables business analysts without data science training to rapidly perform data science tasks such as building, configuring, and training AI models. Ex Machina was launched inFebruary 2017 as a C3 AI Application and as a stand-alone product inNovember 2020 . Initial Public Offering and Concurrent Private Placements InDecember 2020 , we completed our initial public offering ("IPO"), in which we issued and sold 17,825,000 shares of our Class A common stock at$42.00 per share, which included 2,325,000 shares issued upon the exercise of the underwriters' over-allotment option to purchase additional shares. We received net proceeds of$694.6 million after deducting underwriting discounts and other offering expenses. We also completed a concurrent private placement immediately subsequent to the closing of the IPO, in which we issued and sold 2,380,952 and 1,190,476 shares of the Company's Class A common stock at$42.00 per share toSpring Creek Capital LLC , an affiliate ofKoch Industries, Inc. , and Microsoft Corporation, respectively (the "Concurrent Private Placement"). We 29 -------------------------------------------------------------------------------- Table of Content s received aggregate proceeds of$150.0 million and did not pay underwriting discounts with respect to the shares of Class A common stock that were sold in these private placements. How We Generate Revenue We generate revenue primarily from the sale of subscriptions to our software, which accounted for 87%, 84%, 87%, and 86% of our total revenue in the three months endedJanuary 31, 2021 and 2020 and for the nine months endedJanuary 31, 2021 and 2020, 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. Our subscription contracts are generally non-cancelable and non-refundable. We commonly enter into enterprise-wide agreements with Entities that include multiple operating units or divisions. We define an Entity as each such buying entity that has an enterprise agreement to deploy or establish the governing terms should we contract to deploy the C3 AI Suite or one or more C3 AI Applications to different customers within the Entity. We often provide our software to distinct departments, business units, or groups within an Entity, and use customer to include each distinct department, unit, or group within an Entity. We generally invoice our customers annually in advance and primarily recognize revenue over the contract term on a ratable basis. In addition, customers pay a usage-based runtime fees for production use of the C3 AI Suite and C3 AI Applications, which is either paid in advance for specified levels of capacity or paid in arrears based on actual usage. Customers who choose to run the software in our cloud environment pay the hosting costs charged by our cloud providers. Our subscriptions also include our maintenance and support services. Additionally, we offer premium stand-ready support services through ourC3 Center of Excellence , or COE, which are included as part of the subscription when purchased. We also generate revenue from professional services, which consist primarily of fees associated with our implementation services for new customer deployments of C3 AI Applications. Professional services revenue represented 13%, 16%, 13%, and 14% of total revenue for the three months endedJanuary 31, 2021 and 2020 and the nine months endedJanuary 31, 2021 and 2020, 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 Suite 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 for our professional services over the period of delivery as services are performed. We are growing rapidly, with total revenue of$49.1 million and$130.9 million for the three and nine months endedJanuary 31, 2021 , respectively, representing a 19% and 14% increase compared to the same period last year, respectively. Our subscription revenue grew to$42.7 million and$114.2 million for the three and nine months endedJanuary 31, 2021 , respectively, representing a 23% and 16% increase compared to the same period last year, respectively. Go-to-Market Strategy Our go-to-market strategy is focused on large organizations recognized as leaders in their respective industries or public sectors, and who 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 worldwide. These lighthouse customers serve as proof points for other potential customers in their particular industries. Today, 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 customers will decrease as a percentage of total revenue. As our C3 AI Suite is industry agnostic, we also expect to expand into other industries as we grow. Acquiring new customers and further penetrating our existing customers is the intent of our go-to-market effort and drivers of 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 typically identify incremental opportunities within their operations and expand their use of our products by either purchasing additional C3 AI Applications or by subscribing to the C3 AI Suite to develop their own AI applications. 30 -------------------------------------------------------------------------------- Table of Content s 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 a motivated and highly educated team of C3 AI personnel and partners. We go-to-market primarily leveraging our direct sales force. We also complement and supplement our sales force with a number of go-to-market partners. •Strategic Vertical Industry Partners. We have developed an alliance program to partner with recognized leaders in their respective industries, such asBaker Hughes , Fidelity National Information Services, or FIS, and Raytheon, to develop, market, and sell solutions that are natively built on or tightly integrated with the C3 AI Suite. •Consulting andServices Partners . As part of a global industry alliance, we partner withIBM Global Services , as well as a number of systems integrators specializing in Enterprise AI implementations. •Hyperscale Cloud and Infrastructure. We have formed global strategic go-to-market alliances with hyperscale cloud providers including Amazon, FIS, Google, and Microsoft. 