Earnings Call Transcript
Sprinklr, Inc. (CXM)
Earnings Call Transcript - CXM Q4 2024
Operator, Operator
Greetings, and welcome to Sprinklr Fourth Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Scro, Vice President of Finance. Thank you. You may begin.
Eric Scro, Vice President of Finance
Thank you, Camilla, and welcome, everyone, to Sprinklr’s fourth quarter and full year fiscal 2024 results financial call. Joining us today are Ragy Thomas, Sprinklr’s Founder and CEO, and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation. In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the first fiscal quarter and full fiscal year of 2025; actual results might differ materially. With that, let me turn it over to Ragy.
Ragy Thomas, CEO
Thank you, Eric, and hello, everyone. Thank you for joining us today. We're pleased that Q4 was another strong quarter that exceeded guidance across all key metrics. Q4 total revenue grew 17% year-over-year to $194.2 million, and subscription revenue grew 19% year-over-year to $177 million. We generated a record $32.4 million in non-GAAP operating income, which resulted in a 17% non-GAAP operating margin for the quarter. The end of the fiscal year is often a good time to reflect on how far we've come and where we are going. The opportunity we saw when we founded Sprinklr is coming to fruition in an accelerated fashion because of generative AI. After investing 14 years in unifying the back end of customer-facing functions with our AI-powered platform, we're beginning to see customers bring our vision of unification to life with generative AI and conversational AI. Generative AI has accelerated conversations happening at the brand's digital edge, where the customer buys, gives feedback, and engages for support and service. Anyone can use GenAI to build a chatbot, but behind it is a unified engine to sell, serve, and gain actionable insights. Siloed chatbots can't manifest significant value for the brand. In today's hyper-connected world, customers must experience a unified approach across all touchpoints with the brand. As you know, we're on a journey to create a new category of enterprise software that we call unified customer experience management. We believe that will revolutionize the front office. After continuous building and iteration across our core portfolio, CCaaS, and AI, we have even more conviction today for our long-term vision and success and our platform strategy than we have ever had before. As many of you know, we've been committed to this vision for quite some time now. But to make this vision a reality, we must deliver consistent and repeatable results. As we shared in our prepared remarks on our Q3 call in December, we anticipated that the decline in our FY 2025 revenue growth rate will be driven by a combination of execution that needed improvement, particularly on the go-to-market front as we over-rotated to CCaaS and a difficult macroeconomic condition that drove elevated churn. We believe we now have the clarity on how to best position this company for our next phase of growth and have made several substantive changes across the organization. This includes investment in our leadership team and enhancements to our operational rigor. Let's begin with the investments in our executive leadership. We've recently brought on experienced leaders from high-growth companies that are known for their execution. They have expertise in helping companies scale revenue and profitability significantly beyond our current levels. As we've shared, Trac Pham, a member of our Board of Directors since June 2023, has been appointed as the interim COO, focusing on organizational structure, getting our teams to better collaborate cross-functionally, and bringing operational rigor to Sprinklr. Scott Harvey was promoted to the role of Chief Customer Officer, a role that previously did not exist, where he leads a unified global customer-facing organization that includes all sales, delivery, and service teams to accelerate go-to-market efficiencies and better serve customers. Scott has been actively onboarding several new leaders across the Americas, Europe, and APJI, as well as our partner team. Today, we are very pleased to announce that Amitabh Misra has been appointed as our new Chief Technology Officer effective April 1. Amitabh joins us from Adobe, where he led a global R&D organization responsible for their experience cloud platform. Prior to that, he was the Founder and CEO of GoPro.com and the CTO, Chief Architect, and Head of Engineering at Snapdeal.com. He has invaluable industry experience, extensive experience in scaling businesses, and a deep understanding of AI. We are excited to have him onboard soon. We will continue working towards recruiting top-tier talent with proven track records of success and operational excellence as we build our bench strength to help drive this company and growth forward. In terms of a go-to-market strategy, progress is underway. We have established a more structured, cross-functional, and disciplined approach for fiscal year 2025 under this new leadership. We're now focused on emphasizing a more balanced strategy to pursue growth opportunities in both our core and service suites. There is work in process with renewals, customer engagement, and solution selling across the board. The result of this work will take some time to manifest through the P&L, but we feel very confident that we have a clear plan, and we've brought in the right people with the right experience, and we are heads down focused on executing. As of January 31, 2024, we had 1,735 customers, which is up 21% compared to the previous year. While we are pleased with this growth, it's important to note that we're only at a 4% penetration of our target market of 43,000 named companies, as we shared during our Investor Day last July. This indicates significant untapped potential for Sprinklr. Turning our focus to our technology platform, we are known for a blazing pace of innovation, and this year was no different. Our product and engineering teams' unwavering commitment