AI Q3 Deep Dive: Bookings Rebound, Federal Wins Offset Ongoing Revenue Decline

Enterprise AI software company C3.ai (NYSE:AI) met Wall Streets revenue expectations in Q3 CY2025, but sales fell by 20.3% year on year to $75.15 million. The company expects next quarter’s revenue to be around $76 million, close to analysts’ estimates. Its non-GAAP loss of $0.25 per share was 24.8% above analysts’ consensus estimates.

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StockStory’s Take

C3.ai’s third quarter was marked by a continued year-over-year revenue decline and a negative market reaction, despite meeting Wall Street’s top-line expectations. Management attributed the underperformance to a sharp drop in sales execution earlier in the year, compounded by the impact of a lengthy government shutdown on its federal business. CEO Stephen Ehigian described the sales issues as “totally unacceptable,” emphasizing that demand for enterprise AI remains strong and that the company is now focused on delivering measurable value to customers through disciplined execution and operational rigor.

Looking ahead, management believes that growth will be driven by further expansion in the federal market, the acceleration of its Agentic AI platform, and a renewed focus on rapid deployment of initial production deployments (IPDs). Ehigian noted that new federal mandates are pushing agencies toward commercial off-the-shelf AI solutions, positioning C3.ai to benefit. However, CFO Hitesh Lath cautioned that investments in sales and marketing, along with the costs associated with scaling support operations, will continue to weigh on margins in the near term.

Key Insights from Management’s Remarks

Management pointed to renewed federal sector momentum and robust partner ecosystem activity as key offsets to the revenue decline, while highlighting increased bookings and operational discipline.

• Federal sector growth: Strong demand from U.S. government agencies, such as the Department of Health and Human Services and various defense branches, drove significant bookings growth. Management emphasized that federal, defense, and aerospace bookings grew 89% year over year and comprised 45% of total bookings, despite the disruption from a 43-day government shutdown.

• Partner ecosystem expansion: The company’s joint go-to-market initiatives with partners like Microsoft and AWS played a critical role, with 89% of bookings in the quarter coming through these channels. The pipeline generated with partners more than doubled year over year, reflecting increased traction with both public sector and commercial customers.

• Initial production deployments (IPDs): Management identified IPDs as the most efficient method for landing new customers and expanding within existing accounts. The number of IPDs signed in the quarter rose, and leadership is tying operational incentives directly to successful IPD execution and conversion.

• Product innovation with Agentic AI: The launch of C3 Agentic AI Cross Automation allows enterprises to automate complex workflows using AI agents built via natural language instructions. Management believes this expands the company’s addressable market into robotic process automation (RPA).

• Cost discipline and operational reset: Expense reductions across personnel, cloud infrastructure, and sales and marketing helped lower non-GAAP operating expenses by $10.7 million sequentially, as management sharpened focus on high-growth sectors and aligned compensation with objective performance metrics.

Drivers of Future Performance

C3.ai’s outlook hinges on strengthening federal demand, rapid enterprise AI adoption, and tighter cost controls, balanced against persistent margin pressure from ongoing investments.

• Federal contracts momentum: Management expects that federal sector opportunities will remain a primary growth engine, citing new policy mandates for off-the-shelf AI solutions and long-term investments in reindustrialization. The continued migration from custom-built systems to commercial platforms is expected to drive multi-year demand.

• Scaling IPDs and commercial wins: The company is prioritizing rapid value delivery through initial production deployments, aiming to convert pilot projects into broader enterprise rollouts. Management believes this approach will accelerate both subscription revenue and customer expansion, particularly in verticals like healthcare, manufacturing, and energy.

• Margin headwinds and investment needs: While cost discipline is a focus, management anticipates near-term margin pressure due to higher costs for customer support, major marketing events, and the upfront investment required to scale the partner ecosystem and IPD conversions. These factors are expected to moderate profitability until revenue growth resumes.

Catalysts in Upcoming Quarters

Looking ahead, the StockStory team will monitor (1) the pace and scale of new federal contract wins and associated bookings growth, (2) evidence that initial production deployments are converting into larger, ongoing enterprise agreements, and (3) whether cost-saving initiatives can offset rising investment in sales, marketing, and partner enablement. Progress on product innovation and broader commercial adoption will also be key signposts.

C3.ai currently trades at $14.73, down from $15.18 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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