Sprinklr Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2023

There are 11 speakers on the call.

Operator

Greetings, and welcome to Sprinklr's Third Quarter Fiscal Year 20 24 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Skro, SVP, Finance.

Operator

Thank you, Eric. You may begin.

Speaker 1

Thank you, Alicia, and welcome, everyone, to Sprinklr's Q3 fiscal year 24 results financial call. Joining us today are Raji Thomas, Sprinklr's Founder and CEO and Manish Serene, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8 ks 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.

Speaker 1

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 4th fiscal quarter and full fiscal year 2024 and our initial framework for fiscal year 2025 also posted on our website. With that, let me turn it over to Raji.

Speaker 2

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 $186,300,000 and subscription revenue grew 22% year over year $270,500,000 With our continued focus on operational efficiency, we generated $27,400,000 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.

Speaker 2

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 5 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 costs, risk management and improved customer experiences.

Speaker 2

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 5 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 Q3, Customers executed over 170 AI deployments in Sprinklr service alone. This include Auto speech recognition, advanced intent detection and speech to text models I met with more than 70 customers around the world this quarter.

Speaker 2

And while everyone is universally excited about 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. 1 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.

Speaker 2

As you know, we've 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 Plus. We offer customers the greatest choice in how to utilize generative AI with accuracy, privacy And security in just a few clicks. We maintain 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 SpringClip platform enables us to bring practical actionable AI powered insights to a brand's front office.

Speaker 2

This can only be achieved with AI that is pre trained with bound real world data And it's secure for use in enterprises given their compliance and risk profile. We've been working for over 5 years across A dozen industries to pre train AI for brand insights, product insights, location insights, Crisis insights 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 2,009, We've been talking about unifying the front office.

Speaker 2

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 convert it 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 isn't 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.

Speaker 2

Those who don't have Those who don't unify have numerous point solutions, which creates inconsistencies in 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 chaos. 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 employee 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.

Speaker 2

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 socialdigital 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 some 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, we 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 Reitman In the major players category in the 2023 IDC Marketscape Assessment For worldwide Voice of the Customer applications, IDC noted and I quote, 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, etcetera to seamlessly manage whole customer journey experiences.

Speaker 2

We're 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 plus 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 as little as 3 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.

Speaker 2

We also announced a partnership with Infinite. CX in Germany To help customers in the DUC region, facilitate a seamless migration to cloud based unified customer service In the contact center, together with Infinite. 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 of functions. During the Q3, We continue to add new customers and expand with existing customers. This includes world class brands like Alaska Airlines, AstraZeneca, Ford, Mercedes Benz and Shine.

Speaker 2

Here are some examples. In Q3, one of the world's top 5 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's 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 3 North American home improvements 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 this 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 We'll 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.

Speaker 2

Another example of unification and transformation powered by AI comes from a top 3 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's 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 insights, Just the listening part. More than 1,500,000,000 brand mentions over to Sprinklr. This includes social listening, Benchmarking and product insights.

Speaker 2

This past quarter, they doubled their competitive insights scope and now monitor over 2,000 digital accounts. As a partner in our AI plus beta program this year, the company has Also harness the power of Sprinklr's generative AI, reply assistance. By unifying these solutions onto a single powerful platform, 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 Engineering teams, as always, who make this possible. Their speed of innovation and dedication to serving customers continues To differentiate Sprinklr in the marketplace.

Speaker 2

In closing, we had 2 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.

Speaker 2

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 On growth, which Manish will review in more detail in his remarks as he shares an initial framework for FY 2025. We maintain our conviction for the long term vision of what we are building.

Speaker 2

And like so many companies that have successfully built $1,000,000,000 businesses, We are navigating through the normal course of resource allocation and investment cycles required To balance short term success metrics with long term growth objectives, we're committed to innovating to deliver for our customers and our shareholders. Thank you to our customers, partners and our employees for the hard work And thank you to our investors for believing in our long term vision. Let me now hand over the call to Manish.