to customers set Sprinklr apart in the marketplace. In FY 2024 alone, we released over 2,000 features and platform enhancements to further advance our vision, which we believe has the potential to dramatically transform a brand's front office with AI. Here are a few highlights from Q4. For Sprinklr Social, we launched auto-imagine video optimization that reduces publishing failure and optimizes usability. For Sprinklr Insights, we have extensively deployed AI to reduce time to insight. For example, something that would normally take an average of more than four hours to read and understand in graphs and charts and data form is now just simplified with a click of a button to generate insight in human-readable form. In marketing and advertising, we have deepened our integrations with leading platforms such as Meta, Snap, and Reddit to enable advertisers to diversify media coverage and access these platforms' latest capabilities. Lastly, with Sprinklr Service, we've expanded our channel offerings for Microsoft Teams and Slack and deployed AI in our conversational analytics module to do root cause analysis for top call drivers faster. These enhancements within our architecture, especially our GenAI solutions, are helping customers improve productivity in their front office across the board. In some cases, a large electronics retailer that recently implemented our contact center solution reported a whopping 45% increase in customer service productivity because of our conversational self-service AI capability. During the fourth quarter, we continued to add new customers and expand with existing customers. This includes world-class brands like BT, British Telecom, where we were selected to be the strategic customer service technology partner. We also added and expanded with brands like AT&T, Canada Goose, IKEA, Sephora, and UBS across all our product suites. Major global enterprises are seeking tangible evidence of AI’s efficacy and its potential to drive measurable productivity gains. There's plenty of hype around AI and countless conversations around the theory in infrastructure, but it's time now to make it real in customer-facing functions. We would like to share a few use cases where customers are making it real by leveraging our platform. Our recent partnership with a major European telco company underscores our commitment to delivering next-generation CCaaS solutions. This telecommunications leader aims to be the number one telco in their market and wants to replace more than 10 existing point solutions in the contact center with our comprehensive unified service suite, which is enhanced by our AI. This includes over 30 integrations with their existing customer service support systems. The timing of this collaboration is strategic as it aligns with the new cloud strategy to optimize the CCaaS environment. This customer is now running Sprinklr to support 2,500 agents in eight countries across social, digital, and voice channels. This is all geared to improve efficiency, cost-effectiveness, and overall customer experience for this telco leader. Next, we have a leading pharmaceutical company that recently had their weight-loss drug approved for sale in the market. They are anticipating an obvious increase in customer interactions and needed a partner to scale their front office technology with AI. Discussions on updating display technology quickly expanded to comprehensive migration to our social suite, where we displaced an existing legacy solution. They also invested in understanding millions of public data mentions across social, competitive, and digital conversations without adding additional people or resources. Our innovative approach, commitment to collaboration, and expertise in navigating complex legal requirements required for regulated industries to mitigate brand risk were key factors in the decision. By choosing Sprinklr, they gain a trusted partner committed to improving their customer experiences and generating better ROI for their business. Our third example is about one of the world's leading healthcare companies that embarked on a transformative journey with Sprinklr many years ago. Their continued expansion in leveraging AI to gain competitive and product insights and to measure the effectiveness of their brand. This most recent expansion last quarter was to execute against their new marketing strategy that included better content orchestration and strategic collaboration. Sprinklr is now a strategic partner for this company across three of their key businesses. Through a definition partnership agreement, we are also collaborating with them to significantly enhance our marketing suite. We're introducing critical capabilities like budget and resource management into our marketing suite. I also want to remind you that we'll be hosting our first flagship customer event as a public company from May 7th to 9th. 'CX Unifies the Edge of AI' will be in New Orleans. We will have some of the world's most forward-thinking brands like Amazon, L'Oréal, RDA, Google, Microsoft, and Deutsche Telekom talking about how AI is transforming their front office. We look forward to sharing these customer stories and their tangible results along with practical, usable advice with you. In closing, we delivered a strong year marked by an 18% growth in revenue, record profitability, and strong free cash flow. As we look to the future, we're strengthening our foundation this year with top-tier leadership, fostering innovation, and enhancing our execution capabilities—critical elements that will fuel our sustained success and drive value for customers and shareholders. Our confidence is grounded in the conviction we have for our long-term vision, grounded in the AI-powered unified CXM platform we've developed, the global customers we serve, and the substantial market opportunity that lies ahead of us. Thank you to our customers, partners, and our employees for their hard work and their results. And thank you to all of you, our investors, for believing in our vision. Let me now hand over the call to Manish.