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 supportC3.ai product implementations and complement C3 AI's products. Key Business Metric We monitor remaining performance obligations, or RPO, as a key metric to help us evaluate the health of our business, identify trends affecting our growth, formulate goals and objectives, and make strategic decisions. RPO is not necessarily indicative of future revenue growth because it does not account for the timing of customers' consumption or their consumption of more than their contracted capacity. 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 Quarterly Report on Form 10-Q. RPO was$247.5 million and$239.7 million as ofJanuary 31, 2021 andApril 30, 2020 , respectively. We may experience variations in our RPO from period to period, but RPO has generally increased over the long term as a result of contracts with new customers and increasing the value of contracts with existing customers. These increases are partially offset by revenue recognized on existing contracts during the period. RPO represents the amount of our contracted future revenue that has not yet been recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Our RPO as ofJanuary 31, 2021 is comprised of$62.4 million related to deferred revenue and$185.2 million of commitments from non-cancellable contracts. Our RPO as ofApril 30, 2020 is comprised of$60.3 million related to deferred revenue and$179.4 million of commitments from non-cancellable contracts. RPO excludes amounts related to performance obligations and usage-based royalties that are billed and recognized as they are delivered. This primarily consists of monthly usage-based runtime and hosting charges in the duration of some revenue contracts. RPO also excludes any future resale commitments by our strategic partners until those end customer contracts are signed. Cancellable backlog, not included in RPO, was$48.4 million and$7.2 million as ofJanuary 31, 2021 andApril 30, 2020 , respectively. The duration of our contracts varies by customer. The weighted average contract duration for commercial Entities in the year endedApril 30, 2020 was 35 months, while the weighted average contract duration for federal agency Entities was 11 months. Our total RPO as ofJanuary 31, 2021 andApril 30, 2020 was comprised of approximately 98% and 96% non-federal contracts and 2% and 4% federal contracts, respectively. 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 Quarterly Report on Form 10-Q titled "Risk Factors," that we must successfully address to sustain our growth, improve our results of operations, and establish and maintain profitability. 31 -------------------------------------------------------------------------------- Table of Content s 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 Suite and C3 AI Applications 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 Suite and C3 AI Applications to our customers' business and, as an outcome, increases their runtime usage. We have built a 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, accessing 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 Suite. 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 also 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, 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. Technology Innovation We intend to continue to invest in our research and development capabilities to extend our C3 AI Suite and C3 AI Applications, 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 Applications. By investing to make it easier to develop applications on our C3 AI Suite, our customers have become active developers. With our support, they have developed and deployed almost two-thirds of the applications currently in production and running on the C3 AI Suite. Research and development spending has fueled enhancements to our existing C3 AI Suite. 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 Suite and C3 AI Applications. 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 new market for AI enabled digital transformation. As a result, we intend to continue to invest in brand awareness, market education, and thought leadership. We engage the market through digital, radio, outdoor, airport, and print advertising; virtual and physical events, including our C3 AI Transform annual customer conference; and C3 AI Live, a bi-weekly series of livestreamed events featuring C3 AI customers, C3 AI partners, and C3 AI experts in AI, machine learning, and data science. We anticipate continuing to make significant investments in marketing over the next several 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. Any investments we make in our marketing program will occur in advance of experiencing benefits from such investments. 32 -------------------------------------------------------------------------------- Table of Content s 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 includeBaker Hughes , FIS, IBM, and Microsoft. 