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

Sprinklr, Inc. (NYSE:CXM) Q3 2023 Earnings Call Transcript December 6, 2022

Operator: Ladies and gentlemen, thank you for standing by and welcome to Sprinklr's Third Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Mr. Eric Scro, Vice President of Finance for introductory remarks. Please go ahead sir.

Eric Scro: Thank you, Diego and welcome, everyone, to Sprinklr's third quarter fiscal year 2023 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 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 the 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. With that, let me turn it over to Ragy.

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Ragy Thomas: Thank you, Eric and hello everyone. Thanks for joining us today as we share the financial results of our third quarter and FY 2023. I'll get us started with a few highlights, including what I'm hearing from customers and some of our key wins. Manish will then share details of our financial results. Turning now to the quarter, I'm very pleased to report that Q3 was another strong quarter that exceeded guidance. Q3 total revenue grew 24% year-over-year to $157.3 million and subscription revenue grew 27% year-over-year to $139.9 million. And with our commitment to operational efficiency, we generated $6.9 million in non-GAAP operating income for the quarter due to prudent financial management and greater operational discipline company-wide.

Before providing key takeaways from this quarter, I'm excited to share that we have appointed the former Chief Revenue Officer of ServiceNow, Kevin Haverty, to our Board of Directors. Kevin joins us at an exciting time in Sprinklr's journey, and his experience will greatly benefit our go-to-market execution, something that we are very focused on now. Kevin currently serves as a senior advisor to the CEO at ServiceNow and has been a CRO there under three different CEOs. I also want to thank Matt Jacobson, Partner at ICONIQ Capital, who has retired from our Board after serving us for eight years. ICONIQ joined as an investor in Sprinklr in the very early days and helped chart our course back then. We are very appreciative Matt's contribution, and I wish him all the best.

Now, moving on to Q3. I was fortunate to meet with well over 100 customers around the world from across the U.S. to India, Singapore, South Korea, Dubai, Mexico. The excitement of brands transitioning from point solution KOLs and customer-facing functions to Sprinklr's unified CXM platform is truly palpable if you talk to these customers. And the results they are seeing in terms of reducing customer service costs, increasing revenue by making that ad dollars and marketing dollars work harder and innovating faster while mitigating risk by listening to customers in real-time. It's truly inspiring. A new story line, that is clearly emerging in these conversations, especially from our newer clients is how Sprinklr's AI is helping model and automate omnichannel journeys that can potentially eliminate the need for human service agents by up to 95% for some use cases, while improving customer satisfaction scores at the same time.

This use case is real at Aramex, the largest multinational logistics provider in the Middle East that someone referred to me as the FedEx or the UPS of the Middle East, who recently consolidated their digital contact center stack on to Sprinklr. I met their Group Vice President of Technology in Dubai, it was great to hear how they have been able to automate 95% of their resolution for several common customer inquiries using Sprinklr's, AI and chatbot and automation, while continuing again to improve CSAT scores. While we continue to win deals across all our four product suites across a variety of industries, more than a third of our bookings in Q3 came from our Customer Service Suite or our modern care suite, where voice-led CCaaS was a key driver for us.

We are pleased with our momentum in this space and are confident that technology and our pace of innovation will further differentiate us in this very interesting marketplace. We believe that you can have great customer experience management with our great customer service. However, the current macro environment is leading to delays in purchase decisions and longer sales cycles. And like many other enterprise software companies, we did experience additional pressure on deals in Q3 versus Q2, particularly in Europe. We expect these longer sales cycles and tightening of budgets to continue in light of global uncertainties. While we can't control the macro climate, we can control how we manage the fundamentals of our business. You will see us continue to focus on delivering value to our customers and generating a clear path to profitability for our shareholders as we go forward.

Since founding Sprinklr, we've been clear that the market will move from point solutions that don't work well together to a handful of best-of-suite platforms that become more and more tightly integrated. Furthering our intention of becoming the third or fourth major front office platform for the enterprise, in Q3, we announced an expanded partnership with Salesforce and Accenture. Enterprise customers will now be able to incorporate their massive CX data set within Sprinklr with their CDP and CRM data sets inside Salesforce. And Accenture is a key partner in our go-to-market strategy. They are the experts in helping brands bring technology and data together to deliver best customer experience as possible. We're also actively working with Salesforce to support customers through their transition from social studio to Sprinklr.