Manish Sarin, CFO
Thank you, Ragy, and good afternoon, everyone. As you heard from Ragy, FY 2024 was a solid year for Sprinklr, punctuated by strong financial results with noted opportunities for operational improvement. Starting with our Q4 financial results, total revenue was $194.2 million, up 17% year-over-year. This was driven by subscription revenue of $177 million, which grew 19% year-over-year. Services revenue for the quarter came in at $17.2 million as we completed several key project implementations during the quarter. As noted on our Q3 earnings call, we began to see incremental pressure on renewals in Q3 as certain customers adjusted their spending levels with us. This renewal pressure lingered into Q4, and our current expectation is that we will continue to see some renewal pressure in the first half of FY 2025. Our subscription revenue base net dollar expansion rate in the fourth quarter held steady at 118%. As a reminder, we calculate NDE on a trailing 12-month subscription revenue basis, which makes it a lagging indicator. While we do not forecast NDE, we estimate this number to continue coming down over the next several quarters as the renewal pressure rolls through the revenue waterfall and works its way through the calculation. As of the end of the fourth quarter, we had 126 customers contributing $1 million or more in subscription revenue over the preceding 12 months, which is a 17% increase year-over-year. As Ragy stated, we ended the year with 1,735 total customers, which is a 21% increase in new customers for the year. Turning to gross margins for the quarter, on a non-GAAP basis, our subscription gross margins came in at 83%, with total non-GAAP gross margins of 76%. Non-GAAP gross margins for professional services were better than expected, coming in at 5%. Turning to profitability for the quarter, non-GAAP operating income was a record $32.4 million, resulting in non-GAAP net income of $0.13 per basic share. A 17% non-GAAP operating margin for the quarter was a result of revenue over-performance, strong subscription gross margins, coupled with broad-based expense discipline. This marks the sixth consecutive quarter of non-GAAP profitability. Lastly, on the topic of profitability, for the fourth consecutive quarter, we posted positive GAAP net income totaling $21.1 million or $0.08 per basic share. In terms of free cash flow, we generated $12.3 million during the fourth quarter. Our balance sheet has become stronger each quarter, now standing at $662.6 million in cash and marketable securities with no debt outstanding. Calculated billings for the fourth quarter were $271 million, an increase of 17% year-over-year. Just as a quick reminder, our fourth quarter billings have historically been the largest for us, given the timing of our renewals and the quantum of new business booked in the quarter. As of the end of Q4, total remaining performance obligations (RPO), which represents revenue from committed customer contracts that have not yet been recognized, was $966.6 million, up 34% compared to the same period last year, and CRPO was $587 million, up 21% year-over-year. During the fourth quarter, pursuant to the company's stock buyback program, we purchased 2.4 million shares of our Class A common stock for a total cost of $29.6 million. All the shares repurchased have been retired. Furthermore, between February 1, 2024, and March 26, 2024, we purchased an additional 2.1 million shares for a total cost of $27.1 million. As disclosed in our earnings release, I'm happy to report that Sprinklr’s Board has authorized a $100 million expansion of the existing stock buyback program. As such, as of March 26, 2024, we now have $143.3 million remaining in our share buyback authorization, and we intend to complete the full buyback here in FY 2025. Turning to a quick summary of financial results for the full year FY 2024. Total revenue was $732.4 million, up 18% year-over-year, with subscription revenue of $668.5 million, up 22% versus the prior year. Calculated billings for the full year were $781.9 million, up 19% year-over-year. We reported non-GAAP operating income for the full year of $92 million, equating to a non-GAAP net income per basic share of $0.41 and a non-GAAP operating margin of 13%. In terms of free cash flow, we generated $51.1 million for the year, equating to a free cash flow margin of 7%. This is an increase of over 500 basis points from FY 2023. Before moving on to guidance, I would like to provide additional details on the go-to-market initiatives Ragy mentioned. Starting with renewals, we are implementing a more systematic approach to renewals with a dedicated renewals team. In terms of our customer engagement models, we're creating PODs of customer-facing teams and investing deeper in sales and skills enablement training to best equip our people in the field. And with regards to solution selling, we're developing solution packages that best align with