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

Thank you, Alicia, and welcome, everyone, to Sprinklr’s third quarter fiscal year 2024 results financial call. Joining us today are Ragy Thomas, Sprinklr’s Founder and CEO, and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation. Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP. In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the Fourth fiscal quarter and full fiscal year 2024 and our initial framework for fiscal year 2025, and our actual results might differ materially. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC also posted on our website. With that, let me turn it over to Ragy.

Thank you, Eric, and hello, everyone. Thank you for joining us today. We're pleased that Q3 was another strong quarter that exceeded guidance across all key metrics. Q3 total revenue grew 18% year-over-year to $186.3 million, and subscription revenue grew 22% year-over-year to $170.5 million. With our continued focus on operational efficiency, we generated $27.4 million in non-GAAP operating income, which resulted in a record 15% non-GAAP operating margin for the quarter. We are going through what I believe is the most exciting time in recent history for the modern front office. Many AI experts agree that AI is going to boost human productivity significantly over the next few years. For many industries, customer-facing functions are the most labor intensive. And we believe that 20% to 40% productivity improvements are a real possibility in the next five years. We also believe that the data to train the AI models and the unification of siloed teams, technology and processes are required to unlock the power of predictive and generative AI. I'd like to share more details on these three key areas, given the benefits customers are experiencing in terms of their operating cost, risk management and improved customer experiences. Let's start with everyone's favorite topic, AI. We continue to believe that we are at the forefront of a very long-term durable growth opportunity, given our deep investments in AI more than five years ago. Today, I'm sure no one is debating the fact that we have an early mover AI advantage given our decision to design Sprinklr on a single architectural code base, where AI has been infused across all product suites, Sprinklr Service, Sprinklr Social, Sprinklr Marketing, Sprinklr Insights, our self-service offerings and our entire platform. During the third quarter, customers executed over 170 AI deployments in Sprinklr Service alone.…

Thank you, Ragy, and good afternoon, everyone. As you heard from Ragy, we're pleased with this quarter's results which exceeded the high end of our guidance range on the top and bottom line. For the third quarter, total revenue was $186.3 million, up 18% year-over-year. This was driven by subscription revenues of $170.5 million, which grew 22% year-over-year. Subscription revenue benefited by $1 million from new business being booked earlier than expected in the quarter. Professional services revenue for the quarter came in at $15.9 million. In terms of new logos, we are pleased with the number of new customers that joined the Sprinklr platform in Q3. This is particularly true with our Sprinklr Service product suite as many of the deals in this product suite over the last few quarters have been with new customers. As of the end of the third quarter, we had 123 customers contributing $1 million or more in subscription revenue over the preceding 12 months, an increase of three customers sequentially and a 15% increase year-over-year. Our subscription revenue-based net dollar expansion rate in the third quarter was 118%. While NDE was healthy in the quarter, I would note that we began to see incremental pressure on renewals in Q3 as certain customers that are impacted by the difficult macro environment adjusted their spending levels with us. As a reminder, the NDE statistic is not something we monitor as part of growing our business, but rather a byproduct. Turning to gross margins for the third quarter. On a non-GAAP basis, our subscription gross margins came in at 83% as we continue to drive efficiencies in our cloud operations with total non-GAAP gross margins of 75%. Non-GAAP gross margins for professional services were slightly negative, coming in at minus 2%. As we have discussed in…

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

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

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

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

It's more of an internal resource allocation. And in hindsight, I think the most obvious explanation for this is the fact that we, and I don't know whether we would have, knowing everything we know, done it differently. We kind of over-rotated a little bit more on the CCaaS side. And so we took our field and we incented them strongly to go sell CCaaS. And essentially, there's a lot of people who jumped in and really are happy, and we're thrilled with the results. And there were some that didn't quite jumped, but didn't quite make it on the other side. And the fix is quite obvious to all of us. You've got to take the field folks in sales and support and service that came from the social suite background or the marketing suite background or the research insight suite background. And we got to let them go back and focus on it. So what we are doing now is we think and plan for the next year is we are adjusting quotas, and we are just bifurcating or trifurcating the field to have to just fix the over-rotation we did, and we're pretty hopeful that in one or two quarters, we will begin to see some data that would allow us to just update you further.

Okay. Understood. Thank you very much. Appreciate it.

