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

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

Thank you, Diego, and welcome everyone to Sprinklr's third quarter fiscal year 2023 results financial call. Joining us today are Ragy Thomas, Sprinklr's Founder and CEO, and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation. Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP. With that, let me turn it over to Ragy.

Thank you, Eric, and hello everyone. Thanks for joining us today as we share the financial results of our third quarter and FY 2023. I'll start with a few highlights, including customer feedback and some key wins. Manish will then provide details on our financial results. I'm pleased to report that Q3 was another strong quarter that exceeded expectations. Total revenue for Q3 grew 24% year-over-year to $157.3 million, while subscription revenue rose 27% year-over-year to $139.9 million. Our commitment to operational efficiency led to $6.9 million in non-GAAP operating income for the quarter, thanks to prudent financial management and enhanced operational discipline across the company. Before I share the key takeaways from this quarter, I’m excited to announce that we appointed Kevin Haverty, the former Chief Revenue Officer of ServiceNow, to our Board of Directors. Kevin's experience will significantly enhance our go-to-market execution during this pivotal time for Sprinklr. Kevin currently acts as Senior Advisor to the CEO at ServiceNow, after serving as CRO under three different CEOs. I also want to thank Matt Jacobson from ICONIQ Capital, who has retired from our Board after eight years of service. ICONIQ became an investor in Sprinklr early on and has played a significant role in our journey. We are very grateful for Matt’s contributions and wish him all the best. Moving on to Q3, I had the opportunity to meet with over 100 customers globally, from the U.S. to India, Singapore, South Korea, Dubai, and Mexico. The enthusiasm among brands transitioning from point solutions to Sprinklr's unified CXM platform is evident. Customers are seeing significant reductions in service costs, increased revenue, and faster innovation while minimizing risks by listening to customer feedback in real-time. A notable trend emerging in discussions, particularly from newer clients, is how Sprinklr's AI is facilitating the modeling and automation of omnichannel journeys, potentially reducing reliance on human service agents by up to 95% in some cases while simultaneously improving customer satisfaction scores. This is exemplified by Aramex, the largest logistics provider in the Middle East, which has consolidated its digital contact center onto Sprinklr. I met with their Group Vice President of Technology in Dubai, who shared that they have automated 95% of resolutions for common inquiries using Sprinklr's AI and chatbot, all while maintaining high customer satisfaction scores. While we continue to achieve deals across all four of our product suites in various industries, more than a third of our Q3 bookings originated from our Customer Service Suite, driven by our voice-led CCaaS capabilities. We are encouraged by our momentum in this area and are confident that our technology and pace of innovation will further set us apart in this evolving market. However, the current macro environment is causing delays in purchase decisions and longer sales cycles. Like many enterprise software companies, we faced additional challenges on deals in Q3 compared to Q2, particularly in Europe. We anticipate these longer sales cycles and tighter budgets will continue amid global uncertainties. While we cannot control the macro environment, we can manage our business fundamentals. You will see us focus on delivering value to our customers and establishing a clear path to profitability for our shareholders as we move forward. Since our inception, we've been clear that the market will transition from point solutions to comprehensive best-of-suite platforms that offer tight integration. In Q3, we announced an expanded partnership with Salesforce and Accenture. Enterprise customers will now be able to merge their extensive CX data sets with their CDP and CRM data within Salesforce. Accenture is a vital partner in our go-to-market strategy, assisting brands in merging technology and data to enhance customer experience. We are also working closely with Salesforce to help customers during their transition from social studio to Sprinklr, and we are seeing positive momentum from these customers. During the third quarter, we continued to add new customers while expanding with existing ones. Notable brands include Geico, HEMS, Honda, IPG Health, and Overstock. To illustrate how customers are utilizing Sprinklr, I want to highlight a few examples across our product suite. In customer service, one of the largest global consumer software and hardware companies expanded their partnership with Sprinklr by adding over 500 care agents, bringing their total to over 1,000. They support 60 product lines across 16 languages on modern channels, and their agent response time improved significantly. Since becoming a customer in 2014, they now use 24 Sprinklr products across all four suites. Another example includes a leading global streaming service that conducted a thorough RFP process with 20 CCaaS providers before selecting Sprinklr to transform their legacy CCaaS infrastructure, which involves around 5,000 agents. They chose us for our comprehensive capabilities on a unified AI-based platform and our flexible architecture to integrate with their existing tools. In our Modern Research suite, one of the top food and beverage companies in the U.S. expanded their partnership by incorporating product insights into their existing Sprinklr portfolio. They selected our product insights solution to gain competitive insights and better predict the success of their product lines in the market, leveraging our AI for real-time data integration. In our social engagement and sales suite, BMO, one of North America’s largest banks, expanded its partnership by adding over 2,200 users to our distributed product, which is essential for compliance in financial services. Since 2019, they have scaled from seven point solutions to nearly 8,000 distributed users and 25,000 seats for employee advocacy, showcasing what a financial institution can achieve with Sprinklr. Lastly, Siemens broadened their partnership with Sprinklr by adding 150 modern marketing and advertising seats. In four years, Siemens has consolidated eight siloed solutions into our unified CXM platform, with nearly 2,000 communicators in over 60 countries utilizing Sprinklr daily to manage, plan, and enhance content across various channels. On the product front, we are making advancements with our Lite products in Research and Care, aimed at boosting efficiency in our inbound demand generation efforts. These self-serve versions allow enterprises to experience a lightweight model of our platform at no cost, serving as an entry point for companies in the early stages of their digital transformation. Before concluding, I'd like to commend our customers for their efforts to enhance customer experiences and for co-creating the unified customer experience management category. I also want to acknowledge Sprinklr's outstanding engineering team, whose innovative work keeps us competitive in the market. They are consistently improving our proprietary AI and tackling challenges head-on, whether in voice integration or user experience simplification. In closing, I want to reaffirm our commitment to the fundamentals of our business. We will keep executing our growth strategy while balancing revenue and profitability with disciplined hiring and expense management. We will relentlessly pursue the innovation our customers expect. Our conviction is stronger than ever: brands desire a unified, no-compromise approach to elevate customer experiences. The emergence of unified CXM as a category is unavoidable. Thank you to all our customers, partners, employees, and especially our investors for believing in this vision. Now, I’ll hand the call over to Manish.

