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(AI) Q2 2022 Earnings Call Transcript

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 (NYSE: AI)

Q2 2022 Earnings Call

Dec 01, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening. Thank you for attending today's C3 AI second quarter fiscal year 2022 earnings call. My name is Tamia, and I will be your moderator for today's call. [Operator instructions] I would now like to pass the conference over to our host, Paul Phillips, with C3 AI.

Please go ahead.

Paul Phillips -- Vice President, Investor Relations

Good afternoon and welcome to C3 AI's earnings call for the second quarter of fiscal year 2022, which ended October 31, 2021. This is Paul Phillips, vice president of investor relations of C3 AI. With me on the call today are Tom Siebel, chairman and chief executive officer; and David Barter, chief financial officer. After the market closed today, we issued a press release with details regarding our fourth -- our results, as well as a supplement to our results, both of which can be accessed on the investor relations section of our website at ir.c3.ai.

This call is being webcast, and a replay will be available on our IR website following the conclusion of the call. During today's call, we will make statements relating 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 in any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool owns shares of and recommends C3.ai, Inc. The Motley Fool has a disclosure policy.

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 that could affect our actual results, please refer to our filings with the SEC. 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 and response to your questions, we may discuss metrics that are incremental to our usual presentations 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. With that, let me turn the call over to Tom for his prepared remarks. Tom.

Tom Siebel -- Chairman and Chief Executive Officer

Thank you, Paul. Good afternoon, everyone. I'm pleased to provide an update on our second quarter results and give you a feel for the state of the business. We finished Q2 quite strong, exceeding company guidance and analysts' expectations on almost all fronts.

Top-line revenue for Q2 was $58.3 million, a 41% increase over the prior year. This exceeds company guidance and all published sell-side analysts' expectations. Customer count at the end of the quarter increased to 104, up from 64 -- a 63% increase over Q2 of last year. GAAP RPO ended at 465.5 million, an increase of 74% year over year.

Our cash burn for the six months -- for the first six months of fiscal year '22 was 19.8 million, reflecting increased investments in human capital, marketing, and brand equity. We finished Q2 with $1.08 billion in cash and cash equivalents and investments, enabling us to continue to invest in growth for some time. As we enter Q3, our increased revenue visibility and improved sales processes lead us to raise revenue guidance to 62 million to 68 million for Q3 and 248 million to 251 million for the -- for fiscal year '22, representing a 35% to 37% growth rate year over year, up from a 17% growth rate in fiscal year '21. Let's address customer momentum.

We expanded and extended our strategic partnership with Baker Hughes last quarter for the second time. In June of 2020, they extended the agreement for the first time by extending it, the agreement, for two years and increasing the cash and revenue commitments to C3 from Baker by 130 million. This October, we increased the value of the contract again, this time by an additional 45 million to 495 million, and extended this term from five to six years. Importantly, now, guaranteeing a minimum of 357 million in revenue for C3 over the next three and half years.

Now, historically, C3 AI has relied upon a high-touch, white-glove service, strategic-selling model to acquire and retain customers. In July of 2021, in an attempt to further accelerate revenue, scalability, and customer adoption, we reorganized sales as an independent unit, along traditional, hierarchically regimented selling structures like those in place at SAP and IBM. That proved to be a mistake. While the revenue that came in the quarter was strong, the overall performance of the sales organization, and specifically, new sales activity in the second quarter was unacceptable.

The management team and I have spent the past month restructuring the global's sales function, molded in the traditional model that we know to be effective as a high-touch, classic, strategic-selling machine. That process is now complete, and the early indicators are quite positive. Our customer intimacy has increased, our sales visibility has increased, and the amount of revenue -- of Q3 revenue that we have closed as of the end of November gives us very high confidence levels in our Q3 revenue forecast. On a positive note, we expanded our enterprise AI footprint in a number of diverse industries, including agriculture, agricultural implements, manufacturing, oil and gas, insurance, financial services, life sciences, and energy, with new enterprise production deployments at Cargill, Johnson Controls, Shell; a new contract signed with CNHI, Liberty Mutual, a Top 5 life sciences company; and new additional business with existing customers, including Cargill, Enel, FIS, Mosaic, and PTT Global Chemical.

We substantially increased our public sector business in defense and intelligence, with new production deployments at the U.S. Air Force, new business with the U.S. Space Force, and additional business with the Missile Defense Agency. In Q2, our public sector business grew 33% year over year.

We expect that growth rate in this sector to increase substantially in the last two quarters of fiscal year '22. Let me talk a little bit about our partner ecosystem. We are off to a strong start with our new strategic partnership with Google Cloud, making significant progress on joint product roadmaps and joint sales pipelines. Our significantly growing joint sales pipeline with Google Cloud contributes to our confidence in increased growth in the second half of this year.

I think our pipeline that we're currently working with the Google Cloud team is, you know, over 90 transactions, totaling -- as of today, we have identified, you know, $58 million in business that we're working together for the second half of this year. Our significant partnership with Microsoft continues apace. I think, to date, we've closed over, I think, $220 million of business with Microsoft or something like that. If I look at the forecast that we're -- that the joint pipeline that we're working with Microsoft in the second half of this year, it looks like relative roughly 120 transactions that we're working that total, you know, $140 million in business that we're currently tracking.

