Ladies and gentlemen, thank you for standing by, and welcome to the C3AI Third Quarter Fiscal Year 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would now like to hand the conference over to your speakers today, Paul Phillips, Vice President of Investor Relations at C3AI. Thank you. Please go ahead, sir.
Good afternoon, everybody, and welcome to C3AI's earnings call for the Q3 of fiscal year 2021, which ended January 31, 2021. This is Paul Phillips, Vice President of Investor Relations of C3AI. With me on the call today Thank you, Tom Siegel, Chairman and Chief Executive Officer and David Barter, Chief Financial Officer. After the markets closed today, we issued a press release with details regarding our Q3 results as well as a supplement to our results, both of which can be accessed on the Investor Relations section of our website atir.c3.ai. This call is being webcast and a replay will be available on our IR website following the conclusion of call.
During today's call, we will make statements related to our business that may be considered forward looking under federal securities laws. These statements reflect our views only as of today and should not be considered representative of our views as of any We disclaim any obligation to update any forward looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including our prospectus.
Also during the course of today's call, we will refer to certain non GAAP financial measures. A reconciliation of GAAP to non GAAP measures is included in our press release. Finally, at times in our prepared comments or responses to your questions, we may Discuss metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that we may or may not continue to provide this additional detail in the future. With that, let me turn the call over to Tom for his prepared remarks.
Tom?
Thank you, Paul, and good afternoon, everyone. It's my great pleasure to have the opportunity to spend some time with you this afternoon. So let's talk about the company and talk about the market. Overall, We're really quite pleased with the progress that we continue to make in the market globally. We continue to break ground as the only enterprise AI software pure play.
This is a large and rapidly growing market. We continue to innovate. We continue to expand our market partner ecosystem and the associated increased distribution capacity associated with We continue to demonstrate technology leadership. I believe that we are increasingly well positioned to establish a global market leadership position in enterprise AI software. So let's talk about the financial highlights.
All in all, it was Strong third quarter. Revenue in the 3rd quarter was $49,100,000 $42,700,000 of that was increase of 4% from a year ago. Non GAAP operating expense for the quarter increased to 49,200,000 up 27% from a year ago and non GAAP operating loss for the quarter was $11,900,000 compared to $8,400,000 a year ago. Let's talk about the overall state of the market. When we think about enterprise, ag, Ali and digital transformation, we are focused on an extraordinarily large addressable market that according to analysts It was $174,000,000,000 in 2020, increasing to $271,000,000,000 by 2024.
This is a significant opportunity by any standard and the largest software market opportunity that I have seen in my Digital transformation enabled by Enterprise AI remains at the top of the agenda of virtually every CEO and Board globally. We see increasingly robust interest in demand for enterprise AI solutions and our pipeline continues to grow substantially across all region all industries in all regions. Let me address a few significant a few of the In for a multi $1,000,000,000 ERP software provider. Under the terms of the agreement, In for will be integrating many existing In for applications with the C3AI suite and the C3AI applications to market, sell and deploy AI based solutions to their customers under the In for brand. This will evolve into a broader partnership with In for To market C3AI solutions to In for customers, including C3AI Reliability, C3AI CRM and C3AI ex Machina, a next generation predictive analytics application that empowers anyone to develop, scale and produce Secondly, I want to talk about Johnson Controls in Milwaukee.
Johnson Controls recently Finally, I want to talk about an opportunity at the United States Army, where we expanded our work with U. S. Army Aviation to improve aircraft readiness. In addition, with our partner Raytheon, we recently began work on the U. S.
Army's next generation tactical Ground station that will enable automated processing and analytics of massive amounts of incoming sensor data for improved Situational battlefield awareness. This is very, very high-tech, think Star Wars level technology. This AI based system will provide decision support to commanders based on information coming from into a single unified data image. I want to talk about industry We continue to diversify across industries. We're seeing increasing contributions from life sciences, financial services and the high-tech sectors as well as increasingly healthy growth in international sales.
Hy Tech accounted for 8% of our business in fiscal year 'twenty one year to date compared to less than 1% for the same period a year ago. Life Sciences accounted for 7% of our businesses this year 'twenty one year to date compared to less than 1% for the same period a year ago. Manufacturing sector accounted for 11% of our business in fiscal year 'twenty one to date compared to approximately 1% over the same period a year ago. At the same time, oil and gas accounted for 38% of our business in fiscal year 'twenty one year to date compared to approximately 59% a year ago. Addressing strategic partnerships, core to our market growth strategy is 1, the evolution of our global direct geographic and vertical market sales organizations to include major accounts, Enterprise sales, mid market sales and mass market sales channels and 2, the expansion of our market partner ecosystem in both horizontal and vertical markets.
We realized significant benefits from these efforts in the 3rd quarter with Increased geographical expansion, increased vertical diversification, significant growth in software subscriptions, and importantly, Increased volume and diversity in the average contract in our sales pipeline. By way of example, our average total subscription This is substantial progress. We continue to build and increase our engagement with our partner ecosystem as a key growth strategy, enabling us to significantly expand our market reach and serve customers across industries globally. In the Q3, we established or expanded such partnerships with Microsoft, BiggerHuge, And you can expect to see continued activity, accelerated activity in this area going forward. In the financial services sector, Our industry partner FIS launched FIS AML Compliance Hub powered by C3AI, the first joint product release under a broad alliance between FIS and C3AI.
This solution leverages C3AI's advanced machine learning technology combined with the deep Financial industry domain expertise of FIS to dramatically improve the effectiveness of financial crime detection. C3AI and Microsoft closed our 1st We believe AI will represent a significant and growing part of the $60 plus 1,000,000,000 CRM market globally. In the defense sector, we engaged with our defense industry partner Raytheon to provide technology for the U. S. Army's Intelligent Ground Station initiative.
