Sprinklr Inc (CXM) 2024 Q4 法說會逐字稿

Greetings, and welcome to the Sprinklr's fourth-quarter fiscal year 2024 earnings call.

(Operator Instructions) 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.

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 sprinkler 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.

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 of unifying the back end of customer-facing functions with our AI-powered platform, we're beginning to see customers bring our vision of unifying 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 gen AI to build a checkbook, but under the engine or the foundation behind it is unified to sell, to serve, and to gain actionable insights.

Siloed chat bots can manifest significant value for the brand.

In today's hyper-connected world, customers must experience a unified approach across all touch points 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, and we believe that will revolutionize the front-office.

And after continuous building and integration 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 FY25 revenue growth rate will be driven by a combination of execution that needed to be improved, particularly on the go-to-market front as we over rotated to CCaaS and a difficult macro and economic 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 has 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 have shared, Trac Pham, a member of our Board of Directors since June of 2023, has been appointed as the interim COO, where he is focused 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 did not exist where he needs a unified global customer facing organization, including all sales and 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.

And today, we are very, 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 that was 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 out of bench strength to help us 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, as well as service suites.

There is work in process with renewals, customer engagement, and solution selling pretty much across the board.

But the result of this work will take some time to manifest through the P&L, but we feel very good 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 team's unwavering commitment to customers set Sprinklr apart in the marketplace.

In FY24 alone, we released over 2,000 features and platform enhancements to further advance our vision, a vision we believe that has the potential to dramatically transform brand front office with AI.

Here are a few highlights from Q4.

For Sprinklr Social, we launched auto image and video optimization that reduces publishing failure and optimizes usability.

For Sprinklr Insight, we have extensively deployed AI to reduce time to insights.

For example, something that would normally take an average of more than four hours to read and understand in a graph and chart and data form, now is 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 platform's latest capabilities.

And 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 gen AI solutions, are helping customers improve productivity in their front office across the board, dramatically in some cases, a large electronics retailer that recently implemented our contact center solution.

We reported a whopping 45% increase in customer service productivity because of our conversational self-service AI capability.

During the fourth quarter, we continue 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, Kia, Sephora, and UBS across all our product suite.

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 put plenty of conversations around the theory and infrastructure, and it's time now to make it real in customer-facing functions.

We 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 seeker 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 that's enhanced by our AI.

This includes over 30 plus integrations with our existing customer service support systems.

The timing of this collaboration is pretty 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 improved 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 and updating the display technology quickly expanded to comprehensive migration to our social suite where we displaced an income company 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 their decision.

By choosing Sprinklr, they gain a trusted partner committed to improving the customer experiences and generating better ROI for the 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 our Unified-CXM platform now includes all our product suites.

They have more than 450 users and consume more than 2 billion mentions to get competitive in 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 in our marketing suite.

I also want to remind all of you that we'll be hosting our first flagship customer event as a public company on May 7 through 9.

CX Unifiers, The Edge of AI, will be in New Orleans and we will have some of the world's most forward-thinking brands like Amazon, like L'Oréal, like Cartier, like Google, like 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 by fostering innovation and by enhancing our execution capabilities; critical elements that would fuel our sustained success and drive value for customers and shareholders.

Our confidence is grounded in the conviction that we have for our long-term vision, total grounded in the AI-powered Unified-CXM platform we've developed, the global customers we serve, and with the substantial market opportunity that lies ahead of us.

Thank you to our customers, partners, our employees for the 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.

Thank you, Ragy, and good afternoon, everyone.

As you heard from Ragy, FY24 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 FY25.

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 keep coming down over the next few quarters as the renewal pressure rolls through the revenue waterfall and work its way through the calculation.

As of the end of the fourth quarter, we had 126 customers contributing $1 million or more than subscription revenue over the preceding 12 months, which is a 17% increase year over year.

And 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.

This 17% non-GAAP operating margin for the quarter was a result of revenue overperformance, strong subscriber subscription gross margins, coupled with broad-based expense discipline, and is 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.

And 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 on the end of Q4, total remaining performance obligations, or RPO, which represents revenue from committed customer contracts that has not yet been recognized, was [$966.6 million], up 34% compared with 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.

And as disclosed in our earnings release, I'm happy to report that sprinklers 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 FY25.

Turning to a quick summary of financial results for the full-year FY24, 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 in free cash flow for the year, equating to a free cash flow margin of 7%.

This is an increase of over 500 basis points from FY23.

Before moving on to guidance, I would like to provide additional details on the go-to-market initiatives Ragy mentioned.