Thank you, Ragy, and good afternoon everyone. As you heard from Ragy, we delivered another strong quarter across the board, exceeding expectations across all key financial metrics. Our third quarter results demonstrate our ability to generate strong growth with a clear path to profitability. We are benefiting from multiple long-term tailwinds that we believe will support our business for the foreseeable future, namely our customers transforming their digital edge, the breadth of our product offering, and how the value of our unified CXM platform is resonating with customers. However, we are not immune to the current macroeconomic environment in the short term. Many of the macro trends that we saw in the second quarter worsened through the third quarter with a general tightening of budgets for both new and existing customers. In addition, during the third quarter, we saw the operating environment become increasingly challenging, most notably with a more pronounced slowdown in our EMEA business. Turning to our financial results, for the third quarter, total revenue was $157.3 million, up 24% year-over-year and slightly above the high-end of our guidance range. This was driven by subscription revenue of $139.9 million, which grew 27% year-over-year, also above the high-end of our guidance range. Subscription revenue outperformance was driven by more new business closed earlier in the quarter than expected. Services revenue for the quarter came in at $17.3 million, down marginally from the recent quarterly trend. This is driven by a focus on margins for our services business as we have been thoughtful about not taking on lower-margin services business. We will continue to actively manage our professional services margin, which may impact the absolute level of our professional services revenue moving forward. Our subscription revenue-based net dollar expansion rate in the third quarter was 125%, consistent with our Q2 results. I had alluded to this earlier as we have continued to be successful in upselling existing customers at renewal time while driving significant new business from existing accounts. This metric continues to demonstrate how strategic the Sprinklr platform is for our mid to large enterprise customers and how we expand with them as they mature. Our gross renewal rate in Q3 was again on par with leading enterprise software companies. We believe this high renewal rate, coupled with the expansion in our installed customer base, is a testament to how important Sprinklr is to our customers' daily workflows. This should also provide further evidence that Sprinklr's position in the front office software suite remains resilient even in a potentially recessionary environment. As of the end of the third quarter, we had 107 customers contributing $1 million or more in subscription revenue over the preceding 12 months, which is a 34% increase year-over-year. Our platform and the traction we have with the world's largest and most valuable brands continue to grow. As a reminder, we calculate this customer count using $1 million in recognized revenue from these customers on a trailing 12-month basis as opposed to ARR. Turning to gross margins for the third quarter. On a non-GAAP basis, our subscription gross margin increased to a record 81.4% as we continue to drive efficiencies in our cloud operations, leading to a total non-GAAP gross margin of 74.7%, another record for us here at Sprinklr. Our professional services non-GAAP gross margin came in at approximately 20%, much higher than in recent quarters as we have become more selective in taking on new services business. We estimate the non-GAAP services gross margin to be in the mid-teens for Q4, which we believe to be a sustainable level moving forward. During the third quarter, total non-GAAP operating expenses increased 8.5% year-over-year to $110.5 million, representing 70% of revenues. This is, in fact, down from 80% of revenues during the same period last year, and total non-GAAP operating expenses are down $4.1 million sequentially. We continue to generate efficiencies in sales and marketing, which is reflected in our results this quarter with a 750 basis points decrease year-over-year. We also continue to generate operating leverage from G&A, which decreased by 200 basis points year-over-year. As you may recall on the last few earnings calls, we had said that the investments we made in the second half of FY 2022 and early in FY 2023 were partly the result of catch-up investments from prior years due to the unknown impact of the pandemic at that time. That level of catch-up investment has concluded, and we estimate the magnitude of year-over-year increases in non-GAAP operating expenses to further moderate in the coming quarters. Turning to profitability for the quarter, non-GAAP operating income was $6.9 million or $0.02 per share on a non-GAAP EPS basis. This 4% operating margin for the quarter was the result of revenue overperformance, improved gross margins, coupled with operating expense discipline across every department. This was also the first quarter of positive non-GAAP operating income since Q4 of FY '21, and we achieved positive bottom-line performance one quarter ahead of our Street guidance. To that end, in terms of free cash flow, we had a marginal burn of $1.7 million during the third quarter, compared to a burn of $4.1 million in the same period last year. The free cash flow improvement in the third quarter was driven by ongoing operational improvements, slightly muted by the timing of our billings and subsequent collections. And as mentioned on prior calls, given the seasonality and low duration of our billings, we estimate that adjusted free cash flow will be negative here in Q4 and on a full-year basis for FY '23. However, we remain committed to generating positive free cash flow in FY '24 on a full-year basis, an improvement on what we have communicated on our previous earnings calls. We ended the quarter with a very healthy balance sheet, including $544 million in cash and investments and no debt. This puts us in excellent shape to continue investing in strategic initiatives that will drive growth in