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

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

Pinjalim, I'm glad you asked that question. Look, I think our, I've not seen this kind of excitement since the early days of social that I'm seeing now on the CCaaS side. I think we have a very differentiated product. And these, and we've landed, I mean we're ahead of schedule in terms of our own expectations, which is why we rotated and we're seeing like such an exciting reception to that. And the idea there is pretty simple, right? We're going into a market with vendors who have been there for a long time and a market that's very fragmented. If your knowledge base, your agent console, your supervisor console, you're routing and your bot and your quality and your workforce management, all this is unified and everything is based on AI. These results are fairly spectacular and it's cost advantageous as well, right? So we're bringing the average handling time down. And these demos are received really well. And the number 1 question we get is, that's not real is it? in the way like [we are] (ph), we'll set it up for you. I want you to know, though, that excitement is meted in months, not weeks, right, a social product on time, people are happy. Let's go. In the CCaaS world, these are very time-consuming transformation. So there are long protracted RFPs. And so we're very pleased with where we are. The number one excitement we're seeing in the field among customers is our CCaaS product. And so we know we've done the right thing. Now if you play this movie in three-year increments, I think most of us would agree we did the right thing. So excitement on AI, excitement on practical AI, excitement seeing the results, because we are walking into customers, I'll give you a large customer that I spoke to, who was on the track to kind of build their own LLM. And after really understanding how we're approaching AI, they were like, oh my God, yeah, we just got to work with you, and then you'll ensure that we can always use the best LLM and the best model that yields us the best results. And that's the most exciting thing that's going on. No surprise that AI and what it can do for you. And we're manifesting just easy, measurable results on the CCaaS side.

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

Well, I'll start by saying No, and Manish, can you elaborate?

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

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

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 our net dollar expansion to be under pressure from some of those moderating renewals and upsells. So I'm just curious, the downsell pressure incrementally more than you expected? 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? Thank you.

Yeah. That's a good question. So let me start and then Ragy might chime in. So first, I want to be clear, we're not seeing logo channel. We're just seeing a reduction in the number of seats as an example. And why now? Well, you've seen a lot of corporations pull back on headcount, there have been 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 we're seeing a downdraft in terms of the number of seats being renewed. So I think that's point number one. And then as Ragy 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 ascribed to that product suite. Hope that helps.

Got it. Yeah. No, that's very helpful. 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.

Yeah. That's an exciting thought. Our approach here as we kind of bring a fairly disruptive new product to a new buyer is to 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, et cetera. But we've tried to keep the pricing model parity with the market sees. But I agree with him, and I think there is some upside for us as we as we get to scale in our CCaaS side, there is opportunity for us to revisit pricing. And that's not something we're willing to comment on right now.

Yeah. 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?

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

Yeah. 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 in] (ph) accounts. So offering them additional product suites is one of the players where there's a number of other players we are running, and again, this is part of the reason I was saying just given where we are and the limited visibility in how this plays out for the remainder of this year, what is captured in the guide is the situation we see.

Understood. Thank you.

Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your questions.

Good afternoon. Thanks for taking the question. I guess when you look at the success of the contact center product on Sprinklr 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?

Not surprisingly, I think it's 50-50. We're surprised to see brand-new companies involved and include us in a contact center RFP. Usually a late addition is usually coming from an analyst who've 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 customers 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, are the large BPO players. And these are things that there's an established market that's 20 years old. 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. 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 their eye off the ball on the social and marketing side? Or anything that you think your internal sort of sales focus influenced performance by the partner community as well?

Yeah. Yeah, 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 and digital customer service base. Now we're talking to the guy who runs the contact center, who like kind of didn't know that Sprinklr existed till about three to six months ago. 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 of very long-term established partnership and trying us up. 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 that transition and landing it right, where we're still developing our playbook and a blueprint to enable partners right? So the people who are trying are loving it, we have to document our successes we have to create the blueprint. We have to train the partners. So there's a, let's say, any way you look at it, you're looking at a six to nine-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 bookings side. I think that's probably the two quarters or three that we need.

Okay. Thanks for taking the questions.

Absolutely.

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

Thanks guys. Congrats on the strong quarter. I guess last quarter, you flagged some very large deals with some of 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 a bifurcation of, I guess, in terms of the type of customer? Maybe the industry of that customer that is expanding versus downsell?