This work has been well underway this year, and we're seeing positive momentum from those customers. During the third quarter, we continued to add new customers as well as expand with existing customers. Some examples of these world-class brands include Geico, HEMS, Honda, IPG Health, and Overstock. I'd like to provide a few examples of how customers are currently using Sprinklr across our product suite. As a reminder, these suites include our Modern Care suite, Modern Research suite, our Social and Sales suite, and our Marketing and Advertising suite. Let's start with our customer service offering, the Modern Care suite. In Q3, one of the largest global consumer software and hardware players further expanded their partnership with Sprinklr by adding over 500 more care agents, doubling their current agent count to over 1,000.

They are now supporting 60 of their product lines across 16 languages on modern channels using Sprinklr. And their agent support has gone from 90% coverage in one hour to 95% coverage in under 30 minutes. With Sprinklr's AI Studio, they're also achieving over 95% accuracy, which has reduced manual processes significantly. Since first becoming a customer in 2014, they are now using 24 Sprinklr products across all four product suites. Another great example of impressive customer service results for us is with one of the world's leading global streaming services. They conducted an extensive RFP process with 20 of today's leading CCaaS providers to select a technology partner that they could use to help transform their legacy CCaaS infrastructure that currently has around 5,000 agents.

They chose Sprinklr and in large part because of our full set of CCaaS capabilities on a single, unified AI-based platform, and also our architectural flexibility to integrate with their large number of homegrown tools that exist currently. Turning to Modern Research, this quarter, one of the largest food and beverage companies in the U.S. expanded its partnership by adding product insights to their already expansive portfolio of Sprinklr products. They chose our product insight solution to access competitive insights and better predict the success of the current and future product lines in the marketplace. By using our AI, they are creating a real-time closed-loop data that connects voice of the customer feedback to their product and their customer service teams.

Moving to our social engagement and sales suite. In Q3, BMO, one of the largest banks in North America expanded its partnership with us, adding over 2,200 users on a distributed product. If you recall, distributed product for us, it's a key product that's used in the financial services sector for advisers to engage with and sell to their customers across modern digital channels in a compliant way, very essential if you are in one of the regulated industries like financial services. In 2019, they unified seven-point solutions onto Sprinklr and today, they have scaled to nearly 8,000 distributed users and 25,000 seats for employee advocacy. BMO is a showcase of what can be done by a financial institution across social selling, employee and executive advocacy and branch social enablement.

And lastly, global technology leader, Siemens, expanded their partnership with Sprinklr this quarter by adding 150 modern marketing and advertising seats. Within four years, Siemens has consolidated eight siloed solutions into our unified CXM platform. Today, nearly 2,000 communicators in more than 60 countries work from the Sprinklr platform every day to plan, manage, distribute, and optimize content across social, web, blogs, and e-mail. Rounding out on the product front, I'd also like to share that we continue to make progress with our Lite products in Research and Care. As we've stated previously, the goal for our Lite products is to accelerate and drive greater efficiency in our in-bound demand generation efforts. This is a self-serve way for enterprises to try an easy to use light-weight version of our platform free of charge, which we see as a gateway for companies that are at the earlier stage of their digital journeys.

Before wrapping up, I'd like to applaud our customers for the work they are doing to improve their customers' experiences and for co-creating unified customer experience management as a category. I also want to celebrate Sprinklr's incredible engineering team who make all of this possible. They continue to innovate at a breakneck pace and speed that differentiates Sprinklr's platform in the marketplace. Whether it's improving our proprietary AI every day or taking on a channel like voice that has over 40 years of maturity in the CCaaS space or making user expedient simpler, this team shows no fear regardless of how daunting the challenges. In closing, I'd like to reiterate that we remain focused on the fundamentals in our business. We will continue to execute on our efficient growth strategy, balancing revenue growth, and profitability, while being disciplined about our strategic hiring and expense management.

But we will also stop at nothing to provide the innovation our customers deserve. Our collective belief has never been stronger. Brands want a no-compromise, unified approach to create better customer experiences at the edge of their brand. And that -- the emergence of unified CXM asset category is inevitable. Thank you to all of you, our customers, partners, employees, and most importantly, investors for believing in that vision. With that, let me hand over the call to Manish.

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Manish Sarin: Thank you, Ragy and good afternoon everyone. As you heard from Ragy, we delivered another strong quarter across the Board, exceeding expectations across all key financial metrics. Our third quarter results demonstrate our ability to generate strong growth with a clear path to profitability. We are benefiting from multiple long-term tailwinds that we believe will support our business for the foreseeable future, namely our customers transforming their digital edge, the breadth of our product offering, and how the value of our unified CXM platform is resonating with customers. However, we are not immune to the current macroeconomic environment in the short-term. Many of the macro trends that we saw in the second quarter worsened through the third quarter with a general tightening of budget for both new and existing customers.