Speaker 3

Thank you, Raji, and good afternoon, everyone. As you heard from Raji, we're pleased with this quarter's results, We've exceeded the high end of our guidance range on the top and bottom line. For the 3rd quarter, total revenue was 186 $300,000 up 18% year over year. This was driven by subscription revenues of $170,500,000 which grew 22% year over year. Subscription revenue benefited by $1,000,000 from new business being booked Earlier than expected in the quarter.

Speaker 3

Professional services revenue for the quarter came in at 15,900,000 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 sprinkler 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 $1,000,000 or more in subscription revenue over the preceding 12 months, an increase of 3 customers And a 15% increase year over year. Our subscription revenue based net dollar expansion rate in the 3rd quarter 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.

Speaker 3

Turning to gross margins for the Q3. On a non GAAP basis, our subscription gross margins came in at 83%, 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 $27,400,000 resulting in non GAAP Net income of $0.12 per basic share.

Speaker 3

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 5th Consecutive quarter of non GAAP profitability. Lastly, on the topic of profitability, for the 3rd consecutive quarter, we posted Positive GAAP net income totaling $17,000,000 or $0.06 per basic share. In terms of free cash flow, we generated $15,900,000 during the Q3 compared to a cash burn of $1,700,000 in the same period last year. With this result in Q3, our free cash flow generation During the 1st 9 months of this year, now stands at $38,900,000 Our balance sheet has become stronger each quarter now standing at $656,400,000 in cash and marketable securities with no debt outstanding. Calculated billings for the Q3 were $161,200,000 an increase of 16% year over year.

Speaker 3

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 $774,500,000 up 34% compared to the same period last year And CRPO was $491,400,000 up 19% year over year. Moving now to our Q4 and full year FY 'twenty four non GAAP guidance. Our Q4 guidance assumes the go to market dynamics Raji 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 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.

Speaker 3

Given these dynamics, for Q4, we expect total revenues to be in the range of $187,500,000 to $189,500,000 representing 14% growth year over year at the midpoint. Within this, we expect subscription revenue to be in the range of $172,500,000 to $174,500,000 representing 17% growth year over year at the midpoint. We expect professional services revenue of approximately $15,000,000 in Q4. We also expect non GAAP gross margin from Ford Professional Services to be approximately negative $2,000,000 in Q4. From a profitability perspective, we expect non GAAP operating income to be in the range of $20,300,000 To $22,300,000 and non GAAP net income per share of $0.08 to $0.09 per share, Assuming 275,000,000 basic shares outstanding.

Speaker 3

The slight decrease in non GAAP operating income sequentially Is driven by our ongoing investments in sprinkler service product development and delivery. For the full year FY 'twenty four, We are raising both our subscription and total revenue outlook for the year. We now expect subscription revenue to be in the range of $664,000,000 to $666,000,000 representing 21% growth year over year at the midpoint. This is an increase of $6,000,000 at the midpoint, which is higher than the full magnitude of the Q3 beat. We expect total revenue to be in the range of $725,500,000 to 727 point For the full year FY 'twenty four, we are raising our non GAAP operating income estimate to now be in the range of $80,000,000 to $82,000,000 Equating to a non GAAP net income per share of $0.36 to $0.37 assuming 273,000,000 basic weighted Shares outstanding.

Speaker 3

This implies an approximately 11% non GAAP operating margin at the midpoint on a full year basis. Note the increase of $15,000,000 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 $24,000,000 in interest income for the full year with 6 $1,000,000 of that to be earned here in Q4. Furthermore, a $6,000,000 total tax provision for the full year FY 2024 Needs to be added to the non GAAP operating income ranges provided. We estimate a tax provision of $2,500,000 here in Q4.

Speaker 3

And given the performance throughout the 1st 9 months of the year, we will be GAAP net income positive for the full year FY 'twenty four, 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 $262,000,000 for the quarter. This translates to total billings of about $773,000,000 for the full year FY 2024, which is up a little over 17% on a full year basis compared to FY 'twenty three. Before moving into Q and A, I would like to provide some high level commentary on fiscal year 2025.

Speaker 3

As I just outlined, We are on track to deliver a very successful FY 'twenty four with 18% revenue growth and 11% operating margins That will have expanded by more than a 1,000 basis points year over year, and we accomplished all this while broadening our product portfolio. Our primary strategic focus in FY 2024 has been to rapidly scale our sprinkler 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 Raji 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.