a profitable manner. Calculated billings for the third quarter were $138.4 million, an increase of 19% year-over-year. And just as a quick reminder, our third quarter billings have historically been the lowest quarter for us given the quieter summer months in Europe and the general timing of our renewals. The dynamics of our billing trends, as outlined on the last few earnings calls, notably, the seasonality we experienced with Q4 being the highest billing quarter and our overall billing cadence having a duration of less than 12 months remains in place. For the first nine months of FY '23, calculated billings are up 22%, compared to the first nine months of FY '22. And as noted previously and reported here in the third quarter, we expect the delta between revenue growth and billings growth to continue to hold with billings growth lagging revenue growth by approximately five percentage points, assuming all else remains the same. As of the end of Q3, total remaining performance obligations, or RPO, which represent revenue from committed customer contracts that has not yet been recognized, was $586.1 million, up 28% compared to the same period last year, while current RPO was $420.2 million, up 27% year-over-year. As expected, the third quarter was a seasonally slower quarter for both RPO and CRPO given the timing of our renewals. We continue to believe that subscription revenue and RPO growth are the best metrics to evaluate the underlying health of our business. Our billings can fluctuate significantly relative to revenue based on the timing of invoicing cadence of renewals and the duration of customer contracts. Moving now to our Q4 and full-year FY '23 guide and business outlook. As noted on our last earnings call, we faced tougher comparisons in the second half of the year given the strong growth we demonstrated over the last three quarters of FY '22. We also recognize that the macroeconomic environment has worsened in the third quarter with additional scrutiny along with tighter budgets on new spending. Given this environment, we're taking a prudent view of the near-term growth expectations for Q4. Starting with Q4 FY '23, we expect total revenue to be in the range of $162.3 million to $163.3 million, representing 20% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $145.5 million to $146.5 million, representing 24% growth year-over-year at the midpoint. We expect non-GAAP operating income to be in the range of $6 million to $7 million and non-GAAP net income per share of $0.01 to $0.02, assuming 264 million weighted average shares outstanding. For the full-year FY '23, we are tightening both our subscription and total revenue outlook for the year. We now expect subscription revenue to be in the range of $545.8 million to $546.8 million, representing 28% growth year-over-year at the midpoint. We expect total revenue to be in the range of $615.2 million to $616.2 million, representing 25% growth year-over-year at the midpoint. Note that the full-year FY '23 guide is impacted by our decision to actively manage services margin going forward, impacting the absolute level of professional services revenue, as previously mentioned. For the full-year FY '23, we now expect a non-GAAP operating loss to be in the range of $1.3 million to $2.3 million, equating to a non-GAAP net loss per share of $0.04 to $0.05, assuming 260 million weighted average shares outstanding. The non-GAAP operating loss for the year at the midpoint is an operating margin improvement of $34 million versus FY '22 and a $44 million improvement versus our original guide for FY '23. This is the result of our continued focus on operating discipline, specifically go-to-market efficiencies and better allocation of resources. As a quick reminder, in deriving the net loss per share for modeling purposes, a $9.5 million total tax provision for the full year FY '23 needs to be added to the non-GAAP operating loss range just provided. We booked a $7 million tax provision in total for the first nine months of the fiscal year. Therefore, we estimate the tax provision to be approximately $2.5 million for Q4. FX continues to be a very topical discussion given the macro environment, so I want to reiterate our position here. FX does not have a material impact on our financials because even though we have approximately 35% of our business outside the U.S., most of our billings are in U.S. dollars. Before moving into Q&A, I would like to provide some high-level commentary on fiscal year 2024. We will provide formal guidance on our Q4 earnings call sometime in March, which is our normal practice. But given the uncertainty in the market, we believe it is helpful to give investors a view of our thinking for next year. As you heard today, long-term demand trends and engagement for Sprinklr remain strong. However, in the near term, we believe we will continue to be impacted by the current macroeconomic environment. We expect the macro trends from the last three months to continue through FY '24, resulting in further tightening of budgets and lengthening of sales cycles. With all that said, we expect revenue growth to moderate in FY '24 from the Q4 growth rate I just outlined. Based on what we are seeing today, we estimate total revenue growth to be approximately 15% for the next fiscal year. In terms of our path to profitability, we are proud of the improvements we have made over the course of FY '23. We will build upon that success next year and expect to generate meaningful non-GAAP operating income that is at least equal to the non-GAAP operating margin we just reported for Q3 FY '23. And as mentioned earlier, we continue to expect to be free cash flow positive on a full-year basis for FY '24. Lastly, I would like to thank all our employees for delivering a strong third quarter during an uncertain macro environment and continued volatility in the financial markets. I'm grateful for the confidence that our customers have placed in us and the dedication of our employees. We remain focused on building a track record of successful execution and operating discipline across the business. With that said, let's open it up for questions.

