CXM - NYSE

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. [Operator Instructions] 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 get us started with a few highlights, including what I'm hearing from customers and some of our key wins. Manish will then share details of our financial results. Turning now to the quarter, I'm very pleased to report that Q3 was another strong quarter that exceeded guidance. Q3 total revenue grew 24% year-over-year to $157.3 million and subscription revenue grew 27% year-over-year to $139.9 million. And with our commitment to operational efficiency, we generated $6.9 million in non-GAAP operating income for the quarter, due to prudent financial management and greater operational discipline company-wide. Before providing key takeaways from this quarter, I'm excited to share that we have appointed the former Chief Revenue Officer of ServiceNow, Kevin Haverty, to our Board of Directors. Kevin joins us at an exciting time in Sprinklr's journey, and his experience will greatly benefit our go-to-market execution, something that we are very focused on now. Kevin currently serves as a Senior Advisor to the CEO at ServiceNow and has been a CRO there under three different CEOs. I also want to thank Matt Jacobson, Partner at ICONIQ Capital, who has retired from our Board after serving us for eight years. ICONIQ joined as an investor in Sprinklr in the very early days and helped chart our course back then. We are very appreciative Matt's contribution, and I wish him all the best. Now, moving on to Q3. I was fortunate to meet with well over 100 customers around the world from across the U.S. to India, Singapore, South Korea, Dubai, Mexico. The excitement of brands transitioning from point solution KOLs and customer-facing functions to Sprinklr's unified CXM platform is truly palpable if you talk to these customers. And the results they are seeing in terms of reducing customer service costs, increasing revenue by making that ad dollars and marketing dollars work harder and innovating faster, while mitigating risk by listening to customers in real-time. It's truly inspiring. A new story line, that is clearly emerging in these conversations, especially from our newer clients is how Sprinklr’s AI is helping model and automate omnichannel journeys that can potentially eliminate the need for human service agents by up to 95% for some use cases, while improving customer satisfaction scores at the same time. This use case is real at Aramex, the largest multinational logistics provider in the Middle East that someone referred to me as the FedEx or the UPS of the Middle East, who recently consolidated their digital contact center stack on to Sprinklr. I met their Group Vice President of Technology in Dubai, it was great to hear how they have been able to automate 95% of their resolution for several common customer inquiries using Sprinklr's, AI and chatbot and automation, while continuing again to improve CSAT scores. While we continue to win deals across all our four product suites across a variety of industries, more than a third of our bookings in Q3 came from our Customer Service Suite or our modern care suite, where voice-led CCaaS was a key driver for us. We are pleased with our momentum in this space and are confident that technology and our pace of innovation will further differentiate us in this very interesting marketplace. We believe that you can have great customer experience management with our great customer service. However, the current macro environment is leading to delays in purchase decisions and longer sales cycles. And like many other enterprise software companies, we did experience additional pressure on deals in Q3 versus Q2, particularly in Europe. We expect these longer sales cycles and tightening of budgets to continue in light of global uncertainties. While we can't control the macro climate, we can control how we manage the fundamentals of our business. You will see us continue to focus on delivering value to our customers and generating a clear path of profitability for our shareholders as we go forward. Since founding Sprinklr, we've been clear that the market will move from point solutions that don't work well together to a handful of best-of-suite platforms that become more and more tightly integrated. Furthering our intention of becoming the third or fourth major front office platform for the enterprise, in Q3, we announced an expanded partnership with Salesforce and Accenture. Enterprise customers will now be able to incorporate their massive CX data set within Sprinklr with their CDP and CRM data sets inside Salesforce. And Accenture is a key partner in our go-to-market strategy. They are the experts in helping brands bring technology and data together to deliver best customer experience as possible. We're also actively working with Salesforce to support customers through their transition from social studio to Sprinklr. This work has been well underway this year, and we're seeing positive momentum from those customers. During the third quarter, we continued to add new customers, as well as expand with existing customers. Some examples of these world-class brands include Geico, HEMS, Honda, IPG Health, and Overstock. I'd like to provide a few examples of how customers are currently using Sprinklr across our product suite. As a reminder, these suites include our Modern Care suite, Modern Research suite, our Social and Sales suite, and our Marketing and Advertising suite. Let's start with our customer service