Ladies and gentlemen, thank you for standing by and welcome to Sprinklr Second Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Eric Scro, VP Finance for introductory remarks. Please go ahead, Eric.

Thank you, Alex and welcome, everyone, to Sprinklr's second 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 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 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. In addition, during today's call, we'll be making 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 third fiscal quarter of 2023 and full fiscal year 2023 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.

Thank you, Eric and hello, everyone. Thank you for joining us today as we share the financial results of our second quarter and FY '23. 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. But before I jump into the results of the quarter, I'd like to take a moment to share that Luca Lazzaron, our Chief Revenue Officer, has made the decision to step down from his position at Sprinklr after a tremendous 5 years of building and growth. When Luca joined Sprinklr back in 2017, I had asked him for a full year commitment to bring structure, process and discipline to scaling our sales operations. He achieved that and so much more, hiring great talent and preparing us for the IPO last year. I want to thank Luca personally for giving us that extra year. And for all his contributions, we wish him the very best. Luca will be succeeded by Paul Ohls who has actively been serving as our EVP of Worldwide Sales and success. Luca recruited Paul to join 4 years ago and has been preparing him for this role. Paul is an important member of our global leadership team with experience in enterprise software sales, including a lot in customer experience space. I speak on behalf of my entire leadership team when I say that we are very confident in Paul's ability to step into the CRO role and help take Sprinklr's growth to the next level. Paul will officially transition to his new role on October 1 and Luca will stay on as an adviser until the end of the calendar year. Turning now to the quarter. I'm very pleased to report that Q2…

Thank you, Ragy and good afternoon, everyone. As you heard from Ragy, we delivered another strong quarter across the board and are pleased with our ability to once again exceed expectations across all key financial metrics. In spite of a challenging macro environment, our ability to deliver strong results demonstrates the long-term tailwinds for our business, from 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. For the second quarter, total revenue was $150.6 million, up 27% year-over-year or $3.1 million above the midpoint of our guidance range. This was driven by subscription revenue of $133.1 million which grew 29% year-over-year and was $2.6 million above the midpoint of our guidance range. Much of this overperformance was driven by an exceptional renewal rate and renewals occurring much earlier in the quarter allowing for additional revenue during the quarter. To follow up on Ragy's remarks, we have seen sales cycles lengthened marginally during the quarter with additional scrutiny on new customer spend. However, to be clear, the quantum of new business that we booked during the quarter was in line with our forecast, except it was more back-end loaded than what we had modeled. I'm also happy to report that our subscription revenue-based net dollar expansion rate in the second quarter was 125%. This metric continues to expand for the fifth straight quarter and demonstrates our ability to upsell and cross-sell our extensive product set to our installed base of mid and large enterprise customers. As mentioned earlier, our renewal rate in Q2 was the highest we have seen over the last 2 years, putting us in great company with other elite enterprise software companies. We believe this high renewal rate, coupled with the expansions…

[Operator Instructions] Our first question comes from the line of Tyler Radke with Citi.

I wanted to ask you just around the overall deal environment you're seeing. Obviously, a nice set of results in outlook as well. But I guess, specifically, are you factoring in the environment getting worse for the second half? And then just help us understand what you’re seeing on pipeline, too. We’ve seen some of your peers like salesforce.com, talk about maybe some pipeline generation issues in the back half of the year. Just curious what you’re seeing on the pipeline side as well.

All right. Thank you, Tyler. We -- like I said in my prepared remarks, we are seeing incremental scrutiny in deals. Our deals are in the enterprise world are larger. And we're seeing another set of eyes as CFO is spending an extra day looking through it. And we did see that our deals were a little more back-end loaded in the quarter than they traditionally are. However, we're seeing demand continuing to be consistent and robust. What do I mean by that? Businesses want to save money when things are uncertain and things get tougher. So we help them increase revenue, reduce costs and help manage risk better by processing external data, give them visibility into what customers like in they don't like. So we're seeing demand strong but deals are going through more reviews. And while we did not see that in last quarter affecting our numbers and we have to be cautious and watchful of the macroeconomic changes in the next 2 quarters.

That’s helpful. And maybe if I could just ask about the competitive landscape. Obviously, you have an environment where the funding for private companies is not nearly as robust as in prior years. And then you also have what seems like an appetite from larger customers to consolidate solutions. So I’m just curious if you’ve noticed any uptick in win rates? Or do you think some of those competitive factors are helping drive your results here?