As I referenced earlier, we formed a comprehensive alliance with In for to integrate Many existing In for applications using the C3AI suite and C3 applications and enabling In for to market these To its customers through all its channels. You can expect that in the coming quarters, we will make increased efforts to expand Our market partner ecosystem across both horizontal and vertical markets as we see this as a key point of leverage for market growth. We focused a lot on strengthening We expanded the company's leadership with the addition of Jim Snabe, formerly co CEO of SAP And Chairman of Siemens, also Chairman of Maersk to the C3AI Board of Directors. I've come to rely on Jim as a trusted advisor As he has been an advisor to the company for some time, he has been advisor to me for some time, okay. As we work to establish C3AI Mike is a leading global enterprise software company.
He brings a unique set of leadership skills and expertise to the company and is a great addition to our world class board. In addition, we continue to expand our global advisory board that has been really, really The Advisory Board now includes Jacques Akerlin, who is Founder and First President of the European Bank For Reconstruction and Development and former Special Adviser to the President of France, Sajid Javid, who is a Member of Parliament and former Home Secretary and former Chancellor of Exchequer in the U. K. Admiral Denning McGinn, Former U. S.
Assistant Secretary of the Navy in the Obama Administration Rick Leggett, Former Deputy Director of the NSA In the Obama administration, Frank Cohen, former President of SAP in Europe and George Matthew, former President and COO of Alteryx. Now those of you who have been Tuned into financial channels or watching the Wall Street Journal or reading the Financial Times or Bloomberg, you don't have noticed that we have been investing, Okay, in branding globally. And we expanded our enterprise AI branding campaign to include Significant cable, TV and radio presence with spots running on virtually all the major business and financial networks in the United States and Europe. We also expand our advertising to include the UK, EMEA and ATAC as well as the United States. We are becoming increasingly known as the enterprise AI market leader.
Leading indicators of brand Equity and brand recognition have been substantially increasing, including PR volume, public relations volume, News sentiment, social media sentiment and Internet search frequency. Let's talk about energy sustainability. Well, the energy and sustainability market is back, okay, and it is on And so we are seeing increased interest for AI enabled solutions in the energy and sustainability market. This market is coming Over the last year alone, the number of companies and governments that are committed to reach net 0, emissions has doubled. No doubt, you've seen the flood of announcements from companies such as Engie, Shell, Baker Hughes, for the new U.
S. Administration targeting a $2,000,000,000,000 investment in climate security. C3AI where we started with our first product offering in 2010, C3 Energy Management, which we have deployed in the production use with many large organizations globally, including ENGIE and the New York Power Authority. Fortune 100 Company has been a customer since 2012. They have set ambitious sustainability goals and use our energy management application to identify and prioritize their energy efficiency and carbon reduction investments globally to meet their climate goals.
Many utilities use C3AI technology and C3 Energy Management, not only to optimize their own energy usage And optimize the green infrastructure, but also to help their customers meet their energy efficiency enabling its large commercial and industrial customers to achieve their energy efficiency and greenhouse gas goals. And with our energy partner, Engie, we're delivering innovative solutions built with C3 Energy Management. Ohio State University, for example, has deployed Engene Smart Institutions built on C3AI technology to reduce and manage its energy use and carbon footprint across its entire 4 85 building campus in Columbus. We're also working with ENGIE on a novel cutting edge solution addressing the very difficult challenges of managing Scope 3 emissions, a problem that requires In the Q3, we significantly expanded our effort, our investment in the C3AI Digital Information Institute issuing a new call for papers to fund innovative research in applying AI and digital transformation to Energy and Climate Security. We're very excited to support this next wave of research by providing enabling Safer, cleaner, lower cost and more reliable energy and to help lead the way to a lower carbon future.
We are extraordinarily well positioned for this new opportunity. Many of you will know that C3AI It was recognized by Glassdoor as the best place to work during the pandemic. We were ranked among the top 25 cloud computing companies with stellar employee satisfaction during the COVID crisis. This ranking is based on employee feedback provided through Glassdoor during the 1st 6 months of the pandemic. I encourage those of you who are interested to take a look at Glassdoor to get a feel for the high levels of employee engagement and enthusiasm As you know, we place An exceptionally strong focus on human capital at C3AI and are aggressively expanding the company.
In the few short months since the company went public in December, we've increased our headcount by approximately 10% to roughly 5 We continue to attract massive interest from the global data science and Data engineering software pool. In the Q3, we received over 17,000 job applicants. We conducted 3,960 interviews with over 1700 candidates and administered almost 700 assessments. Of that, we hired 60 full time employees and we've processed an additional 57 job offers that have been accepted. One of the unique aspects of C3AI is our clear technology and product differentiation, And we continue to protect the company's intellectual property with a combination of trade secret, copyright, trademarks, And a growing family of U.
S. And foreign patents with 13 U. S. And foreign patents having been awarded and 40 U. S.
And foreign Patent applications pending. The U. S. Patent Office recently awarded us a broad and important patent entitled Systems, Methods and Devices for an Enterprise AI Development Platform. This is the most significant and substantial patent we have been awarded to date.
This patent essentially secures the fundamental concepts of applying a model driven architecture for enterprise AI applications and it secures it at C3AI intellectual property. And we are working now to form a technology licensing office at C3 to license some of this IP to companies that elect to attempt to Internally develop their enterprise AI applications. Big picture, We see a robust and growing interest in enterprise AI software and the solutions that we offer. We continue to make significant progress on all fronts and our objective to establish and maintain a global leadership position in Enterprise AI, We continue to aggressively grow the company, diversify our business across industries and geographies and expand our partner ecosystem. We believe We are very well positioned to address this $200,000,000,000 plus addressable market opportunity and we are just getting started.
