10-Q: C3.ai Q2 FY26: Revenue Declines Amid CEO Transition & AI Investments

C3.ai reports significant revenue decline and increased losses in Q2 FY2026, navigating a CEO transition and continued heavy investment in generative AI.

Summary

• Net loss for the three months ended October 31, 2025, was $(104,668) thousand, compared to $(65,972) thousand for the same period last year.
• Total revenue for the three months ended October 31, 2025, decreased by 20% to $75,147 thousand from $94,338 thousand in the prior year.
• Subscription revenue decreased by 13% to $70,242 thousand for the three months ended October 31, 2025, from $81,162 thousand in the prior year.
• Professional services revenue decreased by 63% to $4,905 thousand for the three months ended October 31, 2025, from $13,176 thousand in the prior year.
• Gross profit for the three months ended October 31, 2025, was $30,380 thousand, a 47% decrease from $57,840 thousand in the prior year.
• Operating expenses increased by 7% to $142,493 thousand for the three months ended October 31, 2025, from $133,128 thousand in the prior year.
• Net loss for the six months ended October 31, 2025, was $(221,437) thousand, compared to $(128,799) thousand for the same period last year.
• Total revenue for the six months ended October 31, 2025, decreased by 20% to $145,408 thousand from $181,551 thousand in the prior year.
• Cash and cash equivalents were $103,205 thousand as of October 31, 2025, down from $164,358 thousand as of April 30, 2025.
• Marketable securities were $571,829 thousand as of October 31, 2025, down from $578,330 thousand as of April 30, 2025.
• The accumulated deficit reached $1.6 billion as of October 31, 2025.
• Stephen Ehikian was appointed Chief Executive Officer, effective September 1, 2025, with Thomas M. Siebel continuing as Executive Chairman.
• The company's global sales and services organization underwent a restructuring in the first quarter of fiscal 2026, which had a disruptive effect on financial performance.
• Unanticipated health issues of the Executive Chairman impacted his active participation in the sales process.
• The company executed 20 initial production deployment agreements during the three months ended October 31, 2025, a decrease from 36 in the prior year period.
• A foundational U.S. patent (No. 12,111,859) for generative AI agentic technology was awarded in October 2024.

Sentiment

Score: 3

Explanation: The company reported significant revenue declines and increased net losses, exacerbated by internal restructuring and management health issues. While there are strategic investments in generative AI and new product launches, the immediate financial performance is poor, and numerous risks are highlighted, indicating a negative short-term outlook.

Positives

• Continued strong customer demand and adoption for C3 Generative AI in diverse use cases, including operator assistance, intelligence analysis, complex documentation drafting, and customer service.
• Introduced C3 AI Agentic Process Automation in September 2025, designed for intelligent, reliable automation of enterprise processes with minimal human intervention.
• Launched a Deep Research Agent to handle complex, long-form tasks like document generation, accelerating research and supporting high-quality outputs.
• Awarded a foundational U.S. patent (No. 12,111,859) in October 2024 for generative AI agentic technology, reinforcing leadership in generative AI.
• Introduced the C3 Generative AI Accelerator Program, a three-day workshop to help organizations implement generative AI solutions effectively.
• Maintained significant cash, cash equivalents, and marketable securities totaling $675.0 million as of October 31, 2025, providing substantial liquidity.
• Strategic alliances with hyperscale cloud providers (Microsoft Azure, AWS, Google Cloud) and consulting firms (McKinsey & Company, PwC, Fractal, Paradyme) are in place to expand market reach.

Negatives

• Net loss increased to $(104,668) thousand for the three months ended October 31, 2025, from $(65,972) thousand in the prior year, and to $(221,437) thousand for the six months, from $(128,799) thousand.
• Total revenue decreased by 20% for both the three months ($75,147 thousand vs. $94,338 thousand) and six months ($145,408 thousand vs. $181,551 thousand) ended October 31, 2025, compared to prior year periods.
• Subscription revenue declined by 13% and 16% for the three and six months, respectively, and professional services revenue declined by 63% and 45% for the same periods.
• Gross profit decreased significantly by 47% for the three months and 48% for the six months ended October 31, 2025.
• Operating expenses increased by 7% for the three months and 14% for the six months ended October 31, 2025, contributing to higher losses despite declining revenue.
• Cash and cash equivalents decreased by $61,153 thousand during the six months ended October 31, 2025.
• The accumulated deficit grew to $1.6 billion as of October 31, 2025.
• The restructuring of the global sales and services organization had a disruptive effect on financial performance.
• The Executive Chairman's unanticipated health issues negatively impacted his active participation in the sales process, potentially affecting sales results.
• The number of initial production deployment agreements decreased to 20 for the three months ended October 31, 2025, from 36 in the prior year.
• The company is involved in multiple ongoing legal proceedings, including securities class actions and derivative actions, which could result in substantial costs and diversion of management attention.