And all of these pipelines will continue to increase in the course of Q3 and Q4. Through our growing partnership with energy-services leader, ENGIE, we advanced our position in energy and sustainability and ESG across multiple industries, with deployments at a multinational packaging leader, a major hotel group, an iconic global coffee shop brand where C3 AI is helping manage energy consumption and GHG emissions at more than 12,000 sites. We are seeing huge interest in the new C3 AI CRM offering. CRM software and service represents a $120 billion market in 2021.

Our best guess is that the total installed base of CRM has to exceed $1 trillion. Many companies have hundreds of millions of dollars invested in their CRM installations that have been highly customized by their systems integration partners, and they are not seeing returns from those investments. Now, we are seeing substantial interest from the larger CRM systems integrators in leveraging C3 AI CRM as a complementary adjunct to their customers' existing installed CRM systems. So, they are on top of their existing CRM systems and on top of the customizations and modifications they have made, adding a modern, simple, intuitive user experience and making their existing CRM investments instantly predictive, including precise AI revenue forecasting, precise AI product forecasting, AI-enabled customer retention, next best product, next best offer, predictive interrelationship management, customer service optimization, AI-based predictive maintenance and service, etc.

This will be a very large market and a huge growth opportunity for C3 AI. Let me talk a little bit about product innovation. We continue advance -- we continue to advance our product leadership in enterprise AI. In Q2, C3 AI announced the launch of C3 AI Data Vision.

We have believed that C3 AI Data Vision represents a fundamental paradigm shift in the enterprise application user experience model from today's rather clunky, forms and table-based metaphor to a highly visual, interactive, dynamic, knowledge graph experience. Go take a look at it at the website. It's really exciting. C3 AI introduced two new applications last quarter to serve the needs of county tax assessors.

The new C3 AI applications, AI Residential Property Appraisal and C3 AI Commercial Property Appraisal, will be marketed nationally and have broad applicability for state and local governments and counties, as well as financial services institutions engaged in mortgage lending and related services. OK, this basically dramatically accelerates the time to generate a highly accurate, highly defensible property appraisal with a complete evidence package to basically support that appraisal should it be adjudicated. We think this represents a significant growth opportunity to the company. This, along with C3 AI CRM, C3 AI Ex Machina, and other initiatives further our efforts to increase revenue diversity.

C3 AI production applications showed expanded industry diversification in the quarter, growing now to 14 industries in Q2 of fiscal year '22, compared to seven industries a year ago, including notable expansions in financial services, life sciences, healthcare, manufacturing, and -- I'm sorry, manufacturing, agriculture, and agricultural instruments. Let me address company leadership. We significantly strengthened our leadership team this quarter, and we did so in our federal business with the addition of Lieutenant General H.R. McMaster, U.S.

Army retired, to the C3 AI advisory board. A graduate of the U.S. Military Academy and veteran of the Gulf War, Operation Enduring Freedom, and Operation Iraqi Freedom, Lieutenant General McMaster served as the United States national security advisor from 2017 to 2018. He has held multiple roles in the United States Central Command and as a senior fellow at the Hoover Institution and a lecturer at the Stanford Graduate School of Business.

I'm also most pleased to announce that Adeel Manzoor has joined the company in the role of senior vice president and chief administrative officer. Adeel has a rich history in information technology, formerly serving as chief financial officer at Telenav, a wireless location-based services corporation. Prior to that, he served as a vice president and business unit CFO of the storage and big data and value compute business at Hewlett Packard Enterprise. He also served as vice president and business unit CFO of the converged infrastructure business unit at HPE.

Effective December 3, Adeel will also assume the role of CFO at C3 AI. I am disappointed to announce that David Barter will be retiring from C3 AI for personal reasons effective later this month. David had made many substantial contributions to the success of the company, and he will be missed. Let me touch a little bit about new university relations because I think this is a particular area of strength for C3 AI.

We continue to support our powerful university ecosystem through the C3 AI Digital Transformation Institute. This is a public-private partnership that consists of C3 AI, Microsoft, Lawrence Berkeley Labs, the National Center for Supercomputing Applications, UC Berkeley, the University of Illinois-Urbana, MIT, Carnegie Mellon, Princeton, Stanford, and KTH in Sweden. The C3 AI DTI sponsors advanced primary research in AI for digital transformation, sponsors industry colloquia, and has awarded significant research funding to develop advanced AI techniques in precision medicine, COVID, pandemic mitigation, and energy and climate security. Let me talk a little bit about human capital.

We continue to attract exceptional talents to the company. The company received, believe it or not, over 18,000 employment applications in the course of Q2. We ended the quarter with 668 full-time employees, an increase of 39% year over year. So, in summary, what we have at C3 AI is a high growth story, and we are laser-focused on growth attainment.

