Sprinklr, Inc. (CXM) Earnings Call Transcript & Summary

Welcome to our next session. I'm really happy to have Manish here. Manish, like you had really good results yesterday. So maybe we actually start with recapping that first to get everyone on the same page, and then we just kind of can take it from there.

Absolutely. So yesterday we announced our Q3 earnings. Subscription revenue grew 27%. We spoke about growth in gross margins. Overall gross margins got to around 75%, subscription gross margins over 81%. We've been focused really on operating expense reduction and [ containing ] the cost in the business. Even though our guide for Q3 was a breakeven, we came in at $6.9 million, so that's almost a 4% operating margin. So across the board, whether you look at subscription revenue, total revenue, improvement in gross margins, OpEx reduction getting to an operating income positive level, there was great performance across the board. We did then give early commentary around FY '24 more as a look into given what we're seeing right now, just so that we wanted to make sure the sell-side analysts didn't really get ahead of themselves in terms of the macroeconomic issues.

Like we tend to do. Yes -- No, it was like -- I really appreciate it as well because that was kind of one of the main themes I saw for the whole of software, and like management teams didn't want to say too much. Analysts didn't want to move their numbers because management didn't say any [ anything ] then -- and numbers are too high. Yes. No, that was really useful.

Manish, like the – in your space, there's a decent amount of noise in terms of competition, et cetera. We – and maybe it's worth to start to clarify a little bit in terms of where you play and what you define as enterprise versus like what others maybe kind of see as kind of enterprise, just to kind of level set? Like who are you -- like -- yes, first, let's start with that one.

And when you mean how do we play in terms of size?

Yes, exactly. Yes.

So the way we are organized today is, we have a global strategic accounts team that calls on, call it, the Fortune 2000 at the very high end of the pyramid. And then we have a large enterprise team that focuses on anywhere above 1,000 seats. So we tend to not sell into the small and mid-market. We really focus on a more discerning buyer. The way we have designed our products -- and this is our 13th year of existence -- it is all around providing an exceptional level of products with a lot of features that really caters to a high-end buyer with a commensurate amount of budget. So we're looking to provide a lot of feature rich products. That is the reason why we focus on the larger enterprises, which distinguishes us, if you will, from other players in the mid-market.

Yes. And then the -- if you think about it, that -- part of that is like a real platform approach as you mentioned as well. Like can you just help us understand a little bit what is part of that platform? Like, what are kind of examples of what you do with it?

Yes. So the way to think about Sprinklr really is, you have to take a step back and look at the underlying platform the way it was architected. So our routes around the same social media management, and that is -- social engagement is one piece of it. From there, we obviously added solutions around what we call research, whether that's listing and engagement and so on. And that led down to the third pillar -- or the third product suite is really around marketing and advertising. And think of that as a workflow tool. So we're not really -- we're not benefiting from ad spend per se, but it's all around providing a workflow that allows mid and large enterprises to use that workflow to better manage their ad spend, creative content, engagement, collaboration across teams. And then the fourth product suite where we've been spending a lot of time on now is the CCaaS product line. And maybe I will spend a few minutes just talking about the success we're seeing there. Because at the end of the day, our vision is looking at the front office suite. It all needs to be a single pane of glass. Whatever you might be listening to in terms of customers saying that is a ticket, because at the end of the day, that's what customers are talking about you. They just haven't called you yet. So our view is the customer care or customer success needs to be more proactive, less reactive. And the current set of products that go after the care market, they're all very siloed because a lot of the vendors started from a voice-based solution. The world has obviously transitioned very much into digital and social and so on, and none of those vendors have really kept pace, and we're just following what end customers are looking for, which is, provide us an omnichannel experience where you can maintain state as you go from one channel to the other. And our view is, we can cover a lot of these given where we came from. And most recently, when we added voice, we have a complete suite of modern care solutions. These are the 4 product suites: single code base, single pane of glass, all interconnected, all built for the mid and large enterprise.

And the 2 questions I had coming out of that. One is, is part of that success that you have in the -- on the services side, also driven by the fact that most of the competitors came out of voice? And so, then the social becomes like after fold, and it's like [ we bolted ] on, but it's kind of voice where you kind of started more out of the new world, you added voice now, so you actually you're in the new world with kind of a little bit with the voice capability. So it's just kind of a more modern approach to the same thing where the others are still all in the old cap? Is that the right way to think about it?