With that, I I will turn it over to our CFO, David Barter, for further details on our financial results in the Q3. David? Thank you, Tom.
We delivered a strong performance in the 3rd quarter and we're optimistic about the growing demand we're seeing for our software. Revenue in the 3rd quarter was $49,100,000 up 19% from a year ago, reflecting continued Business momentum and increased adoption of Enterprise AI. During the Q3, subscription revenue was $42,700,000 an increase of 23% from a year ago. Professional services revenue was 6 point We also saw an increasing diversification of our revenue mix. Our revenue growth in the quarter was highlighted by contributions from over 6 different industry verticals, including some of our newer verticals such as life sciences and financial services that delivered approximately 24% of our 3rd quarter revenue.
Geographically, EMEA and APAC drove over 30% of our Finally, it's important to note the improving operating efficiency. This quarter, subscription revenue increased 23% year over year, while non GAAP Sales and marketing expense increased 14% year over year. An important aspect of our model is the usage of Market Partners. It is a leveraged selling model that significantly extends our sales reach into each industry vertical. Our partners possess deep domain expertise in in their respective vertical markets, a commitment to enterprise AI and a significant customer base that will benefit from our enterprise AI applications.
This will provide us with Sales leverage over time. It is worth noting that our contract with Baker Hughes, our market partner for oil and gas, includes a very specific It is a 5 year agreement and the total contract value is $450,000,000 Their commitment to C3AI increases over the 5 year term of the agreement. This offers predictable growth in the years ahead. For example, the BAKER JU commitment is $75,000,000 in fiscal year 'twenty two compared to $53,000,000 in fiscal year 'twenty one. Our contractual backlog continues to provide us with healthy revenue visibility.
It is important to note that we use adjusted RPO to measure our backlog. This metric includes our GAAP remaining performance obligations, our contracts with the cancellation clause and the Baker Hughes commitment. At the end of Q3, Adjusted RPO was $538,000,000 up 16% from the prior year. Within The GAAP RPO was $247,500,000 our contracts with a cancellation clause was $48,400,000 and the Baker Hughes commitment was $241,800,000 With the healthy revenue visibility and coverage that comes from an unusually large contractual backlog, we continue to focus on expanding our footprint within existing customers, adding new market partners and adding new in existing and new industry verticals. In discussing our expenses and profitability, I will be referring to non GAAP measures unless otherwise indicated.
A GAAP to non GAAP reconciliation is provided with our earnings press release. This can be found in the IR section of our website and it is on file with the SEC. The difference between our GAAP and non GAAP Financial measures in the quarter was stock based compensation expense. Gross margin in the 3rd quarter was 75.9% compared to 73.8 percent a year ago. This expansion was driven by subscription gross margin.
It increased to 84% compared to 74.7% in the prior year period. Operating expense increased to $49,200,000 up 27% from a year ago. As Tom described, We are making significant investments in R and D in order to bring new products to market that can enhance our growth. C3AI CRM and C3AI ex Machina are 2 such initiatives. We are also investing in our go to market efforts, including the expansion of our direct sales force.
We're also investing in brand awareness, market education and enterprise AI thought leadership. Operating loss for Q3 was $11,900,000 or a margin of 24.3 percent compared to $8,400,000 or a margin of 20.3 percent a year ago. Turning to our balance sheet and cash flows, we ended the 3rd quarter with $1,120,000,000 in cash and cash equivalents. This includes net proceeds of 844,600,000 from our initial public offering in December. Our operating cash outflow for the period was $24,700,000 due primarily to increased investments Sales, marketing and headcount.
CapEx in Q3 was $200,000 This led to free cash outflow of $24,900,000 The timing of our billings and collections can vary. In order to capture a complete picture of our cash flow margin, It's recommended to calculate it on a rolling 4 quarter basis. For the last 4 quarters, our free cash flow margin was a negative 24%. Deferred revenue was $62,300,000 at the end of the quarter. It's important to note that deferred revenue is not a perfect measure for our business due to the quarter to quarter variability in the timing of invoices to our customers and our historical large transaction sizes.
In addition, our billing terms vary. For some contractual arrangements, we are not billing at inception, but instead, we will bill the customer periodically over the duration of the arrangement. So these customers' Revenue commitments do not appear in deferred revenue. As an example, at the end of the third quarter, we booked several deals that will generate $4,100,000 of revenue, but this amount is not in our deferred revenue. Looking to representing approximately 21% year over year growth at the midpoint of the range.
Non GAAP loss from operations is expected to be in the range of $28,000,000 to $27,000,000 For full fiscal year 2021, we expect total revenue to be in the range of $180,900,000 to $181,900,000 representing approximately 16 and year over year growth at the midpoint of the range. Non GAAP loss from operations is expected to be in the range of of $50,100,000 to $49,100,000 Historically, the difference between our GAAP and our non GAAP financial measures has been limited to stock based Beginning with this guidance, for the Q4 and full year fiscal 2021 and in future reporting periods, The difference between GAAP and non GAAP measures will include stock based compensation expense and the employer portion of payroll tax related to stock transactions. In summary, we are pleased with our strong performance in our Q1 as a public company. Our results and outlook reflect growing market demand from enterprises across an increasing range of industries. With continued investment in multiple growth drivers, We are increasingly well positioned to capitalize on a large multibillion dollar market opportunity, generating value for all of our stakeholders.
Thank you for joining today's call. Now I'll turn the call over to the operator for questions. Operator?