We've established as the central leadership position in the nascent stage of the enterprise AI market. The addressable market opportunity in enterprise AI is staggering, promising to exceed a $300 billion software market by 2025. Our purpose is clear. We are here to establish a clear global market leadership position, to establish and maintain clear technology and product leadership, to continue to attract and retain the highest quality human capital, to operate a high-performance global enterprise, to maintain the highest levels of customer satisfaction, to establish thought leadership in enterprise AI, and importantly, in ethical AI.

I believe our technology foundation is without compare. Our human capital is exceptional. Our brand equity is increasingly positive. The enterprise AI market is large and rapidly growing.

We have the technology, we have the leadership, we have the human capital, we have the capital, and we have a huge market opportunity. I believe the moderate growth opportunity facing C3 AI has never been greater than it is today, and the company has never been in a better position to establish a global market position, and that is what we intend to attain. So, with that, I will conclude my comments and turn it over to my colleague, David Barter, to drill down further into the financial details. David.

David Barter -- Chief Financial Officer

Thank you, Tom. We delivered strong second quarter results that again exceeded our guidance ranges for revenue and operating income. At the same time, our notable increase in backlog helps improve our revenue visibility and provides us with confidence in our outlook for the full year. Revenue was $58.3 million, which is above the high end of our guidance, and it represented an increase of 41% from the prior year.

Within revenue, subscription revenue was $47.4 million, up 32% from a year ago. Professional services revenue increased to $10.9 million. Despite the higher proportion of professional services revenue in the second quarter, we continue to target our subscription revenue mix in the high 80% range. Our revenue continues to be well-diversified across industry verticals and geographies.

Five industry verticals each contributed over 10% of our revenue this quarter. Revenue growth from oil and gas and financial services led the way in Q2. We're also excited about the growth being generated by sales to federal government agencies, and we expect growth in this vertical to increase meaningfully in the second half of the year. Geographically, we also are well-diversified.

APAC continues to perform particularly well, with revenue up 77% in the second quarter. Revenue from customers in EMEA and APAC represented 28% of our first half revenue. The amendment of our JV with Baker Hughes, which Tom referenced in his remarks, enhances our backlog and our revenue visibility. The amendment includes several noteworthy improvements.

One, it increased the total contract value by $45 million. Two, it extended the JV term by one year. And three, a new pricing model makes it easier for Baker Hughes to further accelerate the sales of C3 AI software. Since future revenue from Baker Hughes is now contracted and committed, the majority of the future revenue related to the JV agreement is now included in GAAP RPO.

With this in mind, at the end of the second quarter, current RPO was $179.4 million, up 34% from a year ago and 24% from last quarter. Total GAAP RPO was $465.5 million, an increase of 74% from a year ago and 60% from last quarter. Our cancelable backlog, which is not included in GAAP RPO but has historically converted to revenue, was an additional $63.8 million. Combining our GAAP RPO plus cancelable backlog leads to a non-GAAP RPO of $529.3 million, up a meaningful 74% from a year ago and 48% from the prior quarter.

We believe these are very healthy metrics, which further raise our confidence and visibility. As a reminder, revenue associated with the Baker Hughes JV consists of related party revenue interacted directly with Baker Hughes for their own use or its sell-through to their end customers in oil and gas. The related party revenue in the second quarter was $15.9 million. Nonrelated party revenue derived from transactions assisted by Baker Hughes but the end customer contracted directly with the C3 AI was $4.7 million.

In total, this produced $20.6 million of revenue from our JV in second quarter. With the Baker Hughes JV amendment executed in the second quarter, we expect the related party disclosure to be less relevant due to the change in sales model going forward. Turning to expenses and profitability, I will be referring to non-GAAP measures, which exclude stock-based compensation expense and the employer portion of payroll tax expense related to stock transactions. A GAAP to non-GAAP reconciliation is provided with our earnings press release.

Gross margin in the second quarter was 77.8%, up 160 basis points from a year ago, reflecting leverage in our operating model as our business continues to scale. Subscription gross margin in the quarter was 81%, consistent with a year ago. And professional services gross margin was 63.8%, compared to 47% a year ago. Operating expenses were 67.9 million, up 66% from last year as we continue to focus on executing planned strategic investments to drive our long-term growth.

Operating loss was $22.6 million in the second quarter, better than our guidance of a loss of $37 million to $30 million. Turning to our balance sheet and cash flows, we ended the quarter with $1.08 billion in cash, cash equivalents, and investments. Operating cash flow was an outflow of $18.9 million in the second quarter. And after capital expenditures of 0.9 million, free cash outflow was $19.8 million.

Deferred revenue was $72.9 million at the end of the quarter, compared to $82 million in the prior year. Turning to our guidance for the third quarter and the full year. Our amended Baker Hughes JV agreement reinforces our confidence as we look forward. In Q3, we expect total revenue in the range of $66 million to $68 million, representing growth of 34% to 38% from a year ago.

We expect to invest thoughtfully in headcount and initiatives that will drive our continued growth and anticipate a non-GAAP operating loss in the range of $30 million to $26 million. For full fiscal year 2022, we are increasing our revenue guidance to the range of $248 million to $251 million, representing growth of 35% to 37%. We now anticipate a non-GAAP operating loss in the range of $108 million to $100 million, which also represents an improvement from our prior guidance. In summary, we're pleased to deliver second quarter results that exceeded our guidance ranges.