Yes, because I think, if you look at the evolution of the care market, we're sort of in the third generation now. Because if you step back, the first generation is all around, as you said, voice-driven care solutions, different siloed teams. You call different teams based on the mode of communication. So you might e-mail a customer care agent. That is a separate team that deals with inquiries coming in over e-mail. There's a separate team that deals with customers that call in over a 1-800 number. The second-generation solutions was all around whether it's nice -- a lot of other players in the digital, which is Chat and so on. And where we are right now is what we call the third generation, because all of these things need to talk to each other. And to the point that you made, we don't have the legacy [ baggage ] of coming from the voice world. What we tend to do is play in the software layer. So it's an application sitting on top of legacy telephony stuff. We, of course, go to market with the likes of an Amazon Connect or Twilio, but our solution is very much a software layer on top of an existing infrastructure set.

Yes. And then the other question that came out of it, because you mentioned the single code base, how everything is coming together. Like in these slightly uncertain times, like what -- and Paul Compton mentioned it earlier this morning, it's like you want to have like a trusted vendor and work with them. Like talk a little bit about how that kind of platform approach kind of helps you or kind of feeds into the customer conversations now that [ it ] should help you a little bit?

Yes, it does. Because a lot of the markets that we play in are highly fragmented. We've been very explicit in saying 2/3 of our new business comes from selling into the installed base. And I've always felt that there is no better confirmation of how customers love you than when they pay with their money. So from that perspective, we've been very successful. You'll see that in our financial results that the net dollar retention rate has remained very high. It's right around more than 25% for Q3. So we've been fairly successful because our approach is -- the customers can obviously go by siloed products, but it's very hard to get them to integrate. You need to work with SIs. With us, of course, it's, as I was saying, single pane of glass, one code base. It's just a matter of turning on various modules and they all connect with each other because that's the way we've architected them.

Yes. And then, you mentioned the 125 NRR number. That's something I want to kind of go in deeper into. That's a very strong number, like from whatever angle you want to look at it. Like what do you see like, the path is? Like how do you get to that number in terms of like cross-sell? Like, I mean, are the typical kind of pops for customers? Like how do you get to that number?

So we derive that number looking at the cohort of customers and the amount of revenue on a dollar basis that we generated over the last 12 months.

Yes. So that's the classic…

That's the classic definition of doing it. We don't really break down how much of this is cross-sell versus upsell. But we've also been very clear in saying that, as you look at the next year, we're -- there's several things happening. One, obviously, we're coming up with ways to go after new logos, because, as I was saying earlier, historically, our focus has been really upselling in the installed base. So I do expect this metric, which is largely lagging indicator to sort of trail a little bit. But we've been very successful in what we've been doing. The installed base of customers is super happy. We talk about the gross retention rates being best-in-class. So all of that is working well in our favor.

Yes. Okay. And then as you sell -- like we have seen like a change in sales leadership. Like what's the -- like on our side, we always like get a little bit nervous when we see that, and then it's like a new approach and a new way to do things and then there's disruption. Like how do we have to think about it from like your perspective now?

Yes. So all of this was fully meditated, and I think we said that on the earnings call as well. So Luca had been with us for well over 4, 4.5 years. And as part of his agreement with Ragy, the founder, he wanted a stay till the company was public, and he stayed well beyond that. So we were very grateful for the time that he spent in building the business. Paul, who is our current CRO, had been running all of sales under Luca. So this wasn't much of a bringing a third person in. This was the same team that was doing -- was growing the company for the last many years. So it was a very seamless transition from that perspective. What we are doing now is, as part of our much broader product set, we're spending a lot of time now making the existing sales seems more productive. And what I mean by that, and Ragy said yesterday on the earnings call, is, we have a lot of initiatives underway in terms of making it easier to sell, and that has to do everything from booking a transaction to quoting a transaction to pricing to how we go-to-market. And we see -- look, the current environment as such where we just want to start focusing on productivity versus just adding more heads into the go-to-market motion. And that's been our focus now for a couple of quarters, and you see that show up on the bottom line results of the company.