Thank you. Please stand by while we compile the Q and A roster. Your first question comes from the line of Brad Sills with BofA Securities. Your line is
open. Great. Hey, thanks guys for taking my question and congratulations on your Q1 as a public company. I wanted to ask about the vertical partner focus here. Obviously, you talked about some leverage that you See here from some of these partnerships.
Could you help us understand for perhaps some of the newer ones like Raytheon, FIS, these are relatively new verticals for the company. What kind of resources are committed from the partner from these partners? How are you going to market together? How are you expecting to get that leverage through these partnerships? Thank you so much.
Hey, Brad, this is Tom. I'll field this one because it's kind of sales Marketing related. Well, as you know, we're going to market across 3 planes. We have horizontal market partners like, say, Microsoft would be the largest, but also IBM and IBM. We're building a geographic marketing organization in North America, Asia Pacific, okay, and in Europe.
And then across all sectors, We have vertical market sales organizations in oil and gas, in utilities, in financial services, in precision And you can expect that each of the goal is that each of these vertical markets We will align with a leverage market partner. So the classic case is Baker Hughes. So we've aligned in oil and gas With Baker Hughes, this is a $24,000,000 roughly, I think, dollars 1,000,000,000 oil services company that gives us access to 12,000 people now selling with us around the world and there's virtually not one of the largest say 20 or 30 oil companies We are not in active sales motion with, whether it's Aramco, ADNOC, Ross, Nev, Gas, And 12,000 salespeople is a lot of sales capacity. If we look at financial services, as you know, we have a couple of We have a very large and successful relationship in banking with Bank of America And with a number of applications there and with Standard Chartered Bank and we've built a large product line that meets the Needs of financial banks, whether it's anti money laundering, cash management, securities lending, Volker rule compliance, inter day liquidity, what have you. And so through our partnership with FIS, which I think does roughly $12,000,000,000 or $13,000,000,000 of Revenue is taking the banking.
These people are now we have access to their, I think, 20,000 banking customers around The world with their entire sales organization. So this is the entire FIS sales organization. As they're related to In for, I don't know how many Sales people in for ads, I'll have to look it up, but it's a ton of sales people. These guys sell 1,000,000,000 of dollars in software And now they're selling our software solutions as core to what they're doing. So we're dealing with By the time you roll in companies like what we're doing with Microsoft and Adobe in CRM,
what we're doing with oil
and gas Baker Hughes, what we're doing in banking with FIS, okay, what we're doing in manufacturing and particularly with We're dealing with literally tens of thousands of people that are selling for us around the world. And if we're able to Successfully execute this strategy in the next 2, 3 years, honestly, I think we can put the lights out on the market before Anybody else gets here. And so this is core to the strategy. I think nobody has ever encountered this before. We believe it's a core competence for us And expect us and specifically people like me and Ed and Hooman, who you know, to We're spending a significant amount of time on this.
And then we brought in a very senior executive by the name of Gene Resnick, who was the Chief Strategy Officer at Accenture, who had up this initiative of coordinating the vertical market partners. So you Additional announcements with these vertical market partners that we think will give us a Increase our competitive advantage in the market.
That's great. Thanks so much, Tom. And then one more if I may, please. The concept of embedding C3's platform into some of these horizontal categories. You mentioned an early win with the Microsoft partnership here for For C3AI enabled CRM, In for as a new partner for ERP.
Can you remind us a little bit on Kind of where you are with those partnerships? I know they're early. How quickly does it take one of these partners to ramp up from an Integration standpoint and then go to market, when do you think you'll see the leverage out of those 2 partnerships in particular?
Well, I think we've been at Baker Hughes now, if I'm not mistaken, 5 quarters. Is this about right, guys? Okay. David, you can correct me.
I think we're up to 7 quarters.
7 quarters, okay. I stand corrected. Okay, thank you. And I think Baker Hughes is And the bigger use is a large global company and they're fully spooled up. I mean, we're building probably Four products together that we're bringing to market.
We have 2 products that we already have in the marketplace. We're fully spooled up, Granted, Inflora is brand new. Granted, FIS is relatively new. And so you can expect us It will take us 1, 2, 3, 4 quarters to get these things really spooled up and get the momentum going. And it's not going to turn on overnight, But we're building a revenue capacity flywheel that I think once you get in, when you start looking at calendar year, In 2022, 'twenty three, I think this is going to be a significant force to be reckoned with.
That's
Your next question comes from the line of Jack Andrews with Needham. Your line is open.
Well, good afternoon. Thanks for taking the questions and congratulations on the results. I wanted to see if you could expand a little bit on The your go to market strategy around the ex Machina product, I believe this is somewhat of a different offering from the solutions that you've historically sold. So how should we just Be thinking about your strategy and is this something that you expect the uptake to be mainly from your existing Based on customers or do you expect Ex Machina to effectively draw in some brand new customers to the C3AI family?
Thank you for asking, Jeff. So Xmaka is a product that we've had in the market for some years and we've been working Where we are now is we are releasing this and we've done all the work with the documentation, the Stack Overflow, the online training, The community basically offer this as a mass market product. So you can think of this as serving the same market need that is currently served by Alteryx, which is basically associated with the democratization Data science. This is allowing people who would normally be doing analytics with pivot tables, okay, on an Excel spreadsheets to be doing Point no code, low code, WYSIWYG, what you see is what you get, point and click, drag and drop, Data science. And what we've released here is kind of a 21st century version of that solution.
And the democratization of data science is something that has to happen. I mean, for when we see the expansion of AI, This is not all going to happen through people hiring 50 PhD level data scientists from MIT at $250,000 a piece. It's just not going to happen. So we're going to have to provide the tools where mere mortals can apply data science to their business to achieve the benefits. And that's what Ex Machina is all about.