customers' priorities and their strategic technology roadmap. Moving now to our Q1 and full year FY 2025 guidance and business outlook. We recognize that the macroeconomic environment continues to be cautious. Our current assumption is that the broader macro trends from last year are likely to continue throughout FY 2025. Before we walk through FY 2025 guidance, I would like to point out that our guidance range for next year is deliberately a tighter range than what we have done in the past. For Q1 FY 2025, we expect total revenue to be in the range of $194 million to $195 million, representing 12% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $177.5 million to $178.5 million, representing 13% growth year-over-year at the midpoint. This implies professional services revenue of $16.5 million for the quarter. We expect non-GAAP operating income to be in the range of $19.5 million to $20.5 million, and non-GAAP net income per diluted share of approximately $0.07, assuming 289 million weighted average shares outstanding. We are now guiding on a diluted share basis, given our expectation to remain profitable for the full year FY 2025. The change from basic to diluted shares represents about half of a penny in Q1 EPS calculations. Note that the sequential decrease in Q1 non-GAAP operating income is typical for us, as we have larger expenses at the start of the year for sales kickoff, marketing campaigns, and selective hiring. For the full year FY 2025, we expect subscription revenue to be in the range of $740.5 million to $741.5 million, representing 11% growth year-over-year at the midpoint. We expect total revenue to be in the range of $804.5 million to $805.5 million, representing 10% growth year-over-year at the midpoint. For modeling purposes, assume the quarterly revenue distribution follows the same trend as FY 2024. These guidance ranges imply a FY 2025 professional services revenue of $64 million, flat with the numbers we posted for FY24. As we grow our partner ecosystem and work closely with implementation partners, we expect growth in our professional services to remain range-bound. Additionally, as we have stated in the past, we will continue to invest in vertical CCaaS delivery capabilities, and as such, we estimate our professional services gross margin to be largely breakeven throughout FY 2025. I would now like to touch on the billings topic for FY 2025. We have been working diligently to improve billings duration for new deals so that we no longer estimate billings growth to lag subscription revenue growth. For FY 2025, we estimate billings to grow in line with subscription revenue. Given this new dynamic, we estimate total billings for FY 2025 of approximately $868 million and $193 million for Q1. For modeling purposes, this total billings number can be spread across the arc of the four quarters, largely following the same trend as FY 2024. For the full year FY 2025, for non-GAAP operating income, we are forecasting a 13% non-GAAP operating margin, similar to what we posted for the full year FY 2024. This equates to a range of $104 million to $105 million or a non-GAAP net income per diluted share of $0.38 to $0.39, assuming $291 million weighted average shares outstanding. The change from basic to diluted shares represents about $0.02 per share in the full year FY 2025 EPS calculation. Note that we expect subscription gross margins to come down by approximately 2 percentage points in FY 2025 driven by one-time set-up costs associated with new cloud environments to serve new CCaaS customers. These costs are baked into the 13% non-GAAP operating margin highlighted earlier. In deriving the net income per share for modeling purposes, we estimate $20 million in other income for the full year, with $5 million of that to be earned here in Q1. This other income line primarily consists of interest income. Furthermore, a total tax provision of $14 million for the full year FY 2025 needs to be added to the non-GAAP operating income ranges provided. We estimate a tax provision of $3.5 million here in Q1. Regarding free cash flow, we believe we can achieve a 10% free cash flow margin in FY 2025, which would equate to a free cash flow metric of $80 million for the full year. This will be a 300 basis point improvement over FY 2024. We will not be updating our free cash flow guidance quarterly but will provide an update as needed throughout the year. For the second consecutive year, we expect to be net income positive for the full year on a GAAP basis. We are also reiterating our long-term financial targets for FY 2027, as highlighted during our Investor Day in July 2023. Before we open it up for questions, I would also like to thank all our employees for their dedication. I'm also grateful for the confidence that our customers have placed in us. We remain focused on building a track record of successful execution and operating discipline across the business. And with that, let's open it up for questions.
