C3.ai, Inc. (AI) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary presents mixed signals: strong revenue growth and bookings contrast with operational losses and cash flow deficits. The strategic focus on expanding markets and partnerships provides optimism, but gross margin pressures and economic uncertainties pose risks. The Q&A reveals confidence in future growth but lacks concrete guidance. Given the company's mid-sized market cap, the stock is likely to experience a neutral reaction (-2% to 2%) as positive and negative factors balance each other out.
Key Financial Performance
Revenue Total revenue for the quarter was $75.1 million, a quarter-over-quarter increase of 7%. Subscription revenue for the quarter was $70.2 million, a quarter-over-quarter increase of 16.5% and representing 93% of total revenue.
Bookings Our bookings during the quarter were $86.4 million, an increase of 49% from last quarter.
Non-GAAP Gross Profit Non-GAAP gross profit for the quarter was $40.9 million, and non-GAAP gross margin was 54%. Non-GAAP gross margin for Professional Services was 72%. Margins were moderated due to a high mix of IPDs and investments in expanding support capacity.
Non-GAAP Operating Loss Non-GAAP operating loss for the quarter was $42.2 million.
Non-GAAP Net Loss Non-GAAP net loss for the quarter was $34.8 million and $0.25 per share.
Free Cash Flow Free cash flow for the quarter was negative $46.9 million.
Cash Reserves We closed the quarter with $675 million in cash, cash equivalents and marketable securities.
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Operating Highlights
C3 AI Agentic Process Automation: Launched this quarter, it enables enterprises to encapsulate full business and industrial processes through autonomous AI agents. This innovation allows customers to describe complex workflows in natural language, and the system builds and deploys the resultant AI agent in minutes. It expands the addressable market opportunity to include the robotic process automation market.
Federal Market Expansion: Bookings across Federal, Defense, and Aerospace increased by 89% year-over-year, accounting for 45% of total bookings. New agreements were signed with multiple U.S. government agencies, including the Department of Health and Human Services and the U.S. Intelligence Community.
Private Sector Growth: Major customer wins include AMD, GSK, Signature Aviation, and others. GSK is using the C3 Agentic AI platform enterprise-wide, while Signature Aviation advanced to full production across 20 facilities.
Partner Ecosystem Growth: 89% of bookings in Q2 were closed through the partner ecosystem. The Microsoft partnership alone generated over $130 million in bookings, with 24 joint agreements closed in Q2.
Revenue Growth: Revenue grew 7% sequentially to $75.1 million, with subscription revenue increasing by 16.5% quarter-over-quarter.
Operational Efficiency: Non-GAAP expenses were reduced by $10.7 million quarter-over-quarter through personnel cost reductions, cloud infrastructure cost savings, and improved operational efficiency.
Focus on High-Growth Sectors: Efforts are concentrated on federal, state, and local markets, as well as energy, healthcare, and manufacturing sectors.
Sales Execution and Product Focus: Implemented a detailed execution plan to drive sales with discipline and focus on delivering rapid economic value. Sharpened focus on areas with demonstrable leadership, such as industrial asset performance and supply chain optimization.
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Risk or Challenges
Government Shutdown Impact: The 43-day government shutdown created significant headwinds for the company's Federal business, affecting operations in the Department of War, civilian sectors, and related markets such as shipbuilding, healthcare, manufacturing, and industrials.
Gross Margin Pressure: Gross margins are expected to remain moderated in the near term due to a high mix of Initial Production Deployments (IPDs), which carry greater costs during the initial phase, and investments in expanding support capacity.
Operational Losses: The company reported a non-GAAP operating loss of $42.2 million for the quarter, reflecting ongoing challenges in achieving profitability.
Free Cash Flow Deficit: The company experienced a negative free cash flow of $46.9 million during the quarter, indicating liquidity challenges.
Expense Management Challenges: While the company reduced expenses by $10.7 million quarter-over-quarter, it still faces challenges in balancing cost reductions with strategic investments in sales and customer services.
Economic Uncertainty in Federal Sector: The Federal market, while a growth vector, is subject to economic uncertainties and government mandates, which could impact future operations and revenue.
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Guidance & Outlook
Revenue Guidance for Q3 FY26: $72 million to $80 million
Revenue Guidance for FY26: $289.5 million to $309.5 million
Non-GAAP Loss from Operations for Q3 FY26: $44 million to $52 million
Non-GAAP Loss from Operations for FY26: $180.5 million to $210.5 million
Future Sales and Marketing Expenses: Sequentially higher expenses in Q3 and Q4 due to major marketing events, including World Economic Forum and Transform.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Why did the business fall off so much, and what steps are being taken to bring it back?
A:Stephen Ehikian attributed the business decline to poor sales execution, which was unacceptable and partly due to Tom's health issues. He emphasized that demand for C3 and enterprise AI is accelerating, and the company has a world-class product. He highlighted the need to focus on delivering real value to customers, as seen in the GSK example, and mentioned having a plan and operational rigor in place. He also praised the talent density and customer-focused team.
Q:How confident is the management in getting the business back to growth and profitability?
A:Stephen Ehikian expressed confidence in the opportunity ahead but acknowledged the need for execution. He emphasized that the market and technology are there, and the company has a plan in place to drive the business forward.
Q:What was the $21.9 million during the quarter attributed to?
A:Hitesh Lath confirmed that the $21.9 million was from demo licenses.
Q:Is there any change in the long-term outlook for the Professional Services (ProServ) mix?
A:Hitesh Lath stated that the long-term ProServ mix is expected to remain between 10% to 20%. The lower ProServ mix this quarter was due to lower Prioritized Engineering Services (PES) revenue, which is sold opportunistically to large customers.
Q:What is the view on the public sector's performance and its outlook for the rest of the year?
A:Stephen Ehikian described the Federal business as a durable growth engine for C3, driven by trends such as the push for commercial-off-the-shelf solutions, AI adoption through the AI Action Plan, and reindustrialization efforts like the Maritime Industrial Base. These trends are expected to benefit the company in the long term.
Q:What are the key initiatives to drive better execution and growth?
A:Stephen Ehikian emphasized focusing on the IPD motion, which is the most efficient way to deliver value. This involves rigorous evaluation, setting milestones, and working closely with customers to deliver economic value quickly. He identified bookings and growth in IPD and Production revenue as key metrics to evaluate progress.
Q:How can progress on the company's plan be evaluated externally?
A:Stephen Ehikian stated that bookings and growth in IPD and Production revenue would be the leading indicators to evaluate the company's progress.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance on returning to growth and profitability, using general statements like 'the market is there' and 'we have a plan in place.' Additionally, while they mentioned bookings and IPD growth as metrics, no concrete numerical targets or timelines were provided for these indicators.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI platform
Agentic Process
COTS
Department Health
Department War
Federal
GSK
Health Human
Human Services
IPDs
Naval
Process Automation
Systems
agreement
analyst
attainment
booking
care manufacturing
department
health care
intelligence source
legacy
manager employee
mandate
objective
opportunity partner
plan
platform enterprise
production
shelf solution
shutdown
solution shelf
supply
type
value
win
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Frequently Asked Questions
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