Sprinklr, Inc. (NYSE:CXM) Q3 2024 Earnings Call Transcript

Sprinklr, Inc. (NYSE:CXM) Q3 2024 Earnings Call Transcript December 6, 2023

Sprinklr, Inc. beats earnings expectations. Reported EPS is $0.11, expectations were $0.07.

Operator: Greetings, and welcome to Sprinklr’s Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Scro, SVP, Finance. Thank you, Eric. You may begin.

Eric Scro: Thank you, Alicia, and welcome, everyone, to Sprinklr’s third quarter fiscal year 2024 results financial call. Joining us today are Ragy Thomas, Sprinklr’s Founder and CEO, and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we’ve made them available on the Investor Relations section of our website, along with the supplementary investor presentation. Please note that on today’s call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP.

You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP. In addition, during today’s call, we’ll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the Fourth fiscal quarter and full fiscal year 2024 and our initial framework for fiscal year 2025, and our actual results might differ materially. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC also posted on our website.

With that, let me turn it over to Ragy.

Ragy Thomas: Thank you, Eric, and hello, everyone. Thank you for joining us today. We’re pleased that Q3 was another strong quarter that exceeded guidance across all key metrics. Q3 total revenue grew 18% year-over-year to $186.3 million, and subscription revenue grew 22% year-over-year to $170.5 million. With our continued focus on operational efficiency, we generated $27.4 million in non-GAAP operating income, which resulted in a record 15% non-GAAP operating margin for the quarter. We are going through what I believe is the most exciting time in recent history for the modern front office. Many AI experts agree that AI is going to boost human productivity significantly over the next few years. For many industries, customer-facing functions are the most labor intensive.

And we believe that 20% to 40% productivity improvements are a real possibility in the next five years. We also believe that the data to train the AI models and the unification of siloed teams, technology and processes are required to unlock the power of predictive and generative AI. I’d like to share more details on these three key areas, given the benefits customers are experiencing in terms of their operating cost, risk management and improved customer experiences. Let’s start with everyone’s favorite topic, AI. We continue to believe that we are at the forefront of a very long-term durable growth opportunity, given our deep investments in AI more than five years ago. Today, I’m sure no one is debating the fact that we have an early mover AI advantage given our decision to design Sprinklr on a single architectural code base, where AI has been infused across all product suites, Sprinklr Service, Sprinklr Social, Sprinklr Marketing, Sprinklr Insights, our self-service offerings and our entire platform.

During the third quarter, customers executed over 170 AI deployments in Sprinklr Service alone. This includes auto speech recognition, advanced intent detection and speech to text models, along with agent assist features like smart responses and other Generative AI enablement. I met with more than 70 customers around the world this quarter. And while everyone is universally excited about the possibilities of AI, the customers I spoke with wanted more than AI in theory. They wanted practical, actionable real-world AI that works safely and reliably and produces measurable business results now. This is what Sprinklr is doing for them. For example, one of our leading telecom customers using Sprinklr’s conversational AI bots and AI routing achieved over 90% improvement in the response time and more than 60% reduction in average case handling time after enabling our chatbot.

One of our luxury goods customers has seen a 25% improvement in their CSAT score, along with a 50% reduction in their average handling time using Sprinklr’s conversational analytics product. As you know, we have taken a very open approach to AI. This is why you’ve seen us announce our integrations with Google Cloud’s Vertex AI and OpenAI in addition to our proprietary Sprinklr AI+. We offer customers the greatest choice in how to utilize Generative AI with accuracy, privacy and security in just a few clicks. We maintained that Sprinklr is the fastest and the most effective ways for many enterprise customers and prospects to get actionable and practical AI across a global brand front office today. The breadth of the Sprinklr platform enables us to bring practical, actionable AI-powered insights to a brand’s front office.