Speaker 3

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 and L. To put some numbers around these dynamics, if you adjust for the $1,000,000 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 2025. This equates to approximately a 10% total revenue growth for the full year, which we believe is the appropriate starting point for FY 2025.

Speaker 3

From a profitability perspective, We have been pleased with the significant progress in our profitability performance this year. We expect FY 'twenty five non GAAP operating margins To continue to expand from our guidance for 11% operating margins for FY 'twenty four, I want to be clear The dynamics I've just discussed here will be short term in nature and do not change our expectations for Sprinklr's growth potential Across each of our 4 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 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.

Speaker 3

And with that, let's open it up for questions. Operator?

Operator

Thank you. We will now be conducting a question and answer Our first question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

Speaker 4

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 down sell is greater Than other areas just as we try to hone in on where the headwinds are increasing the most?

Speaker 2

Yes. Arjun, let me take a first pass at it. It's kind of the obvious culprit is what most people would guess it is. One of our product suites is a marketing and advertising product suite. And as you know, in 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 isn't helping.

Speaker 2

And so that's an obvious place where we're seeing some additional pressure.

Speaker 4

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, etcetera.

Speaker 2

It's a Mode 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 SEEK as and essentially There's a lot of people who jumped in and really are happy and we're thrilled with the results. And there are some that didn't Quiet.

Speaker 2

The jump 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. We got to let them go back and focus on it. So what we are doing now as 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.

Speaker 2

And we're pretty hopeful that in 1 or 2 quarters, we'll begin to see some data that would allow us to just update you further.

Operator

Our next question comes from the line of Pimjalim Bora with JPMorgan. Please proceed with your question.

Speaker 5

Hey, guys. This is Noah on for Pendulum. Thanks for taking our questions. On the first part, Raji, you mentioned that you mentioned you met with over 70 customers globally this quarter. Just curious to hear some of the feedback from those conversations, just any incremental takeaways from there?

Speaker 5

And then I had a quick follow-up. Thanks.

Speaker 2

I'm 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 were 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've been there for a long time In a market that's very fragmented, if your knowledge base, your agent console, your supervisor console, your Routing and your, bot and your quality and your workforce management, all just is unified and everything Based on AI, these results are fairly spectacular and its cost advantages as well, right?

Speaker 2

So we're bringing the average handling time down and these demos are received really well. Number one question, we get it That's not real. Is it in the way like we are, we'll set it up for you. I want you to note though that excitement is metered In months, not weeks, right? A social product turn it on, people are happy, let's go.

Speaker 2

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.

Speaker 2

Now if you play this movie in 3 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, It yields us the best results. So that's the most exciting thing that's going on. No surprise that AI and what it can do for you.

Speaker 2

And we're manifesting just Easy, measurable results on the CCaaS side.

Speaker 5

Got it. No, 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?

Speaker 2

Well, I'll start by saying no and Manish, can you elaborate? Yes.

Speaker 3

It does not change our FY 'twenty seven long term plan. And again, just to be clear, this is not our guide for 2025. 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, we just wanted to be clear that we laid out what we are seeing right now.

Speaker 3

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 different about FY 'twenty seven than we did 6 months ago.

Operator

Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Please proceed with your question.

Speaker 6

Hi. This is Matt Saltzman on for Elizabeth. So I'd love to just touch on Some of the renewal headwinds that you all are seeing, you previously highlighted the expectations for net dollar expansion To be under pressure from some of those moderating renewals and upsells. So I'm just curious, the down sell pressure incrementally more than you And just any sense for why now when we've been hearing from a lot of your software peers over the last year Talk about this dynamic. So just curious around the timing of it now, and also just versus your initial expectation?

Speaker 6

Thank you.

Speaker 3

Yes, that's a good question. So let me start and then Raji might chime in. So first, I want to be clear. We're not seeing logo churn. We're just seeing reduction in the number of seats as an example.

Speaker 3

And why now? Well, You've seen a lot of corporations pull back on headcount. There will be layoffs across the economy. Q4 tends to be our biggest business, Both in terms of renewals and new business. And I suspect what is happening is when those contracts are up for renewal, which for us Happens to be in Q4.