And so think about it, I think, Aldrich is a fine company. I'm sure It will continue to be successful, but it has some it serves that said market need. Now Aldrich has some constraints. It'll run on any computer you want as long as it's on premise on a Windows machine. And Ex Machina will run on any computer that supports the browser, so it's entirely cloud native.
Alteryx will use any amount of data you want as long as It doesn't exceed 2 gigabytes. Well, we're doing data science at organizations like Enel, Shell, United Healthcare, Department of Defense, we're dealing with hundreds of petabytes, not a couple of gigabytes. And Alteryx will allow you to Perform data science on basically as many rows as you want as long as it doesn't exceed 10,000. And so think about A 21st century interface on a cloud native WYSIWYG application where the new glitter reactor that's under the surface Chris, that nobody knows is the entire C3AI platform. And so that is a it's a mass market Product, it's available on the market right now.
You can sign up on the web today and get a free trial. I encourage you to do so. And after you do your 30 day free trial, I encourage you to buy it. I think it costs $300 a month or something. And so we'll be looking at that'll be an area where we'll be looking at It's now a tried, tested, proven production product.
And everybody on the call, I encourage you to go find g3ai.c3.ai, click on Ex Machina, sign up for a free trial And send me an email and some of your thoughts on the product either before or after you buy it.
Your next question comes from the line of Michael Turits with KeyBanc. Your line is open.
Hey, guys. Congrats, Of course, on the Q1 out. So I was really pleased to see the Fortune 500 deal in the Microsoft partnership. I was wondering if you could Drill down a little bit on that and tell us where what the value creation was there and why that seems promising going forward? And then I've got a follow-up.
Great question, Michael. I mean, we have a number of significant partners that when we go to market with AWS, we go to market With Google, we go to market with a lot of these guys. But I would say the organization that is kind of that has the DNA most aligned with ours is Microsoft. I mean these guys are really strong in enterprise selling. And so we've been able to align with them, some of the largest organizations in the world in the United States government with And with others, I mean, we're on speed now with these guys.
They are a great partner. And it looks to me like as it relates to cloud computing, I mean these guys are going to be a force to Because they really do understand the enterprise and they know how to sell there. And I think they've come to believe We're not entirely unfamiliar with that process also. And so we get along with those guys really well. And we're selling with them in oil and gas, we're selling them in utilities, we're selling with them in banking.
I could someplace around here, there's a whole pipeline of transactions that are working Like with Microsoft Enterprise transactions, but it I'm confident it's hundreds of transactions that we're working together. Great. Thanks, Andrew. Microstarters, they don't hesitate to spend to spool up the big guns. So if They need to close a deal or make a commitment to a customer, they'll roll out Satya or Judson or JP or whoever they need Make the commitment and make sure the commitment gets met.
They're really strong.
And Tom, if I could just get you to be macro prognosticator here for a minute. You did 20% sequential almost 20% sequential growth in the quarter. That's the most you've done in 7 quarters. And is this an indication that from a I mean, obviously, you're doing a lot of things right, but from a demand or a macro perspective that People are opening up to these kinds of larger projects that you do?
Well, I think our subscription revenue was It was like 24% growth, wasn't it? And it was really pretty healthy and that's what we're focused on. We're really not focused on the services line. And you'll want to keep that services line under control and we give you guys the courtesy of disaggregating those 2, so there's no question as Whether we're a software company or a services company. Okay, now let's talk about I mean coming into January So of 2020, and we were blowing and glowing, right?
Blowing and growing, right? I think our growth rate last fiscal year was 68 Percent was in the top line? Okay. And oh, 71%. Okay, thank you.
71%. I mean, it was we were blowing and going. When COVID hit in February, I mean, our world just stopped. I mean, I understand back then, our average transaction size, as you know, was like, what did I say, dollars 21,000,000 Okay? And so London closed, Paris closed, New York closed, Chicago closed, God knows San Francisco closed, okay, and even the beaches in North County were closed.
There was nobody else for business. So we hit a speed bump, okay, in the first two quarters I would say in the February, March, April, May timeframe, we hit a speed bump. Okay. Then the all of a sudden, you start getting all the stimulus starts to take place, people start focusing on digital transformation, they start focusing And we began to see a significant acceleration in our business once again in June, July, August, September, which made I just feel comfortable talking to you guys about the idea of making this a public company. I mean, there is no question that we're seeing an acceleration.
And we believe that as we get into fiscal year 2022 and 2023, we will see And so this is a healthy market and I believe we know how to grow our business rapidly And we're pretty optimistic. But I think the growth the overall growth rate And this year, this fiscal year, David, which will be what?
In April, I think. This year? Yes, we would be The midpoint of the guidance is 16%.
Midpoint of the guidance is like 16%, okay, fine. But once we're dragging Q1 and Q2 like a boat anchor Of this fiscal year, they heard us. But COVID has turned from a massive decelerant to And accelerate. And we're I'd like to say COVID was behind us. Hopefully, He will be behind us soon, so we can all get together for a cocktail in New York.
But Yes, we're optimistic about the next 2 years.
Thanks, Tom.
Your next question comes from the line of Dan Ives with Wedbush. Your line is open.
Yes, thanks. So Tom, could you maybe talk about how Your conversations have changed with customers over the last 6 to 9 months when I Compared to a year ago, I mean, maybe does it really feel like it almost went from more of a push to a pull? I mean, could you just maybe talk about some of the drivers and some of the anecdotal conversations with CEOs and CIOs? Thanks.
It's a great question, Dan. I did not anticipate the effect of the IPO on the brand. I guess I should have because all the tankers tell you it's going to do it and gee, this is going to be important for your business. I just looked at it as a financing The finance growth. And so I guess I'm kind of slipping because the effect of the IPO and the associated PR really has been huge on the perceived Credibility and gravitas in the business.