Risks

• A history of losses and anticipated increases in operating expenses mean the company may not achieve or maintain profitability in the future.
• Reliance on a limited number of customers means non-renewal or impairment of relationships with largest customers could adversely impact revenue and results.
• The business depends on the ability to attract new customers and on existing customers purchasing additional subscriptions and renewing existing ones.
• Intense competition from various market players could lead to loss of market share.
• Long and unpredictable sales cycles, particularly for large subscriptions, require considerable time and expense without guaranteed sales.
• The market for C3 AI Software may fail to grow as expected, or businesses may not adopt the software, adversely affecting results.
• Failure to respond to rapid technological changes, extend C3 AI Software, or develop new features and functionality could impair competitiveness.
• The transition of the CEO and the ability to retain key senior management may impact the successful execution of the business strategy.
• Macroeconomic uncertainties (e.g., government shutdowns, inflation, interest rates) could adversely impact business, operations, and markets.
• Stringent and evolving U.S. and foreign data privacy and security laws (e.g., GDPR, CCPA, EU AI Act) could lead to regulatory investigations, litigation, fines, and reputational harm.
• Compromise of information technology systems or data, or those of third parties, could result in regulatory actions, litigation, fines, and business disruptions.
• Sales to government entities and highly regulated organizations are subject to challenges and risks, including U.S. federal government shutdowns and specific contractual terms.
• Issues raised by the use of artificial intelligence (AI), including machine learning (ML) and agentic AI, may result in reputational harm or liability.
• Changes in accounting standards and subjective assumptions, estimates, and judgments could adversely affect financial results.
• Expanding international operations exposes the company to increased business and economic risks.
• Governmental export and import controls could impair the ability to compete internationally or subject the company to liability.
• Exposure to greater than anticipated tax liabilities, including on past sales for taxes, surcharges, and fees.
• Limitations on the ability to use net operating losses (NOLs) and certain other tax attributes to offset future taxable income or taxes.
• Ongoing intellectual property rights claims and other litigation matters could harm the business if resolved adversely.
• Indemnity provisions in various agreements potentially expose the company to substantial liability for intellectual property infringement and other losses.
• Failure to protect intellectual property rights and proprietary information could diminish brand and other intangible assets.
• Use of third-party open source software could negatively affect the ability to offer and sell subscriptions and subject the company to litigation.
• The trading price of Class A common stock may be volatile, leading to potential investment loss.
• The dual class structure of common stock concentrates voting control with Class B holders, limiting other stockholders' ability to influence corporate matters.
• Provisions in constituent documents and Delaware law may prevent or frustrate attempts by stockholders to change management or acquire a controlling interest.
• Failure to maintain an effective system of disclosure controls and internal control over financial reporting could impair the ability to produce timely and accurate financial statements.
• The business could be disrupted by catastrophic events, including natural disasters, power loss, or cyberattacks.
• Short sellers may engage in manipulative activity intended to drive down the market price of Class A common stock.

Future Outlook

The company expects to continue incurring operating losses and generating negative cash flows from operations in the next few quarters due to ongoing investments in the business. Existing cash, cash equivalents, and marketable securities are believed to be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. The company anticipates research and development and marketing spend as a percentage of total revenue to decline over the longer term as the business scales and brand awareness is established. The number of customers is expected to increase, while the average total subscription contract value and revenue from 'lighthouse customers' as a percentage of total revenue are expected to decrease. The company plans to continue heavy investment in generative AI to enhance existing offerings and create new applications, and to expand international operations and its partner ecosystem.

Management Comments

• "We will need to successfully transition the role of Chief Executive Officer to Mr. Ehikian and integrate Mr. Ehikian into the C3 AI organization in order to successfully execute on our business strategy."
• "The restructuring has had a disruptive effect on our financial performance. This disruptive effect, together with onboarding of new leadership, and the impact of our Executive Chairmans unanticipated health issues preventing him from participating in the sales process as actively as he had in the past, may have had and may continue to have a negative effect on our sales results."
• "Our future success and financial performance depends on the ability of our restructured sales and services organization to achieve desired productivity levels in a reasonable period of time."
• "Investing in generative AI positions us as leaders in the Enterprise AI space."
• "As the AI landscape continues to evolve, we remain at the forefront of generative AI technologies. This is clear in the product innovations we continue to roll out."
• "A key priority for us is not just to meet but anticipate the needs of the Enterprise AI market."
• "We expect to continue to invest heavily in generative AI, leveraging these advanced technologies not only to enhance our existing offerings, but also to create new, innovative applications that expand our impact in Enterprise AI."

Industry Context

The company operates in the intensely competitive and rapidly changing enterprise AI software market, characterized by continuous technological advancements and evolving customer demands. Its heavy investment in generative AI, including domain-specific offerings and agentic process automation, positions it within a key growth area of the industry. The adoption of a consumption-based pricing model and strategic alliances with major cloud providers and consulting firms reflect broader industry trends towards flexible consumption and ecosystem leverage. The company faces diverse competition, from internal IT solutions to specialized software vendors and large cloud providers. Increasing regulatory scrutiny on AI and data privacy, such as the EU AI Act, is a significant industry-wide challenge impacting operational and compliance strategies.

