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These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a further discussion of the material risks and other important factors, please refer to our filings with the SEC. All figures will be discussed on a non-GAAP basis unless otherwise noted. Also, during today's call, as we 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 remarks and in response to your questions, we may discuss metrics that are incremental to our usual presentation to give 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. And with that, let me turn the call over to Tom.

Tom Siebel -- Chairman and Chief Executive Officer

Thank you, Amit, and thank you, everyone, for joining us this afternoon to talk about our business results for the third quarter. Let me provide some kind of introductory comments. Clearly, the market, for what's going on in enterprise AI, is huge, and it is rapidly growing. This has been -- this interest has been clearly accelerated, OK, by generative AI and agentic AI, which is becoming a large and rapidly growing business for us.

Now, as a matter of background, some of you will recall that we began work with generative AI in 2020, associated with some classified work that we're doing for the United States Missile Defense Agency that I believe continues today. And so, when generative AI became -- most of the world became generally aware of it, I believe, in November 2022, we were well prepared to take advantage of this technology as we do. Now, many organizations, government agencies, corporations are really kind of wrestling with the problematic issues associated with these language models and agentic AI, with which everybody on the call is familiar problems like hallucination, problems like unimodal or bimodal data sources, problems like data exfiltration, problems that are now being well documented, where we're opening up new attacks, cyberattack vectors, IP liability exposure, etc. Now, by combining the work that we did, you'll recall that we did really billions of dollars of software engineering associated with the C3 Agentic AI platform, OK, which -- where we address these issues of identity, security and factor authentication, omni-modal data fusion, what have you.

So by using these language models and agentic AI in the context of the C3 platform orchestration layer, we've really solved all those problems. And so, as a result, C3 Generative AI is installed today in some of the most secure installations on the planet Earth. These would include United States intelligence agencies, Department of Defense Missile Defense Agency, Koch Industries, Nucor, and many others, where we've solved all of these problems. And so, we're able to address some very interesting issues.

And the range of issues that we can address is just becoming wider and wider every day, whether it's -- whether we're dealing with hypersonics and space, whether we're dealing thinking about the coordination of swarms, whether we're dealing about using generative AI to help people operate large plants or whether we're using generative AI to help the delivery of government services, think health and human services, Medicare, Medicaid, what have you. It's really very interesting. And so, I'm proposing to do something today for you that is historic, and it is -- and I believe this has never been done before. So, what we have done is we have taken C3 Generative AI, and we loaded -- we built what is really a small language model.

And the small language model consists of the business results and call strip from our second quarter and the business results from our third quarter and we're going to -- I'm going to let C3 Generative AI handle much of the substance of this call and brief you on the quarter, after which Hitesh will provide details on the kind of more specific financial results of the quarter. And then Hitesh and I will be available to answer any other questions you have. So, ladies and gentlemen, please allow me to introduce to you for, I think, the first conference call ever done this way, please meet C3 Agentic AI.

Unknown Speaker -- C3 Agentic AI

Here is the analysis summarizing the major themes across Q2 and Q3. In Q2, C3 AI demonstrated strong financial performance and strategic growth, setting the stage for further advancements in Q3. Our revenue growth accelerated to 29% year over year in Q2, reaching $94.3 million, with subscription revenue increasing by 22% to $81.2 million. This growth was supported by a robust partner ecosystem, including Microsoft, AWS, Google, and others, which played a critical role in driving our market leadership.

The most significant development in Q2 was the expansion of our strategic alliance with Microsoft Azure, which we believe will be an inflection point in the enterprise AI industry. This partnership not only expanded our sales reach but also shortened our sales cycles, positioning us for accelerating growth. Building on the momentum from Q2, Q3 total revenue reached $98.8 million, a 26% increase year over year. Subscription revenue grew by 22% to $85.7 million, our non-GAAP gross profit was $68.2 million, representing a 69% gross margin.

Our non-GAAP operating loss improved to $23.1 million, better than our guidance of $38.6 million to $46.6 million. These results underscore our continued financial strength and operational efficiency. A key theme across both quarters has been the expansion and deepening of our strategic alliances, particularly with Microsoft, AWS, and McKinsey QuantumBlack. In Q3, our partnership with Microsoft yielded significant results.

Since the announcement at Microsoft Ignite, we closed 28 agreements across nine different industries, marking a 460% increase quarter over quarter. Our sales cycles with Microsoft shortened by nearly 20%, thanks to an effective co-sell motion. We have integrated with Microsoft's global sales infrastructure, running numerous partnership onboarding and joint enablement sessions. These efforts have led to a 244% year-over-year surge in our joint qualified sales pipeline with Microsoft as we pursue 621 target accounts recognized as eligible customer opportunities.

