Operator: Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Please proceed with your question.
Brett Knoblauch: Hi, guys. Thanks for taking my questions. I guess, the first one is maybe on the annual customer count metric. I guess, is there any way to provide or provide additional color into maybe what was the bigger driver of that this year in between CCaaS, and maybe your kind of core social media products? And how has that changed maybe compared to years of past?
Ragy Thomas: I’d say, look, what I can tell you is it was in CCaaS or core. We had outlined last year that we were — we had put together a team that’s focused on new logos. It was a small team in sort of a limited capacity, but we’re seeing success with that model. So that’s something that we’re going to double down on.
Brett Knoblauch: Got it. And then maybe I could just touch on the — I think, if I heard you correctly, you’re expecting a two percentage point headwind to cost or gross margin this year due to one-time implementation costs or your CCaaS solution. I guess maybe in a bit more detail. A 2% headwind kind of sounds like a lot.
Manish Sarin: Yeah. So this is Manish. I said, approximately 2%, but what is going on here is there are data residency requirements in many geographies across the globe. And largely, this is driven by as we spin up new instances with our hyperscalers partners there are one-time fees for a lot of them. There are initial costs to set up these instances that, again, I’m conservatively estimating approximately up to 2%. Hopefully, it will be lower. But that’s what’s baked into the model right now.
Brett Knoblauch: Perfect. Thank you.
Operator: Our next question comes from the line of Michael Berg with Wells Fargo Securities. Please proceed with your question.
Michael Berg: Hi, there. Congrats on the quarter, and thanks for taking my question. I guess, just in terms of the relationship between free cash flow and operating margin, should we expect that to steady moving forward, as now it seems like billings are mostly annualized and the growth should be in line with subscription revenue? And I have a follow-up. Thank you.
Manish Sarin: Yeah. I think, that’s a terrific question. As billings get sort of in line with subscription revenue, now also note, there is the professional services, which many a times is sort of build upon completion. So that is a separate element. But over time, you should expect our free cash flow to get closer in line to operating income. Where the distinction will be is, many a times, we have to pre-pay for a lot of cloud usage as an example. So there are those aberrations that do affect free cash flow, obviously don’t affect operating income to that same extent. But I think that’s part of the reason, you would have seen, over the last couple of years, the steady improvement in free cash flow. So you’ve gone from obviously, I believe, negative $45 million a couple of years ago to positive $51 million in FY 2024.
And I think, based on where we sit, we’re comfortable with an $80 million number for FY 2025. Again, all steps in the right direction, but you should see the narrowing of the two margins over time.
Michael Berg: Got it. Helpful. And then just a quick follow-up to that, the implied margin expansion for this year is in the 150 bps range, a pretty meaningful step down from last year. I know, there’s all the go-to-market changes happening in the background. But anything for us to point to you as to why there’s not more margin expansion here as growth slows or just natural offset the realignment of the go-to-market organization. Thanks.
Manish Sarin: And just to make sure I understand. So we ended FY 2024 around 13% non-GAAP operating margin. And that’s what we are using the guide for the full year FY 2025. Maybe I’m not following the question.
Michael Berg: Sure. It’s just the incremental step function and operating margin progression is much less implied for fiscal ’25 guidance relative to what was done in fiscal ’24 and the nature of the question is, is there a particular reason or driver as to why there’s not more margin accretion here as growth slows? I understand there’s the go to market changes happening in the background but is there something else at play?
Manish Sarin: Yes. I think up in the December call I also mentioned and I’ve been saying to investors that we obviously have a lot of near term success as we went from where we were a couple of years ago to last year. So there was a lot of low-hanging fruit that we were able to go take care of margin expansion from here will be subdued. Again, let’s be let’s be candid. This is just the initial outlook for the year as we make progress during the year. We’ll of course update investors, but at this point I’m most comfortable just stating the 13%.
Michael Berg: Helpful. Thank you.
Operator: Our next question comes from the line of Jackson Ader with KeyBanc Capital Market. Please proceed with your question.