Thank you. At this time, we'll conduct our question-and-answer session. Our first question comes from Raimo Lenschow with Barclays. Please state your question.

Hey, this is Frank for Raimo. Thanks for taking my question. I want to ask if you could walk if there are any specific changes made to the go-to-market playbook just given the recent sales leadership transition and the changed macro environment? Thank you.

Absolutely, Frank. Good to talk to you again. As I outlined last year, this has been a significant focus for the company. You probably saw from our recent Board Director announcement to the changes that we're squarely focused on it. We have an initiative in the company across the board, which is our number one priority across the four priorities we set for ourselves this year to make it easier to sell Sprinklr. The way we look at it, we have a business that has pretty world-class retention rates and expansion rates, which means that if we make it easier for customers to come in the door and for our field folks to sell, then the business should grow better. We have a fairly comprehensive plan. I'll give you a few high-level details. One is to move from selling products to verticalized selling solutions for each vertical. That's a multiyear project that's already underway. Two is to go from a focus on capacity to start focusing on productivity, which gives us a more nuanced way to decide where to invest our dollars. Traditionally, we've been more focused on geographic expansion, and we're going to switch that now to investing where we're seeing growth and being a lot more prudent in where we put our chips on the table. There's a lot more behind it, but there's going to be increased focus on new logos forever with companies just considering a dollar as a dollar, whether it comes from an existing account or a new account. We're making changes to have dedicated teams focused on new logos. So, I'm not going to go through everything, but there is a clear seven-point plan that translates to about different goals and KPIs, and it's translated to several hundred OKRs for the entire company. So, that's a big priority for us.

Very helpful. Thank you, Ragy.

Thank you. Our next question comes from Pinjalim Bora with JPMorgan. Please state your question.

Great. Hey guys, thanks for taking the questions. One question on the guidance for next year. It seems like you're calling for about a 10-point deceleration. Maybe Ragy, help us understand what you're hearing from CIOs in terms of how they're thinking about budgets for next year? Are you hearing them resetting budgets lower dramatically? Help us understand what's guiding that guidance? And maybe, Manish, you can chime in with some of the assumptions around expansion rates and new business bookings. How are you kind of building that guide?

Yes. I want to ensure that we're clearly communicating what we're trying to communicate. What you're seeing us do here is taking a slightly more defensive posture for next year. We read everything Manish said or listen to him; basically, what we're seeing, we've taken the top line down a little bit and adding it to the bottom line. And that, I think, is the prudent thing to do given what we're seeing in the marketplace today. Manish, can you comment on that before I really answer the question?

Yes. So, Pinjalim, let's quickly go through the math behind it. So, it isn't a 10-point decrease. So, consensus is 21%, and I think we're saying as a starting point, use 15%. The math there is very simple because based on what I see today, if you take the midpoint of the Q4 guide, that is a sequential increase of 3.5% over Q3. If you now apply that same 3.5% across the arc of FY 2024 fourth quarter, we'll get to a starting point of just around 15% for next year. What we are saying, before Ragy adds more color, is given the visibility that we have right now, this would seem to be the prudent place to start. To the point that Ragy mentioned earlier, I want to ensure people take into account that we demonstrated a 4% non-GAAP operating margin for Q3. We're comfortable at this point saying you could apply the same 4% for the entirety of FY 2024, which will give you a significantly higher operating income number for next year. To say it differently, we're turning the dials based on what we can see today, and we're obviously looking to see productivity and an uptick in customer demand before we turn the dials back again.