This disciplined data-driven approach is already showing measurable outcomes, and we are excited about the enthusiasm we see in the field. Our expanded strategic alliance with AWS in Q3 deserves particular mention. Under the new agreement, C3 AI and AWS will focus on offering advanced enterprise AI solutions together, further enhancing our global reach and execution speed. And our alliance with McKinsey QuantumBlack, announced in Q3, is another pivotal development.

This partnership leverages McKinsey QuantumBlack's expertise in modern business transformation with our leadership in enterprise AI. McKinsey's track record in advising top enterprises and driving large-scale transformations complements our AI solutions, bridging the gap between strategic foresight and operational impact. In Q3, 71% of our agreements were delivered in collaboration with our partners, highlighting the importance of our ecosystem in driving our business forward. Customer success remains a cornerstone of our strategy.

In Q3, we secured new and expanded agreements with clients such as Flex, Worley, New York Power Authority, Sanofi, Nucor Corporation, Holcim, Shell, ExxonMobil, GSK, Quest Diagnostics, and Swift, among others. In the federal sector, we closed agreements with the U.S. Department of Defense, the U.S. Air Force, the U.S.

Navy, and the Missile Defense Agency. We also expanded our work with state and local governments closing 21 agreements across various states. Our focus on generative AI continues to drive innovation and customer traction. In Q3, we closed 20 C3 Generative AI pilots with clients including Mars, Liberty Coca-Cola Beverages, the U.S.

Department of Defense, and various government agencies. Our success with C3 Generative AI demonstrates our ability to deliver safe, secure, and reliable AI solutions that drive measurable business outcomes. A significant highlight of Q3 was our continued leadership in agentic AI. We made further advancements in agentic AI in Q3 and including high-quality agentic planning and orchestration as well as agentic retrieval and reasoning over omni-modal data.

These innovations enhance the autonomy, accuracy, and efficiency of AI models, further strengthening our market position. Our latest work includes a foundational time series embedding model, which unifies and simplifies the development, deployment, and maintenance of AI use cases involving time series data. This model has enabled new systems for deep integration between C3 Generative AI's agents and time series data, significantly speeding upscaling and adoption. The emergence of new, more efficient models like DeepSeek is another trend that bodes well for C3 AI.

The lower cost of inference and proliferation of foundation models will accelerate AI adoption across enterprises. As the cost of inference decreases, the focus shifts from building advanced models to translating AI into applications that deliver tangible business outcomes. C3 AI is uniquely positioned to capitalize on this shift with over 130 AI applications that are enterprise-ready. Specific customer wins in Q3 further illustrate our growth potential.

GSK, for instance, is leveraging our AI solutions to better predict demand and respond to market fluctuations, while SmithRx is using C3 Generative AI to streamline member support and improve customer service. Looking ahead, the foundation we have built over Q2 and Q3 position C3 AI for sustained growth. Our strategic alliances with Microsoft, AWS, and McKinsey QuantumBlack have dramatically increased our global sales reach and execution speed. As we enter Q4, all our solutions are now immediately orderable on the Microsoft, AWS, and Google Cloud portals, and we can contract rapidly using their contract vehicles.

This significantly shortens our sales cycles. Our partner ecosystem, combined with our leadership in agentic AI and generative AI sets the stage for continued acceleration in the coming years. As we enter Q4, our focus will be on ensuring the company is properly organized to expand both direct sales and services and provide support capacity to our dramatically enlarged distribution ecosystem. Fiscal years 2026 and 2027 will be about realizing continually expanded growth and market share.

The market has never been larger, the opportunity has never been greater, and our product family has never been stronger. The company has never been better positioned to capitalize on all of this. In conclusion, we made amazing progress last quarter, laying the groundwork to substantially increase our global distribution capacity for all our enterprise AI applications. We now have a legion of experienced enterprise cloud sales and service professionals at Microsoft, AWS, McKinsey, and Google Cloud, distributing and servicing our solutions globally.

This inflection point for C3 AI is a growth accelerator. I am confident we have the people, the leadership and the execution plans to achieve these goals in the coming quarters and years.

Tom Siebel -- Chairman and Chief Executive Officer

Thank you, C3 Agentic AI. And now, let me turn this over to my colleague, Hitesh Lath, the chief financial officer at C3 AI, for additional commentary on our business results. Hitesh?