Starting with renewals, we're implementing a more systematic approach to renewals with a dedicated renewals team.

In terms of our customer engagement models, we're creating parts 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 to customers' priorities and their strategic technology roadmap.

Moving now to our Q1 and full-year FY25 guidance and business outlook.

We recognize that the macroeconomic environment continues to be cautious, and our current assumption is that the broader macro trends from last year are likely to continue throughout FY25.

Before we walk through FY25 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 FY25, 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 a 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 FY25.

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 FY25, 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 FY24.

These guidance ranges imply a FY25 professional services revenue of $64 million, flat with the numbers that 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.

In addition, as we have stated in the past, we will continue to invest in critical CCaaS delivery capabilities, and as such, we estimate our professional services gross margin to be largely breakeven throughout the course of FY25.

I would now like to touch on the billings topic for FY25.

We have been working diligently to improve billings duration for new deals, such that we no longer estimate billings growth to lag subscription revenue growth for FY25, we estimate billings to grow in line with subscription revenue.

Given this new dynamic, we estimate total billings for FY25 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 FY24.

For full-year FY25 for non-GAAP operating income, we are forecasting a 13% non-GAAP operating margin similar to what we posted for full-year FY24.

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 FY25 EPS calculation.

Note that we expect subscription gross margins to come down by approximately 2 percentage points in FY25, driven by onetime 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 $14 million total tax provision for the full-year FY25 needs to be added to the non-GAAP operating income ranges provided.

We estimate a tax provision of $3.5 million here in Q1.

But regarding free cash flow, we believe we can achieve a 10% free cash flow margin in FY25, 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 FY24.

We will not be updating our free cash flow guidance quarterly, but will provide an update as needed throughout the year.

And 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 FY27 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 Instructions) Arjun Bhatia, William Blair.

Thank you, guys, and appreciate all the detail here.

Maybe one to start off with, I know it last quarter and this quarter to talking about some of those down-sell and churn pressures that we're seeing in place with.

Manish, when I look at the numbers, cRPO growth in the low-20s billings growth was strong.

I'm not sure I fully see where that pressure is coming at least in Q4.

So can you maybe just walk us through what you're seeing in terms of demand?

And is there something that's offsetting it from a new customer perspective where you are seeing some tailwinds, I suppose, offset some of the churn headwinds?

Thanks, Arjun.

I think the way we look at this is -- you'd note that in the past we have said we endeavor to get to a 90% and above gross retention rate or renewal rate.

And I think the pressure we're seeing now is just what's happening in the macro, definitely driven by usage patterns were 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 wanted to just be transparent there.

So 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 in the calculation, it is going to start to show up because some of these are lagging indicators.

But as I'm sitting where I sit and looking into at least the first half of this year, I do expect to experience or keep experiencing renewal pressure just the way I think we'd spoken in the December call.

Okay, understood.

And then just in terms of -- as you're thinking about fiscal '25, it doesn't sound like you're making quite a few investments in the CCaaS products set.

But when you think about growth and maybe some of the go-to-market changes that are being made, how do you think growth should fare between your core social solutions versus CCaaS in fiscal '25?

Yeah, Arjun, I'll take that.

This is Ragy.

We have -- we designed our go-to-market to be, what we think is, a fairly high-quality quality companies with multiple buying centers.

And so those changes are -- we've just kicked off a new year, so those changes are being rolled out.

That means we have specialist focus on our core offerings and specialist focus on CCaaS.

We expect CCaaS to be a growth driver, but we also expect that renewed focus to start and yielding better results in core as the quarters progress.

Okay, perfect.

Thank you very much.

Thank you, Arjun.

Raimo Lenschow, Barclays.

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 yet to go-to market changes, but you're narrowing the ranges that you've given.

Can you just talk me through that logic?

In theory, I would think it's a broader range rather than the smaller range.

I'm just trying to understand that.

And then I had one follow-up.

Yeah.

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, there certainly felt that given the visibility that we have at least for the quarter, we could tighten the range.

You'd also note 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.

And I just felt entering this year, I ended our 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.

Okay.

Perfect.

Okay, thank you.

And then, Ragy, one for you more.

If I think about the CCaaS space, like a lot of players want to play the AI end goal and thing like, we have that, et cetera.

Can you talk a little bit about, like who you're running into on those assignments?

And like, what's the main difference between who is real, or like what are you offering that is more real than what others have to offer?

Thank you.

I can confirm that we are running into the traditional incompetent, 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 the Unified platform from the ground up.

So when you look at the contact center stack, it's usually somewhere between 6 and 20 applications that they use in the contact center that's usually connected to somewhere between 15 and 100, in some cases, external applications and they have to go look up.