In addition, during the third quarter, we saw the operating environment become increasingly challenging, most notably with a more pronounced slowdown in our EMEA business. Turning to our financial results, for the third quarter, total revenue was $157.3 million, up 24% year-over-year and slightly above the high end of our guidance range. This was driven by subscription revenue of $139.9 million, which grew 27% year-over-year, also above the high end of our guidance range. Subscription revenue outperformance was driven by more new business closed earlier in the quarter than expected. Services revenue for the quarter came in at $17.3 million, down marginally from the recent quarterly trend. This is driven by a focus on margins for our services business as we have been thoughtful about not taking on lower margin services business.

We will continue to actively manage our professional services margin, which may impact the absolute level of our professional services revenue moving forward. Our subscription revenue-based net dollar expansion rate in the third quarter was 125%, consistent with our Q2 results. I had alluded to this earlier as we have continued to be successful in upselling existing customers at renewal time as we drive significant new business from existing accounts. This metric continues to demonstrate how strategic the Sprinklr platform is for our mid to large enterprise customers and how we expand with them as they mature. Our gross renewal rate in Q3 was again on par with leading enterprise software companies. We believe this high renewal rate, coupled with the expansion in our installed customer base, is a testament to how important Sprinklr is to our customers' daily workflows.

This should also provide further evidence that Sprinklr's position in the front office software suite remains resilient even in a potentially recessionary environment. As of the end of the third quarter, we had 107 customers contributing $1 million or more in subscription revenue over the preceding 12 months, which is a 34% increase year-over-year. Our platform and the traction we have with the world's largest and most valuable brands continues to grow. As a reminder, we calculate this customer count using $1 million in recognized revenue from these customers on a trailing 12-month basis as opposed to ARR. Turning to gross margins for the third quarter. On a non-GAAP basis, our subscription gross margin increased to a record 81.4% as we continue to drive efficiencies in our cloud operations, leading to a total non-GAAP gross margin of 74.7%, another record for us here at Sprinklr.

Our professional services non-GAAP gross margin came in at approximately 20%, much higher than in recent quarters as we have become more selective in taking on new services business. We estimate the non-GAAP services gross margin to be in the mid-teens for Q4, which we believe to be a sustainable level moving forward. During the third quarter, total non-GAAP operating expenses increased 8.5% year-over-year to $110.5 million, representing 70% of revenues. This is, in fact, down from 80% of revenues during the same period last year and total non-GAAP operating expenses are down $4.1 million sequentially. We continue to generate efficiencies in sales and marketing, which is reflected in our results this quarter with a 750 basis points decrease year-over-year.

We also continue to generate operating leverage from G&A, which decreased by 200 basis points year-over-year. As you may recall on the last few earnings calls, we had said that the investments we made in the second half of FY 2022 and early in FY 2023 were partly the result of catch-up investments from prior years due to the unknown impact of the pandemic at that time. That level of catch-up investment has concluded and we estimate the magnitude of year-over-year increases in non-GAAP operating expenses to further moderate in the coming quarters. Turning to profitability for the quarter, non-GAAP operating income was $6.9 million or $0.02 per share on a non-GAAP EPS basis. This 4% operating margin for the quarter was the result of revenue over performance, improved gross margins, coupled with operating expense discipline across every department.

This was also the first quarter of positive non-GAAP operating income since Q4 of FY 2021, and we achieved positive bottom-line performance one quarter ahead of our Street guidance. To that end, in terms of free cash flow, we had a marginal burn of $1.7 million during the third quarter compared to a burn of $4.1 million in the same period last year. The free cash flow improvement in the third quarter was driven by ongoing operational improvements, slightly muted by the timing of our billings and subsequent collections. And as mentioned on prior calls, given the seasonality and low duration of our billings, we estimate that adjusted free cash flow will be negative here in Q4 and on a full year basis for FY 2023. However, we remain committed to generating positive free cash flow in FY 2024 on a full year basis, an improvement on what we have communicated on our previous earnings calls.

We ended the quarter with a very healthy balance sheet, including $544 million in cash and investments and no debt. This puts us in excellent shape to continue investing in strategic initiatives that will drive growth in a profitable manner. Calculated billings for the third quarter were $138.4 million, an increase of 19% year-over-year. And just as a quick reminder, our third quarter billings have historically been the lowest quarter for us given the quieter summer months in Europe and the general timing of our renewals. The dynamics of our billing trends, as outlined on the last few earnings calls, notably, the seasonality we experienced with Q4 being the highest billing quarter and our overall billing cadence having a duration less than 12 months remains in place.