Tyler, we didn't see anything pronounced and different in the last quarter but our entire value prop is that we go into an enterprise with 1 unified platform with 4 product suites for customer-facing function and 33 products. In one of our typical larger deployments, we usually take out somewhere between 5 and 25-point solutions around the world when we are done with our deployment in the first 12 to 18 months. So we're continuing to benefit from that because that's our value proposition. Unification is a value proposition. But to answer your question directly, we didn’t see the funding dry up play into our deal dynamics, at least not in the last quarter.

Our next question comes from the line of Michael Turrin with Wells Fargo.

You got Michael Berg on for Michael Turrin. Congrats on a great quarter. Apologies if this was answered on your script but can you talk us through where you’re getting your margin improvement and how we can think about the margin improvement as you look into not only the second half of this year but moving into fiscal ‘24 and beyond?

Michael, this is Manish. So we're getting operational improvements across the board. So you would have seen our gross margins tick up. So as I said in my prepared remarks, 73% gross margin was the highest we've seen here. On the subscription side, we were at 81.2%. And again, a lot of this is just methodical looking at where we can nip and tuck. We've always said, once we hit scale, we'd be able to improve our subscription gross margins which what we did. And then on the operating expense side, I've said this in the last 2 earnings calls, that we will look to get more efficient as we scale the business. And our view always was ever since we went public, that once we hit a 25% plus or minus growth rate, we would start focusing more and more on marginal productivity of every individual that we have in the business. And we've been doing that all the way from looking at non-people costs. These could be real estate, these could be other investments, including how we are onboarding employees and how we have now focused more on making them more productive versus just keeping up a very high rate of employee addition into the business. So I think all of these things in the aggregate is what you're seeing now drop to the bottom line and we've been speaking to that over the last couple of quarters and now we're seeing the benefits of that.

And a quick follow-up. Anything to point to -- this is probably just due to a lot of low numbers but you saw a nice -- little uptick in the adds of $1 million customers. Anything to point to in particular, whether it’s just the deals getting pulled forward or the strength to your product breadth and depth, just curious on that front as well.

Michael, that's fairly consistent, I think, with the evolution and the maturity of the market. And we're seeing a gradual but very noticeable uptick in companies wanting to buy into the vision and the strategy at the outset because if you know when we IPO-ed our story. And if you look at our past, the story has been, we come from the social media management world and most company sources of social media management product and they got started that way and they expanded out. We’re beginning to see an awareness in the marketplace of the need for the third platform, the one that complements the other 2 biggies in the front office space is very pronounced. And we’re seeing customers entertaining the notion of buying into the platform approach from the get-go or much faster than they did traditionally.

Our next question comes from the line of Raimo Lenschow with Barclays.

I've got two, if possible. Ragy, can you talk -- if you think about the changes in sales leadership, that's kind of where I got most of the questions from. Obviously, five years is a good time but it does look like momentum is increasing, et cetera, like why that's down now, what changed now. And are we expecting any changes as a result of that? That would be my first one and then I have 1 follow-up.

Raimo, you answered the question yourself. Five years is a long time for someone because I convinced Luca who has partly retired and was consulting and doing stuff. I told him we needed 4 years to get this team set up. Look at the fact that he -- we're promoting somebody he hired and he groomed. I don't know what else I can point to. And look, we made the decision to go public with the team that built the company because they knew everything about everything. And could provide continuity in this transition. What you're seeing us is a normal growing up of a company that's scaling up and grow and grow in the way it should. So Luca is a friend of family, a personal friend of mine is going to be an adviser and continuing to work with us.

Yes. Okay. Perfect. That’s really helpful. And then the follow-on question was a…

Sorry -- well, sorry, I just want to also add that. And Paul Ohls, who is being groomed and hired by Luca is -- has been running worldwide sales for us already. So if you just look back and look at how we've been transitioning it, this is, I think, the smoothest anybody could have done.

Yes. Yes. Yes. Okay. Perfect. That's super helpful. And then the follow-up was, as we go into more volatile times, it's good to see that you guys haven't seen that much. Have you kind of changed anything in terms of sales approach that you kind of are looking for higher pipeline coverage. Obviously, in tougher times, people look more at consolidating vendors which should play into your favor. Like what changes have you taken to kind of prepare yourself for what’s going on here?