Yes. Regarding your question about the marketplace, I've been traveling extensively and hearing from executives across different continents. Their message is quite clear: there is uncertainty about future outcomes. As a result, companies are being more cautious and strategic. You're monitoring many companies out there, and it's evident that our growth rate is moderating from a place of caution. We're not experiencing a drastic decline from 40% growth to 18% because we have a well-rounded portfolio of product suites that address areas like customer service, marketing, customer feedback and research, as well as sales and engagement. This variety is helping us weather the situation. Companies are looking to reduce costs, and our customer service solutions that enhance automation and self-service are effectively lowering expenses while boosting customer satisfaction and response times. Marketing and advertising isn't thriving right now, as expected. Our research and voice-of-the-customer products support our overall customer service efforts. Currently, our sales and engagement offerings are showing modest growth projections. There are significant developments happening in the traditional social market where we originated, but our diverse portfolio is aiding us. I mentioned earlier about our observations in Europe, which is a region that has only recently begun prioritizing customer service. In the U.S. and the Middle East, we've shifted more toward selling customer service solutions and entering the CCaaS market, which has proven to be more successful for us. So yes, we have a strategy to navigate these challenges, and a lot will depend on how well we execute it.

Understood. That's very clear. Thank you for going through everything.

Our next question comes from Michael Turits with KeyBanc. Please state your question.

Hi, this is Michael Vidovic on for Michael Turits, and thank you for taking my question. I was wondering if you could comment on what you're seeing in terms of customer size? Is high enterprise doing better than, let's say, mid-market? Or is it relatively the same for you?

We wouldn't know, Michael. We've been playing in the enterprise space fairly squarely. There's been a lot of temptation to go down market, something that we thought as a company and a strategy was something we're focused on. What I can tell you is large companies are spending money to save money. Large companies are spending money to mitigate risk. They're cautiously spending money to go revenue. Are they a little more tightfisted than they were a year ago? Absolutely. Are we seeing that more in Q4 than we saw in Q3? Absolutely. Are we seeing in some parts of the world more than in other parts of the world? Absolutely. But I think it is much more muted compared to — I’m speaking from Sprinklr's experience, broadly from friends who are playing in the SMB space; it's a lot more muted than the bigger swings we are seeing down market.

Okay, great. And then just one quick follow-up from me. Would you expect any pressure on average revenue per customer on our initial deal sizes in light of macro headwinds? Or are you really not seeing that at this point?

Well, you heard Manish say that we have over 107 customers who pay us over $1 million, right? So, we have customers—now multiple customers are going to pay us north of $10 million. Our strategy is not focused on that initial land deal. Our strategy is landing that customer that has the potential to keep growing, keep paying us hundreds of thousands and potentially millions of dollars. We are less focused on the initial land deal and more focused on the type of customers. So, we're pretty clear. We have a list of 100,000 companies and a list of 10,000 companies and 5,000 companies within that, that's in our sweet spot, and we keep expanding down from there. To answer your question directly, we're not seeing much pressure there. We're not in the volume game. That might really explain why we have this answer.

Thank you. Our next question comes from Parker Lane with Stifel. Please go ahead.

Hi, it's Max Osnowitz on for Parker Lane. Thanks for taking my question. For starters, is there any single solution that you're seeing drive a majority of the customer interest right now? Or is it still a good mix of all the core features even in this uncertain environment?

Yes. Like we said, we saw over one-third of our bookings from our customer service product suite. That's kind of what reflects our focus, but it also reflects where the market is focused. We're seeing excitement not just in rip-and-replace CCaaS but really kind of modernize CCaaS and then put automation on it. Traditionally, if you're doing it without Sprinklr, you're working with a legacy CCaaS player. You're trying to bring a shiny automation or AI company into it, which is fraught with a lot more integration and breakage points inside the infrastructure. We're seeing a lot of excitement in automating customer journeys. If you recall, we talked about a large bank—our first-to-go big implementation in CCaaS. That's going really well. They've automated 80 customer journeys. Most of our customers are on this journey of identifying, modeling, and automating at least the low-hanging fruit when it comes to service inquiries. So, that's something that we're seeing a lot of excitement around. Omnichannel is something that is seeing a lot of excitement with customers looking to—I talked about Aramex in my prepared remarks. What he said to me was fascinating. He said, look, WhatsApp was a very important channel for their customers. Before Sprinklr, they just really didn't have an SLA. You could try to reach them on WhatsApp, and your inquiry may be unanswered for days. Since implementing the bot that now services WhatsApp as a gatekeeper, their first response is in eight seconds, and many of their use cases are completely handled by the bot or seamlessly handed over to the human and back to the bot when humans and bots are involved. Those are the areas we're seeing excitement.