Comparison to Industry Standards

• The company's shift to a consumption-based pricing model for new customers is noted as 'becoming common for enterprise software companies,' indicating alignment with evolving industry practices.
• The strategy of focusing on 'lighthouse customers' (large, industry-leading organizations) to build proof points is a common approach for emerging enterprise technology providers seeking to establish market credibility.
• The reported significant revenue decline and increased net losses, while substantial, are not entirely unprecedented for growth-stage technology companies in highly competitive and rapidly evolving markets like AI, which often prioritize market penetration and R&D investment over short-term profitability.
• The company's foundational U.S. patent for generative AI agentic technology suggests a differentiated position in a specific, advanced segment of the AI market, potentially offering a competitive edge compared to general AI offerings.

Management Changes

Corporate Governance

Legal Proceedings

• The Reckstin Family Trust v. C3.ai, Inc. et al.: A putative securities class action filed March 4, 2022, alleging material misstatements/omissions and insider trading. Most claims dismissed, but portions of Section 11 and 15 violations remain. A third amended complaint was filed February 14, 2025, with a motion to dismiss under submission since June 6, 2025.
• Six Putative Shareholder Derivative Actions (Suri, Rabasca, Vo, Lanfair, Pankow, Rosenfeld v. Siebel et al.): Filed between May 23, 2022, and June 28, 2024, asserting claims against current/former officers and directors for breach of fiduciary duty, gross mismanagement, etc. All actions have been stayed pending resolution of the Reckstin case.
• John Liggett Sr. v. C3.ai, Inc. et al.: A putative securities class action filed August 22, 2025, alleging false/misleading statements regarding Mr. Siebel's health and its impact on business operations between February and July 2025.
• Three Putative Shareholder Derivative Actions (Jaffee, Steffens, Fernicola v. Siebel et al.): Filed between August 29, 2025, and September 11, 2025, based on allegations similar to the Liggett case. These were consolidated on October 3, 2025, and stayed on November 7, 2025, pending resolution of the Liggett case.
• C3.ai, Inc. v. Enel Global Services S.r.l.: The company filed a lawsuit on February 27, 2024, in Rome, Italy, claiming misappropriation of trade secrets and breach of contract, seeking €2.1 billion in compensatory damages and other relief.
• Enel Global Services S.r.l. v. C3.ai, Inc.: Enel initiated two lawsuits on December 23, 2024, in Rome, claiming ownership of two of C3's patent applications. Motions to stay were granted.

Related Party Transactions

• Sublease Arrangement with First Virtual Group, Inc.: On February 21, 2023, the company subleased approximately 3,130 square feet of office space in Redwood City, California, to First Virtual Group, Inc. Thomas M. Siebel, the company's Executive Chairman, also serves as Chairman of the Subtenant. The monthly base rent was approximately $8,608 through September 30, 2023, with annual increases thereafter, plus an allocated share of costs.

Stakeholder Impact

• Shareholders face significant negative impact due to substantial net losses, declining revenue, increased operating expenses, and ongoing legal proceedings. Potential future dilution from capital raises and limited influence due to the dual-class stock structure are also concerns.
• Employees may experience impacts from the recent restructuring of the sales and services organization. Opportunities exist in generative AI development, but the company's ability to attract and retain talent is crucial for executing its strategy.
• Customers may benefit from new generative AI products and features, but face risks of service disruptions or defects in the C3 AI Software. The shift to consumption-based pricing and potentially longer sales cycles could affect customer engagement.
• Partners, including major cloud providers and consulting firms, are critical for market expansion. The success of these alliances depends on mutual commitment and could be impacted if partners do not prioritize C3 AI Software.
• Creditors may view the company's deteriorating financial performance as an increased risk, although the company maintains substantial cash and marketable securities.

Next Steps

• Successfully transition the CEO role and integrate the new CEO into the C3 AI organization.
• Achieve desired productivity levels from the restructured sales and services organization.
• Continue to invest in research and development to extend C3 AI Software and develop new features and functionality.
• Continue to invest heavily in generative AI to enhance existing offerings and create new, innovative applications.
• Expand the ecosystem of strategic partners and the number of industry verticals served.
• Increase brand awareness, market education, strategic paid media, and thought leadership, particularly as it relates to generative AI.
• Expand international operations by increasing direct sales teams and supplementing with strategic partners.
• Address ongoing legal proceedings and potential liabilities.

Key Dates

Recommendation

The company's financial performance is significantly deteriorating, with a 20% revenue decline and a substantial increase in net losses for the quarter and six-month period. Gross margins have also fallen sharply. While strategic investments in generative AI and a new CEO appointment are noted, the immediate operational disruptions from sales restructuring and the Executive Chairman's health issues are negatively impacting results. The company continues to burn cash from operations and faces intense competition and numerous legal challenges. The combination of poor financial results, operational headwinds, and significant risks suggests a negative outlook for the stock, warranting a 'sell' recommendation.

Keywords

Enterprise AI, Artificial Intelligence, Generative AI, Machine Learning, SaaS, Cloud Computing, Software, Digital Transformation, Financial Results, SEC Filing, 10-Q, Corporate Governance, Risk Management, C3.ai, CEO Transition, Legal Proceedings, Stock Options, RSU, Patent, Strategic Alliances