Again, you know that we think we're on the right side of history through these transitions as painful as they are. And I hate even saying that the way I did. But I think the trend towards consolidating, getting the big platforms to work with each other, is the one way, right. So we're definitely benefiting from that. And we're continuing to see companies wanting to do strategic deals. And so we're not -- all of that is pointing in the right direction for us. What did we change in our sales approach? Not really anything except the fact that as we go through and scale, we're maturing the process. I've always said to you that our go-to-market approach will have to continue to evolve because our pedigree is in selling to large global companies with the direct sales. So Arun, our CMO, started a few months ago. And so you're going to see -- you continue to -- you will see our marketing and our sales evolve and evolve together from a demand gen top down. You will see our partnership and the things that we're going to do in building out. We've got a great alliances program, how do we build that out. These are things that as companies mature into the $1 billion range of ARR, they have to do. And we’re a little bit late than I’d like but we’re going to catch up.

Our next question comes from the line of Arjun Bhatia with William Blair.

Ragy, one for you maybe. Obviously, there's a lot of focus on how the macro might unfold and what that means for your business. But I'm curious, as you look at your product portfolio, right, you have these four big suites. Do you anticipate the increased uncertainty that’s out there changing demand for specific products, right, as customers focus on different areas of investment. Does care become a more important area of investment and then marketing advertising, maybe less so. Just curious how you see that playing out.

It's a very good question, Arjun and thank you for that. Look, I think -- we -- our entire value prop is that the platform is unified, built from the ground up on one code base with workspaces and workflow and teams a whole bunch of things which we think are very unique in the entire enterprise front office software space. So for us, the -- the question is not which product is slowing and which product is growing. To understand that I want you to understand the two things we're doing. We are creating next-generation AI-based truly omnichannel customer-facing capabilities, whether that's in care or whether that's in marketing, okay. So when you use our care suite, we're displacing probably 5 to 15 solutions point solutions in that. And we're doing the same thing in marketing. So we continue to benefit in -- across our product suites. Now we've been public in the fact that we see care as a great opportunity and that's a strategic priority for two reasons. First reason, we see this contact center refreshes begin to spike. The contact center space is really very -- it's been around for 40-plus years. So people are trying to figure out how to consolidate data centers and how to move to the cloud. And when you're disrupting and you've taken apart what's been working for you, you're always looking at not just how do I catch up but what's coming next and people are buying into this vision. Remember, a couple of quarters, we talked about this large Asian bank that went live with our voice capability. And I'm pleased to report today that they've actually gone live in multiple sites. And boy, they're seeing some really good results. And you have to really take this apart to…

That's really interesting and very helpful. Thanks, Ragy. And then just a follow-up for Manish, if I can. If I look at just your margin guidance and given the current quarter results, it seems like you actually had a quarter-over-quarter sequential decline in total sales and marketing spend. As we look out for the remainder of the year and possibly into 2024, fiscal ‘24 as well, where do you anticipate the biggest portion of leverage to come from over the next 4 to 6 quarters?

Yes. So that's a great question. I think for FY '24 official guidance, you'll have to wait for the December earnings call. You might get some prelim guidance at that time. But I think your observation is astute. I did call out even in the prepared remarks that the biggest area of leverage we would see is in sales and marketing. And again, this just goes back to marginal productivity. So some of that will taper down. We’re obviously looking to generate a very healthy level of growth but do it in a manner which balances both growth as well as what drowns to the bottom line. So you’re going to see that ARC continue for the remainder of this year. On the bottom line, we are obviously alluding to a $5 million operating profit here in Q4. And I don’t think it would be a stretch to assume that as you look at FY ‘24, you would see that continue as to exact numbers, we will talk through that in December.

Our next question comes from the line of Michael Turits with KeyBanc.

So first of all, congrats on the quarter, probably obvious reasons, tough environment, great performance, really nice to see. But I'd love to keep going. So I love to keep going in the sales and marketing and tied margin direction. I’m just trying to understand not just quantitatively that you’re going to see more efficiency productivity. But what’s happening in terms of go-to-market, in terms of focus on direct sales. Where you’re coming back from relative to the catch up? Any changes that might be taking place, maybe some efficiencies that come out of the light offerings what is really enabling that change in productivity at a very concrete level right now?