Operator, Operator
Thank you. We will now take questions. Our first question comes from Arjun Bhatia with William Blair. Please go ahead with your question.
Arjun Bhatia, Analyst
Thank you, everyone, and I appreciate all the details provided. To start off, I know we discussed some of the down-sell and churn pressures in the last quarter and this quarter. Manish, looking at the numbers, CRPO growth in the low 20s and strong billings growth, I’m not completely clear on the source of that pressure, particularly in Q4. Could you walk us through what you are observing in terms of demand? Is there something from a new customer perspective that might be balancing out those churn challenges, perhaps some positive factors?
Manish Sarin, CFO
Thanks, Arjun. I think the way we look at this is, you'd note that, in the past, we've said we endeavor to get to a 90% and above gross retention rate or renewal rate. I think the pressure we're seeing now is just what's happening in the macro, definitely driven by usage patterns. We're sort of below that. In terms of what we shared in the Q3 earnings call, some of that had obviously caught us by surprise, and so we want to be just transparent there. I think a lot of this is driven by where we want to be. Now, certainly, it's not yet fully reflected in the numbers, and I was saying even when you look at the NDE calculation, it is going to start to show up because some of these are lagging indicators. But sitting where I sit and looking into at least the first half of this year, I do expect to keep experiencing renewal pressure just the way I think we've spoken in the December call.
Arjun Bhatia, Analyst
Okay, understood. As you consider fiscal 2025, it seems you're investing significantly in the CCaaS product set. In light of the growth and some of the go-to-market changes being implemented, how do you anticipate growth will compare between your core social solutions and CCaaS in fiscal 2025?
Ragy Thomas, CEO
Yes, Arjun, I'll take that. This is Ragy. We have redesigned our go-to-market to be what we think is a fairly high-quality multiproduct company with multiple buying centers. Those changes have been rolled out, and we have just kicked off our new year. That means we have specialists focused on our core offerings and specialists focused on CCaaS. We expect CCaaS to be a growth driver, but we also expect that renewed focus to start yielding better results in core as the quarters progress.
Arjun Bhatia, Analyst
Okay, perfect. Thank you very much.
Operator, Operator
Our next question comes from the line of Raimo Lenschow with Barclays. Please proceed with your question.
Raimo Lenschow, Analyst
Thank you. Congrats from me as well. Two questions. Manish, if you think about guidance for the next year, the thing that puzzles me a little bit is like you still have all the uncertainties, you have the go-to-market changes, but you're narrowing the ranges that you're giving. Can you just talk me through that logic? In theory, I would think it's a broader range rather than a smaller range. I'm just trying to understand that. And then I had one follow-up.
Manish Sarin, CFO
Yes, hi Raimo. So, I think what's driving it is, as we look at, again, what's happening in the broader macro environment, and obviously, a lot of our peers certainly felt that given the visibility that we have, at least for the quarter, we could tighten the range. You'd also note, the last couple of years, we have had a broader range for the full year, and then we have had to adjust the range as we got into the second half of the year. That added a little bit more confusion as analysts were trying to figure out what was happening to the range. I just felt entering this year— I ended my prepared remarks by saying, we're looking to get into a lot more operating discipline. It just felt the right time for us to introduce a much tighter range for the full year as well.