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 Suite 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 Suite 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 trials of our applications as part of our customer acquisition strategy. InJune 2019 , we entered into a three-year arrangement withBaker 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 Suite for their own operations (which we refer to below as direct subscription fees), the exclusive right forBaker 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-cancelable, total revenue commitments to us of$50.0 million ,$100.0 million , and$170.0 million , for each of the fiscal years endingApril 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 endedApril 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 byBaker Hughes through the reseller arrangement. This arrangement was revised inJune 2020 to extend the term by an additional two years, for a total of five years, with an expiration date in the fiscal year endingApril 30, 2024 and to modify the annual amount ofBaker Hughes' commitments to$53.3 million ,$75.0 million ,$125.0 million , and$150.0 million , over the fiscal years endingApril 30, 2021 , 2022, 2023, and 2024, respectively.Baker Hughes revised revenue commitments are inclusive of their revised direct subscription fees of$27.2 million per year. Any shortfalls against the total annual revenue commitment made to us byBaker Hughes will be assessed and recorded by us at the end of the fourth quarter of each fiscal year. We are obligated to payBaker Hughes a sales commission on subscriptions to our products and services offerings it resells in excess of these minimum revenue commitments. Our RPO related toBaker Hughes , which includes both direct subscriptions and reseller arrangements, is comprised of$10.3 million related to deferred revenue and$93.7 million of commitments from non-cancellable contracts as ofJanuary 31, 2021 and$2.4 million related to deferred revenue and$84.8 million from non-cancellable contracts as ofApril 30, 2020 . As ofJanuary 31, 2021 andApril 30, 2020 the total remaining amount ofBaker Hughes' minimum revenue commitments not yet contracted under the direct subscription fee or reseller arrangement, and thus subject to the shortfall annual provisions, under the entire arrangement was$241.8 million and$183.8 million , respectively. 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 Suite 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 40%, 19%, 35% and 21% of our total revenue for the three and nine months endedJanuary 31, 2021 and 2020, respectively, from international customers. 33 -------------------------------------------------------------------------------- Table of Content s Impact of COVID-19 The COVID-19 pandemic has caused general business disruption worldwide beginning inJanuary 2020 . The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on future developments that are uncertain. As a result of global business disruption, the COVID-19 pandemic had a significant adverse impact on our conclusion of new and additional business agreements in 2020 and may continue to pose challenges until the effects of the pandemic abate. As a result of the COVID-19 pandemic, we temporarily closed our headquarters and other offices, required our employees and contractors to work remotely, and implemented travel restrictions, all of which represented a significant change in how we operate our business. The operations of our partners and customers have likewise been altered. While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the extent and effectiveness of containment actions, it has already had an adverse effect on the global economy and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown. In particular, the conditions caused by this pandemic are likely to affect the rate of global IT spending and could adversely affect demand for our C3 AI Suite, lengthen our sales cycles, reduce the value or duration of subscriptions, reduce the level of subscription renewals, negatively impact collections of accounts receivable, reduce expected spending from new customers, cause some of our paying customers to go out of business, limit the ability of our direct sales force to travel to customers and potential customers, and affect contraction or attrition rates of our paying customers, all of which could adversely affect our business, results of operations, and financial condition during fiscal 2021 and potentially future periods. Components of Results of Operations Revenue Subscription Revenue. Our subscription revenue is primarily comprised of term licenses and our software-as-a-service offerings. Sales of our term licenses grant our customers the right to use our software, either on their own cloud instance or their internal hardware infrastructure, over the contractual term. Sales of our software-as-a-service offerings include a right to use our software over the contractual term. Our subscription contracts are generally non-cancelable and non-refundable, with the majority of contracts with customers averaging approximately three years in duration. We generally invoice annually in advance and recognize revenue over the contract term on a ratable basis. In addition, customers pay a usage-based runtime fee for the C3 AI Suite and C3 AI Applications, which is either paid in advance for specified levels of capacity and/or paid in arrears based on actual usage. Our subscriptions also include 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. We also offer a premium stand-ready service through our COE, and we offer a hosting services. When these services are purchased, they are generally included as part of the software subscription fee. We currently have a small number of public utility 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 and training. 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 Suite 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. We recognize revenue for our professional services over the period of delivery as services are performed. 