Speaker 3

We're seeing a downdraft in terms of the number of seats being renewed. So I think that's point number 1. And then as Raji was saying, there are quite a bit of macro challenges, particularly as we look at the marketing and advertising suite. We sell volumes here, so it's not really seat based. And again, companies are looking to Advertise less, just given the macro and that's pulling back the ARR that we ascribe to that product suite.

Speaker 6

And just maybe as a quick follow-up, when you think about the pressure On some of those seat based renewals, is there any opportunity to potentially move some of those seats into separate SKUs that maybe the customer will utilize more to maintain overall ACV. I'm just I'm curious if there's any Discussion internally about pursuing avenues like that to just maintain overall retention levels? Thank you.

Speaker 2

Yes, that's an exciting thought. Our approach here as we kind of bring a fairly disruptive new product to a new buyer Please do not confuse them with the new model, pricing model. So we've started by there are some products that are just flat AI based conversational bots, But we've tried to keep the pricing model parity with the market sees. But I agree with you, Matt. I think there is some Upside for us as we get to scale in our CCaaS side, there is for us to revisit pricing and that's not something we're willing to comment on right now.

Speaker 3

Yes. And let me make sure, Was your question that at renewal time, are we trying to offer them additional SKUs to maintain ARR? Was that the question?

Speaker 6

Yes, it's partly it. I think but your answer also addresses it.

Speaker 3

Yes. And I think to be clear, That is one of the plays we are running. So we are constantly, as you'd recall from our prior earnings calls, upsells for us has always been a very strong suit. So we are constantly figuring out ways to either maintain as what we're doing now or increase ARR on accounts. So Offering them additional product suites is one of the place where there's a number of other place we are running.

Speaker 3

And again, this is part The reason I was saying just given where we are and the limited visibility and how this plays out for the remainder of this year, What is captured in the guide is the situation we see.

Speaker 7

Understood. Thank you.

Operator

Our next question comes from the line of Matt VanVleet

Speaker 8

I guess when you look at the success of the contact center product on sprinkler service here, any help in terms of The mix of existing customers that are buying that versus this as a tool to land at new logos, and how do you think about that going forward?

Speaker 2

Not surprisingly, I think it's fifty-fifty. We're surprised to see Brand new companies involved and include us in a contact center RFP. We're usually a late addition It's usually coming from an analyst who's seen the product saying you guys got to take a look or our reps calling in or Someone who's tried us, the few that have tried us that have been impressed. And so the answer is, There is a surprising number of sort of net new RFPs we are beginning to get in and then there is always a customer that have been using us for social and digital care And are also expanding into voice with us. But I'll tell you a new category that potentially has some upside and We're beginning to look at them or the large BPO players and these are things that there's an established market that's 20 years old.

Speaker 2

So we're seeing more traction early, but more traction from the partner sourced So the leads for us and so that's something that we're excited about. Okay.

Speaker 8

Very helpful. And then When you look at the partner community, it seems like they've been pretty instrumental in helping some of the growth here on the contact center side. But Did were you also sort of refocusing them in that direction and maybe they also took the eye off the ball on the social and marketing side or Anything that you think your internal sort of sales focus influence Performance by the partner community as well?

Speaker 2

Yes, yes, it's a good question. And actually, let me just take a step back, right? It's obvious that we're going to go through an air pocket here. And that's the nature of the beast as we transition From a set of buyers that were largely marketing based or like social customer service or digital customer Service based. Now we're talking to the guy who runs the contact center, who would like kind of didn't know that Sprinklr existed Until about 3 to 6 months ago.

Speaker 2

And that curiosity and that growth is what we think was worth the effort. Having said that, the partner ecosystem is the same way. They are transitioning off very long term established partnership and trying us out. So I think a lot of this air pocket situation for, let's say, up to a year or so Can be explained by making the transition and landing it right, where we're still developing our playbook and our blueprint To enable partners, right. So the people who are trying 11 it, we have to document our successes.