We are optimistic about the momentum we're generating in the marketplace, which further supports our outlook for fiscal year 2022. Finally, I'd like to add that this has been a privilege to have been part of the C3 AI team. I'm very appreciative of the opportunity Tom provided to me and for all his support. We have a strong finance and accounting team, and I'm looking forward to supporting Tom and Adeel with a smooth and thoughtful transition.

Before opening up the call for questions, I'd like to invite Adeel Manzoor, our new chief financial officer, to say a few words. Adeel.

Adeel Manzoor -- Senior Vice President and Chief Administrative Officer

Thanks, Tom and Dave, for the warm welcome to C3 AI. I'm incredibly excited to be part of the team. The company has established such a strong leadership position and is off to a great start. I'm looking forward to working with Tom and the team to drive growth and realize company goals.

I'm also looking forward to working with you all. With that, I'll turn the call over to the operator for any questions that you may have for us. Operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] The first question is from the line of Sanjit Singh with Morgan Stanley. Your line is now open.

Sanjit Singh -- Morgan Stanley -- Analyst

Thank you for taking the questions and sorry to see you go, David. Best of luck with all your endeavors in the future. Tom, I'm wondering if you could talk a little bit about some of the motivations around the restructuring of the contract? The first go-around with Baker Hughes was right smack in the middle of the pandemic. It made a lot of sense to restructure that contract, extend the life of it.

What was the sort of motivation this time and sort of the contribution and two in terms of new RPO? And then if you sort of exclude, you know, the bookings from that, from Baker Hughes, if we just sort of look at the business ex-Baker Hughes in the quarter, how would you sort of characterize the bookings performance in the quarter? Because it seems like -- it seems pretty good too by our numbers but then you sort of hinted at a sort of restructuring of the sales force. I'm trying to put these pieces together and understand like how did bookings evolve relative to your expectations in Q2.

Tom Siebel -- Chairman and Chief Executive Officer

Well, there's a number of questions there. Let me see if I can piece this apart. The real motivation behind structuring Baker Hughes was to basically kind of realign the sales structure. So, Baker Hughes is -- I mean, roughly a $20 billion business.

And they run four central business units. And, you know, the real relationship with Baker Hughes has to do with a deep, deep energy -- you know, expertise in oil and gas, process industries, and kind of in chemical -- you know, petrochemical business. I mean, they are kind of the masters of the universe of that. And they have these, you know, unbelievably close relationships going back now I think 70 years with everybody in the world, from Rosneft to Gazprom, to Aramco, to Shell, Chevron, you name it.

OK. And those relationships and that expertise are in their four business units. When we first put together the relationship with C3 AI-Baker Hughes, they basically formed, you know, a new business unit that was called BakerHughesC3.ai, that sat kind of outside of those organizations. And so, they really weren't the people with the relationships and they weren't the people with the quotas and they weren't the people with the deep industry expertise.

And what we really did here was -- is we restructured it in a way that we put all of the sales resources and of the quota in the operating units of Baker Hughes. OK? And so, that's where the relationships are, that's what we do, whether we're talking about the Ecopetrols, the Qatar gases, the [Inaudible]  Shell. And so, the quota and of the people in the operating units. That was the nature of the restructuring.

But we're also -- we also did this in a way that gave them increased pricing flexibility to price in a manner that's consistent with that business segment, be it LNG. OK. Be it, you know, deep water. Be it renewables.

Be it petrochemicals. So, we gave them the flexibility. In consideration, what they -- for us given them that flexibility, what they gave to us was irrevocable and nonrefundable revenue commitment. So, that becomes hard RPO, I think $352 million if I'm not mistaken.

I guess I'm not?

David Barter -- Chief Financial Officer

Three fifty-seven over the next three and a half years.

Tom Siebel -- Chairman and Chief Executive Officer


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Three hundred fifty-seven over the next three and a half years. That's a pretty significant, you know, roughly $100 million a year baseline that we start from that we could build on top. So, I'm confident that's in the best interests of the shareholders of C3. So, it's a win-win relationship that allows them to accelerate their business as the oil and gas industry recovers.

And, you know, it's a good thing. You know, as it relates to the sales organization, yeah, well, you know, the attempt was, and candidly, I think we did it too early, was to put together kind of your traditional, highly hierarchical, highly regimented kind of independent business unit sales organization. OK? Like they have at SAP, like they have at IBM, like they used to have at Oracle. And, you know, the idea is you let a sales organization like that run kind of independently.

And theoretically, you know, you can scale the business at a greater rate. Now, that's a different model than we're used to using because I know many of you kind of always ask, well, how many people do we have in the sales organization? And it's really -- you know, the answer was how many people we have in the company. You know, that's already available in the sales structure. You know, we would always put together sales teams, you know, from engineering or from forward-deployed engineering, from product marketing, from the office of the CEO, whatever it took to take care of a customer.

And, you know, we -- you know, I think, candidly, we did it too early and, you know, the performance of the organization was unacceptable. And so, we watched it. We watched it very carefully. It became apparent that it was not going to, you know, meet the growth needs of the company going forward.