Got it. And then thinking about a comment that Manish made earlier on the outlook for 2024. I understand waiting for demand to improve before kind of dialing up the spending. Is that communicating that we'll see a decrease in margins once that time comes? Or are you guys committed to margin expansion for the long run?

Yes, we're committing to margin expansion, if you're referring to gross margins and operating margins. We're committing to that for the long-term. What we are saying is given the limited visibility that we have and given the preponderance of factors that are beyond our control, our ability to start with a different number, if that makes sense.

Got it. Thanks. That’s it from me.

Our next question comes from Elizabeth Porter with Morgan Stanley. Please state your question.

Great. Thank you so much for the color around next year; that was super helpful. In your comments, you highlighted just customers focused a lot on saving money, especially with single modules like efficiency with customer care. We're also hearing just broadly in the market a willingness to consolidate spend with IT vendors to save more money. So, I just wanted to get a sense for what you're seeing in terms of the willingness to consolidate vendors, kind of displace other solutions? And is that happening at a more accelerated rate? Or is that something that takes a little bit longer to play out?

Elizabeth, great question, and thank you for asking that and giving us an opportunity to highlight something that we've always believed in. Remember, we were the first ones to keep using the phrase point solution chaos. Traditionally, this has been a major strategy for the company. We're actually on the receiving end of that trend, and that's reflected in our net expansion rate of 25%, that's reflected in our retention rates. Once a customer is in, we now—in many verticals, we have a clear path of how they should expand and how they should consolidate. What I'll point out in our case is a transition that we've made. If you talked to us three years ago, typically, the companies we were replacing were social publishing tools or social listening tools, advocacy tools, and advertising tools. But now we're replacing in the contact center a different slew of systems, like Zendesk with ticketing being replaced with Sprinklr, like a module from something like NICE being replaced with our AI and our sentiment analysis. Our knowledge base is replacing another little suite or a homegrown system, and our self-service community is replacing another community solution. All of this works very well together because it's a platform. We're now replacing a pure-play AI that's promising to automate the contact center. We're taking out three to seven contact center point solutions. For me, talking to customers, it's an interesting new phenomenon we're seeing with a different set of competitors in that market.

Great. Thank you so much. And just as a follow-up, I wanted to ask on the customers that are spending over $1 million. You actually saw an increase quarter-over-quarter; that was higher than what we've seen previously—not by a ton, but I just think that's surprising, just given the environment you spoke to about a quarter earlier. So, what's driving that momentum still in the large customer spend? How much of it is landing of new logos on a big size versus existing customers spending more consolidating on the platform?

Elizabeth, almost all of that is existing customers consolidating and spending more. What is driving that? Hard ROI, like nonnegotiable hard ROI. Every one of our expansion deals and the big ones is preceded by making a business case. That has to have a hard—here's how much you're going to save; here's how much you're going to automate; here's how much more you're going to expect in advertising dollar optimization; here is what those insights pan out to do. Our go-to-market strategy in expanding is just very business case-driven. If someone's paying $5 million or $7 million or $10 million, there's no way we are retaining the way we are if that's not all backed up by hard dollars—not just shiny objects. We're able to take a use case and show how an AI automation can automate free up the agent's time to do other things. We're showing how to convert unhappy customers into happy advocates and quantify the marketing impact. We have a whole slew of models that we've developed that we show and validate with customers that they sign off before they buy. We're increasingly providing proof of concept. Traditionally, it wasn't something we did, but increasingly, we’ve become so confident. I encourage everybody on the call to reach out to our customers and talk to them. We're confident that our technology is superior, and the results are very real. After a proof-of-concept, they buy, minimizing the risk.

Thank you. Our next question comes from Arjun Bhatia with William Blair. Please state your question.

Hey guys. Thanks for taking the question. Ragy, I know you mentioned that new customers are becoming a priority and you're dedicating a team to that. Can you just talk about the timing before you start to see tangible results? And can new customers land with that team? Put that into the context of this macro environment where I think newer customers are a little more hesitant to spend on new software solutions. How do you see that playing out over the next year or so?

Arjun, I'm assuming it's you, and you didn't change your name. Yes, great question. We have not been disclosing new logos, right, on a quarterly basis; the change—Manish made. I can't disclose that, but that number is on the rise. Our early efforts to focus on that are panning out really well. There's a lot more to optimize, but we're still kind of heavily weighted on upsells compared to new logos. We've made a lot of progress this year and we are modeling and continuing to focus on making more progress next year because we think the TAM is so big. We're very encouraged about how customers behave once they're on and understand how to work with us; a dollar is a lot more valuable for us if it's a new logo, and we're just going to invest a little bit more.