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 34 -------------------------------------------------------------------------------- Table of Content s COE staff, hosting of our C3 AI Suite, 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 as well as the geographies into which we sell, in any given period. Our gross margins are lower when we provide hosting services to our customers as compared to when a customer hosts our software in their self-managed private or public cloud environments. Our subscription gross margin may experience variability over time as we continue to invest in personnel and continue to scale our C3 AI Suite. 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. Sales and Marketing. Sales and marketing expenses consist of expenditures related to advertising, media, marketing, promotional events, brand awareness activities, business development, 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 to decline over time. Research and Development. Our research and development efforts are aimed at continuing to develop and refine our C3 AI Suite and C3 AI Applications, including adding new features and modules, increasing functionality and speed, and enhancing the usability of our C3 AI Suite and C3 AI Applications. 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 to 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. As a result of the closing of our IPO, we have incurred and expect to continue to incur additional expenses as a result of operating as 35 -------------------------------------------------------------------------------- Table of Content s 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 theSEC , 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 scale of our business infrastructure. Interest Income Interest income consists primarily of interest income earned on our cash, cash equivalents, and available-for-sale investments. It also includes amortization of premiums and accretion of discount related to our available-for-sale investments. Interest income varies each reporting period based on our average balance of cash, cash equivalents, and available-for-sale investments 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 investments, and realized gains and losses on sales of securities. Our foreign currency exchange gains and losses relate to transactions and asset and liability balances denominated in currencies other than theU.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. 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. 36 -------------------------------------------------------------------------------- Table of Content s Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Three Months Ended January 31, Nine Months Ended January 31, 2021 2020 2021 2020 (in thousands) Revenue Subscription$ 42,699 $ 34,629 $ 114,248 $ 98,627 Professional services 6,410 6,654 16,685 16,421 Total revenue 49,109 41,283 130,933 115,048 Cost of revenue Subscription(1) 7,023 8,862 22,694 23,493 Professional services(1) 5,203 2,069 10,113 5,785 Total cost of revenue 12,226 10,931 32,807 29,278 Gross profit 36,883 30,352 98,126 85,770 Operating expenses Sales and marketing(1) 28,450 23,162 64,898 60,385 Research and development(1) 18,748 12,331 48,145 47,122 General and administrative(1) 8,184 5,291 21,433 19,541 Total operating expenses 55,382 40,784 134,476 127,048 Loss from operations (18,499) (10,432) (36,350) (41,278) Interest income 129 1,136 997 3,115 Other (expense) income, net 1,721 (402) 4,163 (498) Net loss before provision for income taxes (16,649) (9,698) (31,190) (38,661) Provision for income taxes 203 98 456 283 Net loss$ (16,852) $ (9,796) $ (31,646) $ (38,944) __________________
(1)Includes stock-based compensation expense as follows:
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 2021 2020
(in thousands)
Cost of subscription $ 214 $ 104 $ 557 $ 246
Cost of professional services 164 30 301 93
Sales and marketing 2,790 613 5,835 1,894
Research and development 846 308 1,952 910
General and administrative 2,575 1,006 5,625 2,281
Total stock-based compensation expense $ 6,589
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The following table sets forth our consolidated statements of operations data
expressed as a percentage of revenue for the periods indicated:
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 2021 2020
Revenue
Subscription 87 % 84 % 87 % 86 %
Professional services 13 % 16 % 13 % 14 %
Total revenue 100 % 100 % 100 % 100 %
Cost of revenue
Subscription 14 % 21 % 17 % 20 %
Professional services 11 % 5 % 8 % 5 %
Total cost of revenue 25 % 26 % 25 % 25 %
Gross profit 75 % 74 % 75 % 75 %
Operating expenses
Sales and marketing 58 % 56 % 50 % 52 %
Research and development 38 % 30 % 37 % 41 %
General and administrative 17 % 13 % 16 % 17 %
Total operating expenses 113 % 99 % 103 % 110 %
Loss from operations (38) % (25) % (28) % (35) %
Interest income - % 3 % 1 % 3 %
Other (expense) income, net 4 % (1) % 3 % - %
Net loss before provision for income taxes (34) % (23) % (24) % (32) %
Provision for income taxes - % - % - % - %
Net loss (34) % (23) % (24) % (32) %
Comparison of the Three and Nine Months Ended January 31, 2021 and 2020
Revenue
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Revenue
Subscription $ 42,699 $ 34,629 $ 8,070 23 % $ 114,248 $ 98,627 $ 15,621 16 %
Professional services 6,410 6,654 (244) (4) % 16,685 16,421 264 2 %
Total revenue $ 49,109 $ 41,283 $ 7,826 $ 130,933 $ 115,048 $ 15,885
Subscription revenue accounted for 87% and 84% of our total revenue for the
three months ended January 31, 2021 and 2020, respectively. Subscription revenue
increased by $8.1 million , or 23%, for the three months ended January 31, 2021 ,
compared to the same period last year, predominantly driven by revenue growth of
$5.9 million from new or expanding C3 AI Suite customers and an increase in the
volume of trial contracts of $3.7 million . The increase in subscription revenue
was partially offset by a decrease in revenue of $1.9 million related to the
Baker Hughes contract modification.