So, basically, we reverted to our old selling -- old strategic selling model, which is a tried, tested, proven technique that many companies are familiar with. I think it was developed in 1988 by Robert Miller and Stephen Heiman in a book called Strategic Selling. Pretty good book if you haven't read it. And so, now, we've gone back to what we did before, is for every account, you know, we put together a team of four, five, six, or seven people who we think are just the best people in the company to handle that account, be they from finance, be they from the engineering organization or product marketing, from the sales organization or from the office of the CEO to, you know, surround the customer, develop a strategic partnership with the customer, make sure the trials are successful, their implementation is successful, that their production deployments are successful.

And this is what we've done. It took us about two weeks to place -- they put all that in place, you know, and all things have been in place since the first day of this quarter. It's a done deal. We're off to the races.

And based about what we're seeing now, it was absolutely the right thing to do. We have a lot of visibility into Q3 and a large pipeline for Q4. And, you know, to the extent that it's going to a hierarchal model was a mistake because I'm the CEO, so I have to accept responsibility for that. But we've made a course correction, and we're back on track.

Sanjit Singh -- Morgan Stanley -- Analyst

I appreciate all the color, Tom. And I'll let slip a little one more if I might and this is on the sort of partnerships go to market. So, you -- I think you called out a number of them. But the one that sort of perked my ears was Google Cloud and Microsoft.

What's driving the momentum behind that partnership? Is it, you know, one of those specific apps that you guys, is it the CRM app that's driving a lot of the go-to-market collaboration around that particular apps, or is it the broader platform, or even a whole host of other apps? If you can sort of give us some color on the momentum between -- with Microsoft and Google Cloud, that would be really helpful.

Tom Siebel -- Chairman and Chief Executive Officer

It's really different between the two. I would say that if you look at the DNA between the Microsoft sales organization and the C3 sales organization, they're actually very similar. I mean, these people are really highly professional experienced, you know, enterprise sales professionals. And we just kind of, you know, understand how to approach accounts together, you know, how to address opportunities together.

We can talk together in shorthand and figure out how to get the deal done to the customer satisfaction and how to make the customer succeed. That has been a hugely, hugely successful relationship. It is directly between Judson and [Inaudible] and I. And, you know, and Ed and everybody else.

But it's at the highest levels. And we -- and that is a very, very successful relationship. They look at -- their motivation is to drive Azure. OK? Now, Google approached us from a very different perspective.

So, Thomas Kurian, when he took over Google, and I think he had about 400 sales people, I suspect they're all gone. OK? And now, he's got about 4,000 sales people. Well, most of them are kind of experienced enterprise sales men and women from SAP and other companies. He decided to approach a hyperscaler market.

He's been very clear that he wanted to approach the hyperscaler market but from a different competitive edge. So, rather than approach -- rather than compete with AWS and Azure based upon, you know, CPU seconds and storage hours, and, you know, with arguably a better architecture, he wanted to approach it to the application layer and deliver a family of applications for manufacturing, for consumer packaged goods, for telecommunications, for life sciences, for financial services, and for aerospace, defense, and intelligence. So, he wanted to approach it by delivering applications, tried, tested, proven enterprise AI applications that run on top of the Google Cloud that delivers solutions rapidly to the customer. Now, that's a pretty interesting and I think sensible and creative market differentiated strategy.

Now, the net effect of it is, you know, it accelerates the sale of a CPU seconds and storage hours. It just gets you there a lot quicker. So, if you were in the market and you wanted to partner with somebody, let's say had, you know, 10, 20, 30, 40 turnkey enterprise applications that ran on top of the Google Cloud that addressed the value chains of oil and gas, utilities, energy, manufacturing, healthcare, financial services, manufacturing, etc., I would argue that there's just definitely one door in the world that you could knock on. OK.

And that's the door right on the front of this building. And so, that's the door they've knocked on. That's the relationship we've put together, and now, we're jointly selling these applications globally. And it's a really interesting and productive relationship.

Sanjit Singh -- Morgan Stanley -- Analyst

I appreciate all the details, Tom. Thank you.

Operator

Thank you, Mr. Singh. The next question is from the line of David Hynes with Canaccord. Your line is now open. 

Luke Hannan -- Canaccord Genuity -- Analyst

Hey, guys, this is Luke on for DJ. Thanks for taking the question. So, you called out in your prepared remarks the fairly significant uptick in professional services revenue in the quarter. Could you just expand there and discuss what drove that dynamic? Is that just a reflection of new large customer relationships ramping or is there anything else to call out there?

David Barter -- Chief Financial Officer

That's a great question. There's really nothing to call out. Our subscription revenue over time has averaged 86%, but it's moved around five or six points in any quarter -- given quarter and this just has to do with timing of projects and delivery. So, nothing more to that than just timing in execution. 

Tom Siebel -- Chairman and Chief Executive Officer

So, you would expect that to stay -- you know, professional services will stay in the 14% to 20% range of revenue in perpetuity. 

David Barter -- Chief Financial Officer

And that's kind of where we have targeted.

Luke Hannan -- Canaccord Genuity -- Analyst

Got it. Thanks. That's helpful. And then maybe just another on sort of the government opportunity out there.