offering, the Modern Care suite. In Q3, one of the largest global consumer software and hardware players further expanded their partnership with Sprinklr by adding over 500 more care agents, doubling their current agent count to over 1,000. They are now supporting 60 of their product lines across 16 languages on modern channels using Sprinklr. And their agent support has gone from 90% coverage in one hour to 95% coverage in under 30 minutes. With Sprinklr's AI Studio, they're also achieving over 95% accuracy, which has reduced manual processes significantly. Since first becoming a customer in 2014, they are now using 24 Sprinklr products across all four product suites. Another great example of impressive customer service results for us is with one of the world's leading global streaming services. They conducted an extensive RFP process with 20 of today's leading CCaaS providers to select a technology partner that they could use to help transform their legacy CCaaS infrastructure that currently has around 5,000 agents. They chose Sprinklr and in large part because of our full set of CCaaS capabilities on a single, unified AI-based platform, and also our architectural flexibility to integrate with their large number of homegrown tools that exist currently. Turning to Modern Research, this quarter, one of the largest food and beverage companies in the U.S. expanded its partnership by adding product insights to their already expansive portfolio of Sprinklr products. They chose our product insight solution to access competitive insights and better predict the success of the current and future product lines in the marketplace. By using our AI, they are creating a real-time closed-loop data that connects voice of the customer feedback to their product and their customer service teams. Moving to our social engagement and sales suite. In Q3, BMO, one of the largest banks in North America expanded its partnership with us, adding over 2,200 users on a distributed product. If you recall, distributed product for us, it's a key product that's used in the financial services sector for advisers to engage with and sell to their customers across modern digital channels in a compliant way, very essential if you are in one of the regulated industries like financial services. In 2019, they unified seven-point solutions onto Sprinklr and today, they have scaled to nearly 8,000 distributed users and 25,000 seats for employee advocacy. BMO is a showcase of what can be done by a financial institution across social selling, employee and executive advocacy and branch social enablement. And lastly, global technology leader, Siemens, expanded their partnership with Sprinklr this quarter by adding 150 modern marketing and advertising seats. Within four years, Siemens has consolidated eight siloed solutions into our unified CXM platform. Today, nearly 2,000 communicators in more than 60 countries work from the Sprinklr platform every day to plan, manage, distribute, and optimize content across social, web, blogs, and e-mail. Rounding out on the product front, I'd also like to share that we continue to make progress with our Lite products in Research and Care. As we've stated previously, the goal for our Lite products is to accelerate and drive greater efficiency in our in-bound demand generation efforts. This is a self-serve way for enterprises to try an easy to use light-weight version of our platform free of charge, which we see as a gateway for companies that are at the earlier stage of their digital journeys. Before wrapping up, I'd like to applaud our customers for the work they are doing to improve their customers' experiences and for co-creating unified customer experience management as a category. I also want to celebrate Sprinklr's incredible engineering team, who make all of this possible. They continue to innovate at a breakneck pace and speed that differentiates Sprinklr's platform in the marketplace. Whether it's improving our proprietary AI every day or taking on a channel like voice that has over 40-years of maturity in the CCaaS space or making user expedient simpler, this team shows no fear regardless of how daunting the challenges. In closing, I'd like to reiterate that we remain focused on the fundamentals in our business. We will continue to execute on our efficient growth strategy, balancing revenue growth, and profitability, while being disciplined about our strategic hiring and expense management. But we will also stop at nothing to provide the innovation our customers deserve. Our collective belief has never been stronger. Brands want a no-compromise, unified approach to create better customer experiences at the edge of their brand. And that -- the emergence of unified CXM asset category is inevitable. Thank you to all of you, our customers, partners, employees, and most importantly, investors for believing in that vision. With that, let me hand over the call 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 budget 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 result. I had alluded to this earlier as we have continued to be successful in upselling existing customers at renewal time as we drive 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 continues 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 over performance, 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 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 represents 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 remains 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. Operator?