And these, 5, 10, 15 point solutions from a knowledge base to a quality management to a workforce management to ticketing to agent console and supervisor console, and all of those community knowledge base, they are not being matched together, even the big guys.

Some of them don't even have like an agent console or pure ticketing capability.

So what we are encountering is this mishmash of solutions from competitors that are in woven together.

And ours is just clean, pure, everything worked with everything else.

And that we integrate with all the external systems, and everything is based on AI.

So right from the conversational interface, the bank that we have talked about in the past and many other customers, in many cases, are replacing their IVR with the conversational experience.

Imagine not having to press one and say, hey, just want to know what my credit card balance is, when you pick up the phone.

And so it's fairly dramatic right at the onset with the customer that goes to the community where we're using AI.

When the agent logs on, we automatically summarize all the previous assignments.

We've looked at the knowledge base, not even don't have to search.

We found the right two lines that you can use being taken through guided workflows.

The agent is determined using Smart Response, Smart Assignments, which is AI-based.

It's prompted with the Smart Response, not just with better things that there can be upsold and better responses.

And so it's just completely end-to-end AI and summarized when you close the call.

And what's happening now is there are startups that offer like this -- some of these capabilities, but it's an add on and you have to go figure out how to bolt it with your existing infrastructure.

Whereas, our legacy is in conversation management and AI in over 100 languages that we've been developing models for nesting for the last six, seven years.

Okay, that makes sense.

Thank you.

Thanks, Raimo.

Pinjalim Bora, JPMorgan.

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 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.

Yeah, 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 I think just looking at the way this metric is calculated for us, and this is why I take pains to walk through every quarter, that this is done on a trailing 12-month subscription revenue basis.

So 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 come down, but it will come down.

Got it.

And then one of the customer wins you highlighted during the quarter was with BT.

I mean, just doing a quick Google search, it seems like BT supports over 80,000 service agents from what we see on our end.

And I mean, I think that's double what Deutsche Telekom does, which is also a customer.

So just curious how on that our relationship came to fruition?

If you can unpack any details around that deal?

Thanks.

Pinjalim (sic - Noah), I can tell you that it's a strategic partnership.

I can tell you that it was a very long, tough evaluation process, where they looked at -- the BT, right?

I think the number one brand in the UK, one of the top brands.

So all that -- everybody with any AI, from the small to the big to the cloud providers, all participated in the process.

So we think of this as a very momentous win for us, a hard-fought one, and a great validation of the vision.

I can't go into any of the details, unfortunately.

But I can tell you it's very strategic and it's something that and is along the lines of other bigger partnerships we're signing off very, very early, but we see a lot of potential.

Elizabeth Porter, Morgan Stanley.

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've previously talked about 20% to 40% savings in the front office.

And given that you guys are leveraging your own tools internally, how is this impacting your own cost initiatives?

I'd be curious to hear how you've changed your own view on spending it and how that may play out in your market expansion.

Elizabeth, I have to thank you for that question.

We are we are running several implementations of our own AI technology for ourselves.

And obviously, we're smaller than many of the customers we serve.

And we've seen some very, very dramatic impact.

I'll give you a quick example.

And by the way, don't model any of this into this year's guidance, because this is very early, but it's a big focus for us. [Sprinklr launch] was a big focus for us this year, and I'm personally focused on it.

But I'll give you an example.

We just model the process that from beginning to end was going to take a week for every one of our outbound, outreaches and this involves -- in fact, very interesting. and what I mean -- like all companies, B2B companies doing you have to research everything that's out there.

Externally, we've done public filings, investor report, news, look people out, figure out the point of view on what the focus areas are for the company.

Then you got to translate that into what products fit, and then you got to put that into an e-mail and send it out if you're an SDR.

And that process, to do it really well, was taking a week across all the stakeholders.

We just finished our internal pilot.

And literally, now you click a button, ask our internal go on teams, ask our internal conversational AI product and you get the answer in seconds.

So we're talking about dramatic and this is where we get excited about, our own ability to use it.

Now, granted, it's too early and we're not modeling any of this, but I would definitely hope that in the out years, we're going to we're going to be able to grow without adding resources and drop that to the bottom line.

Great.

Thank you so much.

And just as a follow-up on the go-to-market changes.

You made the fix and an overcorrection and to seek out 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 or pipeline that you can speak to?

I mean, look, I think the leadership changes are the most important one.

Try to start there.

I mean, no plan is going to work unless you have great leaders.