Speaker 2

We have to create the blueprints. We have to train the partners. So there is a let's say, anyway you look at it, you're looking at 6 to 9 month lag in that going from one to the other. And that's the way we look at it. So We're seeing very good early traction and that early traction to convert to steady predictable growth on the booking side.

Speaker 2

I think That's probably the 2 quarters or 3 that we need.

Speaker 8

Okay. Thanks for taking the question.

Operator

Our next question comes from the line of Brett Knoblau with Cantor Fitzgerald. Please proceed with your question.

Speaker 7

Perfect. Thanks, guys. Congrats on the strong quarter. I guess, last quarter you flagged some very large deals

Speaker 3

with some of

Speaker 7

your largest customers and said that those kind of contract values were up 10%, 15% or double digit. But it seems like this quarter, large customers are more of a headwind. So I guess is there bifurcation of, I guess in terms of the type of customer, maybe the industry of that customer that is expanding versus down sound?

Speaker 2

Yes. These are 2 different bases, right? So some of the down sell pressure we're talking about sort of The marketing side and advertising side. And the other thing to put in perspective, we did land some large implementations and In contracts sort of brand wise, size wise on CCAT, we will continue to do so. The thing though is there is a They go market by market, right?

Speaker 2

So these are companies in many cases that have executed a master agreement. But then you go market by market and you will start seeing those bookings and revenues only as markets come on board. And these markets are on different contract timing cycles, right. So you might have a set of markets in LatAm Whose renewal with their current solution is coming up in 6 months or 9 months. It's actually good for us because these early implementations, The 99, the 59 uptimes and a whole bunch of things that we are just working through, the system we've done it before, That it's good to have that breathing room.

Speaker 2

So I just want to make sure that you understand the time lapse as you take those snapshot and try to put it together. And that should once the base is established through The rest of this year and next year, we should see that pipeline convert steadily, but you're going to see a little bit of a starting lag.

Speaker 7

Understood. Makes sense. And then maybe just on or kind of like net revenue retention and how we should think about that going forward. I guess to get to maybe the 10% growth that you guys were talking about next year, it seems like that's going to fall pretty sharply. Is that something that we should expect to maybe end 25 below 110?

Speaker 3

Yes, this is Manish. So I have never given a number for net Dollar expansion or retention, as I state on every earnings call, it's a byproduct of what's happening in the business. We have signaled even in the past, we do expect the 118% to keep coming down. I don't know where it's going to end up, but I think you can use the total revenue guide, you can use the billings number for next year to Know that it is going to come down from the 118, probably maybe not very different from where you were expecting, but it's not something that I Formally put out a number on.

Speaker 5

Got it. And then maybe if

Speaker 9

I could just ask one more

Speaker 7

on the expense side. Particularly with sales and marketing, it looks like kind of cash based sales and marketing expenses are down a good bit from the Q1. I guess, how should we think about expense growth While you go through this go to market transition?

Speaker 3

I think at this point, we will probably provide more Color in the March earnings call for next year. I did want to point out that non GAAP operating margins ought to Expand from here. So there will be more efficiencies across the business. I don't want to specifically call out for sales and marketing. But I think as Rajiv answered in one of the other questions, we're not looking to incrementally invest a lot more.

Speaker 3

I It's more around reallocation of existing resources.

Speaker 2

Yes. I mean, and this might be premature, but look, We just I started the call by saying one should expect 20% to 40% productivity gains in the front office. And look, we intend and let me be specific, I intend for us to be client 0. So So there's a lot of things that we're doing now that's going to take a few quarters that it just like we're going to eat our own dog food or drink our own champagne here. And so look, we're anticipating and working towards improving productivity.

Speaker 2

So I think I echo Manish's sentiment that we should be able to do both.

Speaker 7

Perfect. Thank you, guys. I appreciate it.

Operator

Thank you. The question comes from the line of Michael Byrd with Wells Fargo. Please proceed with your question.

Speaker 9

I wanted to ask going back to CCaaS, when you think of the sales process for your CCaaS offering, It's primarily in the application layer. You do have the voice capabilities now. But maybe more holistically, how do you think about That piece of business progressing to doing more what I at least how I imagine augmentations today More strategic holistic rip and replace, at least that's becoming more of the norm. Thank you.