Yes. Because like -- okay, so its existing guys. The higher sales productivity gives you better margin, [ lot of ] margin. Okay. Yes. Okay. Perfect. That helps. And then the -- as part of that macro theme and especially if you sell to enterprises, if I talk to the other vendors -- and I just had SAP in here like a couple of sessions before, it's more about selling value understanding and talking about the value. Like talk a little bit about like some of the initiatives like Lite or verticalization that help you kind of get closer to your customers?

Yes. So let's take each one of those in one by one. So we started talking about verticalization a couple of quarters ago. This is going to take the rest of this year to sort of pull together. But at a high level, what it is, is, we're looking to get a major and a minor for every rep starting next year. So today, the sales teams are not verticalized. Their regions are more geography-driven. And what we are looking to do is, given the expertise we want to build on the sales team, given the use cases that -- the way we sell to end customers like you're talking about, all of that we are building together playbooks, and every rep will have a major and a minor starting next year. So that's going to not only make it easier, but the content is going to be catered towards what the end customer is in that vertical.

When you say what -- major and a minor, what does that mean? Like a major account manager and a minor account manager?

No, what I mean is verticals. So I, as a new rep might get banking as a major and I might get, call it, insurance as minor. So I [ added ] a handful of accounts in both, but the whole idea being that the verticals that I'm given, I'm going to be given a set of playbooks and use cases that resonate in that vertical, and we are in the process of building all of that together. We've done a few of these already. We need a little bit more time before we begin to verticalize the sales team starting next year. So that's on the verticalization side. There was another...

Lite..

So the Lite side of products are more around enabling new customers to try something out before they buy. So it's less of a means for us to go attack the mid-market. It's more driven by, should somebody want to understand how our care product works, there is a care Lite version. So they can try it out. It's a way of getting accounts to try things out before they buy.

Yes. And can you -- I mean, like -- on the one hand, it makes a lot of sense. On the other hand, you think like, look, you're kind of providing enterprise solutions. So if I look at the history of application software, like someone that wanted to kind of scale down or lighten up their kind of enterprise solution, was always kind of like a near one. Like I remember I covered -- covering CP for 20 years and then we try and go around, is like, good luck, like it never works. Like how does it play out for you? Like how easy is it to do Lite and get that momentum there?

Yes. So let's be clear. For our large enterprise and GSA accounts, they are not buying the Lite.

No, exactly. Yes.

So it's the accounts that are, call it, 1,000, 2,000 seats. And for them, this is an easier entry point. If they want to buy 10 seats, 15 seats, this is a nice way for them to get their foot in the door. And as they grow and as they mature, they can migrate to the full enterprise solution. That's the way we thought about it more as an on-ramp tool than a tool to really see the mid-market.

And on that note, like, how do I have to think about it, at least like if you -- unless certain use cases where a Lite place more role? Because like if I think about a service operation, it's kind of difficult to get like 15 guys out of the 1,000 guys -- like a different solution because it's like a break in terms of my customer data and everything. Like how do you envision that like in terms of to play out? Like are there certain kind of listening -- or like where would that play a role?

So today, there's 2 Lite products that we have out. One is for care; one, I believe, is research Lite. So again, as I was saying earlier, we're not looking to co-mingle any of this, and this is all around trying and buying, making it easier for a new account to test things out . And for mid-market customers that may not yet be ready to commit to a full-blown care solution. They can try out an entry point and then go from there.

Yes. And then -- so that builds you the top of the funnel kind of through that and then you can…

[ Sure ]. Yes.

Yes. Okay. Perfect. That makes sense. And then the -- if you think about it -- and also like in terms of -- you're working with kind of Accenture, you're working with Salesforce now. Like how do we have to think about that relationship where with this kind of -- the biggest is [ ILE ], the biggest kind of customer company. Like, how does that relationship evolve for you? And like how do you fit in there? Especially like -- I always get the question, and maybe it's a silly one -- from investors like, well, are they not going to tiptoe of Salesforce at some point what they do. Like how do you see that relationship playing out?