So this is -- I can tell you, this is the most direct, most focused, most substantive set of changes that we've made.

I can tell you that in every area, we've brought in leaders who have been there and done that.

You can go look them up on LinkedIn.

Second, we've spent a lot of time getting everyone on the same page, mapping out our 16 stages of the customer's journey with us, all the teams.

And we've been leveraging an external consulting firm to bring all of us together and get on the same page and the plans are being formulated and we've got ownership in a way that this company has never done before.

So I'm very optimistic, but I can also tell you this is going to take several quarters to roll out.

And then these leadership changes are cascading and it takes -- even just to flow through and get the team that we want everywhere, it's going to take us in a couple of quarters.

And so we feel very good about where we're going and how we're approaching this.

I can tell you this was always a priority.

Right now, this is the priority.

And so that's all I can tell you about what's different.

Great.

Thank you so much.

Thank you, Elizabeth.

Knoblauch, Cantor Fitzgerald.

Hi, guys, thanks for taking my question.

I guess the first one is maybe on the annual customer count metric.

I guess, is there any way to provide additional color into maybe what was the bigger driver of that this year in between CCaaS and maybe your core social media products?

And how has that changed maybe compared to years that passed?

I'd say -- look, what I can tell you is it wasn't CCaaS or core.

We had outlined last year that we had put together a team that's focused on new logos.

It's a small team in a limited capacity, but we're seeing success with that model.

So that's something that we're going to double down on.

Got it.

And then maybe if I could just touch on the -- I think if I heard you correctly, you are expecting a 2 percentage point headwind to cost your gross margin this year due to one-time implementation costs or your CCaaS solution.

I guess, maybe on a bit more detail?

That 2% headwind kind of sounds like a lot.

Yeah, so this is Manish.

I said approximately 2%.

But what is going on here is there are data residency requirements in many geographies across the globe.

And largely this is driven by -- as we spin up new instances with our hyperscalers partners, there are one-time fees for a lot of them.

There are initial costs to set up these instances that, again, I'm conservatively estimating approximately up to 2% OP to be lower, but that's what's baked into the model right now.

Perfect.

Thank you.

Michael Bird, Wells Fargo Securities.

Hi there.

Congrats on the quarter and thanks for taking my question.

I guess just in terms of the relationship between free cash flow and operating margin.

Should we expect that the study moving forward?

As now it seems like billings are mostly annualized and the growth should be in line with subscription revenue And then I have a follow-up.

Thank you.

Yeah, I think that's a terrific question.

As billings get in line with subscription revenue, and I'll also note there is the professional services, which many a times is build upon completion.

So that is a separate element.

But over time, you should expect our free cash flow to get closer in line to operating income where the distinction will be is many a times we have to prepay for a lot of cloud users as an example.

So there are those aberrations that do affect free cash flow obviously don't affect operating income to that same extent, right?

That's part of the reason you would have seen over the last couple of years the steady improvement in free cash flow.

So we've gone from, obviously, I believe, negative $45 million a couple of years ago to positive $51 million in FY24.

And I think based on where we sit, we're comfortable with in an $80 million number for FY25.

Again, all steps in the right direction, but you should see the narrowing of the two margins over time.

Got it.

Helpful.

And then just a quick follow-up to that.

The implied margin expansion for this year is you earned in the 150 bps 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 the realignment of the go-to-market organization?

Thanks.

And just to make sure I understand, so we ended FY24 with around 13% non-GAAP operating margin.

And that's what we are using the guide for the full-year FY25.

But maybe I'm not following the question?

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.

And 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?

I understand there's the go-to market changes happening in the background, but is there something else at play?

Yeah.

And I think up in the December call, I also mentioned and I've been saying it to investors that we obviously have a lot of near-term succes1s, as we went from where we were a couple of years ago to last year.

So there was a lot of low-hanging fruit that we were able to go take care of.

Margin expansion from here will be subdued.

Again, let's be candid that this is just the initial outlook for the year.

As we make progress during the year, we'll, of course, update investors.

But at this point, I'm most comfortable just stating the 13%.

Helpful.

Thank you.

Jackson Ader, KeyBanc Capital Market.

Great.

Good evening guys.

Thanks for taking our questions.

The first one, Ragy, how can we -- or I guess can we quantify how much of either bookings dollars or growth actually comes or is being generated from the generative AI?

And how much maybe going forward do you expect to come from generative AI?

Jackson, thank you for that question.

We have taken the approach of, like, infusing everything we do with AI.

And in the past -- and take the approach of trying to monetize it separately.

However, we're looking at what's going on in the industry and we think that could be an opportunity.