Speaker 2

Sorry, Michael, can you so what was your question? Is it can you repeat the question? I'm not sure I got it.

Speaker 9

Absolutely. I guess, how do you think about the progression of in CCaaS moving from being an augmentation in the more the digital application layer within the CCaaS deployment to being a more holistic strategic replacement of the legacy vendors from end to end Moving forward or I guess what inning are you in that transition? Thank you.

Speaker 2

Got it. We I don't know when and what to expect in reality. So we have 2 sets of buyers, right? We have a set of buyer that Is used as the social customer service and is expanding to digital maybe as a next step. We have a bunch of those.

Speaker 2

The exciting development there, Michael is our conversational AI capability. And that's becoming really, really good. And so and it's becoming more human like. I'm not going to name the customer, but we have one customer where our bots and a case that's closed by a bot has a higher NPS So I think that speaks to the progress we've made in technology. So that's sort of the Class A digital Customer service and mitigation of production and call volume, just saves you money.

Speaker 2

And the other one is where we are Actually in a CCaaS replacement RFP. I can tell you this is anecdotally because we don't have enough data to be specific here. Our win rate when we are seriously considered is pretty high. And you have this We never got fired for buying IBM syndrome is the only reason why someone who sees it and believes it and test it And kind of maybe, Seth, I'm going to give it more time. So we know we have a very differentiated product.

Speaker 2

We know that The opportunities we are in, we're seeing very good win rates. We have to develop that muscle across the company. And that muscle development takes time. The good news is the parts of the world where that muscle Seems to have developed quickly either through hiring salespeople who have been at other CCaaS companies or leaders embracing CCaaS. They're doing really well.

Speaker 2

And so it's inconsistent at this point across the company and one of our Big goals for next year is to make that really consistent around the world.

Speaker 9

Helpful. Thank you.

Speaker 2

Thank you, Michael.

Operator

Question comes from the line of Michael Turits with KeyBanc Capital Markets. Please proceed with your question.

Speaker 10

Hi. This is Michael Vadovic on for Michael Turits. Thanks for taking my question. On the headwinds you talked about seeing this quarter with the over rotation, the down sell pressure, I guess, were you not seeing those same dynamics in Q2 and Q3 in like a similar frequency? Or is that still relatively new for this quarter?

Speaker 10

Thanks.

Speaker 2

It's kind of consistent, right? But because as Manish said, we have a much bigger base coming up in Q4. So we're not seeing The macro environment get better or get worse. And so I wouldn't characterize it something changed in Q4. Yes.

Speaker 3

So let me clarify that. I think what YG is getting at is the level of down sales that we are Beginning or we saw in Q3 and then we expect here in Q4 is much sharper than what we saw in the first half of the year. But to also add to what he said, when we look at the how the sales teams were organized, of course, A lot of this was things that we had wanted to do in terms of our focus on CCaaS, which was very successful. But I think that whole sequence of moving the sales teams around, we probably didn't see at least till now that we were not Getting the level of market momentum in our core products or traction in the core products that we should have had.

Speaker 2

That's causing the change that were Manish has articulated.

Speaker 10

Great. And then just on that over rotation you called out, I guess how significant on like a dollar or a resource standpoint Are you reallocating away from CCaaS? I guess I'm just trying to figure out, are you far enough along in the CCaaS expansion or growth that you can continue to like Pushed into that market and grow the business despite that reallocation?

Speaker 3

I think the short answer is yes. We have had several quarters here of looking at not just win rates, but the go to market model CCaaS, what is working in the market, as Rajiv was mentioning earlier, we've been successful in onboarding partners In that segment, so we now have, I'd say, enough of a science around what it's going to take for us to succeed in that segment. And I think this would be the appropriate time for us to refocus on all of our product suites, not just CCaaS.

Speaker 2

I would just say though, I would again give ourselves the explanation for all of this is, we'll probably need another quarter or 2, before the partner enablement, the scaling of that completely new product suite It's just brought to the world, right? So now we're implementing these early partners working with that. So it's just We're in the process of templatizing it and being able to do it with much less heavy lifting.

Operator

Our next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed with your question.

