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

Hey, guys, welcome to our next session. Manish, really happy to have you here. What a day. Maybe -- like, look, maybe you can recap. Like, look, I was at a conference. I looked at the numbers last night, and for me, they look pretty solid, and now I'm seeing the share price reaction. Can you speak a little bit like how the quarter played out for you and a little bit about the guidance?

Yes, absolutely. And I think this is more people in the audience than I've seen in many times, so I think people are interested in hearing what we did in terms of guide. So first, let's talk about Q3, right? So Q3 numbers that we reported last night, subscription revenue, up 21%; total revenue, up 18%; the full year guide as well including Q4, pretty solid, an 18% growth for the full year. And I think given where we sit, it just felt like there were some onetime things happening that we wanted to address as part of what is going to transpire in FY '25, which is for us calendar year '24. And I think the big question for us was consensus right now for next year is circa 16-odd percent. And that seemed a little bit high, and we've been now talking to buy-side accounts. And they were familiar with the fact that it did seem a little bit high. And so the question really was how do we bridge from where people think will come out and where I believe given all the things that we are seeing. So it just felt like yesterday was probably as good a time as any to sort of let people on to here's what we're seeing in the business and to help people bridge to why the 10%, if you will, for next year. So 2 big things. One is there's a set of onetime really unique idiosyncratic situations, companies that are going through fairly fundamental structural changes. That probably accounts for 2% to 3% of the downdraft for next year. And these are not things we could have predicted, so they are really unique situations. And then we are seeing a heightened level of down sell here in Q4. And again, we have inspected all of these accounts. It's not really lower churn, but I suspect companies that have been going through a restructuring earlier in the year, as their contracts are coming up for renewal here in Q4, they're just renewing for a lower seat count. Q4 for us happens to be almost 40% of our renewal business, so we didn't see much of it at the beginning of the year. And I suspect that we're all waiting for their contract to come up for renewal, where they would then renew it for a lower price value. So I think that's what's happening. We, of course, don't have any more visibility than this. And in order to construct at least an initial look into next year, not the formal guide, our view was let's just look at the sequential growth from Q3 to Q4, not having any further visibility, and let's assume a conservative tone. That would equate to circa 10-ish percent for next year. So I think that's the approach we took. I can understand it probably isn't sitting well with many folks, but there was at least some talk behind it.

Yes, yes, yes. And if you think about it, the -- like, oh, yes, the one question I got is like the specific customers -- that can happen when it's not in -- under your control. It's more -- I think people were slightly more nervous on the renewal commentary. And the one question I got there is like, obviously, like we've seen other vendors more in the front office, for example, ZoomInfo started talking Q3 last year already about that and the headwinds there. Like why is that showing up only now for you guys?

Yes. And I think that's a fair question. We've been asked that all morning, which is why now compared to Q4 of last year. And I think the only thing I can allude to is while we obviously sell to the marketing CMO, a lot of what we sell is to a very discerning buyer at a very high price point. It's sort of more stickier than your discretionary marketing spend. So I suspect some of it took a little bit longer to work through the system. The other thing that we are seeing now is -- and I think that is easier to explain is if you look at the marketing and advertising product suite, there is elements of that, that is driven by the amount of ad volume that goes to our network. And as businesses are trying to squeeze down on discretionary advertising, we're seeing the downdraft to that. We've obviously seen some of that also at the beginning of the year, but I think now is the time, as they plan for next year, they are really constraining their budgets further. And that's what we are seeing.

Yes, yes, yes. Okay. Okay. And then Ragy, on the main call, talked a little bit about like a big focus on CCaaS that kind of maybe where you guys took the eyes off your ball -- off the other part of the business a little bit. Can you talk a little bit about what was going on there?

Yes. And I think that, that is -- as we look at things that we could have done differently, this falls squarely in that camp. So at the beginning of the year, given the success we were having in CCaaS, we were very comfortable telling the sales team that this is the new product to go push. We did feel there is ample opportunity, and we still do by the way. What that does is because all our comp plans are structured where it's all driven by retiring new ARR whether it's selling core products or whether it's selling CCaaS. And with CCaaS in particular, we were successful in hiring a group of specialists from the existing vendors in that market. So the whole idea was these specialists would work with the generalist sales team and go prosecute CCaaS deals in those accounts. And I think what you realize over time is salespeople are largely coin operated. You incent them to go do something, and that's what they will go do. And I think in the process, what happened is they probably weren't spending enough time in their accounts trying to figure out upsell opportunities or cross-sell opportunities that weren't related to CCaaS, and so ordinarily, the flywheel that we have going for our core products didn't function the way we wanted it to. And it took us a little bit of time to sort of figure that out because we've seen tremendous success in CCaaS over the last 9 months. And we've been fairly open in talking about it in all the earnings calls. So I think on the one hand, that was a great one. On the other hand, maybe it was too much of an over rotation as Ragy was calling it towards just one product line, which probably have a dedicated set of CCaaS sort of sales specialists instead of having the entire sales team go after that.