Let me kick it off and maybe Manish can add details. Michael, we -- in our earlier years as we're building the platform, our primary focus in growth was added capacity. And I think what we've done and we have to add capacity because ramping takes a while, right, as you know, in our space, in enterprise software sales across the board. So having done that, what we've done is we've built enough capacity and then now we're focused on productivity. And so that's what you will start seeing. And I think it will take us a few more quarters to get that capacity and productivity focus weighted right and then we’ll be able to kind of give you a long term where it should be. But there’s no reason for you to think that we would be anywhere less than best-in-class in the long run.

Yes. And to sort of add to what Ragy was saying, Michael, it's nothing more complicated than it takes a certain amount of time for reps to ramp up. And I think historically, in a low interest rate environment, there certainly wasn't any real need for companies to start focusing on what's the marginal productivity of a rep? How do we make sure it gets to a certain threshold. And there was sort of all the reason to go keep adding the capacity because the whole aim was to generate a much higher growth rate. And our view is, look, we want to get to a very healthy growth number that we believe we can sustain over a long period of time. And in terms of adding additional capacity, we want to be extra thoughtful. We'd rather focus our energies on enabling the existing teams in place, getting them to be more productive, adding more resources around enablement, adding more resources around getting them more leads, more pipeline, more productive back again to that phrase than sort of adding additional capacity at the margin. And we're sort of getting a lot more methodical about it than we were before.

Great. That’s helpful.

Does that give you more color?

Yes, that’s helpful. And then just sort of a clarification. Manish, it was interesting. You said that the renewal -- you have strong renewal rates and the renewal came earlier in the quarter driving revenues but new business in the quarter was more back-end loaded. So why is that, that new business was more back end but renewals earlier.

Yes. So that's a good question. And I wanted to call it out because I wanted sort of investors to dissect the revenue composition and understand why there was overperformance in the quarter. So as Ragy and I both said in the prepared remarks, there is extra level of scrutiny on the new spend. I mean, damn these CFOs but that’s what they do. And so we saw our last week of the quarter was tremendous. We did book the amount of business that we were looking to book but it all sort of came together in the last week or so. Now every quarter is different in terms of the cadence of renewals. And Q2 was one of those quarters where a lot of our big customers were slated for renewal much earlier in the quarter. So when we build our financial models, we’re not down to the individual customer and there’s a certain puristics we used to figure out where things would land. And given that we generate a lot of our new business in terms of upselling to existing accounts, given those renewals were much earlier in the quarter, a lot of the upsells into the accounts -- into those accounts happened in the first or second month. So we picked up additional month or two of revenue but a lot of the nonrenewal business from new accounts happened in the last week of the quarter. So if you net the whole thing out, that’s the $3 million in overperformance compared to the midpoint you see for the quarter. So I wanted to lay all of this bear so people understood how the sausage is made. Does that make sense?

Let me add one other perspective. We used to be -- our fiscal year used to be calendar year. So there's an accumulated book of business that as we switch to January 31 year-end, that book of business kind of renews early, right, early in the quarter. So there's some historical context to how sometimes renewals are in line with where we see the new business expansions.

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

I wanted to ask on the NRR. It was really impressive to continue to see that performance, especially in light of hearing other companies talk about a more challenging environment. So could you unpack some of the improvement in the NRR between gross sell, cross-sell and upsell? And how should we think about the continuation of trend through the rest of the year? And did that renewal business that you just highlighted? Is that any sort of onetime impact NRR we should think of?

Yes. So -- our primary focus has been Elizabeth, upsells and growth within existing accounts. Let me explain the strategy behind it. And then Manish can add more color. We know we are attempting to do too much, 33 products for a company that's 13 years old and most of it was built organically pretty much pull of it. And so we know we’re attempting to do too much. We know we’re changing a very, very big and powerful vision. So it was and it has always been very important for us to focus on a segment and make sure that they are getting very measurable, tangible value from this bigger investments they’re making in us as a platform. So that was the strategy behind going to the very top, biggest companies. If we can solve the biggest and the most complicated use cases and situations and show ROI, we think it’s much easier to simplify, make itself service and all that. It’s admittedly a different strategy than many other companies but that’s what we chose to do. So our customers -- our larger customers have always been buying more and more of Sprinklr and that’s been a path to grow. Having said that, we are now at a point after 13 years, where the core capabilities of the platform has been built out and is super visible and is super clean and customers are happy and they’re buying more. And so it is time for us now to start putting a lot more emphasis on new logos. And you will see us in the next, I’d say, two to four quarters, slowly but surely increase our investment in new logos.