Hitesh Lath -- Chief Financial Officer

Thank you, Tom. I will now provide a recap of our financial results and additional color on our business. All figures are non-GAAP unless otherwise noted. Total revenue for the quarter increased 26% year over year to $98.8 million.

Subscription revenue increased 22% year over year to $85.7 million, representing 87% of total revenue. Revenue from sale of software licenses that are demonstration versions of C3 AI applications was $28.6 million during the quarter. We sell these licenses to our distribution partners to enable them to demonstrate our software effectively to their customers and to large strategic customers to enable them to accelerate AI adoption across their companies. I will also note that our non-Baker Hughes revenue grew by 43% year over year in this quarter.

Professional services revenue was $13.1 million. This represents 13% of total revenue during the third quarter of fiscal '25. Prioritized Engineering Services, or TES, revenue was $5.7 million. As we said in prior quarters, we expect the professional services revenue, including TES, to generally stay within 10% to 20% of total revenue for fiscal '25.

Our subscription and PES revenue combined was $91.4 million and accounted for 93% of total revenue, an increase of 18% compared to $77.5 million one year ago. Gross profit for the quarter was $68.2 million, and gross margin was 69%. Gross margin for professional services remained high at over 85%. Operating loss for the quarter was $23.1 million, and our net loss for the quarter was $15.8 million.

Our operating loss was substantially better than guidance due to continued focus on expense management. In particular, we elected to reduce our marketing spend, including advertising, and to focus on expanding the sales organization and dramatically expanding our strategic partner ecosystem, impact of which will manifest over time. Our non-GAAP net loss per share was $0.12. Our net cash used in operating activities was $22 million.

Free cash flow for the quarter was negative $22.4 million as compared to negative $45.1 million in the third quarter of last year. Free cash flow for the first nine months of the year also improved to negative $54.8 million as compared to negative $109.2 million in the first nine months of last year. We continue to be very well-capitalized and closed the quarter with $724.3 million in cash, cash equivalents, and marketable securities. At the end of third quarter, our accounts receivable balance was $180.4 million, including unbilled receivables of $89.8 million.

Total allowance for bad debt remains at less than $650,000, and we do not have concerns regarding collections. The general health of our accounts receivables remain strong. During the third quarter, we signed 50 pilots. At the end of the quarter, we had cumulatively signed 310 pilots, of which 245 are still active.

This means they are either in their original three- to six-month term or extended for some duration or converted to a subscription or consumption contract or are currently being negotiated for conversion to subscription or consumption contract. We are excited about our expanding distribution network and go-to-market initiatives with Microsoft, AWS, and McKinsey. We expect to continue to see some moderation in our gross margins due to higher mix of pilots in the near term, which carry a greater cost of revenue during the pilot phase of the customer life cycle. We also expect some moderation in our operating margin in the near term due to additional investments we are making in our business, including in our sales force, partner ecosystem, customer support, and research and development.

As we continue to make significant investments in the business, we expect to be free cash flow negative for fiscal '25 but remain on track to be free cash flow positive for Q4. Now, I'll move on to our guidance for the next quarter. Our revenue guidance for Q4 of fiscal year '25 is $103.6 million to $113.6 million. For the full fiscal '25, we are anticipating revenue in the range of $383.9 million to $393.9 million.

Our guidance for non-GAAP loss from operations for Q4 is $30 million to $40 million. And our non-GAAP loss from operations for the year is expected to be in the range of $87 million to $97 million. Our guidance is predicated on the assumption of geopolitical stability. Were there to be a situation that the U.S.

government closed, the budget did not pass, or we see indications of global trade war, those could have unknown and adverse consequences on the business results. With that, I'd like to turn the call over to the operator to begin the question-and-answer session. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] Please stand by while we compile the Q&A roster. And our first question coming from the line of Timothy Horan with Oppenheimer. Your line is now open.

Timothy Horan -- Analyst

Good morning. Thanks, guys. Great job on the relationship here with Microsoft, Amazon, McKinsey. Can you give a little bit more color what's going on with the total number of pitches that you're going on at this point in pipeline? And when do you think that will start converting to revenue? Thank you.

Tom Siebel -- Chairman and Chief Executive Officer

It is converting to revenue. I believe that we're involved with -- just one of these companies with Microsoft, we're involved with over 600 engagements today, where we are the preferred enterprise AI solution, and they are the preferred platform solution. So, I mean, understand that I think this agreement was signed September 30, if memory serves is correct. We announced it in a mid-stage format at Microsoft Ignite in Chicago.