Yes. So let's first talk about what we announced with respect to social studio, right. So even when we go back a couple of years, we've always been transitioning customers away from social studio to our platform. So that was always the case. More recently, we had one connector on the AppExchange in Salesforce. We have introduced several more connectors, and as part of this relationship, we have sort of [ upbeat ] our partnership with them. And what that means is, there is now a financial incentive for a sales force rep to introduce the Sprinklr platform. Historically, there wasn't. Now there is. So that takes away the friction that you have. And as social studio gets sunset, there is an opportunity for that customer to migrate to the Sprinklr platform. And now with this partnership, there is even more added incentive for Salesforce to enable that transaction to happen. So, that's what we are trying to do. With respect to Accenture, they're obviously a very big SI. We have had many, many successful deployments with them even in the past. With the partnership that we are announcing, again, there is an opportunity for them to register transactions with us. And there's obviously a financial incentive baked into that. And obviously, they get to work on a whole host of services engagements. And I mentioned some of this yesterday. We do want to enable the partner ecosystem. And you'd notice our gross margins are going up because, part of what we are also trying to do is, we really don't want to be an SI as we keep growing, right? So services is a key part, but services shouldn't be growing at the same rate of software. So we're trying to be very thoughtful about how do we train and enable a set of SIs to go deploy the Sprinklr platform. So that's what this partnership is all about.

And if you think about it, like -- so I came from PwC, so like I was in one of those SIs years ago. The -- like how do you go about building out that SI channel? Like do you have enough -- do you think there's enough business around for quite a few or you -- it sounds a little bit more -- you're a little bit more targeted on certain SIs to make sure they grow up. And then, as time progresses, you can add others. Is that the right way to think about it?

There is enough business around the Sprinklr platform, so the Accenture one in particular. I spoke about Salesforce and they are the #1 SI for Salesforce. So there is lots of opportunity when you think about not just the social studio migration, but bringing together Salesforce data into a customer data platform. So there is plenty of stuff to be done from a services perspective there. And then, when we talk about care being a bigger and bigger part of our business, that is a highly customized install. It's very different than just using the social engagement side, and that requires a lot of handholding, which is where I think the SIs can play a much bigger role in the future.

Yes. And they see that -- like what do you see in terms of build out there, on the SI side, in terms of hiring people, training people? Is that like a boom market for them?

Our platform?

Yes. No -- Yes, in terms of Accenture, training people for your platform?

Yes. So we have a 3-year commitment for them right now, the partnership that we've signed. As part of that, we are training some set of people at Accenture. There is obviously a financial incentive baked into it. We're obviously committing to them a certain amount of business. So all of that is in the spirit, as I was saying yesterday, where we're trying to figure out the right balance of services that we deliver, that we enable the SIs to deliver.

Yes. Okay. Shifting gears a little bit, like you were one of the few that kind of give us like a yardstick for grow for next year. And I think, yes, we had that conversation on the call back in terms of like -- you probably did some very scientific stuff to kind of come up with a number. Like how do I have to think about that -- like the number that you gave to us, and like maybe I'll just leave it as an open question here.

How did I think about the 15%?

Yes.

It was nicely between 10% and 20%. Well, in all fairness, as we constructed the guide for Q4, you'll notice the sequential growth rate is 3.5% going from Q3 to Q4. And we live in a very uncertain time. So macro uncertainty obviously persists for everybody. And our view was not knowing anything better. The last thing we want to do was, if estimates for next year were too high -- so we just felt if you applied the same sequential growth rate for the 4 quarters of FY '24, you would get a growth rate for FY '24 around 15.3%. So that's how we came up with the number.

It's very scientific. Yes. And then -- yes, and I did mean to ask you like, on the Q4 guidance, revenue -- there was an impact on revenue coming from services. Like maybe just talk about that? And is that 3.5% sequential that you use for next year enough to capture, like services coming off your books?