Yes, yes. But then, I mean, as you started it, it's like, in a way, it doesn't matter where the money is coming from. So your over-performance on CCaaS, but it was not enough to offset like what kind of was missing from the other side. Is that kind of the way to think about it?

That is one way to think about it because let's just be very clear. The sales cycles in the core products are much shorter.

Oh, okay. So you're missing ARR. Okay.

Yes. And whereas the sales cycles in CCaaS are much longer. So while we have the broader sales team chasing those deals, they're -- it takes a while for them to convert, whereas had they only focused on the core product, much shorter sales cycles, obviously smaller price points, but you would keep that flywheel going. So now what has happened is we've taken a little bit our eye off the ball on the core product and are finding that the flywheel is taking a little bit longer to kick up in CCaaS. So I think what we are concluding is we don't need to make any structural changes. We do have exactly the sales team. There is a bunch of reps that are super comfortable selling the core product. All we have to do is really point them back to what they were always comfortable doing, keep the specialists that we hired for CCaaS and have them go after the CCaaS opportunities.

Is it like, in the classic software sense, you would say like -- or that they go elephant hunting in a way?

In a way, and I think, look, let's be honest, and we are sort of admitting to things where we fumbled the ball. We aren't the only company. If you think about companies that have gotten to $1 billion in subscription revenue, it's rarely from selling one product. So we're sort of going through the natural evolution of the company that has multiple product suites and needs to figure out the most elegant go-to-market motion for the entire product suite. We're obviously trying our way through it. This is probably one where we could have done things slightly differently. But we're sort of -- the traction we have received in CCaaS, we wouldn't have gotten otherwise.

Yes, yes, fair enough. And like in a way, it should be a temporary thing because like if your guys were -- the general sales was elephant hunting, that basically means they didn't build the pipeline for the other side. Now that you refocus them, they need -- that's why, I guess, you said like it's a couple of quarters that you need kind of to rebuild this, so that's where the couple of quarters is coming from, because you need to rebuild pipeline on the other side. And then that should kind of feedback to normal. Is that kind of the right way to think about it?

Yes. It's actually a little bit more nuanced than that because as we look at the pipeline, we are creating even for the core products. We have always been creating that even the last couple of quarters. What was happening is the reps weren't chasing that pipeline because they were enamored by doing bigger CCaaS deals. So it's not like we need to go back and start creating pipeline. The pipeline is there. Nobody was actually taking it to fruition.

Nobody was working on it. Yes, yes, yes. Okay. That should be fixable though.

Well, I hope so.

Yes, yes. Okay. Okay. Then more like -- looking more bigger at the bigger price. I mean that's the CCaaS opportunity. Like talk a little bit about what you're seeing there in the market and why you're so excited about that, on the CCaaS side because there is like a reason why you're kind of going after this market now.

Well, for one, it's a huge replacement market. When I look at that market compared to our core market for core products, it's much, much bigger. There is a huge technological evolution happening in that market. We've looked at third-party reports that talk about an $800 billion spend, but a lot of it is labor cost. As the software spend increases in that market, we should be a natural beneficiary of that. So I think that's reason #1. And reason #2 is there is a big sort of leap in how a contact center is viewed now. So no longer is it just a cost center with various teams that are dedicated to different communication channels, somebody answering the phone on 1-800 pick your brand, then another one on e-mail, another one on social media, another one on live chat. What companies are looking for is one key, which can address customers' concerns no matter what channel you call them on, and I think that's where we have a unique advantage because there is -- our technology allows them to have -- as you go from channel to channel, the contact center agent can track you along the process. So there is natural evolution to what's happening here. And then couple of the accounts that we've spoken about on some earnings calls are really looking at their contact centers really as revenue generators. So as you're calling that agent for assistance with whatever issue you might be running into, there are pre-prescribed scripts on what to sell back to the customer. We have also shown, and I think we did it at our Analyst Day, how the AI that we use for the agent is actually transcribing whatever the customer is saying and is running through a knowledge base to help the agent, both in terms of a response as well as resolution. So there's a number of things we're bringing to bear whether it's the AI aspects of the technology, the ability to switch between various communication mediums and obviously, the increase in software spend in that space that we believe makes it a sort of natural attraction to where we are coming from.