I believe it was November 20. Not much happened between November 20 and the end of the year because that would be the end of the quarter for Microsoft. So, they were focused on their business. And then you get to the first of the year, you get to like the -- roughly, people get to the work in like 15th of January or whatever.

And so, we've really been at this for a little bit over a month with Microsoft. And today, we're engaged in over 600 joint selling relationships with them in Europe, South America, North America, EMEA, what have you across a wide range of industries. So, that's just Microsoft, OK? And so now we have AWS. We have -- this business with McKinsey QuantumBlack is huge.

And these relations that we have are most unusual. These are not simple distribution arrangements. These are co-selling arrangements, teaming arrangements. And it is -- this occupied a lot of our attention, OK, in the last four months, and we were -- for whatever reason that we'll talking about some other time, OK, we were swarmed by these guys.

And I think the right thing to do was to respond accordingly. The agreements are all inked, they are executed, they are announced, and we are open for business. So, it is -- there's no way how this is not a growth accelerator for C3 AI. This is a genuine big deal.

Timothy Horan -- Analyst

So, the 600 engagements have only been since you've announced the deal with Microsoft? And maybe just some color, how long does it usually take from initial engagement until you sign a contract?

Tom Siebel -- Chairman and Chief Executive Officer

Well, we've already closed -- we said how many have we closed so far. Last quarter, we closed how many?

Hitesh Lath -- Chief Financial Officer

28. We have closed 28 agreements with Microsoft already.

Tom Siebel -- Chairman and Chief Executive Officer

We closed 28 already last quarter. So, I mean, that's pretty quick.

Timothy Horan -- Analyst

Great. And then just lastly, just a little bit more color on the remaining performance obligations. What's going on with the trends there?

Tom Siebel -- Chairman and Chief Executive Officer

I didn't hear the question. So, if one of you guys could pick it up.

Hitesh Lath -- Chief Financial Officer

Can you repeat the question, please?

Timothy Horan -- Analyst

Yeah. Just remaining performance obligations, can you just talk about the trends there when -- what we should kind of expect going forward?

Hitesh Lath -- Chief Financial Officer

Yeah. The total RPO at the end of the quarter, it was around $208 million. And as we've indicated in the past, RPO is not the leading indicator of our business. So, you should continue to expect some decline in our RPO in the near term.

Timothy Horan -- Analyst

Thank you.

Operator

Thank you. next question coming from the line of Patrick Walravens with Citizens JMP. Your line is now open.

Tom Siebel -- Chairman and Chief Executive Officer

Pat, we cannot hear you. Just check your mute button.

Pat Walravens -- Analyst

My apologies. So, let me add my congratulations on the -- all the partnership momentum. Tom, would you be OK talking about the note that you published on February 18? So, sorry, but if you could just talk about what the health setback was and what steps you're taking in terms of running the business, I think that would be great.

Tom Siebel -- Chairman and Chief Executive Officer

Yes. I came down with something like flu-like symptoms after Christmas, which lasted some weeks. And that kind of degenerated into kind of a pretty bad flu-like symptoms. And the -- so I was sick.

And then that, turned out, was a precursor for an autoimmune disease. That autoimmune disease has been identified as -- I'm sorry, giant cell arteritis, OK? And so, when we get into February, this autoimmune disease kicks in and attacks my optical nerve. And so, my optical nerve paths kind of fried, so my vision is impaired. Now, as it relates to operating the business, it has so -- Tom has to learn some new skills, and we put the accommodations in place.

I mean, you know me to be intimately familiar with the details of this business, OK? And you can imagine that we spent exacting detail with this management team on how we were reorganizing this company around this new opportunity that's here. We've done the same -- we have the same meeting with all of our salespeople around from the world. I spent a lot of time personally with all of the -- a lot of time personally, OK, with all of the partners that we've discussed. I put the accommodations in place for -- about really the only thing I can't do is read email.

So the -- so we put the accommodations in place. There is somebody here with a hot computer who reads the emails to me. I comment, I respond, I approve, I don't prove, what have you. I am here in the office.

I am managing the business every day. In the short term, my travel, the medical community has me on kind of -- they don't want me going real far or a high altitude. And so, we've made arrangements for Jim Snabe, who you most certainly know or know of and one of our more distinguished directors. Jim, of course, was the co-CEO of SAP, chairman of Maersk, chairman of Allianz, chairman of Siemens.