Yeah, these are two different bases, right? So some of the downsell 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 in contracts sort of brand-wise, size-wise, on CCaaS, we will continue to do so. The thing though is there is, they go market by market, right? So these are companies, in many cases, they have executed a master agreement, but then you go market by market, and you'll 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 six months or nine months. It's actually good for us because these early implementations the [99, the 59] (ph) 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. So I just want to make sure that you understand the time lapse as you take those snapshots 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.

Understood. Makes sense. And then maybe just on your 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, seems like that's going to fall pretty sharply. Is that something that we should expect to maybe end '25 below [110?] (ph)

Yeah, 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 sort of 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.

Got it. And then maybe if I could just ask one more on the expense side, particularly with marketing, it looks like kind of cash-based sales and marketing expenses are down a good bit in the first quarter. I guess how should we think about expense growth while you go through this go-to-market transition?

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 Ragy answered in one of the other questions, we're not looking to incrementally invest a lot more. I think it's more around reallocation of existing resources.

Yeah. 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 zero. So there's a lot of things that we're doing now. That's going to take a few quarters. That it's 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. So I think I echo Manish’s sentiment that we should be able to do both.

Perfect. Thank you guys. Appreciate it.

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

Hi, thanks for taking my question. I wanted to ask, going back to CCaaS. When you think of the sales process for your CCaaS offering is primarily in the application layer. You do have the voice capabilities now. But maybe more holistically, how do you think about that piece of the business progressing to doing more, at least with how I imagine, augmentations today to more strategic holistic [indiscernible] at least that's becoming more of a norm. Thank you.

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

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

Got it. Got it. Got it. We I don't know when and what to expect in reality. So we have two sets of buyers, right? We have a set of buyers that is used as to social customer service and is expanding to digital maybe as a next step. We have a bunch of those. 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 are bought and a case that's closed by a bot as a higher NPS than a case that's closed by a human. 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 direction and call volume, when it just saves you money. 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, no one ever got fired for buying IBM syndrome is the only reason why someone sees it and believes it and test it and kind of maybe says, I'm going to give it more time. So we know we have a very differentiated product. 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. 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.

Helpful. Thank you.

Thank you, Michael.

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

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

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.

Yeah. So let me clarify that. I think what Ragy is getting at is the level of downsells 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. So I think that's a bit of a new element.

But I would, again, to reconcile the two, right? The macro, we don't think is what's changing. It's really our over-rotation that's causing the change that, where Manish as articulated.

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 push into that market and grow the business despite that reallocation?

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 for CCaaS, what is working in the market as Ragy 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.

And I would just say, though, I would, again, give ourselves the explanation for all of this is we'll probably need another quarter or two before the partner enablement, the scaling of that completely new product suite is 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.

Great. Thanks guys.

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

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 auto and tax and financials. Wondering if you're seeing the same thing or something different? Thanks.

I mean I don't think there's anything super noticeable. If you like want to interpret it 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 interpret that there's some extra softness there. There's been the streaming wars that have been going on has come down. So these social networks are in a very different place than they used to be, and as you know, there are some, these are all like onetime things that we, for us, it's just unfortunately, timing they're coming together at the same time. But I'd say that's probably one way to interpret it.

Yeah, thank you. That’s very helpful.

Yeah. Thank you.

Thank you. Our next question comes from the line of Austin Cole with JMP Securities. Please proceed with your question.

Hello, thanks for taking my question. So on Sprinklr Service, it sounds like customers are seeing pretty meaningful productivity improvements. I'm wondering if you could walk through how does Sprinklr Service handle automated call deflecting and routing to agents? Just 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? Thanks.

So, Austin, thank you for that question. I really mean it. Because I think when you see it action, it actually, it just changes our perspective. I'll tell you the story of, you remember the big bang we talked about, right, one of the, I think the fifth largest bank that was one of our first CCaaS implementations, 15,000 agents. I met with the CEO, and they did a live demo for me. Put the phone on the table and just dialed out 1,800 banks, what 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, how can I help you? And you just say, I want to know my credit card balance. And then the follow-up question is, can you please put in your security code we will recognize your phone number? And literally, you could just continue the conversation. And there are, I don't know, 100-some journeys that they've identified, some of 50% to 80% of that as we connect to 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 that 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,…

Very helpful. Thank you.

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

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 and decades of creating a new category that we call Unified Customer Experience Management. Thank you very much, and have a wonderful evening.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.