And where are we on that -- like I remember I kind of did in CCaaS a couple of IPOs years back, and I was always agreeing, like finally the CCaaS will change and the market will change. And it kind of worked, but it was always slow progress to some degree. Like where are we on the like inflection point of like this is happening now?

So if I understand your question, why is the CCaaS evolution happening now?

Yes, yes, yes. Why is now the right time? What are you seeing there?

Because I think everybody is evaluating the ROI of their contact center spend. Now historically, if you go back many, many years, it was largely telephony-based. You and I probably would never call a 1-800 with an issue. We're always looking for if I have my Xfinity down, I'm always trying to get to them on the app or on a chat. And I think there is an actual evolution in what's going on here. And we believe, given the tool set that we have built to cater to the bigger brands, we have a natural entry into this market now because it's not based on a telephony layer.

Yes, yes, yes. Okay. Okay. What are you seeing there in terms of -- obviously, you're like the disruptor in that CCaaS market. Like what do you see about the competitive dynamics that are playing out then?

So we, of course, are running into your traditional vendors in that market, and they have a formidable presence because this is one of those solutions where it's pretty hard to replace. It requires a lot of integrations into your existing systems. There are a lot of processes built around it. So I can understand there is a reluctance on behalf of the customers over a powered PBX-based contact center solution. They're also obviously inventing and adding other layers to it, so they can compete in this new realm. As we spoke about for Deutsche Telekom, there are big opportunities that we can take down as long as the customers on the other end are willing to make that technological evolution with us.

Yes, yes, yes. Okay. And then the -- like obviously every time -- like you've [ shared on this ] that much conspiracy theories come up of like, oh, there is like renewals are not happening or like down renewals are happening or there must be a competitive issue. What are you seeing in terms of competitive dynamic on CCaaS. I asked CCaaS already but like on the...

On the core product.

On the core product, right. Yes.

Yes. And this is what I was saying earlier. Look, I think we need to get through Q4 to have a much more informed view. This is by far our biggest renewal quarter, so 40% of renewals happen in Q4. And as I was saying earlier, there's a couple of these idiosyncratic situations. If you leave those aside, as we look at the existing book of business that's up for renewal, our sort of churn, if I take our down sales, is not very different than what it was in prior years. But what is happening, though, is bigger accounts are renewing at a lower seat count than we were expecting them to.

Yes, yes, yes.

So a little bit of that is catching us by surprise. And I would agree with you. Why now? Why not sooner? I don't know other than saying a lot of them probably went through a restructuring in earlier part of the year. Their contracts are up for renewal here in Q4, and this is the only time we're seeing it.

Yes, yes, yes. I mean -- and it's surprising. Just like it's -- it's interesting that you see it before the quarter ends already like -- because if I think back about other vendors, it was like, towards the end of the quarter, the renewal came in. It's like, oh, shoot. Like you're seeing it now. I mean that speaks that your sales guys are actually kind of close enough to kind of get that information before. Yes.

Correct. And look, it's not like we are engaging with them at renewal time. We have been engaging with them even before. And I think as we saw this come together, everything happens, obviously, during the quarter. And you are correct that we have a much better pulse because there are much big accounts, so we know exactly where we stand. And what is captured in the guide both for the outlook for next year as well as the guide for Q4 is sort of a more conservative view of where I think things will land. Now we're obviously doing diving sales all over the place, so things might be much better than where I think they'll pan out but -- yes.

Yes, yes. And then what does it do? If you think about it, talk a little bit about -- you mentioned gross renewal and like NRR as well. Like what's the numbers that we should think about [ will part -- ] coming off here? I think gross renewal is not going to change that much. It's like more NRR that's going to be the issue.

Yes. So I think -- look, I look at our business with 2 different metrics. One is new ARR that we sell. We've said historically, give or take 2/3 of that goes into existing accounts. Third of that comes from new logos. And then we have a big focus on renewal rate, so gross renewal. If I have $100 up for renewal, how much of that do I renew?

Yes, yes, yes.