This can only be achieved with AI that is pretrained, with bound real-world data and is secure for use in enterprises, given their compliance and risk profile. We’ve been working for over five years across a dozen industries to pretrain AI for brand insights, product insights, location insights, crisis insight and competitive insight. Given the enormous amount of data that Sprinklr has access to outside of the traditional CRM and CDP data and our industry-leading AI, we can generate and provide actionable insights out of the box right after implementation. Let’s talk about unification. Since our inception in 2009, we’ve been talking about unifying the front office. If you aren’t able to make AI and insights actionable in customer-facing functions, you really aren’t moving the needle.

How do you take a negative customer review or a comment and automatically converted into a customer service ticket, if your product feedback isn’t unified with customer service? How do you take a competitive or a content insight, and translate that to a marketing campaign that works if your Insight product is unified or integrated with your marketing stack? This makes unifying the front office one of the most critically important and strategic things any brand can do today to improve customer experiences. Now those who don’t have, those who don’t unify have numerous point solutions, which creates inconsistencies and interpretation and reporting. And trying to infuse these point solutions independently with siloed AI models, that aren’t coming off the same training data, makes it even worse.

The result is just AI point solution [types] (ph). To create better experiences for the customer and to improve everything from marketing and sales and service and compliance and growth opportunities, brands of the future must unify their digital edge where their customers meet a customer-facing employees and have their different customer-facing teams, market and geographies work together. As many of you know, we’ve been on a multiyear journey to transition each one of our product suites into a large mainstream replacement market. Over the past few quarters, you have heard us talk about how we are taking our Service product suite and successfully transitioning it from a social/digital solution to a complete CCaaS solution, by adding voice as a channel.

That’s telephone lines. The second is our insights product suite, where we have started transitioning that from a social digital listening product to a full-blown customer feedback management or a voice of the customer suite as I call it, by adding surveys. The power of unifying unstructured, unsolicited feedback with structured and solicited feedback is endless. It makes the feedback real time, actionable and one that can be validated. This quarter, we started definition partnership for our Customer Feedback Management suite with a select few brands and have been demonstrating our early success to industry analysts. We’re pleased to announce that Sprinklr was recently named by IDC’s Research Director, Lou Reinemann, in the major players category in the 2023 IDC MarketScape assessment for Worldwide Voice of the Customer Applications.

IDC noted and “Sprinklr has grown its capabilities to have a fully featured VOC platform for listening, analyzing and acting on customer feedback. Sprinklr aims to bridge functional silos, sales, marketing, support, et cetera, to seamlessly manage whole customer journey experiences. We are very pleased with the momentum and the progress we’ve made in our Service suite. Our vision is to help customers transform the contact center from a reactive voice-first cost center to a more efficient AI-powered proactive omnichannel revenue center by unifying it with marketing and sales. We are excited to share the launch of Conversational AI+ in the Sprinklr Service suite. We can now empower our enterprise customers to deploy and scale generative AI-powered bots.

For human like text and voice conversations in effortless three easy steps. This is a leading and innovative way for customers to train a bot in their brand’s voice, automate and deflect call volume and provide a natural conversational experience to their customers. We also announced a partnership with infinit.cx in Germany, to help customers in the DACH region, facilitate a seamless migration to cloud-based unified customer service in the contact center. Together with infinit.cx, we will help the most innovative companies in the region, harness AI to its full extent, and be able to act on insights and unify the front-end functions. During the third quarter, we continued to add new customers and expand with existing customers. This includes world-class brands like Alaska Airlines, AstraZeneca, Ford, Mercedes Benz and Chime.

Here are some examples. In Q3, one of the world’s top five cosmetics companies, expanded its long-standing partnership with Sprinklr to now include conversational commerce. With over 65 brands working on over 20 channels, the company has integrated Sprinklr Conversational AI and Conversational Commerce to enhance customer interactions, support care agents and transform conversations into sales and long-term value. Sprinklr is helping the company to achieve its goal of generating more than 50% of its revenue through digital sales by 2025. In Q3, a top three North American home improvement retailer, selected Sprinklr’s AI first CCaaS solution to provide customers with a unified seamless customer experience across channels. The retailer will consolidate all digital channels into — onto the Sprinklr platform to provide a more consistent customer experience while simplifying the lives of its customer service agents.