Yes. So first, let's talk about FY '23 and Q4. So as I've said in my prepared remarks, we've been very thoughtful about what services business do we deliver, and what services business do we encourage our customers to work with third parties on. And our view was, we could improve the gross margin on the services side. So Q3, you'd notice we were 20% gross margins. And I was comfortable saying that for Q4 and beyond, we should be at least 15%, if not higher. So with that said, we looked at our book of business, and this is something I knew coming into Q3 as well. There were some services business that we probably weren't going to take on to our books. So if you look at my guide for at least the full year, we raised the subscription amount in the midpoint from $545 million that I put out at the end of Q2, to now $546.3 million. So there was an uptick in subscription revenue. Overall revenue obviously came down by $3.6 million, but that was all largely driven by services. So our view is some of these services, I jokingly called it empty calories yesterday. We don't need to consume it. There are other people who can probably do a much better job than we can, and that's the way we should be constructing our business. So that's with respect to FY '23. And I think you had another...

It was more like -- is that -- that should be a multi-quarter trend?

It should be. So as you think about next year, the way to think about it is assume services growing, call it, circa 10%, plus or minus, which would mean subscription probably would be growing much faster than the 15% that I said for overall top line.

Okay. And then – last couple of minutes. Let's talk a little bit about profitability and that kind of balance between margins and cash flow. Obviously, the financial markets all of sudden cares about cash and margins, like who would have known? How do you think -- like you're relatively new in your role as well. Like how do you think about that dynamic and that discipline around that?

Yes. Well, I always say losses are for losers. So we managed to get out of that penalty box. So our view is this business, if we look over the medium to long-term, can easily be a 10% to 15% operating income business -- operating margin business. We've taken our first steps in that direction. That is also the initial starting point for next year, which is what I said, use 4% for the full year. We intend to obviously do better than that. And one of the things we've been doing is -- back to the discussion around sales productivity, we believe we can increase productivity of the existing sales teams through a variety of techniques, enablement, verticalization, have specialists for care as an example. All of these things in the aggregate will improve sales productivity, reduce our need for constantly adding more people into the equation to get the incremental revenue. So all of that, I believe, when you look at sales and marketing spend, G&A spend will taper as we go into next year, will help improve productivity, and obviously improve the bottom line performance.

Yes. So it's more of that -- I mean, like where do you think -- do we call it the good olden good days where nobody cared about margins and you just kept adding sales guys? Like where do you think like your sales productivity is compared to where like -- kind of where you want to run it? Or is it just changing times? Or like how do you think about that idea?

So this is a bit of [ analog ] discussion. When we look at productivity for our reps that call on the Global 2000, that's always been amazingly high because you're selling to a very discerning buyer with a significant amount of budget. And given the way our platform is architected, we found that there is natural resonance in that customer base. So the productivity of that team has always remained very high. As we started thinking about the next level of customers more in the large enterprise, this is where we need to either go down the path of verticalization or do a number of other things, and that productivity does need to keep going up. But that's a nascent effort for us. We started a lot of these things 12, 18 months ago. So it's going to take some time before we get to a level of fruition.

Yes. Okay. And then last question for me is like, what's the situation on cash -- cash generation, cash usage for you?

Yes. So we have been -- if you look at the 9 months of the year, we've been free cash flow positive. We expect to be free cash flow positive for the full year next year. So that does leave us with more than $0.5 billion. We're going to be thoughtful about how we spend that money. We've been fairly open to interesting M&A ideas. Historically, we've done smaller set of tuck ins. We might still go down the path of doing that. But what the management team is maniacally focused on is better operating execution first before we go look at some of these assets. So there could be room for us to go do some M&A, but I'd say that's going to be more opportunistic than anything else.

And do you -- I did ask the question a few times before, like where do you see asset prices in that respect? Like that's probably the other factor that you kind of need to see like where are expectations from these private companies?

Yes. So I don't think the private multiples have reset the way public multiples have. I think a little bit more time needs to pass before people realize this is the new normal, even in the private world. I don't think we're there yet. So we are constantly hit by other companies that are looking to raise money. But as I said, we want to be very opportunistic, look at assets that fit very nicely with the existing product portfolio because, as you can imagine, we're not shortened products. We have a very expansive product set. And the last thing we want is take on an integration risk of a scaled asset, which doesn't fit very well with our existing products. So we've been very thoughtful. Obviously, haven't come across any assets yet, but that could be one use of our cash. Otherwise, I'm happy sitting on $0.5 billion.

Yes. All right. Okay. Well, that's a great closing statement. Thanks for being here. That was a great session. Thank you.

Thank you.

Thank you.