Jackson Ader: Great. Good evening guys. Thanks for taking our questions. The first one Ragy, how can we or I guess can we quantify how much of either bookings dollars or growth actually comes or is being generated by generative AI? And then, how much maybe going forward, do you expect to come from generative AI.
Ragy Thomas: Jackson, thank you for that, question. We have taken the approach of like infusing everything we do with AI and in the past and take the approach of trying to monetize it separately. However, we’re looking at what’s going on in the industry and we think that could be an opportunity. So, we are currently evaluating and this is quite a bit of work. So again don’t factor anything into this year, but we think there’s an opportunity to charge a premium for it least for our AI Plus offering and we’re exploring that. So right now no, but we’re exploring the possibility of being able to do that on our part or our position has always been that AI is a big differentiator for us across everything we do, but I think the market’s willing to absorb some additional cost for.
Jackson Ader: Okay. All right. Got you. And then on the renewals pressure, I’m expecting it kind of persist here in the first half and then maybe start to go away. I’m just curious like how do we know that the pressure will end? Is there something — is there some cohort or is there something specific about the renewals that are going to be happening over the next couple of quarters that you can point to and say like they are different from what the renewals will look like after we get past this first half?
Ragy Thomas: Okay. So I think first off, I got to tell you, we’ve put a lot of energy behind understanding what is going on. And what I can confirm as we’ve done in the past is we think the majority of it is self-inflicted. And we’re finding that – is that the best execution of our team versus the best execution of any competitor in our core markets and the CCaaS frankly, we win. So what we’re finding is — and I say it self-inflicted because weak execution, weak execution on our side, meeting strong execution with the competitor is when we’re losing. And so it gives us a lot of confidence that there’s a fixable things and is a part of this big set of initiatives that we have outlined. And like we said, it’s going to take a few quarters. But right now, we’re pretty optimistic that we should see our retention go back to our historic norms once our execution and what we can control is addressed.
Jackson Ader: Okay. I got you. So this is a process turnaround, not necessarily like a customer-driven thing. Okay. All right. That’s great. Thank you.
Ragy Thomas: Correct. Correct. Thank you, Jackson.
Operator: Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.
Unidentified Analyst: Hi. This is Matt Pride [ph] on for Tyler Radke. I was just curious if you could comment on just dive more into the win rates for CCaaS and what you expect moving forward?
Manish Sarin: Look, I think we have taken a very pointed approach right now, given that we’ve only been in general availability for a short period. So I can confirm that when we are in a competitive RFP and follow-on process that CCaaS – in the CCaaS market, I can confirm that the win rates are pretty high. But we — it’s not — we’re not able to deploy it everywhere in every market across all teams. And that’s partly because we need to get to a critical mass of seats, which we should be getting through towards later this year. That will then allow us to be featured in analyst reports, which will then allow us to be a default participant. Right now is word of mouth and people being very impressed when they actually see the platform in action and trying it out and doing a proof of concept and being convinced that a new comment like us can outperform others. So it’s more measured and it’s more — it’s not around the world in all markets.
Unidentified Analyst: Got it. And can you speak to the conversational AI offering and how that’s ramping?
Manish Sarin: Very well. Very well. It’s one of the silver linings that we see are — so we are able to now digitize voice and have conversational AI called, not just text and chat and interaction. So many of the deals we are winning is because of our ability to manifest this. So there’s a lot of talk about whose AI is better. We challenge our customers to just put this to task and we show them that we can do a better job than others. So we have taken the approach of developing models across languages for each function and now developing those models, specifically for industries. And so we’re able to start with a baseline of a much higher accuracy level than others. And then we customize those models. We’ve done thousands of customer models, where that just gets to a really, really good percentage of accurate responses.
And our power is we’re not a point solution offering AI in the contact center, right? We have a full blown agent experience sitting behind it. So the frustrating thing for a lot of customers and brands is, if you just go in with AI and on the bar takes you through 17 steps and then you hit a dead end. And it’s very frustrating because in the Non-Unified Contact Center the consumer is not repeating everything he did which is beyond frustrating. So in our world that doesn’t happen, because all of that context you’ve seen seamlessly transfers to an AI whose pickup is as though he was the one talking to them. So there’s a few things that are strategically it is working well for us.