And so we're seeing a much substantial increase in the growth of the pipeline. Conversations are happening faster. The default position the companies are coming into the discussion is that it works And how are we going to make it work? There's virtually if we want to hire a senior executive today, there's virtually nobody who won't return And so it's the effect on the company has been extraordinarily positive. If you Do when you go play in Google Analytics sometime and go do a search on like I will take a look at what has happened in terms of kind of where we are In search frequency in these terms, I mean, we've moved way, way up in the list.
So it's I would just say since the IPO, I think the IPO contributed. I think the global economy has contributed. I think the fact that the government is trading $100,000,000,000 a day, U. S. Government probably isn't hurting.
And And the focus on digital transformation and AI, so we're I think we're in the right place at the right We have a good solution and I think things have changed significantly.
Thank you.
Your next question comes from the line of Mark Murphy with JPMorgan. Your line is open.
Yes. Thank you very much, Tom. We've seen quite a bit more excitement about a commodity super cycle and in particular in oil Because of the pandemic recovery and response, I'm wondering how different is your energy deal pipeline today versus a year ago. I don't think you commented on Patronus in the script. Wondering if you could comment on that.
Just how different is that pipeline? And does the typical oil and gas company feel more pressure to modernize during tough times or Maybe more inclination to spend into a super cycle.
Well, Mark, I don't pretend to be an expert at energy markets, It's as you know, but it's been fascinating to watch. And first of all, the relationship with Baker Hughes is extraordinarily Positive. And it's kind of funny that it would be because you couldn't find 2 companies more culturally different. This is old school oil and gas company. It was a new school high That company, but these guys are pretty switched on.
And yet today, we must talk between the 2 companies 100 times a day and We can finish each other's sentences. When we first you get into February, March, April oil was negative $37 a barrel. You think that might have had a little chilling effect on the energy business. Holy moly. I mean these guys were just reeling, They couldn't figure out how to lay off people fast enough.
And then after they picked themselves and dusted themselves off, Yes, I think they started looking at the reality situation where companies like Shell, which is, as I recall, roughly a $300,000,000,000 business, I think the 5th largest company in the world. And then look at the economics of you look at oil futures at the time, nobody was predicting oil over $50 a barrel. I believe it might But it wasn't being predicted to go over it. And there's a lot of downward pressure on oil prices for all the reasons We both know, I think if you look at $50 a barrel oil, there might be one company in the world that can make money, okay, $50 or $45 a barrel and that would be Saudi Aramco because they have no lifting cost. I think that stuff comes out of the ground at about $6 a barrel.
So then you have the rest of these guys, whether it's Ross, Dev, Gazprom, Exxon or Shell, who are running these large Global Enterprises and they have the choice to either reinvent themselves or slowly go out of business. And so These I mean, you get to places like Shell, these guys are not I mean, these are highly Educated really bright people, they've made the decision to reinvent themselves. So I think the oil pressure and oil fluctuations Are proving an accelerant to the use of AI as these companies You're really focused on renewable. I mean, Shell is turning itself into a renewable energy company. And with the bulk of, I think, their revenues are going to Coming from electricity in the future, that's a big change.
And we see this Rosneft Gazprom, Aramco, Adnan, all the big guys are thinking about this and we're at the table.
Okay, great to hear. And David, as a quick follow-up, could you clarify how did the GAAP RPO or backlog Behave sequentially in the January quarter. I'm just not sure if I heard that number correctly. And I know you There's a few different layers on that cake for you. So just how did the RPO that GAAP RPO behave sequentially?
And then I'm just wondering, do you have the current RPO or the next 12 months portion at your fingertips by any chance or perhaps do we see that later?
Yes, you'll see the current RPO in the queue, but the current RPO is $131,000,000
Okay. Great. And then what was the sequential change just in the total GAAP RPO?
Absolutely. So when you actually look at our total GAAP You're looking at it from last quarter, it was $2.67 and it's $2.47 So $267,400,000 to be precise, dollars 247,500,000 is the GAAP RPO.
One of the changes that's happened here, Mark, Yes, that back in the old days, like say pre December, we were ruthless about the way that We did software transactions, okay. If the commitment from the customer was not irrevocable, nonrefundable commitment to buy, Okay. Over multiple years, we just did not give business hard stop, okay? Now that we have a Now we're kind of a little different position where we're focused. And what we're doing, we're doing our best to finance the business and we did a pretty good Okay.
Without ringing a lot of doorbells on Sand Hill Road. When other businesses pretty well capitalized, we're focused on market share. Okay. And we've gone towards more, I would say, market transactions where we are willing to consider Engaging in multi year transactions with organizations where some percentage of The transaction is cancelable based upon performance. Well, you can be sure that we're going Bust our assets to make sure that nothing gets canceled, but it does.
But that decision didn't have a negative effect on RPO, okay? And I think it's the right decision to make for the business. But we've become we're doing engaging and we're being More flexible and easier to do business with in order to get contracts signed. And It does have some downward pressure on RPO, but I think it will have upward pressure on revenue, respectively.
And Mark, with that in mind, the cancelable piece went from 37.1% to 48.4%, so sequentially
up 30%. Okay.
So if I'm hearing you Up 30%.
Okay. So it's a if I'm hearing you correctly, there's a little more inclusion of cancellation clauses in the contracts. So that Just the RPO is kind of the mix is shifting a little off the long term and a little off the GAAP piece, and it's rolling a little more The cancelable piece, but it's netting out positively for revenue. Is that a fair estimation?