Yes. And just to add to that. So I think as we've alluded to earlier, we don't have an internal NRR or net dollar retention target. Given that we tend to start with one product suite and then over time, as Ragy was saying, customers do eventually end up at the unified CXM platform. So we’ve historically become fairly adapt at trying to sell multiple product suites to those accounts. You obviously see that in the 98 customers with more than $1 million in subscription revenue over the last 12 months. The other thing I just wanted to make sure was clear the NRR metric for us, it is a trailing 12 month on a recognized revenue basis, not ARR. So sometimes that does confuse people. And back to the earlier comments I made around growth retention we’re obviously best-in-class. So there is a number of these things that are coming together. And as Ragy was saying, that was one of our underlying premise that we can bring bigger accounts to our full product suite and platform over time and we’re obviously transitioning more and more to adding new logos into the mix now.

And again, this is -- we're not going to give out too much more but we now have multiple customers that pay us over $10 million in ARR. So that's where we're going with this. And we will emphasize our new logo motion going forward but we're very comfortable with where we are.

Got it. And then just as a quick follow-up. Last quarter, you introduced Arun as the new CMO, any early learnings or initiatives as it relates to the go-to-market motion following his addition.

We're excited about Arun being here. He has already made such a big difference. Now obviously, he had to start by putting together his team. And so it's very, very early for me to declare anything. But directionally, I think we're doing some of the fundamental things. And I know companies 1/5 our size have done better. So we're behind the 8 ball on it and we will catch up, Elizabeth. But you should expect more and better in the next, I'd say, two to three quarters.

Our next question comes from the line of Pinjalim Bora with JPMorgan.

And congrats on the quarter guys. Ragy, you talked about in one of the answers, I think the contact center refreshes are spiking. You added voice capabilities recently, I believe. Is that helping you on the CCaaS side, is that acting as a tailwind to that modern care business, how are you approaching that market? And is the competitive dynamics changing for real because of that?

Sure. We expect that to be and we're not yet benefiting from it. So just know that the CCaaS space is a very ambitious venture of ours. We've invested a lot of time and energy into it. We think at this point, we have a very competitive product. We've had multiple companies score us high, very high, even compared to very seasoned vendors on technical capabilities. But as you know, that's not how the market works. We have to kind of get a few implementations under our belt and we have to then get into the analyst waves and be known as a CCaaS vendor. So we're kind of in the early stages of that as well. We are expecting that to be a significant opportunity for us and we are continuing to prioritize it.

Got it. And one for Manish. When I look at the deferred revenue and RPO, it seems like deferred revenue in the balance sheet had a sequential drawdown but RPO grew nicely sequentially on a dollar basis. Is there anything to call out between those two dynamics? Is it just because of the back-end loaded nature of the quarter that some deals might have got booked but not billed, anything more color you can provide?

Yes. So that's a great observation, Pinjalim. If you look back over the last six to eight quarters, you see that our deferred revenue actually doesn't have much of a trend line, unfortunately. And a lot of this is, like you alluded to, we book all the business that we get and this quarter was particularly back-end loaded. So billings, some of it takes time and that obviously doesn't get into the deferred number. So you're correct there. And obviously, as I was saying earlier, our billings, given the mishmash of monthly quarterly, semiannually, annually, the billings trend line isn't as clear cut as one would like. And that's part of the reason we've always focused investors on look at subscription revenue and its growth as well as RPO and its growth as the key driving factors in the business. Does that make sense?

Our final question comes from the line of Parker Lane with Stifel.

Congrats on the quarter. I'll just keep it one of the interested time. Looking at EMEA and other, it looks like it grew a touch lower than the Americas business during the quarter. I know you said FX isn't really a big consideration in your business. Anything to call out in international markets from a demand environment or sales cycle perspective relative to the Americas?

Parker, the short answer is no. We’re not seeing any macroeconomic changes affect our geographic distribution tends to be -- it’s pretty consistent with what it was. And any change that we’re seeing is just attributed to -- can be attributed to operations and leadership and the changes we are making internally.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back over to Ragy Thomas for closing remarks.

Thank you, Alex and thank you all for joining us today. I'd like to thank our employees, partners and most of all, our customers for their business and their continued trust in us as we develop this category. We look forward to updating you all again soon as in -- as we continue our exciting journey and building this category, whose rights we know is inevitable. Thank you all and talk to you again soon.

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day.