Subscription revenue accounted for 87% and 86% of our total revenue for the nine
months ended January 31, 2021 and 2020, respectively. Subscription revenue
increased by $15.6 million , or 16%, for the nine months ended January 31, 2021 ,
compared to the same period last year, predominantly driven by revenue growth of
$17.7 million from new or expanding C3 AI
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Suite and application customers and an increase in the volume of trial contracts
of $7.3 million , partially offset by a decrease in revenue of $9.0 million
related to the Baker Hughes contract modification.
Professional services revenue decreased by $0.2 million , or 4%, for the three
months ended January 31, 2021 , compared to the same period last year,
predominantly due to the timing and mix of implementation services projects for
new C3 AI application customers.
Professional services revenue increased by $0.3 million , or 2%, for the nine
months ended January 31, 2021 , compared to the same period last year,
predominantly due to the timing and mix of implementation services projects for
new C3 AI application customers.
Cost of Revenue
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Cost of revenue
Subscription $ 7,023 $ 8,862 $ (1,839) (21) % $ 22,694 $ 23,493 $ (799) (3) %
Professional services 5,203 2,069 3,134 151 % 10,113 5,785 4,328 75 %
Total cost of revenue $ 12,226 $ 10,931 $ 1,295 $ 32,807 $ 29,278 $ 3,529
The decrease in cost of subscription revenue for the three months ended January
31, 2021 compared to the same period last year was primarily due to a decrease
in personnel- and travel related costs of $1.1 million , and lower cloud service
providers costs of $0.3 million .
The decrease in cost of subscription revenue for the nine months ended January
31, 2021 compared to the same period last year was primarily due to decrease in
lower cloud service providers costs of $0.9 million , partially offset by higher
personnel- and travel related costs of $0.3 million .
The increase in cost of professional services revenue for the three months ended
January 31, 2021 compared to the same period last year was primarily due to
higher personnel-related costs of $1.9 million and higher third-party
outsourcing costs of $0.7 million .
The increase in cost of professional services revenue for the nine months ended
January 31, 2021 compared to the same period last year was primarily due to
higher personnel-related costs of $2.7 million and higher third-party
outsourcing costs of $1.0 million .
Gross Profit and Gross Margin
Three Months Ended January Nine Months Ended January
31, 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Gross profit $ 36,883 $ 30,352 $ 6,531 22 % $ 98,126 $ 85,770 $ 12,356 14 %
Gross margin
Subscription 84 % 74 % 80 % 76 %
Professional services 19 % 69 % 39 % 65 %
Total gross margin 75 % 74 % 75 % 75 %
The increase in gross profit was primarily driven by subscription margin
improvements, partially offset by declines in profession services margin due to
investments in personnel to support current and future revenue growth. Overall,
total gross margins increased for the three months ended January 31, 2021
compared to the same period last year, and were flat for the nine months ended
January 31, 2021 compared to the same period last year.
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Operating Expenses
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Operating expenses
Sales and marketing $ 28,450 $ 23,162 $ 5,288 23 % $ 64,898 $ 60,385 $ 4,513 7 %
Research and development 18,748 12,331 6,417 52 % 48,145 47,122 1,023 2 %
General and administrative 8,184 5,291 2,893 55 % 21,433 19,541 1,892 10 %
Total operating expenses $ 55,382 $ 40,784 $ 14,598 $ 134,476 $ 127,048 $ 7,428
Sales and Marketing. The increase in sales and marketing expense for the three
months ended January 31, 2021 compared to the same period last year was
primarily due to higher personnel-related costs as a result of headcount growth
of $3.5 million , and higher advertising spend of $2.3 million .
The increase in sales and marketing expense for the nine months ended January
31, 2021 compared to the same period last year was primarily due to higher
personnel-related costs as a result of headcount growth of $11.2 million , higher
advertising spend of $2.1 million , and professional services costs of $0.6
million , partially offset by lower compensation expense of $8.2 million as a
result of the 2019 tender offer and lower travel-related costs of $1.8 million .