Thank you. At this time, we'll conduct our question-and-answer session. [Operator Instructions] 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, [Raimo] (ph). Good to talk to you again. This is being, as I outlined last year, has been a significant focus for the company. And 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 have set for ourselves in this year that is to make it easier to sell Sprinklr. And the way we look at it, we have a business that has pretty world-class retention rates and expansion rates, which just 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 verticalize and sell solutions for each vertical. That's a multiyear project that's already underway. Two is to go from the focus on capacity to start focusing on productivity, which gives us a much more nuanced way to decide where to invest our dollars. And 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 considered a dollar as a dollar, whether it comes from an existing account or a new account. And 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.

Thank you. And 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 decel. 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 kind of guiding that guidance? And maybe, Manish, you can chime in with maybe some of the assumptions around expansion rates, new business bookings. How are you kind of building that guide?

Yes. Yes. I want to make sure that we're communicating what we're trying to communicate. What you're seeing us do here is in my mind, us 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 market place today. Manish, can you comment on that before I really answer the question?

Yes. So, Pinjalim, let's just 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%. And 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. And 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. And I think 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. And to the point that Ragy mentioned earlier, and the thing that I want to make sure people do take into account is we demonstrated a 4% non-GAAP operating margin for Q3. And we are comfortable at this point saying you could apply the same 4% for the entire FY 2024, which will give you a significantly higher operating income number for next year. So, said differently, we're turning the dials based on what we can see today. And we're obviously looking at seeing productivity and uptick in customer demand before we turn the dials back again. So, if that makes sense, I'll turn it back to Ragy.

Yes. So, Pinjalim, your question on what I'm seeing in the marketplace, when -- gosh, you know I've been on the road non-stop and listened to what the C-suite's saying in every continent. What we're hearing them say is very, very clear. We don't know just like VTK always said, we don't know how things are going to turnout. So, everyone is just much, much more careful and deliberate and intentional. Our -- I mean you all are following a ton of companies in the marketplace. I think what you're hearing us do -- and you're seeing our growth rate moderate from a defensive place. But the reason we're not swinging from like a 40% growth down to 18% growth is because we have a very balanced portfolio of product suites, four product suites that play in everything from customer service to marketing through voice of customer and research to sales and engagement. That's what's really helping us cushioning this up. What we're seeing is companies universally wanting to save money and for the -- our ability in customer service to automate and self-serve and bring down the costs, while improving customer satisfaction and time to respond and resolve is working really well. Marketing and advertising, as you would expect, that's not the hot area right now, understandably. Our research product, our voice-to-customer product feeds into our care. So, that gets a natural pull as care becomes more successful. And our sales and engagement product, again, I'd say, is very, very modest in terms of our outlook for its growth for now. There's a lot of things going on in the traditional social space, which we -- where we come from, the advent of Reddit as a major data source, money moving to TikTok, things that are going on Twitter, but the balance portfolio is what's helping us. And I alluded to Europe and what we're seeing in Europe in my prepared remarks, that's an example of a region for us that was slower to focus more on customer service. And we have regions where like the U.S. and the Middle East, where we have swung a little more towards selling customer service and getting into CCaaS, we're seeing much better success. So, do we have a strategy to deal with it as we go through it and a lot of that is going to come down through execution.

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. So, what I can tell you is large companies are spending money to save money. Large companies are spending money to mitigate risk. And 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 -- and I'm speaking that from Sprinklr 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 our -- 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. So, 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. So, 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 see much pressure there. We're not in the volume game. So, that might really explain why we have this answer.