And I know all of that then gets combined into this net dollar retention rate or NDE that people focus on. So for Q3, it was 118%. It's not bad. But I have been pretty clear on all earnings calls saying, hey, this is not a metric we track. It's just a by-product or an output of what happens in the end. But we also do expect it to come down in Q4 partly because, as I said, down sells are going up. So I expect the 118% to come down. I'm not sure exactly where it's going to land, but it might be circa in the 110-ish percent give or take.

Yes, yes, yes. Okay. Okay. That helps. And then like how backwards looking is that? How do you...

12 months.

12 months.

Yes. So it's that cohort of customers 12 months ago. If they were paying us $100 12 months ago, they're paying us $118. So it has the full churn and down sell as well as the upsell and cross-sell for that cohort of customers.

Yes. So you're doing the quarter last quarter to the quarter this year.

Yes.

Okay. It's not 4 quarters rolling. So -- because like part of the problem could be for you going forward is like if it's in the -- if it's 4 quarters rolling, then it's in the mix forever like for 4 quarters, so then kind of ruins the update. Yes. But that's not a problem for you, no. Okay. Good. Okay. The -- if you have these situations play out for you, like how do you think about investments like -- or how do you think about spending money? You've been on a very good track, better profit margins, better cash flow. So that's really good. Now you have a little bit of headwind there. Like how do you think about investments in this sort of scenario?

Yes, that's a great question because we did point out in the prepared remarks yesterday that our 11% non-GAAP operating margin for FY '24, we expected to keep growing next year. So said differently, we're not really looking to increase OpEx by a lot next year. We've made all the investments we need to make and both in terms of this go-to-market reallocation. It's largely a reallocation of existing resources, less to do with hiring a whole new sales team.

Yes, yes.

Our G&A and R&D, as you know, are pretty much in line. We're sort of 11% for R&D spend. Don't really expect it to grow by very much. G&A is around 12% give or take. I think, over time, it should probably keep trending down as we get more and more efficient.

Yes, yes. And then going back to the sales setup. So at the moment, you have the CCaaS specialists that you hired and kind of an overlay to your generalist guys, so they're kind of splitting their deals nicely between each other. And now going forward, they're separate, so you actually kind of have a lot more sales capacity, is like not too simplistic.

No, I think you're on to the right thing. Today, what happens is for a CCaaS deal, we pay 2 reps.

Yes, exactly. Yes, yes, yes.

Going forward, it's only going to be one because either you're going to be a rep covering the core set of products or a rep selling CCaaS. So the specialist by definition will become CCaaS reps. There might be reps that this year have been quite successful selling CCaaS, and they might choose focus on that going forward. And then there might be others who probably found it a little bit tough selling a whole new product set who might want to be more comfortable selling our core products.

Yes, yes, yes. And then do you -- how do you do it in terms of territory management and [ curious the -- ] is the CCaaS opportunity in different accounts and where the core guys are? Or could you have a situation where you have like a -- like one part of the organization gets hit by the CCaaS guy and the other part of the organization gets hit by the other guy? How is that going to play out for you?

Yes. Did you spend some time in sales operations?

No, not yet, but like I could.

No, I think that's a terrific question. So the way we have designed territories, we have something called a right to win account. And so when we do our territory planning, we look at accounts that we believe have a higher propensity to buy CCaaS. And there's a number of criteria we use including external factors that we take in from in terms how are these accounts structured, how big are they, how big is their contact center as an example. Are they in that ZIP code -- I mean, sweet spot where we could be one of their preferred vendors. And then same for the core set of products. So these right to win accounts will get assigned to reps depending on which bucket you're in. If you're selling core products, you get a right set of accounts that are right to win for that bucket. And if you're a CCaaS rep, you get a right to win account for CCaaS. Now the question you would ask is what if that same account has 2 reps. So this is where you want to avoid any confrontation in the field, so there will always be one account owner. We will, of course, make it easier for them to collaborate by figuring out a way to increase the size of the pool, if you will, if they get a deal in that account. Yes.

Yes, yes, yes. Okay. Okay. Makes sense. And then the -- okay. Makes sense. The last few minutes, I wanted to shift gear a little bit on AI because that's coming up a lot at the conference. You guys -- especially on CCaaS, there's going be a lot of opportunity with AI. Like where are you guys on that journey?