You obviously had a big quarter in terms of signing new contract value with those three agencies you called out. Do you feel like there's no proof to be had there, or how would you characterize that opportunity going forward? Thanks.

David Barter -- Chief Financial Officer

I think that opportunity is huge. And I think, you know, we've had -- you know, General Ed Cardon joined us as -- in the capacity of chairman of federal systems, H.R. McMaster -- General McMaster has now joined us. I think you can expect some, you know, significant announcements, you know, going forward, and we're quite confident that our business in federal, specifically defense and intel, is going to grow at a substantially increased rate in the second half of this year.

Luke Hannan -- Canaccord Genuity -- Analyst

Great. Thank you.

Operator

Thank you, Mr. Hynes. The next question is from the line of Jack Andrews with Needham. Your line is open.

Jack Andrews -- Needham and Company -- Analyst

Good afternoon. Thanks for taking my question. Now, Tom, you talked about sort of this continued need for a high-touch sales approach. And so, I was wonder if you could maybe tie that into just the overall state of the market here.

I mean, there's so much noise, it feels like around AI in general. So, could you just maybe frame for us -- I mean, do your customers -- you know, given the healthy pipeline activity, do -- does everyone out there really understand the concept of enterprise AI and all the use cases, or do you still need to spend time sort of evangelizing, you know, the value proposition of everything that you can deliver to customers?

Tom Siebel -- Chairman and Chief Executive Officer

Great question. You know, right now, if you look at the pipeline that we're working going after the next four quarters, it's about a billion and two. OK? The pipeline that we're working for the second half and what we see as qualified opportunity in the second half of this year is about 800 million. You know, we are looking at a market that is in -- you know, there's this first half of the first inning, OK, in enterprise AI.

And people are just starting to figure it out. And, you know, we -- we're not really spending a lot of time evangelizing. We're not spending -- you know, basically, there's kind of two schools or three schools of thought as it relates to AI. One, I'm like completely confused and I don't get it yet, that would be the largest segment.

OK? The next largest segment is, well, you know, I'm going to think 20,000 people in Bangalore, and I'm going to build this platform myself. OK? And virtually, every one of our customers has tried to build this themselves. You know, it's long, it's expensive, it never works. I mean, GE, I think, spent $6 billion.

Shell tried to build it. Enel tried to build it. Everyone -- Coke tried to build it. There's no -- United States Air Force, God knows how many times they've tried to build it.

And, you know, we don't really fight that fight. So, we let people kind of go through that, first deciding that they want -- once they get to the point that they are going to take advantage of enterprise AI, that's the first qualifying issue. And then when they've gotten to the point where they've decided they're not going to build it themselves, that's -- so we're not going to stay around and talk them out of building it themselves. We're not going to stay around and convince them why AI is good.

We're mostly in the business of just, you know, finding that customer that is, number one, committed to easily transform the organization and has decided no way no how are they going to build it themselves because that's stupid. OK? When we find that customer, that's we -- we're not -- we're spending time qualifying, not evangelizing. It is a -- you know, before it's all over, everybody will be in that third sector. I'm quite confident of that.

And we'll be looking at a $300 billion addressable market. It's just an evolution the market has to go through, and we're -- you know, we have no problem with that.

Jack Andrews -- Needham and Company -- Analyst

Got it. Thanks for the color around that. That's really helpful framing. Maybe just as a follow-up question, just given the sort of sales changes that you've made, could you maybe update us in terms of your hiring plans and priorities for the balance of the fiscal year here?

Tom Siebel -- Chairman and Chief Executive Officer

Well, we had 18,000 job applicants in the last quarter, so we are very -- I mean, we're -- for some reason, we're just -- I think last time I looked in the last year, we had 52,000. OK? But the last -- right now, I think 18,000 annualized is to what, 72,000? OK? And fast math? OK? And so, we have a swath of people who want to come to work here. They're in sales, in data science, in, you know, product marketing. You can expect that we will -- you know, we're very selective about who we hire, both the -- both in terms of personality type and in terms of skill set.

I think something like 86% of our people have advanced degrees. Am I right about that, Jack? It's a huge number. I think -- excuse me, I'm sorry, 68% of our people have advanced degrees, 10% of our people have PhDs. Rough numbers.

So, you give me, you know, a couple of points one way or the other of those kinds. I don't have actually -- I don't have these numbers right in front of me. OK? But it's -- you can expect that we will hire every person that we deem to be qualified, who we think can succeed here, OK, in the next two quarters and in the next two years. And so we're -- we are open for business.

We're hiring. We're hiring in Guadalajara. We're hiring in New York, in Paris, in Rome, in the U.K., in New York, Atlanta, Chicago, and right here in Redwood City, we're hiring. So, it's -- and we feel very fortunate about the people that we're able to attract and retain.

Jack Andrews -- Needham and Company -- Analyst

That's great to hear. Thanks for the update.

Operator

Thank you, Mr. Andrews. The next question is from the line of Michael Turits with KeyBanc. Your line is open.