Positive what? Like and it's also positive. RPL bus cancelable, it's increased year over year,
Year over year, it is up. Sequentially, it was off a little bit.
Okay. Thank you very much.
Thanks Mark.
Your next question comes from the line of Patrick Colville with Deutsche Bank. Your line is open.
Thank you for taking
my question and congrats on your inaugural set of results in the public company. So I guess I've got a 2 part question. I mean, I think we just touched on it just now, but I just want to just clarify. So the delta between RPO and billings, just help me understand that because if I look at billings in the quarter, I think it was off about 5%, whereas the adjusted LPO was up 16%. So just wanted to understand why that might be?
Sure. Well, I think and I tried to include it in my prepared remarks on billings was I think you're looking at perhaps the deferred revenue. Is that correct?
Exactly.
Yes. And so I think what we tried to highlight in our remarks is that, and almost in line with Tom's comment on being more flexible, there were some pieces of our deals that are not flowing through deferred. And I called out a portion of what happened at the end of the quarter where $4,100,000 isn't flowing through deferred. So I think that is To an extent, that's what's impacting your math there.
Okay. Got it. And you prefer to call out the Baker Hughes contribution in the quarter?
The Baker Hughes contribution as part of RPO?
As part of revenue.
The bigger use portion, I think we will actually be including in our 10 Q. And so you'll see that's where that revenue will be that will be published.
Your next question comes from the line of DJ Hynes with Canaccord. Your line is open.
Hey, thanks guys and congrats on the results. Tom, when you think about building domain expertise as you enter a new vertical, how much of that falls on C3 development And how much of that is influenced by the Lighthouse account with which you're partnering? I'm just trying to think about how you replicate
It's a great question, TJ. And one of the real Gems of this story that really is not realized yet by a lot of the market Is that across all of these markets, whether it's AI based predictive maintenance for the Air For us, whether it's customer churn in Bank of America, okay, whether it's process optimization, AI based predictive maintenance for paper manufacturing at Georgia Pacific or whether it's Hydrocarbon loss accounting at Shell, 99% of the code we're installing is the same Across all of this across the entire installed base, because that's the beauty of what we've done, okay? So So you don't need to know we don't need to know first principles of how a turbine works in order a gas turbine works in order Build a digital twin for the turbine or build a predictive maintenance model for that turbine. 99% of the code is exactly the same. All the changes are the data sources, The machine learning models, okay, and the user interface.
We agree that the user interface is trivial. We have trivialized this Idea of aggregating very large data sets in the unified federated image. For example, this is what Palantir calls an ontology. This is what Palantir does, okay? Palantir
has a
large services organization that takes It's a big business, right? I was taking I think at ENGIE, and now we've aggregated 100 trillion rows of data from 50 enterprise data sources, 27,000,000 sensors. And then with regard to the Xterprise for weather and train social media, That will update weather during social media 62,000,000,000 times a day. And when you aggregate that into a unified Federated Image, this is what Palantir says in every sentence of their presentation is ontology, ontology, ontology. Look it up.
It's not quite that magic, Okay. So we'd rather do that through services, we do that through software. Now, so We built with our partners at Baker Hughes, pretty actually before Baker Hughes, we built a predictive maintenance application for an offshore haul rig, Okay. At Shell, we don't know anything about offshore rigs, okay. We have built production optimization for their LNG operations It's in Australia, that's Queensland Gas.
We don't know anything about LNG operations. But we're able to work with their subject Matter experts say our team of 6 people and their team of 6 people and build the applications. Today Shell, God knows how many people they have working on projects is between 100 Well, it's going to be 100 because they have 100 projects in flight. And then we did smart grid analytics for And now I would say that's the largest AI application in production in non classified space on earth. I We don't know anything about how the grid operates, but we know about using AI to do what they want to do, which is volt VAR, predictive maintenance for devices and And what have you.
We're doing AI based predictive maintenance for the F-thirty 5 Joint Strike Fighter. Do you think we have any idea how a Joint Strike Fighter operates? I assure you, we do not, okay? Only the people at Lockheed Martin know that, okay? And so we're able to build the tools Where there are subject matters, experts can do what they do.
That is the beauty of what we've done. We're able to apply the same code For anti money laundering in a bank and okay and predicted maintenance for F-thirty 5 Joint Strike Fighter. And so I don't think we will be constrained by domain expertise. Now that being said, You know, what of then to the extent that we need it, where are we getting it? We're getting it through partnerships like FIS, like In for, like Baker Hughes and NGE as it relates to energy efficiency.
So I kind of went all around that, but you do not need to be a nuclear scientist to build a predictive maintenance Location for our nuclear reactor and that's the beauty of what we built.
Yes, yes, makes perfect sense. Very helpful. Thank you, guys.
Your next question comes from the line of Peggy Yu with Morgan Stanley. Your line is open.
Hi, thank you for taking my question. First to touch on the pipeline, you had mentioned seeing greater customer interest and The pipeline has continued to grow pretty substantially last quarter. I wanted to see if you could give us a little bit color on pipeline conversion trends, especially
Pipeline conversion trends. Peggy, I don't have that answer, okay. And it's a legitimate question. Next time we will talk, I'll have the answer. I don't have it, okay?
And so anything I would give you would be misleading. It's a good question. And I'm sorry. No worries at all. It's very, very rarely I get caught absolutely out of my heels and you call me.
So I guess could you talk about the trends around margins as we go head into Q4? Looks like the margins so Q3 obviously saw a pretty good improvement and Q4 seems to be Slightly down. What are some of the puts and takes there?
Q4 margin is down. How was that? How does 1
I think the non GAAP operating loss that we highlighted in the
I think that one of the things that is going to contribute to a little bit margin compression in Q4 We are focused on being a software company, okay. We're not focused on being a software A services company as lucrative as it could be in this particular market, I know. Okay. I read Yes, I'll get Yahoo! Finance every now and then too.