Sprinklr’s AI-powered agent assist capabilities will enable the company to reduce the number of open applications and screens at the agent level and provide the proactive support needed to resolve customer needs faster. Integrations with the company’s knowledge base and order management systems ensure that agents have all the data and information at their fingertips compared to their previous set of solutions. Another example of unification and transformation powered by AI comes from a top three global food and beverage company. A Sprinklr customer for over 10 years. Last year, the company began to globally transition their social teams to Sprinklr Service suite, to empower a closer, more meaningful brand experience for all its customers.

To understand and build brand love further, in Q1 this year, they made the decision to move all their social insight, just the listening part, more than 1.5 billion brand mentions over to Sprinklr, this includes social listening, benchmarking and product insights. This past quarter, they doubled their competitive insight scope and now monitor over 2,000 digital accounts. As a partner in our AI Plus Beta Program this year, the company has also harnessed the power of Sprinklr’s Generative AI, Reply Assistance. By unifying these solutions onto a single powerful platform, the company now has access to deep actionable insights and GenAI capabilities that enable it to provide personalized experiences to each of their many brands that they sell around the world.

Before wrapping up, I’d like to take a moment to celebrate our incredible product and engineering teams as always, who make this possible. Their speed of innovation and dedication to serving customers continues to differentiate Sprinklr in the marketplace. In closing, we had two primary goals this year. The first was to build and establish a foundation to scale in the exciting CCaaS market. And second was to meaningfully improve the operational efficiency and margins of our business. There’s no question that we’ve been very successful in achieving both of these goals, and we’re on track to deliver a solid year with 18% revenue growth, record profitability and strong free cash flow generation. We believe that the product suites we’ve built, the customers we serve and the size of the market opportunity ahead of us, put us in a great position to become a multibillion-dollar revenue company in the years ahead.

Since our IPO in the June of 2021, we’ve continued to expand our product portfolio and market focus from social to digital and transitioning to Unified CXM. The investments we’ve been making over the last 18 months are enabling us to mainstream our product suites into large obvious replacement markets, starting with establishing ourselves as a disruptor in CCaaS. As we’ve diversified the business and focused on scaling our CCaaS business, we’d like to acknowledge that we have made slower progress on some of our other go-to-market initiatives focused on our core product suites. We expect this will have a near-term impact on growth, which Manish will review in more detail in his remarks as he shares an initial framework for FY ’25. We maintain our conviction for the long-term vision of what we are building.

And like so many companies that have successfully built billion-dollar businesses, we’re navigating through the normal cohorts of resource allocation and investment cycles required to balance short-term success metrics with long-term growth objectives. We’re committed to innovating and developing a new category of software that we call Unified Customer Experience Management and executing for growth and profitability to deliver for our customers and our shareholders. Thank you to our customers, partners and our employees for their hard work and results, and thank you to our investors for believing in our long-term vision. Let me now hand over the call to Manish.

Manish Sarin: Thank you, Ragy, and good afternoon, everyone. As you heard from Ragy, we’re pleased with this quarter’s results which exceeded the high end of our guidance range on the top and bottom line. For the third quarter, total revenue was $186.3 million, up 18% year-over-year. This was driven by subscription revenues of $170.5 million, which grew 22% year-over-year. Subscription revenue benefited by $1 million from new business being booked earlier than expected in the quarter. Professional services revenue for the quarter came in at $15.9 million. In terms of new logos, we are pleased with the number of new customers that joined the Sprinklr platform in Q3. This is particularly true with our Sprinklr Service product suite as many of the deals in this product suite over the last few quarters have been with new customers.

