Juho Parkkinen : Mike, this is Juho. Yes, so we did close some of those deals that were pushed out of last quarter. And like we expected from our revenue guidance, the macroeconomic climate, was tougher for the second — after Q1, but it has stabilized and in particular, with our new consumption-based pricing, I think our customers and potential new customers are reacting well to that strategy.
Mike Cikos : Got it. It makes a ton of sense, especially when I think about that average contract value declining from, call it, $19 million to less than $1 million this quarter.
Operator: And our next question comes from the line of Pinjalim Bora with JPMorgan.
Pinjalim Bora : I was talking to myself, I want to ask about the subscription revenue outperformance seems like a big outperformance in the quarter. Was that largely because of the outperformance in the number of pilots that you’re doing? Because even if you have closed some of the deals that got pushed, I wouldn’t have thought that you would recognize a ton of revenue from those. So help me understand that.
Tom Siebel : Well, I think you kind of got it. There were some previous transactions that were not based on consumption-based pricing but did close in the quarter. That did contribute to that. So I think you called it accurately, Pinjalim.
Pinjalim Bora : Okay. So it was because of the deals that closed. Okay. Tom, on a high level, maybe help us understand what are you hearing from CIOs in terms of IT budgets for next year. Are people — you kind have called out, obviously, the headwinds on macro, but are you hearing people kind of resetting their budgets for next year, next calendar year? What are you hearing?
Tom Siebel : I think it’s a really good question, and it varies from company to company. I mean, there are a lot of companies that see this as — and organizations in the Federal government — and by the way, I didn’t comment on our Federal business, but our Federal business is really strong, okay? Particularly in the defense sector. And if you saw the defense budget, when he’s flying through today, he increased, I think, almost over — I’m sorry, $200 billion over last year, if I’m not mistaken. So that’s a big business. I think there’s kind of two categories. There’s companies that are like bearing down and using these technologies to figure out how to save money. That would include Shell. That would include the Air Force, okay?
And then there’s companies that whose name I will not mention, that are just absolutely going to the mat and slashing expenses on everything. They’re going train the bunkers and they’re going into recession mode, and we will see some customer churn from that, okay? Hard stop. Okay. And they’re just cutting to the bone. And so these two classes of companies out there, those who are investing in savings and those who are just kind of going into a knee jerk, perfectly rational response to an impending significant recession and then just slashing all costs. And so we see both. And I don’t know how long this lasts. You guys are the pros of this, whether it’s 12 or 24 months. But when it’s over, we’re going to still be here if you don’t plug it away at it.
And — but it’s — you cannot deny it. I mean, it is rocky out there.
Operator: And our next question comes from the line of Patrick Walravens with JMP Securities.
Patrick Walravens : I want to do a couple of sort of financial ones to start with, if that’s okay. So gross margin, if I’m looking at it right, non-GAAP was 77%, down from 81% last quarter. Is there anything worth noting there?
Juho Parkkinen : Pat, it’s Juho. The only thing to call out there is the trials and tickets, as Tom mentioned in the opening remarks, there is more higher cost than those than the ongoing subscriptions. So as we see increase of pilots and trials even in the coming quarters, we are expecting some pressure on gross margin before it climbs back up to historical levels.
Patrick Walravens : Okay. So as I look forward, should I be around this 77 level?
Juho Parkkinen : I think you should expect a little bit more of a pressure as we increase the pilot as a proportion of total deals. And by the time we are back at Q4 FY ’24, we should be back at these rates and higher.
Patrick Walravens : Okay. And then the subscription fee, but services missed at least my number by a lot and went down sequentially by a lot. What’s to note there?
Juho Parkkinen : Only thing to say, it’s — the services is a direct result of our transition to these pilots in our new consumption-based pricing model. There are minimal upfront big professional services deals associated with these. So as we — as the pilots convert to ongoing license arrangements, we do expect the services component to increase as well. And in the second half of this fiscal year, we actually are expecting services to return back to the 10% to 20% of our total revenues.
Patrick Walravens : So for Q3, it would be 10% to 20% of total revenue?
Juho Parkkinen : I’m saying the full back half of the year. So it could be somewhere in the range for Q3 and higher or lower in Q4.
Patrick Walravens : Okay. And then if you look at the subscription revenue of $59 million and change, the footnote says 32% of that is from related parties. Do you mind just explaining that for people, because I do get that question quite a bit?