Speaker 1

Hey, this is Ari Friedman sitting in for Brian Schwartz. Thanks for taking my question. I'm just wondering like in the quarter, if you saw any strength in certain verticals Or weakness? Our research suggests that there's been like some softness in like insurance and autos and tech and financials. Wondering if you're seeing the same thing Or something different?

Speaker 1

Thanks.

Speaker 2

I mean, I don't think there's anything super noticeable. If you like Want to interpret a certain way? I'd say maybe the media sector, right? Media, publishing, channels who have been customers, we're seeing some sort of Can you interpret that there is some extra softness there? There has been the streaming wars That have been going on has calmed down.

Speaker 2

So this social networks are in a very different place than they used to be. And as you know, there is some these are all like one time things that we for us it's just unfortunate time They're coming together at the same time, but I'd say that's probably one way to interpret it.

Speaker 1

Yes. Thank you. That was very helpful.

Speaker 4

Yes. Thank you. Thank

Operator

you. Our next question comes from the line of Austin Cole

Speaker 5

Sprinkler service, sounds like customers are seeing pretty meaningful productivity improvements. I'm wondering if you could walk through How does Sprinkler Service handle automated call deflecting and routing to agents? Maybe so investors can better understand kind of the technical pieces here. And how are those functions different From other CCaaS solutions and how are customers benefiting, anything there would be? Thanks.

Speaker 2

Austin, thank you for that question. I really mean it, because I think when you see its action, it actually It just changes your perspective. I'll tell you the story of you remember the big bang we talked about, right? 1 of the I think the 5th largest Thank you. It was one of our first CCaaS implementations, 15,000 agents.

Speaker 2

I was I met with the CEO and they did a live demo for me, Put the phone on the table and just dialed out 1-eight 100 Bank. What do you get when you call a big bank? Press 1 for credit cards, press 2. And after they finished implementing Sprinklr for the most part, the question on the other side that the system poses is how can I help you? And you just say, I want to know my credit card balance.

Speaker 2

And then the follow-up question is, can you please put in your security code, maybe recognize your phone number. And literally, if you could just continue the conversation and there are, I don't know, 100 some journeys They've identified some of 50% to 80% of that as we connect the more internal systems have been automated and the credit card Balance inquiry is something that is automated. So literally, you now have an experience where it's very unlike A traditional experience where we're routing and calling. And on the back end, if you did ask a question like I want to Change my credit limit that would go to a human, but we already understand from your speech and your text And your voice said, what you want to do, so we know where to send you and then we use smart AI to find the best agent who can do that. And because you can do it across channels, let's say you request a credit limit increase at the bank, before you had Sprinklr, If that request was on the phone, they could ask you, hey, can you just send me a proof of your salary increase, blah, blah, blah, and you send it and get it done.

Speaker 2

But if that came on the phone on a Friday or Sunday night, if that came on e mail on a Sunday night, The agent that had an e mail console, remember before Sprint, these consoles were all different, right, and they were logging into 8 screens. The agent will reply back via e mail saying, hey, can you send me a proof of your income? And that e mail, You go to work and you reply back 5 days later, the SLA for the same call driver on e mail was dramatically And then if it were on the phone and with Sprinklr that agent who is responding an e mail because it's an omni channel console just puts on call and calls the customer. And those are the kind of magical things. And by the way, in the demo, it was the head of CX who did the demo.

Speaker 2

He hung up before Sprinklr could blurt out the bank credit card balance and called back. And Sprinklr picked up from where it left And continue the transaction. Those are the kind of things that are not possible in a traditional point solution Existing legacy contact center infrastructure. I hope that brings it to life.

Speaker 7

Very helpful. Thank you.

Operator

Thank you. There are no further questions at this time. I would now like to pass the floor Over to Raji Thomas for closing comments.

Speaker 2

Thank you, Alicia, and thank you all for joining us Today, again, I'd like to thank our employees, our partners and most importantly, our customers for their trust and continued business. We look forward to updating you all again in 90 days or so as we continue this exciting journey. I'm sure that's going to span years decades of creating a new category that we call Unified Customer Experience Management. Thank you very much and have

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Earnings Conference Call
Sprinklr Q3 2024
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