As of the end of the third quarter, we had 123 customers contributing $1 million or more in subscription revenue over the preceding 12 months, an increase of three customers sequentially and a 15% increase year-over-year. Our subscription revenue-based net dollar expansion rate in the third quarter was 118%. While NDE was healthy in the quarter, I would note that we began to see incremental pressure on renewals in Q3 as certain customers that are impacted by the difficult macro environment adjusted their spending levels with us. As a reminder, the NDE statistic is not something we monitor as part of growing our business, but rather a byproduct. Turning to gross margins for the third quarter. On a non-GAAP basis, our subscription gross margins came in at 83% as we continue to drive efficiencies in our cloud operations with total non-GAAP gross margins of 75%.

Non-GAAP gross margins for professional services were slightly negative, coming in at minus 2%. As we have discussed in the past, we continue to invest in CCaaS delivery capabilities and build out our expertise in that area. Turning to profitability for the quarter. Non-GAAP operating income was a record $27.4 million, resulting in non-GAAP net income of $0.12 per basic share. This 15% non-GAAP operating margin for the quarter was a result of revenue over-performance, strong subscription gross margins, coupled with broad-based expense discipline and is the fifth consecutive quarter of non-GAAP profitability. Lastly, on the topic of profitability. For the third consecutive quarter, we posted positive GAAP net income totaling $17 million or $0.06 per basic share.

In terms of free cash flow, we generated $15.9 million during the third quarter compared to a cash burn of $1.7 million in the same period last year. With this result in Q3, our free cash flow generation during the first nine months of this year now stands at $38.9 million. Our balance sheet has become stronger each quarter, now standing at $656.4 million in cash and marketable securities with no debt outstanding. Calculated billings for the third quarter were $161.2 million, an increase of 16% year-over-year. As of the end of Q3, total remaining performance obligations, or RPO, which represents revenue from committed customer contracts that has not yet been recognized was $774.5 million, up 34% compared to the same period last year, and cRPO was $491.4 million, up 19% year-over-year.

Moving now to our Q4 and full year FY ’24 non-GAAP guidance. Our Q4 guidance assumes the go-to-market dynamics Ragy mentioned and the renewal headwinds I discussed earlier will have an impact on revenue growth in the quarter. As a reminder, Q4 is our biggest book of business for both new business and renewals. Given the macro environment, we are experiencing a higher level of down sales, as large customers right-size their software spend. As such, we are mindful that this cycle of renewals may be one of the more challenging quarters to get through and is factored into the guidance numbers. Given these dynamics for Q4, we expect total revenues to be in the range of $187.5 million to $189.5 million, representing 14% growth year-over-year at the midpoint.

Within this, we expect subscription revenue to be in the range of $172.5 million to $174.5 million, representing 17% growth year-over-year at the midpoint. We expect professional services revenue of approximately $15 million in Q4. We also expect non-GAAP gross margin from professional services to be approximately negative $2 million in Q4. From a profitability perspective, we expect non-GAAP operating income to be in the range of $20.3 million to $22.3 million and non-GAAP net income per share of $0.08 to $0.09 per share, assuming 275 million basic shares outstanding. The slight decrease in non-GAAP operating income sequentially is driven by our ongoing investments in Sprinklr Service product development and delivery. For the full year FY ’24, we are raising both our subscription and total revenue outlook for the year.

We now expect subscription revenue to be in the range of $664 million to $666 million, representing 21% growth year-over-year at the midpoint. This is an increase of $6 million at the midpoint, which is higher than the full magnitude of the Q3 beat. We expect total revenue to be in the range of $725.5 million to $727.5 million for the full year FY ’24, representing 18% growth year-over-year at the midpoint. For the full year FY ’24, we are raising our non-GAAP operating income estimate to now be in the range of $80 million to $82 million, equating to a non-GAAP net income per share of $0.36 to $0.37, assuming 273 million basic weighted shares outstanding. This implies an approximately 11% non-GAAP operating margin at the midpoint on a full year basis.

