A tale of two relationships for C3.ai, each with potentially different impacts on the future – a partnership with Microsoft that bodes very well for future business and kicks off while another long-standing alliance is on the point of being renewed.
First, Tom Siebel’s enterprise AI company signed an extensive agreement with Microsoft, including the integration of C3.ai technology into the Azure commercial cloud portal. Siebel himself has no doubt about the magnitude of the impact this could have, stating that this improved relationship is “perhaps the most important event” in his company’s 15-year history.
Currently, nearly two-thirds (62%) of C3.ai deals are done through partnerships with or through three hyperscalers: Google, AWS, and Microsoft. More than half of these contracts (51%) concern Google Cloud, 24% on AWS and 21% on Azure, including 5% on-premises. These percentages could soon change, Siebel believes, presenting the new agreement as “an inflection point in the enterprise AI sector”:
We invented enterprise AI. We’ve created more than 100 enterprise AI applications that deliver measurable value to our customers around the world. And now Microsoft is fully involved and getting involved. It’s difficult to overestimate the impact of this deal on C3 AI and the enterprise AI market as a whole.
A direct and immediate result of this alliance, the effective number of C3 AI salespeople will increase from an order of 100 sales professionals at C3 AI on October 1, 2024, to potentially an order of 10,000 sales professionals operating in all zones geographical and in all countries. vertical market… This partnership will accelerate the adoption of enterprise AI on Azure and enable us to solve some of the most complex business challenges of the 21st century for organizations across all industries.
What does that mean?
Concretely, this means:
Under the Microsoft C3 AI strategic alliance agreement, all C3 Enterprise AI and C3 Generative AI solutions are now available in the Azure price list. All C3 Enterprise AI and Generative AI solutions can now be ordered from the Azure Marketplace. All C3 AI solutions are salable across the entire Azure sales organization globally.
Azure sales staff will receive commissions, quota credits and special bonuses on Azure C3 AI sales. Azure sales reps will receive design credits for each Azure C3 AI sale. Importantly, all C3 AI products can now be ordered on Microsoft Paper, incorporating the Microsoft Enterprise Licensing Agreement that Microsoft has in place with, I believe, over 95% of Fortune 500 companies. will significantly shorten C3 AI’s sales cycles. And finally, Microsoft will subsidize C3 AI drivers and C3 AI production deployments on Azure for the duration of this agreement.
There will be “a large number” of joint sales and marketing activities to support the expanded alliance, he added:
The two companies will jointly build a customer account pipeline based on a common business plan with common sales sponsors, common customer acquisition goals, a strong governance structure and executive meeting cadence, a global alliance of systems integrators, a process for recording transactions, sales and technical support resources, advertisements and press releases, marketing initiatives and joint solution offerings.
C3 AI and Microsoft will create joint webinars and sales materials to educate Microsoft and C3 AI sales forces on our shared offering, solutions and value propositions. Microsoft will list all C3 AI software solutions on the Microsoft Commercial Cloud portal, tradable on Microsoft paper. A joint marketing fund will be created for cooperative marketing and promotion of integrated solutions, as well as other activities such as serving as a platinum sponsor of C3 at Microsoft conferences and participation in Microsoft Azure industry days and summits on innovation in AI.
But…
So everything is fine. Perhaps less clear is the future of one of C3.ai’s longest-standing relationships with Baker Hughes, a GE oil and gas company whose current contract expires in April next year. Some commentators have questioned the material impact any non-renewal could have on C3.ai’s still loss-making financial results. That said, Siebel himself seems to estimate that after 5.5 years of relationship, his contribution to C3.ai’s ability to scale is no longer as high as it used to be:
The relative importance of Baker Hughes in our overall business portfolio is declining. In FY23, Baker Hughes accounted for 35% of our revenue. In FY24, Baker Hughes accounted for 27% of our revenue. Last quarter, Baker Hughes represented 18% of our revenue. Revenues excluding Baker Hughes increased 41% year-on-year in Q2 FY25.
That said, Siebel currently believes it is more likely than not that the deal between the two companies will be renewed, as has been the case three times before, but suggests things could change nonetheless. Maybe it’s time to open up the relationship and start “seeing other people”? Siebel says:
As we consider our renewal options going forward, particularly in light of the new Microsoft agreement and the many direct customer relationships we have successfully established in the oil and gas market, we must carefully consider whether this is in the best interest of our shareholders. whether to partner exclusively with Baker Hughes in the oil and gas market or whether we would be better off partnering with all oil and gas service providers. None of these results will impact our guidance and, at this stage, they are not particularly material to our outlook as we have successfully diversified our revenue mix.
In short, there are bigger fish to fry these days:
Let’s put this into perspective. Our relationship with Baker Hughes is excellent. It’s a great company. This is an order, I think, a $24 billion company, okay? Now, what’s the big story today? The big story is Microsoft. Microsoft, if I’m not mistaken, is a commanding $250 billion company. And so, that far eclipses anything we’ve done.
My opinion
We’re going to position (customers) Azure as our preferred cloud provider and Microsoft is positioning on customer positioning, C3 AI is their preferred enterprise AI solution.
This is an important statement, as Siebel himself acknowledges. But he has never been a man to mince his words and this can be taken for granted in his remarks regarding both Baker Hughes and Microsoft, the latter of the two being clearly seen as the future and this is understandable for all reasons which he explains above. This is an agreement between Siebel himself and Judson Altoff, Microsoft’s chief customer officer, indicative of the highest level of management support and sponsorship he has.
The new alliance with Redmond has a negative impact in the short term, in the form of abandoning the goal of positive cash flow for the entire FY25. To succeed, you have to invest, warns Siebel :
Given the scale and great potential of the new Microsoft alliance, we will invest heavily in the Microsoft partnership. Not doing so would not be rational. We will hire more salespeople. We will hire more people for customer support. We will engage in more marketing activities, and we will do so to support a faster growing customer base. The result will be increased sales, increased revenue growth and increased market share.
How quickly all this will start to be reflected in the bottom line remains a question for 2025 and beyond. But for now, it’s clear that Siebel and C3.ai are heading into the new year with a bang, as he sums it up:
A very close strategic partnership with the largest software publisher on planet Earth. This is the beginning, this is the end, and we’ll go from there and see what we can do with it.