Okay. That being said, we're going to supplement In order to facilitate our customers and not be in the professional services business, we're going to outsource professional services work for some third providers that we've enabled. So we have this large ecosystem of 3rd party providers, like IBM's Global Services and I think there's about 20 others. And so we will actually give a piece of our contract which will put some downward pressure on I'm sorry, upward pressure on cost of goods sold and a little bit downward pressure on margins. At the same time, You'll keep me out of the services business.
And that's so that's what it's not a macro trend, but That's what that's all about.
Very helpful. Thank you.
Your next question comes from the line of Arvind Ramnani with Piper Sandler. Your line is open.
Congrats on your Q1 out of the gate. I have a question on your vertical partnerships. It's a very important part of your strategy. And I wanted to understand how you're tracking progress with these partnerships, particularly with the newer ones versus the ones that are more ingrained. You're looking at deals or pipeline and Now, there are certain trigger points that get you to switch from NFIS to Fiserv as the partnership isn't quite working out.
So just kind of conceptually how you're managing success at these important partnerships?
We have very thank you for the question. And we have very, very impressive here on kind of what's going on in the business, what's going on with business activity with each partner, with each vertical, What's the rate at which we're growing pipeline? What deals are we working together? What's the next step of each deal? What's the Expected revenue, what are the revenue goals for this year, next year, the year after, by quarter?
So we have very tight metrics on that. Fortunately, we haven't gotten to the point where one is not working yet and we need to replace it. We're still focused on making every one of them successful. And we believe that with the partners we have that we can. That being are we going to get to the point where one doesn't work?
We will. But Sometime, Arvind, when you're here, I mean, we could kind of show you the metrics that we have for tracking this in sales operations. I believe that we have a finger on the pulse of this business as it relates to the AI enabled CRM system that we have deployed That is absolutely state of the art.
Terrific. Thank you.
Your next question comes from the line of Pat Walravens with JMP. Your line is open.
Great. Thank you. And if I can, I'd like to ask 2. Go for it, Pat. Hi.
Hi. Thanks, Tom. So the first is, for Investors, as they look at this, C3 grew 71% in fiscal 2020. You hit COVID and then in fiscal 2021, revenue at the midpoint is going to grow team. So how should we think about sort of the durable long term growth rate for this business?
We believe the growth rate will expand.
Okay.
Here's the broader one. So Tom, can you talk a little bit about the deal with the U. S. Army That you won with Raytheon. I mean those things are typically super competitive, right?
Who is the competition? And then just more broadly, How big or talk about the opportunity that C3 has with the defense industry? Okay. Now This is our I know that everyone on this call believes that I close every deal that we do, okay? And I'm going to assure you that's not true.
As a matter of fact, from August 13, 2020 until like December 13th December 21st, I did nothing but talk to you guys for about 21 hours a day, And I never talked to a customer or a prospect. So as much as I would like to talk about that deal with Raytheon On that particular transaction, I don't know anything about it, okay? And we Can somehow hold the session to talk about it. How big is the opportunity in defense and intel? It's freaking huge, Okay.
In that and the as it relates to applying AI to military and defense, This is going to be a major initiative for the United States government. And you have China spending Tens of 1,000,000,000 of dollars today a year on AI. And we're in the United States government, I think, been historically under investing. There's There's a lot of talk about it and very little action. I think we're now we're seeing I think going forward as it relates to defense and Intel That market opportunity is going to be virtually limitless.
And I think we're in a position to have a makeup an impact there, which is why you see Denny McGinn, the former Assistant Secretary of the Navy And Rick Leggett, former Deputy Director of the NSA, joining our advisory boards To help us figure out how to navigate that, I'll be on the phone on Friday with The one of the immediate past secretaries of 1 of the 3 branches of the U. S. Military to get his advice on how we should structure this going forward. So you can expect us to be making a very, very substantial investment there. I mean, this isn't will this ever be anything like 50% of our business?
No way, no how, Okay. I mean, we're not going to become a federal contractor. But do we expect it to be a large and rapidly growing segment of our business? Yes, we do. Great.
Thank you.
There are no further questions at this time.
I think we might be at the last we might be about to wrap this up. Is that correct?
Yes, there are no further questions at this time.
Okay. Let me just provide a couple of closing comments and then we'll We'll wrap on this. So First of all, thanks everybody for your attention and your thoughtful questions. And to the extent that I I think there were 2 questions that I didn't have the answer to. 1 was from Pat and one was from Morgan Stanley.
And I I apologize, but we'll figure out a way to I guess I can't get back. Yes, we need to figure out a way can we follow-up In the world of Reg FDA, we could do this? Come on, Frank. Okay. We'll still do this.
I think that we're really pleased with 3rd quarter results. We think they illustrate the power and potential of this highly differentiated model driven architecture that is enabling enterprises across a wide range of industries to rapidly and efficiently develop and operate complex predictive AI And efficiently develop and operate complex predictive AI applications to scale. We think we Really well positioned to address this rapidly growing Greater than $200,000,000,000 addressable market opportunity. And as we enter our 4th fiscal quarter of 2021, I believe that C3AI AI has never been more strongly positioned in the market. I believe that we are demonstrating clear technology leadership in enterprise AI.
We We are building a powerful brand. Our human capital resources are second to none. Our customer and market partners' successes speak for themselves And the competitive landscape does not appear to be limiting. So thank you so much for your time. We look forward to sharing our Progress with you in the months years ahead and we wish you all a great day and a great week.
So thank you for For the courtesy of your time today.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.