Note the increase of $15 million at the midpoint is greater than the full beat for Q3 and the accompanying operating income raise for Q4. In deriving the net income per share for modeling purposes, we estimate $24 million in interest income for the full year with $6 million of that to be earned here in Q4. Furthermore, a $6 million total tax provision for the full year FY ’24 needs to be added to the non-GAAP operating income ranges provided. We estimate a tax provision of $2.5 million here in Q4. And given the performance throughout the first nine months of the year, we will be GAAP net income positive for the full year FY ’24, consistent with our comments on the past few earnings calls. And lastly, I would like to provide some thoughts on billings.

We estimate billings to grow 13% here in Q4, equating to total billings of approximately $262 million for the quarter. This translates to total billings of about $773 million for the full year FY ’24, which is up a little over 17% on a full year basis compared to FY ’23. Before moving into Q&A, I would like to provide some high-level commentary on fiscal year 2025. As I just outlined, we are on track to deliver a very successful FY ’24, with 18% revenue growth and 11% operating margins that will have expanded by more than 1,000 basis points year-over-year, and we accomplished all this while broadening our product portfolio. Our primary strategic focus in FY ’24 has been to rapidly scale our Sprinklr Service product suite. We are very pleased with the results, having made significant demonstrable progress with Sprinklr Service, gaining market share and customer momentum in the CCaaS market.

As Ragy mentioned, our focus on succeeding in our CCaaS business slowed progress with some of our other go-to-market initiatives in our core product suites much more than we had anticipated. Now that Sprinklr Service is at scale, we have developed a consistent and repeatable selling motion to that buying persona and built an enviable collection of reference customers. We’re in a position to refocus our go-to-market efforts to better align our resources across all product suites. We expect it will take several quarters for the full impact of these changes to work its way through the P&L. To put some numbers around these dynamics, if you adjust for the $1 million linearity benefit I mentioned for Q3, Q4 subscription revenue is expected to grow approximately 2.5% sequentially.

At this time, based on what I just outlined, coupled with an unforgiving macro environment, we expect a sequential quarterly increase of 2.5% for each quarter of FY ’25. This equates to approximately a 10% total revenue growth for the full year, which we believe is the appropriate starting point for FY ’25. From a profitability perspective, we have been pleased with the significant progress in our profitability performance this year. We expect FY ’25 non-GAAP operating margins to continue to expand from our guidance for 11% operating margins for FY ’24. I want to be clear that the dynamics I’ve just discussed here will be short term in nature and do not change our expectations for Sprinklrs’ growth potential across each of our four product suites.

We have the strongest product portfolio in our history with an innovation flywheel that is consistently expanding our competitive differentiation. Lastly, I would like to thank all our employees for their dedication and passion for what we are building at Sprinklr. I’m also grateful for the confidence that our customers have placed in us during these uncertain times. We remain focused on building a track record of successful execution and operating discipline across the business. And with that, let’s open it up for questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Arjun Bhatia: Perfect. Thank you guys. Maybe to start just on the go-to-market adjustments that you’re making and the macro pressures that you called out. Are there any products where you’re seeing the greatest incremental pressure or any part of the customer base that sticks out here in Q4 where the downsell is greater than other areas just as we try to hone in on where the headwinds are increasing the most?

Ragy Thomas: Yeah. Arjun, I’ll — let me take a first pass at it. Kind of the obvious culprit is what most people would guess it is. One of our product suite is a Marketing and Advertising product suite. And as you know, and difficult times, Marketing is one of the first budgets and teams to be impacted with layoffs cutting back on spend, what’s going on with some of the networks that isn’t helping. And so that’s an obvious place where we’re seeing some additional pressure.

Arjun Bhatia: Okay. Got it. And then just as we look to the other side of this, when you think about the go-to-market revamp, what are some of the steps that you need to take to, I guess, refocus on the broader suite? Is there incremental hiring that needs to happen? Or is it more a matter of internal resource allocation enablement, et cetera?