So I think we've been talking about how we've had generative AI collaboration, so it's called the Sprinklr AI+. There have been other innovations we have done, and I think we gave several demos during our Analyst Day, so there's lots of innovation that we are doing there for sure. It's obviously become top of mind for investors. And you're correct that there is tremendous opportunity in the CCaaS world in particular. And we've built our own knowledge base. We've built our own IVR, so enough room for us to start innovating in that space, particularly as -- I don't know if you saw the demo that Ragy was showing and maybe he did it before the earnings call. We were able to use our AI to generate Ragy's earnings script and really fine-tune it. So of course, we didn't play it on the call, but suffice it to say, there is enough application for what we are doing internally that we could use it in the broader CCaaS market.

Yes, yes, yes. No, that's amazing. Yes. And then where are we on that -- because CCaaS in a way will -- like AI will -- generative AI will fundamentally change the CCaaS market because there's so much more that can be done there as a first line of defense, first line of like dealing with customers coming in. Like who has the better start? In terms of like everyone will claim -- if I talk with Five9, is it like, oh, I have like 20 years of data and so I can train my AI systems better, et cetera. Who has the better starting point? How do you kind of view your starting point in that one?

Yes. But let's be clear. This is why -- and look, we all think our mousetrap is better than anybody else's. But think about the journey that we've been on, right? So we've been working with big brands for the last 14 years. When you talk about either publishing on the -- on social media platforms or trying to do insight, which is our product that we use to really ingest the entire Internet and figure out ways for brands to connect with their end customers, like we have lots and lots of data around how do you make the models much better. And you would remember from your conversation with Ragy that we've been on this AI journey much before ChatGPT came out with it. Now that's obviously much more helpful for us because we can supercharge our existing models, but it's obviously taken our own AI to a level where people now have better appreciation for what we've built.

And then the -- like if you think about the innovation cycle around AI, it is like crazy. And we just had Microsoft here on stage as well before you and all the stuff they're doing and want to do with partners. How do you see that -- your positioning in that respect? Like in terms of resources, who do you want to partner with, how you want to partner with to drive that further and stay on top of that innovation cycle that is going on there at the moment? Is like -- so is that going to be like a -- I mean ask a question. Is it going to be a Sprinklr effort? Or like is this going to be like a Sprinklr plus Microsoft, plus Google, plus Amazon? How do you want to kind of ensure that you stay on top of the rate?

Yes, I think, look, there's no denying that the big cloud vendors are going to have a huge presence in this market. And I think that's still the thing because we're looking to partner with each and every one of them. What is probably going to happen, and I'm hardly the AI expert, is there's going to be more domain-specific models that will start to come out. So there'll be one for the auto industry or one for financial services because they need to get trained on data and problems that their customers have. So I think that's going to be the next stage up here. Nothing that we've introduced into the market yet. So that's probably, I would suspect, the next thing that's going to come out.

Yes. Okay. We only got a couple of minutes left, and I've got one big question I got from clients quite a bit today. And it's like if the company's in the situation like today, like where you were after the earnings yesterday, like your conviction sounds really high and like your market position sounds kind of really good. Is it time to kind of say, okay, you don't believe me, but I believe myself. Let's kind of put money to work. Like how do you think about like share buyback in this kind of context where we are after today?

Yes, that's a great question. So last year, when we were asked this question, my view always was we didn't have enough float on the stock. So trying to do a buyback would actually make it a bigger problem. So we didn't do any buyback then. Since then, of course, some of our very early investors have sold some shares in the market. Float isn't that much of an issue. We've obviously seen a ton of volume today, so I don't think that's a big of a problem. This might be the time for us to go evaluate it. We haven't had any discussions internally. So let things settle down, but it's something that we can take under advisement.

Yes, yes, yes. Can you maybe remind us like what's the situation on net debt cash for you guys?

Yes, we have no debt. Cash is $650 million give or take, and we're obviously generating free cash. So...

Yes. And then maybe as part of that, kind of capital allocation discussion. Like with a lot of changes in the industry, you obviously want to keep some powder dry in case of there's a new AI innovation and you kind of want to go do some M&A around that, et cetera. How are you thinking about M&A like in that context?

Yes, that's a great question. So many companies choose to pursue M&A because they're looking for more product. That is not the problem we have. We have a lot of product, right? So for us, M&A has been less of an imperative. We have done it in the past more as a tech tuck-in to get teams of people that we believe would be additive to the existing resources we have. But our industry is also very fragmented. So there might be the right opportunity at some time. We haven't obviously run into it yet.

Yes, yes, yes. Okay. Perfect. Manish, 23 seconds. I'm German so we can probably do it right on time. Thank you. Thanks for joining us.

Wonderful. Thank you for the time.

Thank you.