Raimo Lenschow, Analyst
Okay. Perfect. Okay, thank you. And then Ragy, one for you more. If I think about the CCaaS space, many players want to kind of play the AI angle and claim they have that, etc. Can you talk a little bit about who you're running into on those assignments and what the main difference is between who is real or what you're offering that is more real than what others have to offer? Thank you.
Ragy Thomas, CEO
Well, I can confirm that we are running into the traditional incumbent large CCaaS competitors who've been around for a while. Look, I can't comment on what other people are doing with AI. But I can tell you that our win rate is pretty high when we get a chance at that. And that comes from the fact that we have built a unified platform from the ground up. When you look at the contact center stack, it's usually between six and 20 applications that they use, often connected to between 15 and 100 external applications. These multiple point solutions—from knowledge base to quality management, workforce management, ticketing, agent console, and supervisor console, and community knowledge base—not being meshed together is a gap we exploit. Even the big players sometimes lack critical capabilities. What we encounter is this mismatch of solutions from competitors that aren’t woven together. Ours is clean and integrated end-to-end AI, which we've been developing for years. We have a proven track record with a clear strong agent console and seamless integration with external systems. We provide a user experience that prevents customers from being frustrated and ensures that they feel taken care of from start to finish.
Raimo Lenschow, Analyst
Okay, that makes sense.
Operator, Operator
Our next question comes from the line of Pinjalim Bora with JPMorgan. Please proceed with your question.
Q – Unidentified Analyst, Analyst
Hey, guys this is Noah on for Pinjalim. Thanks for taking the questions. On the net revenue retention side, it was great to see that holding stable at 118%. But as we're thinking about going forward, I mean how should we think about the trend for that on that for the rest of this year given the reiteration of the 10% revenue growth guide for the year? And I also have a quick follow-up.
Ragy Thomas, CEO
Yes, I think this is where I did say in the prepared remarks that we do expect this to come down over the next few quarters. I wouldn't be able to give you an exact number of where I think it should land. But just looking at the way this metric is calculated for us, as some of the renewal pressures that I spoke about earlier worked through the revenue waterfall, I do expect this to keep coming down. Again, no point guessing where it's going to land, but it will come down.
Q – Unidentified Analyst, Analyst
Got it. And then, one of the customer wins you highlighted during the quarter was with BT. I'm just doing a quick Google search. It seems like BT supports over 80,000 service agents from what we see on our end. I think that's double what Deutsche Telekom does, which is also a customer. So just curious how that relationship came into fruition and if you can unpack any details around that deal. Thanks.
Ragy Thomas, CEO
I can tell you that it's a strategic partnership. It was a very long, tough evaluation process where they looked at everything— they are BT, the number one brand in the U.K., one of the top brands—so everyone with any AI capability from the small to the big cloud providers participated in the process. We think of this as a very momentous win for us, hard-fought one and a great validation of our vision. Unfortunately, I can't go into any details, but I can tell you it's very strategic and aligns with other larger partnerships we are forming very early in our development.
Operator, Operator
Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Please proceed with your question.
Elizabeth Porter, Analyst
Great, thank you very much. I wanted to hit on some of the productivity savings you mentioned. You referenced a customer seeing a 45% increase. And then you previously talked about 20% to 40% savings in the front office. Given that you guys are leveraging your own tools internally, how is this impacting kind of your own cost initiatives? I'd be curious to hear how you've changed your own view on spending and how that may play out in your margin expansion. Thanks.
Ragy Thomas, CEO
Elizabeth, I appreciate your question. We're running several implementations of our own AI technology internally, and we're seeing significant impact. For instance, we recently automated a process that used to take a week to complete for outbound outreach. It involved researching public filings, investor reports, news, and understanding focus areas for the company. Now, we can achieve this in seconds using our internal conversational AI product. We're very excited about the potential, but while we're enthusiastic, don't model any of this into this year's guidance because this is very early. However, we aim to grow without adding resources, and this would contribute positively to our margins in the future.