So we are currently evaluating and this is quite a bit of work.

So again we don't factor anything into this year, but we think there's an opportunity to charge a premium for at least for our AI plus offering and we're exploring that.

So right now, no, but we're exploring the possibility of being able to do that.

Our position has always been that AI is a big differentiator for us across everything we do, but I think the market's willing to absorb some additional cost for it.

Okay.

All right.

Got you.

And then on the renewals pressure, I'm expecting it kind of persist here in the first half and then maybe start to go away.

I'm just curious, like how do we know that the pressure will end?

Is there some cohort or is there something specific about the renewals that are going to be happening over the next couple of quarters that you can point to and say like, they are different from what the renewals will look like after we get past this first half?

Okay.

So I think first off, I got to tell you, we've put a lot of energy behind understanding what is going on.

And what I can confirm as we've done in the past is we think the majority of it is self inflicted.

And what we're finding that - is that the best execution of our team versus the best execution of any competitor in our core markets and the CCaaS frankly, we win.

So what we're finding is -- and I say it self-inflicted, because weak execution on our side meeting strong execution with the competitor, is when we're losing.

And so it gives us a lot of confidence that there's a fixable things.

And it's a part of this big set of initiatives that we have outlined.

And like we said, it's going to take a few quarters.

But right now, we're pretty optimistic that we should see our retention go back to our historic norms once our execution and what we can control is addressed.

Okay.

I got you.

So this is a process turnaround, not necessarily like a customer-driven thing?

Okay.

All right.

That's great.

Thank you.

Correct.

Correct.

Thank you, Jackson.

Tyler Radke, Citi.

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?

Look, I think we have taken a very pointed approach right now, given that we've only been in general availability for a short period.

So I can confirm that when we are in a competitive RFP and follow-on process in the CCaaS market, I can confirm that the win rates are pretty high.

But we -- we're not able to deploy it everywhere in every market across all teams.

And that's partly because we need to get to a critical mass of seats, which we should be getting through towards later this year.

That will then allow us to be featured in analyst reports, which will then allow us to be a default participant.

Right now is word of mouth and people being very impressed when they actually see the platform in action and trying it out and doing a proof of concept, and being convinced that a new comment like us can outperform others.

So it's more measured and it's more -- it's not around the world in all markets.

Got it.

And can you speak to the conversational AI offering and how that's ramping?

Very well.

Very well.

It's one of the silver linings that we see are -- so we are able to now digitize voice and have conversational AI called, not just text and chat and interaction.

So many of the deals we are winning is because of our ability to manifest this.

So there's a lot of talk about whose AI is better.

We challenge our customers to just put this to task and we show them that we can do a better job than others.

So we have taken the approach of developing models across languages for each function and now developing those models, specifically for industries.

And so we're able to start with a baseline of a much higher accuracy level than others.

And then we customize those models.

We've done thousands of customer models, where that just gets to a really, really good percentage of accurate responses.

And our power is we're not a point solution offering AI in the contact center, right?

We have a full blown agent experience sitting behind it.

So the frustrating thing for a lot of customers and brands is, if you just go in with AI and on the bar takes you through 17 steps and then you hit a dead end.

And it's very frustrating because in the non-Unified contact center the consumer is not repeating everything he did which is beyond frustrating.

So in our world that doesn't happen, because all of that context you've seen seamlessly transfers to an AI whose pickup is as though he was the one talking to them.

So there's a few things that are strategically it is working well for us.

Thank you.

Thank you.

Austin Cole, Citizen's GMP.

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.

Kind of what where do you see the roadmap for these products and what can you do to, if there's anything you can do to add stickiness to these products?

I mean the products are pretty sticky often when implemented correctly.

So I think it brings us back to that execution that we have consistency and repeatability of execution we need to have.

What we are finding is, the product and when configured the way they intended to be used the right way creates a lot of value and it's very sticky.

And where we struggle is people changes on either side of implementation or was it done the way it was originally envisioned, because something changed or seven think of that as a priority.

So it's more self-inflicted.

So I think we'll be in a better position to answer that question, after we feel like our execution across the 16 stages of touching a customer is more pointed and repeatable across the stages.

Okay.

That's helpful.

Thank you.

Thank you.

We have reached the end of our question-and-answer session.

And with that, I would like to turn the floor back over to Ragy Thomas for closing comments.

Thank you, Camilla.

And thank you all for joining us today.

Again, I'd like to thank our employees and 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.

Thank you, all.

This concludes today's teleconference.

You may disconnect your lines at this times.

Thank you for your participation.