Ragy Thomas: It’s more of an internal resource allocation. And in hindsight, I think the most obvious explanation for this is the fact that we, and I don’t know whether we would have, knowing everything we know, done it differently. We kind of over-rotated a little bit more on the CCaaS side. And so we took our field and we incented them strongly to go sell CCaaS. And essentially, there’s a lot of people who jumped in and really are happy, and we’re thrilled with the results. And there were some that didn’t quite jumped, but didn’t quite make it on the other side. And the fix is quite obvious to all of us. You’ve got to take the field folks in sales and support and service that came from the social suite background or the marketing suite background or the research insight suite background.

And we got to let them go back and focus on it. So what we are doing now is we think and plan for the next year is we are adjusting quotas, and we are just bifurcating or trifurcating the field to have to just fix the over-rotation we did, and we’re pretty hopeful that in one or two quarters, we will begin to see some data that would allow us to just update you further.

Arjun Bhatia: Okay. Understood. Thank you very much. Appreciate it.

Operator: Thank you. Our next question comes from the line of Pinjalim Bora with JPMorgan. Please proceed with your question.

Noah Herman: Hey guys. This is Noah on for Pinjalim. On the first part, Ragy, you mentioned that, you mentioned you met with over 70 customers this quarter, just curious to hear some of the feedback from those conversations. Just any incremental takeaways from there? And then I have a quick follow-up. Thanks.

Ragy Thomas: Pinjalim, I’m glad you asked that question. Look, I think our, I’ve not seen this kind of excitement since the early days of social that I’m seeing now on the CCaaS side. I think we have a very differentiated product. And these, and we’ve landed, I mean we’re ahead of schedule in terms of our own expectations, which is why we rotated and we’re seeing like such an exciting reception to that. And the idea there is pretty simple, right? We’re going into a market with vendors who have been there for a long time and a market that’s very fragmented. If your knowledge base, your agent console, your supervisor console, you’re routing and your bot and your quality and your workforce management, all this is unified and everything is based on AI.

These results are fairly spectacular and it’s cost advantageous as well, right? So we’re bringing the average handling time down. And these demos are received really well. And the number 1 question we get is, that’s not real is it? in the way like [we are] (ph), we’ll set it up for you. I want you to know, though, that excitement is meted in months, not weeks, right, a social product on time, people are happy. Let’s go. In the CCaaS world, these are very time-consuming transformation. So there are long protracted RFPs. And so we’re very pleased with where we are. The number one excitement we’re seeing in the field among customers is our CCaaS product. And so we know we’ve done the right thing. Now if you play this movie in three-year increments, I think most of us would agree we did the right thing.

So excitement on AI, excitement on practical AI, excitement seeing the results, because we are walking into customers, I’ll give you a large customer that I spoke to, who was on the track to kind of build their own LLM. And after really understanding how we’re approaching AI, they were like, oh my God, yeah, we just got to work with you, and then you’ll ensure that we can always use the best LLM and the best model that yields us the best results. And that’s the most exciting thing that’s going on. No surprise that AI and what it can do for you. And we’re manifesting just easy, measurable results on the CCaaS side.

Noah Herman: Got it. Thanks so much for that answer. And then maybe just focusing a little bit more on the model. As we sort of contemplate the preliminary 2025 guidance, how does that, if anything, does that change at all the long-term model that you had outlined during your Analyst Day? How should we really think about that going forward?

Ragy Thomas: Well, I’ll start by saying No, and Manish, can you elaborate?

Manish Sarin: Yeah. It does not change our FY ’27 long-term plan. And again, just to be clear, this is not our guide for ’25. I will do that in our March earnings call. Just given the — some of the renewal pressures we are seeing here in Q3. And as I said Q4, we expect it to be quite intense. Given the visibility that we have, and we just wanted to be clear that we laid out what we are seeing right now. It might change substantially when we talk in March, and we talk about the full year guide. But sitting where we sit today, we don’t feel any difference about FY ’27 than we did six months ago.