Elizabeth Porter, Analyst
Great, thank you so much. And just as a follow-up on the go-to-market changes, you made the fix and kind of the overcorrection into CCaaS and refocusing on the core. Any update on the progress you can share that drives confidence that these changes are getting you back to balance? Or any metrics as it relates to sales and efficiency in your pipeline that you can speak to?
Ragy Thomas, CEO
I think the leadership changes are the most crucial. No plan is going to work unless we have great leaders. This is the most direct, focused, and substantive set of changes we've made. I can tell you that in every area, we've brought in leaders who've been there and done that. We've spent significant time getting everyone on the same page, mapping out our 16 stages of the customer's journey with us. We’re leveraging external consulting to align our teams and have clarity on our path forward. We're optimistic, but this will take several quarters to roll out and cascade across our teams.
Elizabeth Porter, Analyst
Great, thank you so much.
Operator, Operator
Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Please proceed with your question.
Brett Knoblauch, Analyst
Hi, guys. Thanks for taking my questions. I guess, the first one is maybe on the annual customer count metric. Is there any way to provide additional color into what was the bigger driver of that this year in between CCaaS and your core social media products? And how has that changed compared to years past?
Ragy Thomas, CEO
What I can tell you is it was driven by both CCaaS and core. Last year we outlined that we had put together a team focused on new logos. It was a small team in a limited capacity, but we're seeing success with that model. That's something we'll double down on moving forward.
Brett Knoblauch, Analyst
Got it. If I heard you correctly, you're anticipating a two-percentage-point negative impact on cost or gross margin this year because of one-time implementation costs for your CCaaS solution. A 2% headwind seems significant.
Manish Sarin, CFO
Yes. This is Manish. I said approximately 2%, but what's going on here is that there are data residency requirements in many geographies. This is largely driven by spinning up new instances with our hyperscaler partners, leading to one-time fees. There are initial costs to set up these instances that, again, I'm conservatively estimating up to 2%. Hopefully, it will be lower, but that's what's baked into the model right now.
Operator, Operator
Our next question comes from the line of Michael Berg with Wells Fargo Securities. Please proceed with your question.
Michael Berg, Analyst
Hi there. Congrats on the quarter, and thanks for taking my question. I guess, in terms of the relationship between free cash flow and operating margin, should we expect that to steady moving forward, as it seems like billings are mostly annualized and the growth should be in line with subscription revenue? And I have a follow-up. Thank you.
Manish Sarin, CFO
Yeah. I think that's a terrific question. As billings get sort of in line with subscription revenue, note that there is the professional services which many times is built upon completion. So that's a separate element. But over time, you should expect our free cash flow to get closer in line to operating income. You would have seen steady improvement in free cash flow, from negative $45 million a few years ago to positive $51 million in FY 2024. We're comfortable with an $80 million number for FY 2025. Again, all steps in the right direction, but you should see the margins narrowing over time.
Michael Berg, Analyst
Got it. Helpful. And then just a quick follow-up to that, the implied margin expansion for this year is in the 150 basis points range, a pretty meaningful step down from last year. I know there's all the go-to-market changes happening in the background. But anything for us to point to as to why there's not more margin expansion here as growth slows or just natural offset to the realignment of the go-to-market organization. Thanks.
Manish Sarin, CFO
Just to clarify, we ended FY 2024 around a 13% non-GAAP operating margin, and that's what we're using to guide for full year FY 2025. I'm not following your question.
Michael Berg, Analyst
Sure. It's just the incremental step function and operating margin progression is much less implied for fiscal '25 guidance relative to what was done in fiscal '24. The nature of the question is, is there a particular reason or driver as to why there's not more margin accretion here as growth slows?
Manish Sarin, CFO
Again, I mentioned in the December call that we had a lot of near-term success as we went from where we were a couple of years ago to last year. There was a lot of low-hanging fruit we could address. Margin expansion from here will be subdued. Let’s be candid—this is just the initial outlook for the year. As we progress, we will update investors but at this point, I’m most comfortable stating the 13%.
Operator, Operator
Our next question comes from the line of Jackson Ader with KeyBanc Capital Market. Please proceed with your question.