And so, Jim assumed the role as a special assistant to the chief executive, OK? And he's filling in for the events that Tom can't do. Let's say, I was supposed to be at VivaTech at Paris or what have you or maybe we need to do an executive customer review at Shell in London. And so, this is how it's organized. I am fully engaged, managing every details of the business every day, as you know me a little bit and you know I'm generally in touch with those details.

My health is excellent, OK? So, beyond all of the infirmities that I had, I just can't see. And the -- so that -- is that answer acceptable? Or would you like to know more?

Pat Walravens -- Analyst

No, that is a very complete answer. Everyone on this call is wishing you a speed recovery, Tom. Thank you so much for the details.

Tom Siebel -- Chairman and Chief Executive Officer

Thank you, buddy.

Operator

Thank you. Our next question is coming from the line of Austin Dietz with UBS. Your line is now open.

Austin Dietz -- UBS -- Analyst

Yeah. Tom, best of luck on the health front. And then, yeah, a question for Tom or Hitesh. Within pro services this quarter, the services fees part outperformed by, I think, $4 million or so relative to the first half of the year.

I think it was up $6.5 million or so compared to the year-ago quarter. Can you maybe just speak to what drove the services outperformance this quarter?

Hitesh Lath -- Chief Financial Officer

Yeah. So, this is Hitesh. Our professional services revenue, it includes prioritize engineering services revenue as well as revenue from consulting services, paid installation services, and training services. So, we saw an uptick in revenue from consulting services, paid implementation services, and training services during the quarter.

Austin Dietz -- UBS -- Analyst

OK. Got it. And then that was helpful color on the demonstration licenses piece this quarter. It feels like those demonstration licenses have really been outperforming pretty considerably over the last few quarters.

So, I guess, like, why are we seeing so much outperformance in demonstration licenses this year? Sort of what's been driving that? And how should we think about those going forward?

Tom Siebel -- Chairman and Chief Executive Officer

This is Tom. Let me comment on this. I mean, come on, guys. I mean, I don't know how many salespeople we just took on, OK, at Azure and AWS.

But I believe it's tens of thousands, OK? And the -- and they have a very, very complex bag of technology that they need to sell, whether they're selling all these fabrics or C3 buckets or all these various tools and widgets they sell now. We're selling solutions, OK? We're selling predictive maintenance. We're selling reliability. We're selling predictive maintenance for furnaces for polyethylene facilities.

We're selling supply chain optimization for consumer packaged goods companies. And so, it is absolutely imperative, OK, that we arm these people with complete sales kits, not only sales presentation, Q&A, a generative AI for asking for answering questions, but also demonstration software so that they can go kick in the door and do the first demo to the customer on their own, and then we can come in. So, I mean, we were simply overwhelmed by interest in big, important people, organizations in the last three, four months. And for us not to arm them with demonstration licenses is just not rational.

And so, now, the way that the demonstration licenses do not have continuing performance -- ongoing performance obligations so that the way that they work under ASC 606 is you recognize the revenue in the period in which they're delivered. But that was a must-do to make these people effective. And I mean they're not selling on their own. They're selling with us, OK? But this shows them -- we're there on the sales call, we're there are on the demo, we're there on the statement of work, where they're working on making the pilot successful.

But also, they need to be able to operate independently of us, and this is an absolute critical success factor. And so, it did result in an increase in that form of revenue.

Austin Dietz -- UBS -- Analyst

Awesome. Thanks, Tom. Thanks, Hitesh.

Tom Siebel -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And I would now like to turn the conference call back to Mr. Siebel for any closing remarks.

Tom Siebel -- Chairman and Chief Executive Officer

Ladies and gentlemen, thank you so much for your time and continuous attention. It's difficult to describe how exciting it is here, and it is -- we are involved in some of the largest, the most complex, and most fascinating enterprise AI deployments on earth. I assure you, it's the professional experience of a lifetime, and I think we are on the verge of building one of the world's great companies. So, thank you for your attention today, and we look forward to keeping you posted on our progress as we power forward.

Thank you all.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Amit Berry -- Investor Relations

Tom Siebel -- Chairman and Chief Executive Officer

Unknown Speaker -- C3 Agentic AI

Hitesh Lath -- Chief Financial Officer

Timothy Horan -- Analyst

Pat Walravens -- Analyst

Austin Dietz -- UBS -- Analyst

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C3.ai (AI) Q3 2025 Earnings Call Transcript was originally published by The Motley Fool