Okay, got it. That makes sense. And then just in terms of Care, it was impressive to hear that a third of the bookings are coming from that Care module. As you think about just the near-term pipeline for that solution, do you see that being more resilient than some of your other suites that you have, especially as you look into Q4? Is that seeing less scrutiny from executives and buyers than some of your other solutions?

Yes, we are and I'll confirm that. It's a lot more of a slam-dunk business case with very much fewer risk factors. The reason, if you recall - many quarters or two, three years ago, we started talking about Care and focusing more on that. Again, the strategy is always built into this unified platform. We think in the next few years, there's a big opportunity coming up with everybody trying to move contact centers to the cloud, consolidate data centers. The traditional CCaaS vendors have put a lot of their energy into building the telephony infrastructure. Ten years ago, that was a differentiator: Can you keep calls, manage calls, keep costs down, route calls, and make IVR work? Today, that's, in my mind, fairly completely commoditized. Good players like Amazon will continue to make that part of the infrastructure. We got lucky in that the avenues we've just built the app layer, making agents more productive, putting more AI to work in understanding conversations and responding back, while picking up all public data and connecting to all channels. That's the advantage we have. We're able to go into a company and say, let me show you the 15% of your service complaints that are not being responded to; give me your average SLA, and let me beat it. I've said this to you before; one of the largest tech companies that use care; one is our first definition partner. An average case resolved in Sprinklr costs them 30% of advisors responding 50% faster with 80% less dissatisfaction. We can quantify it. We won the award this year as one of the top vendors for CX. This becomes—to your point, it's a little bit clearer to articulate the value with fewer variables to play.

Thank you. Our next question comes from Patrick Walravens with JMP Securities. Please state your question.

Great. Thank you. So, Manish, first of all, I'm really grateful to you, and I'm sure Ragy had a part in this too, for guiding to 2024 next year, fiscal 2024. So many companies aren't doing it. I think it's a real service to us and to investors when you do. Now, there's no good deed that goes unpunished. I just don't understand why if you're going to go from 24% growth down to 15%, why wouldn't you be able to drive the operating margins higher than where you are right now?

So, great question, Patrick. Let's step back a little bit. If you look at what we did last year, we grew in FY 2022 subscription revenue 26%. We expect subscription revenue growth to be 28%, which is very respectable given what's happening in the macro environment. Having said all of that—and I'm still at the topline, I'll address your bottom line here in a minute. It wouldn't be prudent for us to start conjecturing call it 60 months before FY 2024 ends; that's part of the reason you're seeing us take a prudent view using the same sequential growth rate for Q4 and applying it for the rest of the year. You would be correct in assuming that our operating margin ought to move up. It most likely would, but given where we sit, it doesn't make sense for us to conjecture what it would be for the full year. We're comfortable saying use 4% for the full year. If you apply that to the $708 million, give or take, you'll get for the topline for next year. You'll get a number like $28 million, which is much higher than I think where consensus is. You've got to give us a little room to maneuver as we see how the book of business builds here in Q4 and what the outlook looks like when we guide in March, if that makes sense.

That's actually really helpful. And then Ragy, how—I think you've kind of addressed this, but just to be direct about it, how is November?

Good. Beautiful. Listen, I think we—with the portfolio we have, you should not get excited with green shoots and you should not get pessimistic when a region doesn't do well with a product. There are so many variables. We feel good about where we are. I feel really good about how—yes, we are moderating up and down a little bit, but our fluctuation is in a limited bandwidth, and that's a better place to be. We feel good, so spend was good, and I think it's all in line with what we're telling. We want to build a fundamentals-driven company. We want to be as transparent as we can and do what you all expect from a good company focused on the long-term, not the next two quarters.

Thank you. Our next question comes from Tyler Radke with Citi. Please state your question.

Yes, thanks for taking the question. Going back to some of the prior questions around the assumptions you're assuming in your outlook. Maybe you could clarify how much of this is what you're seeing today in terms of deal delays? Are you anticipating that there'll be some down sell pressure on renewals? Or is this simply deal delays based on what you're seeing in the macro or in your customer base? Just want to get at exactly what you're assuming in terms of how Q4 plays out and assumptions for next year.

I can confirm that the situation is largely influenced by macroeconomic factors. We are concentrating on enhancing our go-to-market strategy, which is relatively new for a company of our size. Typically, most companies would be further along in this process. We feel positive about our approach, which is primarily driven by these macro factors. We believe we have a defined strategy that aligns with our principle of Leading with Care during this recessionary period, and we think it can be applied across markets. Looking ahead, we are observing improvements and feel we have a solution to address the challenges. However, we remain uncertain. Each quarter, we have monitored this situation. In Q3, it became evident that Europe is facing a slowdown, leading to indecisions; many deals are not getting approved despite solid business cases, with the prevailing response being to wait. It is unclear whether this waiting is genuine or if budgets will be retracted. There are many uncertainties, which mainly relate to macroeconomic factors. Internally, we are pleased with how we are refining our go-to-market strategy to enhance efficiency. Additionally, the Rule of 40 is a significant focus for our executive team.