For the first nine months of FY 2023, calculated billings are up 22% compared to the first nine months of FY 2022. And as noted previously and reported here in the third quarter, we expect the delta between revenue growth and billings growth to continue to hold with billings growth lagging revenue growth by approximately five percentage points, assuming all else remains the same. 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 $586.1 million, up 28% compared to the same period last year; while current RPO was $420.2 million, up 27% year-over-year. As expected, the third quarter was a seasonally slower quarter for both RPO and CRPO given the timing of our renewals.

We continue to believe that subscription revenue and RPO growth are the best metrics to evaluate the underlying health of our business. Our billings can fluctuate significantly relative to revenue based on the timing of invoicing cadence of renewals and the duration of customer contracts. Moving now to our Q4 and full year FY 2023 guide and business outlook. As noted on our last earnings call, we faced tougher comparisons in the second half of the year given the strong growth we demonstrated over the last three quarters of FY 2022. We also recognize that the macroeconomic environment has worsened in the third quarter with additional scrutiny along with tighter budgets on new spending. Given this environment, we're taking a prudent view of the near-term growth expectations for Q4.

Starting with Q4 FY 2023, we expect total revenue to be in the range of $162.3 million to $163.3 million, representing 20% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $145.5 million to $146.5 million, representing 24% growth year-over-year at the midpoint. We expect non-GAAP operating income to be in the range of $6 million to $7 million and non-GAAP net income per share of $0.01 to $0.02, assuming 264 million weighted average shares outstanding. For the full year FY 2023, we are tightening both our subscription and total revenue outlook for the year. We now expect subscription revenue to be in the range of $545.8 million to $546.8 million, representing 28%growth year-over-year at the midpoint.

We expect total revenue to be in the range of $615.2 million to $616.2 million, representing 25% growth year-over-year at the midpoint. Note that the full year FY 2023 guide is impacted by our decision to actively manage services margin going forward, impacting the absolute level of professional services revenue, as previously mentioned. For the full year FY 2023, we now expect a non-GAAP operating loss to be in the range of $1.3 million to $2.3 million, equating to a non-GAAP net loss per share of $0.04 to $0.05, assuming 260 million weighted average shares outstanding. The non-GAAP operating loss for the year at the midpoint is an operating margin improvement of $34 million versus FY 2022 and a $44 million improvement versus our original guide for FY 2023.

This is the result of our continued focus on operating discipline, specifically go-to-market efficiencies and better allocation of resources. As a quick reminder, in deriving the net loss per share for modeling purposes, a $9.5 million total tax provision for the full year FY 2023 needs to be added to the non-GAAP operating loss range just provided. We booked a $7 million tax provision in total for the first nine months of the fiscal year. Therefore, we estimate the tax provision to be approximately $2.5 million for Q4. FX continues to be a very topical discussion given the macro environment, so I want to reiterate our position here. FX does not have a material impact on our financials because even though we have approximately 35% of our business outside the U.S., most of our billings are in U.S. dollars.

Before moving into Q&A, I would like to provide some high-level commentary on fiscal year 2024. We will provide formal guidance on our Q4 earnings call sometime in March, which is our normal practice. But given the uncertainty in the market, we believe it is helpful to give investors a view of our thinking for next year. As you heard today, long-term demand trends and engagement for Sprinklr remains strong. However, in the near-term, we believe we will continue to be impacted by the current macroeconomic environment. We expect the macro trends from the last three months to continue through FY 2024 resulting in further tightening of budgets and lengthening of sales cycles. With all that said, we expect revenue growth to moderate in FY 2024 from the Q4 growth rate I just outlined.

Based on what we are seeing today; we estimate total revenue growth to be approximately 15% for the next fiscal year. In terms of our path to profitability, we are proud of the improvements we have made over the course of FY 2023. We will build upon that success next year and expect to generate meaningful non-GAAP operating income that is at least equal to the non-GAAP operating margin we just reported for Q3 FY 2023. And as mentioned earlier, we continue to expect to be free cash flow positive on a full year basis for FY 2024. Lastly, I would like to thank all our employees for delivering a strong third quarter during an uncertain macro environment and continued volatility in the financial markets. I'm grateful for the confidence that our customers have placed in us and the dedication of our employees.

We remain focused on building a track record of successful execution and operating discipline across the business. With that said, let's open it up for questions. Operator?

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