Jackson Ader, Analyst
Great. Good evening guys. Thanks for taking our questions. The first one, Ragy, how can we or can we quantify how much of either bookings dollars or growth is being generated by generative AI? And then, how much maybe going forward do you expect to come from generative AI?
Ragy Thomas, CEO
Jackson, we have taken the approach of infusing AI in everything we do in the past, rather than trying to monetize it separately. We're evaluating what is happening in the industry now as we think it could become an opportunity. So we are currently evaluating this aspect. However, at this stage, I wouldn't factor anything into this year, but we see an opportunity to charge a premium, at least for our AI Plus offering. AI is a significant differentiator across everything we do; I believe the market will absorb additional costs for it.
Jackson Ader, Analyst
Okay. All right. Got you. And then on the renewals pressure, I'm expecting it to persist here in the first half and then maybe start to go away. I'm just curious how we know that the pressure will end? Is there something specific about the renewals happening over the next couple of quarters that you can point to, indicating they'll be different from what the renewals will look like after we get past this first half?
Ragy Thomas, CEO
First off, we've put a lot of effort into understanding what's going on. I can confirm, as we've done in the past, that we think the majority of it is self-inflicted. What we're discovering is weak execution on our part matched with strong execution from competitors is when we're losing business. It gives us confidence that the issues are fixable and are part of ongoing initiatives. As we mentioned, it will take several quarters, but we're optimistic that our retention will return to historic norms as we improve our execution.
Jackson Ader, Analyst
Okay. I got you. So this is a process turnaround, not necessarily like a customer-driven thing. Okay. Great. Thank you.
Operator, Operator
Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.
Unidentified Analyst, Analyst
Hi. This is Matt Pride on for Tyler Radke. I was just curious if you could comment on just dive more into the win rates for CCaaS and what you expect moving forward.
Manish Sarin, CFO
I can confirm that we have taken a very pointed approach right now, given that we've only been in general availability for a short period. Our win rates are high when we are in a competitive RFP and follow-on process in the CCaaS market. We're aligning our resources and looking to deploy into new markets. As we approach a critical mass of seats, we should gain better visibility and be featured in analyst reports. At this moment, it's word of mouth and customer demonstrations that are winning us business.
Unidentified Analyst, Analyst
Got it. And can you speak to the conversational AI offering and how that's ramping?
Manish Sarin, CFO
Very well. It’s one of the silver linings we see with our offerings. We're now able to digitize voice as part of our conversational AI, beyond just text and digital interactions. Many of our winning deals are a result of our ability to manifest this capability effectively. There's a lot of talk about whose AI is better, and we actively challenge our customers to test our solutions. We've developed accurate models across languages and industries within a framework designed for performance. The power lies not in a point solution but in our comprehensive agent experience that seamlessly integrates conversations.
Unidentified Analyst, Analyst
Thank you.
Operator, Operator
Thank you. Our final question comes from the line of Austin Cole with Citizen's GMP. Please proceed with your question.
Austin Cole, Analyst
Great. Thanks for taking our questions. I guess I just wanted to ask—kind of as you do this rebalancing and you look at the core products, you mentioned you're doing with insights and adding integrations with advertising and marketing. Where do you see the roadmap for these products, and what can you do to add stickiness to these products?
Manish Sarin, CFO
The products are pretty sticky, often when implemented correctly. This brings us back to the execution that we need for consistency and repeatability. We're finding that products create value when configured correctly. Where we face challenges is when there are changes on either side of implementation, or if it wasn't done as originally envisioned. Improvement in execution across the 16 stages of customer interaction will provide better insights into this.
Austin Cole, Analyst
Okay, that’s helpful. Thank you.
Operator, Operator
Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Ragy Thomas for closing comments.
Ragy Thomas, CEO
Thank you, Camilla, and thank you all for joining us today. Again, I’d like to thank our employees, partners, and most importantly, our customers for their trust and continued business. We look forward to updating you all again on the next quarterly call. As we continue on this exciting journey, we truly believe the best is yet to come. Thank you very much, and have a wonderful evening.
Manish Sarin, CFO
Thank you all.
Operator, Operator
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.