Unknown speaker

Hi, this is Michael [Inaudible] on for Michael Turits, and thanks for taking my question. You called out strength in APAC, and I was wondering if you could dive into that a little bit and then compare that to what you're seeing in EMEA? Thanks.

David Barter -- Chief Financial Officer

Sure. I think what we shared on the call was that APAC was up 77%. I think the strength if I think about the deals that we've had in APAC and just thinking about the last couple of quarters have been certainly financial services. I think we've seen some oil and gas and chemicals.

So, I think it hits a number of industry verticals as what we've seen in APAC.

Unknown speaker

OK, thanks. And then if I could do just a quick follow-up. Is there anything you'd comment on the billings sequential change, in the timing, or just strange seasonality around that? Thanks.

David Barter -- Chief Financial Officer

I don't think so. I think, overall, if you think about billings, probably the most noteworthy element and just to kind of keep in mind is, sequentially, things have been very strong. If you were to kind of go back, we had over 121%. The -- going back to Q4, 18% sequential.

So, I think, sequentially, when you think about it, we were kind of coming off of a higher, you know, period. So, that's -- just -- I just keep in mind that there's been a continued decent movement around invoicing and how that percolates to the [Inaudible]

Operator

Thank you, Mr. Turits. The next question is from the line of Brad Sills of Bank of America. Your line is now open.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for taking my question, guys. I wanted to ask about some of the newer vertical industries that you're going after: life sciences, manufacturing, IT services. As you kind of expand into these other verticals, what kind of traction are you seeing there and any color on perhaps applications that you're seeing some early pilots with and, you know, what pipelines look like potentially in those industries? Thank you.

Tom Siebel -- Chairman and Chief Executive Officer

Hi, Brad. You know, I wish I had all the pipelines in front of me. I don't have that done. Jack, do you have the sheet by vertical? Can I look at it? Financial service is going to be huge, Brad.

You know, that's a big one. I mean, now, we're moving into agriculture. Believe it or not, agricultural implements, insurance, telco. I mean, this is going to go everywhere.

I think consumer packaged goods will be good. We're not -- we'll be dead if we're not there. The largest -- unquestionably the largest where we haven't made a lot of traction yet will be precision medicine. No way that cannot be large.

It has to be. So, I mean, it's just a matter of -- you know, these markets will develop. For some reason, the utility -- I know why the utility market was the first to develop because they -- you know, when -- remember when you say everybody is talking about IoT, these are guys that had all the sensors out there. Oil and gas kind of came as a complete surprise.

I mean, when that came in the course of, you know, a gift horse who walked in the door in the person of Baker Hughes. And then, you know, defense and intelligence. Oh my God. I mean, how big will that be? I mean, these guys are -- financial services pipeline is very large in the second half of the year.

Telecommunications is very large. Defense and intelligence -- defense and intel, you know, these poor guys have to keep up with the Chinese. And God knows how many scores of billions the Chinese are spending on this. And so, then -- and, you know, they have some work to do, and I think you'll find that we are part of the solution.

So, we're just -- you know, we're going after the verticals in a kind of very pragmatic coin-operated fashion. And, you know, as the CEO walks through the door and, you know, with a check and a mandate, and he happens to run Boeing, we're in the aerospace business. That's how it works.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, Tom. And then also, if I can ask about some of these vertical partnerships, FIS, ENGIE? If you could elaborate just a little bit on the commitment there, go-to-market resources, any traction you're seeing in those partnerships would be really helpful. Thanks again.

Tom Siebel -- Chairman and Chief Executive Officer

ENGIE is pretty mature, and that's one where we're seeing a lot of traction. And candidly, what they're doing is they're using our technology to provide energy services to large organizations like Ohio State University and others, a large retailer of coffee that will remain unnamed, a number of university systems where they're basically almost stepping in as the role of the utility, OK, where they are, you know, kind of guaranteeing them a reduction in their energy and carbon footprint over the next decade or 20 years, and they're using our software, you know, as the heart of that service that they provide. So, that's mature, growing, hugely successful. FIS is relatively new as you're aware.

I think it was put in place a couple of quarters ago. We're seeing slow but steady progress there. I'm in touch regularly with the guys who run the business that is -- you know, right now, I'm optimistic about it. But we have not yet generated a lot of results there.

I think in the next two quarters, we would know whether that's going to succeed or not. I think it will. I spent the morning -- you know, I had a regular -- I'm at regular communication with the person who runs the kind of defense business at Raytheon, who is our partner in the defense and intelligence community. And their levels of commitment are definitely increasing.

We're involved in some very large projects with them. And you can expect to see that those projects will contribute, you know, some of the growth that we've -- that David mentioned and I have mentioned, you know, in the second half of this year. So, that -- Raytheon is a good one.

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Thanks, Tom.

Operator

Thank you, Mr. Sills. The final question is from Mark Murphy with JPM. Your line is now open.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yes. Thank you very much. So, Tom, I was curious, when you look back on it with a few more quarters under your belt, what is your preferred route to market or what is more efficient? Is it selling direct and letting companies build their own machine learning and AI models or is it the -- is it weaponizing the older applications by working the way you are with Microsoft and Adobe and Infor and other application vendors?