Thank you. Our next question comes from Michael Turrin with Wells Fargo Securities. Please state your question.

Hey thanks. Appreciate you taking the question. I want to go back to the expansion rates because this was held in at 125%. It's better than what we're seeing across a lot of companies in the sales and marketing software stack as that metric is starting to revert back a little bit. Can we first focus on what's driving the stabilization, at least so far? Given the guide for next year, it does sound like you'd expect that metric to revert going forward. Can we talk a little bit about the push-pull between getting customers to consolidate onto the platform and expand, and what you're seeing in the macro and how that informs maybe the delta between the 15% assumed and the 125% expansion you're seeing? Thank you.

Let me start and Manish can add more details. The push-pull you've said is very clear. We're probably one of the few companies that literally has a play in sales, marketing, research, and care, voice of the customer and care. It's a little broader portfolio. That's what's driving ups and downs. I can tell you that we're seeing traction with care, which is driving the upsell. Our customer satisfaction rates, both the way we measure it and speaking to a lot of customers, are almost at an all-time high—customers are consistently happy. I would tell you that it's directly attributable to the macro environment we see; that's where conservatism is coming from. Internally, we're doing things, but the variables are too many for us to predict beyond what we are predicting.

Just to add to that. We've publicly stated that around two-thirds of our new business comes from existing accounts. You would imagine as we sell into the installed base and sell them more modules, the net dollar retention rate, the way we calculate is on a dollar recognized basis over the last 12 months. By definition, that ought to grow. You're seeing that show up even in the $1 million customers and above, which is growing nicely—so you're correct in that that metric has maintained a very healthy growth trajectory. We also mentioned earlier that we are beginning to focus more on new logos. We don't want to just be farming the existing installed base. That metric will ebb and flow, partly driven by macro, as Ragy was saying, partly driven by our push towards getting additional large enterprise logos. There are several factors baked into that metric. It's hard for us to project what that number would look like next year, but it's remained healthy over the last several quarters.

Thank you. Our next question comes from Matt VanVliet with BTIG. Please state your question.

Yes, good afternoon. Thanks for taking the question. I appreciate that you're starting to see some weakness in Europe. But looking at it from a different lens, are there particular verticals that continue to be very strong? Or any that stand out as already showing material weakness that give you additional reason to have prudence in your guidance? Thank you.

We are not seeing any pronounced vertical trends. Our top verticals, as we've mentioned before, are technology and financial services, travel, hospitality—those expected sectors. We have 12 verticals that make up about 90% of our business. I can tell you that post-COVID, travel and hospitality have rebounded strongly. We don't have that much exposure, but the crypto meltdown will impact companies that focus on startups. We're not seeing any sector-specific trends that are materially affecting us.

Headcount plans over the next 12 or 15 months, how have those moderated? Are there areas that you're still going to continue to push forward on hiring? Or do you feel like you're at a capacity level that will allow you to grow into those 2024 expectations? Thank you.

Yes, great question. We explained in our current quarter and previous quarter commentary that we over-invested coming out of COVID, given we had starved the field when we pulled back during COVID. Those investments are largely behind us. We don't expect to grow headcount the way we have in previous years. I think we have capacity in the business to support the growth we have. We stand prepared to add more capacity if we need to. Headcount projections for next year are fairly moderate compared to previous years. Manish, you want to add something?

The only nuance from my perspective is, given the investments already made, both in terms of product development and go to market, we're just stepping back a little bit, waiting to see the fruits of those investments before we make any more incremental in that. We've been clear that we are focused on productivity, and that is across the board. As you can imagine, in any enterprise software company, there needs to be some gestation period before we get productive. We're in that phase where we have invested a fair bit in FY 2022 and the first half of this year; now, we just need to take a little bit of a digestive approach going forward.

Thank you. There are no further questions at this time. I'll hand the floor back to management for closing remarks.

Thank you. I'll summarize by saying that this quarter was strong. We're going into uncertainties. We think we have a strategy to play it out and are taking a slightly more defensive posture to next year. We think it's still very, very early in the category. We're excited by more and more analysts referring to the front office and CXM the way that we are referring to it. We are excited about what the future has. It's great to see all of you, and just remind you that we're trying to build a long-term business based on fundamentals. Thank you.

Thank you. This concludes today's conference. All parties may disconnect. Have a good evening.