Research and Development. The increase in research and development expense for
the three months ended January 31, 2021 compared to the same period last year
was primarily due higher personnel-related costs as a result of headcount growth
of $3.1 million , higher cloud computing costs of $1.4 million , and an increase
in professional services costs of $1.5 million .
The increase in research and development expense for the nine months ended
January 31, 2021 compared to the same period last year was primarily due to
higher personnel-related costs as a result of headcount growth of $6.7 million ,
higher cloud computing costs of $2.6 million , an increase in professional
services costs of $1.4 million and a $1.2 million cash contribution to C3.ai
Digital Transformation Institute partially offset by lower compensation expense
of $11.7 million as a result of the 2019 tender offer.
General and Administrative. The increase in general and administrative expense
for the three months ended January 31, 2021 compared to the same period last
year was primarily due to an increase in corporate insurance costs of $1.1
million , an increase in personnel-related costs of $1.0 million , and higher
professional services costs of $0.9 million .
The increase in general and administrative expense for the nine months ended
January 31, 2021 compared to the same period last year was primarily due to an
increase in higher personnel-related costs of $2.2 million and higher
professional services of $0.8 million , partially offset by lower compensation
expense of $1.8 million as a result of the 2019 tender offer and lower
recruiting fees of $0.8 million .
Interest Income
Three Months Ended January 31, Nine Months Ended January 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Interest income $ 129 $ 1,136 $ (1,007) (89) % $ 997 $ 3,115 $ (2,118) (68) %
The decrease in interest income for the three months ended January 31, 2021
compared to the same period last year was primarily due to investments that
yielded lower returns such as money market funds and government securities. The
decrease in interest income for the nine months ended January 31, 2021 compared
to the same period last year was primarily due to investments that yielded lower
returns such as money market funds and government securities.
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Other (Expense) Income, Net
Three Months Ended January Nine Months Ended January
31, 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Other (expense)
income, net $ 1,721 $ (402) $ 2,123 (528) % $ 4,163 $ (498) $ 4,661 (936) %
The increase in other (expense) income, net for the three months ended January
31, 2021 compared to the same period last year was due to foreign currency gains
on the remeasurement of Euro-denominated cash and accounts receivable balances.
The increase in other (expense) income, net for the nine months ended January
31, 2021 compared to the same period last year was due to foreign currency gains
on the remeasurement of Euro-denominated cash and accounts receivable balances.
Provision for Income Taxes
Three Months Ended January Nine Months Ended January
31, 31,
2021 2020 $ Change % Change 2021 2020 $ Change % Change
(in thousands) (in thousands)
Provision for income
taxes $ 203 $ 98 $ 105 107 % $ 456 $ 283 $ 173 61 %
The increase in provision 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 provided by (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 provided by (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 provided by (used in) operating activities for the
periods presented.
Nine Months Ended January 31,
2021 2020
Net cash used in operating activities $ (5,828) $ (27,107)
Less:
Purchases of property and equipment (1,166) (1,629)
Capitalized software development costs - (581)
Free cash flow $ (6,994) $ (29,317)
Net cash provided by (used in) investing activities $ 48,269 $ (140,652)
Net cash provided by financing activities $
884,977
Liquidity and Capital Resources Since inception, we have financed operations primarily through sales generated from our customers and sales of equity securities. As ofJanuary 31, 2021 andApril 30, 2020 , we had$960.1 million and$33.1 million of cash and cash equivalents and$162.9 million and$211.9 million of short-term investments, respectively, which were held for working capital purposes. InDecember 2020 , we completed our IPO which resulted in aggregate net proceeds of$694.6 million , after underwriting discounts and other offering expenses. We also received aggregate proceeds of$150.0 million related to our Concurrent Private 41 -------------------------------------------------------------------------------- Table of Content s Placement and did not pay any underwriting discounts or commissions with respect to the shares that were sold in these private placements. Our short-term investments generally consist of high-grade commercial paper, corporate bonds, andU.S. government agency securities. We have generated operating losses from our operations as reflected in our accumulated deficit of$325.3 million as ofJanuary 31, 2021 and negative cash flows from operations. We expect to continue to incur operating losses and generate negative cash flows from operations for the foreseeable future 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. We believe that existing cash and cash equivalents and short-term investments will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. 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 Suite enhancements, and the continuing market adoption of our C3 AI Suite and C3 AI Applications. 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. Historical Cash Flows The following table summarizes our cash flows for the periods presented:
Nine Months Ended
2021 2020
(in thousands)
Cash used in operating activities $ (5,828) $ (27,107)
Cash provided by (used in) investing activities 48,269 (140,652)
Cash provided by financing activities 884,977 119,495
Net increase (decrease) in cash, cash equivalents, and restricted cash $
927,418
Operating Activities. Net cash used in operating activities of$5.8 million for the nine months endedJanuary 31, 2021 was due to our net loss of$31.6 million in addition to non-cash charges for stock-based compensation of$14.3 million , depreciation and amortization of$3.2 million , and non-cash operating lease cost of$2.5 million . The$6.0 million cash inflow related to changes in operating assets and liabilities was primarily attributable to an increase to deferred revenue of$2.0 million inclusive of an increase in related party balances of$7.9 million , an increase to accrued compensation and employee benefits of$4.3 million , an increase in other liabilities of$1.2 million and an increase in accounts payable of$7.5 million . This was partially offset by cash outflows related to a decrease in prepaid expenses, other current assets and other assets of$6.9 million , a decrease in accounts receivable of$0.6 million inclusive of a decrease in related party balances of$0.8 million and a decrease in lease liabilities of$2.6 million . Net cash used in operating activities of$27.1 million for the nine months endedJanuary 31, 2020 was due to our net loss of$38.9 million in addition to non-cash charges for stock-based compensation of$5.4 million , depreciation and amortization of$0.6 million , and non-cash operating lease cost of$2.3 million . The$3.9 million cash inflow related to changes in operating assets and liabilities was primarily attributable to an increase in accounts receivable of$33.7 million inclusive of an increase in related party balances of$19.8 million and an increase to accrued compensation and employee benefits of$1.1 million . This was partially offset by cash outflows related to an increase to deferred revenue of$20.3 million inclusive of a decrease in related party balances of$8.6 million , a decrease in prepaid expenses, other current assets and other assets of$6.9 million , a 42 -------------------------------------------------------------------------------- Table of Content s decrease in lease liabilities of$2.3 million , a decrease in other liabilities of$0.4 million and a decrease in accounts payable of$0.9 million . Investing Activities. Net cash provided by investing activities of$48.3 million for the nine months endedJanuary 31, 2021 was primarily attributable to the maturity and sale of short-term investments of$281.0 million , partially offset by purchases of investments of$232.3 million and capital expenditures of$1.2 million . Net cash used in investing activities of$140.7 million for the nine months endedJanuary 31, 2020 was primarily attributable to purchases of investments of$197.1 million and capital expenditures of$2.2 million , partially offset by the maturity and sale of short-term investments of$58.6 million . Financing Activities. Net cash provided by financing activities of$884.9 million during the nine months endedJanuary 31, 2021 was primarily due to$851.9 million of net proceeds from the initial public offering and private placements,$26.0 million of proceeds from the repayment of the full recourse promissory note due from our CEO in connection with the Series F preferred stock financing and$13.8 million of proceeds from the exercise of stock options for Class A common stock, partially offset by the payment of deferred offering costs of$6.7 million . Net cash provided by financing activities of$119.5 million during the nine months endedJanuary 31, 2020 was primarily due to$25.3 million of proceeds from the issuance of Series G preferred stock,$49.8 million of proceeds from the issuance of Series H,$44.0 million in proceeds from the issuance of common stock, and$3.8 million in proceeds from the exercise of stock options for Class A common stock. This was partially offset by$3.5 million used to repurchase common stock and stock options related to the tender offer. Contractual Obligations and Commitments Our contractual obligations and commitments primarily consist of operating lease commitments for our facilities and non-cancelable purchase commitments related to third-party cloud hosting services. For additional information, refer to Note 6 Commitments and Contingencies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year endedApril 30, 2020 . See our Final Prospectus for additional information regarding our contractual obligations. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of condensed 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. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates discussed in the Final Prospectus. Recently Adopted Accounting Pronouncements See Note 1 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements. 43 -------------------------------------------------------------------------------- Table of Contents Emerging Growth Company Status InApril 2012 , the JOBS Act was enacted. Section 107 of the JOBS Act provides that an "emerging growth company" may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period under the JOBS Act until the earlier of the date we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. 44
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