Tom Siebel -- Chairman and Chief Executive Officer

Great question. I tell you, it's a lot easier, Mark, to weaponize existing systems. OK? It really is for. Or just go take an account, say Shell, say Enel, say Coke, say the Missile Defense Agency, take an account and make them successful.

They have built the first half, and then on the second half -- and I'm thinking, for example, you know, at the Air Force, we must have 22 applications live in readiness or will be live, I think, in March. And so, that's preferred. It's easiest. OK? It's highly certain, OK, because you have control over the situation.

You know, you're dealing directly with the customer. You can -- you do not only set their expectations, you could influence what they're going to do first and second and third. And, you know, very much about succeeding at this is picking the right project as you know. You know, the reason that I think a lot of these companies fail at these projects is because they pick projects that are, A, either impossible or like let's say somebody wants to build an AI application to predict the price of, you know, pork bellies next month.

Well, if we can predict the price of pork -- AI was that sophisticated, we could predict the price of gold next month, and we could predict the price of Google stock next month. Then if we could do that, none of us would be in the software business, would we? OK. People that seem to -- try to do these applications, believe me. One was explained to me yesterday.

So, you either have people who choose applications that are impossible or people choose applications that are of low value. Now, when you're dealing with them directly, you can coach them and keep them on high-value applications where AI is an appropriate tool. Now, that being said, if you want to establish and maintain a market leadership position, as you know we do, we need to think about market leverage. OK.

And this is when you're going through a much larger scale through distribution partners like Microsoft, like Google, like FIS, like Baker Hughes. OK. The advantage is you know scale. We have 12,000 people at Baker Hughes; 4,000 people at Google.

I think 60,000 people at Microsoft. I mean, I don't know what the number is, but it's some staggering number like that. So, the good news there, you have leverage. OK.

It's harder. You need to be much more sophisticated about the way you're doing it. You need to be willing to allow people to make mistakes. You're going to have higher rates of failure.

At the same time, you do have market ledger -- leverage. And if you do -- and the goal is to establish and maintain clear market leadership, you need to do with your partner ecosystem. So, as much as I would prefer to do it the easy way, it's not going to achieve the desired objective. Sorry to kind of go full circle on it.

But I mean, it was a really good question.

Mark Murphy -- JPMorgan Chase and Company -- Analyst

Yeah. OK. Yeah. Thank you, Tom.

I appreciate that insight into the strategies. But my other question is just observing, you know, what has happened with commodity prices. And they're up so much year over year. You have this, you know, chunk of business in oil and gas and utilities, although you're diversifying very rapidly.

Is the commodity price creating more budget there for that end market when you head into 2022? And I guess I was just curious, you know, if that's benefiting Baker Hughes, has that given them more confidence to kind of make this stronger commitment to you?

Tom Siebel -- Chairman and Chief Executive Officer

Well, there's no question that as it relates to that segment of our market, you know, it's a lot easier to do business there when oil prices are like above zero. So, when oil prices were, I think, negative $37 a barrel. I mean, all these companies were thinking about is how fast they can lay people off, right? You know, and how fast they can slash budgets? They were all just in shock. Now, with -- you know, I don't know where oil is today.

You probably do. But I suspect it's something like $86 a barrel, but I don't know. I don't really track it. OK.

But it's -- you know, it's significantly non-zero, and they're all investing in the future. Interestingly enough, most of their investment in becoming nonhydrocarbon companies. Certainly, Aramco is. Certainly, Shell is.

I mean, they're all investing and reinventing themselves. You're talking about reinventing say a $300 billion business that's entirely to that in the hydrocarbons to be entirely dependent on, you know, to operating on clean energy, it's a pretty significant transformation. But there's no question, they are looking up and it's, you know -- and now, there are budgets and they are investing. And I suspect this is one of the reasons that motivated Baker Hughes to restructure our agreement the way they did. 

Mark Murphy -- JPMorgan Chase and Company -- Analyst

OK. I understand. Thank you very much. Appreciate it.

Operator

Thank you, Mr. Murphy. There are no additional questions waiting at this time. I'll now turn the conference back over to Tom for any closing remarks.

Tom Siebel -- Chairman and Chief Executive Officer

OK, ladies and gentlemen, we're -- you know, thank you so much for your time and attention. And we look forward to, you know, keeping you posted on the progress of our business. You make -- you know, we're very clear on what our mission here this year, and that is to establish and maintain market leadership position globally in enterprise AI. You know, if we do that, I suspect this will be a pretty successful company, more successful than that.

And we appreciate your time, courtesy, and attention, and we look forward to staying in touch. Thank you all very much.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Paul Phillips -- Vice President, Investor Relations

Tom Siebel -- Chairman and Chief Executive Officer

David Barter -- Chief Financial Officer

Adeel Manzoor -- Senior Vice President and Chief Administrative Officer

Sanjit Singh -- Morgan Stanley -- Analyst

Luke Hannan -- Canaccord Genuity -- Analyst

Jack Andrews -- Needham and Company -- Analyst

Unknown speaker

Brad Sills -- Bank of America Merrill Lynch -- Analyst

Mark Murphy -- JPMorgan Chase and Company -- Analyst

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