Thank you. And 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 guys are 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 was in 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 in not rip and replace CCaaS, but really kind of modernize CCaaS and then put automation on it. And traditionally, if you're doing it without Sprinklr, you're working with a legacy CCaaS player. And then 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. And so we're seeing a lot of excitement in automating customer journeys. If you recall, we talked about a large bank -- our first-to-go a big implementation in CCaaS. That's going really well. They've automated 80 customer journeys. And we talk about our other customers. Most of them 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. Omnichannel is something that we're seeing a lot of excitement around. Customers looking to -- I talked about Aramex in my prepared remarks. What he said to me it was fascinating. He said, look, WhatsApp was a very important channel for their customers. And before Sprinklr they just really didn't have an SLA. So, you could try to reach them on WhatsApp and your inquiry may be unanswered for days. And from there, because of 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 hand it over to the human and back to the bot when there's human and bots involved. So, those are the areas we are 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 kind of 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 though 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. Thank you for the color around -- on 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 the customer care. But 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 are you 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. You remember, we were the first ones to kind of keep using the phrase point solution chaos. And traditionally, this is a major strategy for the company. So, 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. So, 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 seem to have 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 and all that. But what we are now replacing in the contact center is a different slew of systems like

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 a bit into design new logos that expand. So, what's driving kind of that momentum still in the large customer spend? How much of itis landing of new logo on a big size versus existing customers, kind of, 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 are preceded by making a business case. And that has 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. So, our go-to-market in expanding is just very business case-driven. And as you can imagine, 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 not just shiny objects, but hard dollars. And so we're able to now take a use case show how an AI automation can automate some of that free of the agent's time to do other things. We're able to show how you can convert unhappy customers and happy advocates and quantify the marketing impact. So, there's a whole slew of models that we've developed that we show and validate with customers that they sign off before they buy. And we're increasingly doing a lot more proof of concept. Traditionally, it's not something that we did, increasingly because we're so confident. And I encourage everybody on the call to call our customers and talk to them. We're still confident that our technology is superior, and the results are very real. We do a proof-of-concept and then they buy taking the risk out.

Thank you. And 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 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 new customers land with that team and maybe put that into the context of this macro environment where I think newer customers are maybe a little bit 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. That is right.

So, yes, great question. We -- look, we have not been disclosing new logos, right, on a quarterly basis, the change -- Manish made. I can't disclose that, that number is on the rise. And our early efforts to focus on that is 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. And 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 are very encouraged by how customers behave once they're on, and they understand what it is to work with us that I think 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 of that solution, do you see that being more resilient than some of your other suite that you have, especially as you look into Q4? Meaning 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 up business case with very much less risk factors. And the reason, if you recall, Arjun, many quarters or two, three years ago, we basically started talking about Care and kind of, focusing more on that. Again, the strategy is always built in this unified platform. Within that, 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. And what's happening is the traditional CCaaS vendors put a lot of their energy into building the telephony infrastructure, which 10-years ago, that was a differentiator. Can you keep the calls, manage the calls? Can you keep the cost down? Can you route a call? And can you give the call and can you make the IVR work? And today, we're in a place where that just got, in my mind, fairly completely commoditized, right? And good players like Amazon will continue to kind of make that as a part of the infrastructure. And we got lucky in that the avenues we've just been building the app layer, making the agent more productive, putting more AI to working in understanding conversations and responding back has bought and picking up all public data and connecting to all channels. So, that's the advantage we have. And so we're able to kind of, like I said, go into a company and say, let me show you the 15% of your service complaints that are not being responded, give me your average SLA. And let me beat it. I've said this to you before, the company -- one of the largest tech company that user care. One is our first definition partners, right? An average case, that's resolved in Sprinklr cost them 30% advisors responded to 50% faster and have 80% less dissatisfaction. We can quantify it. We won the award this year as one of the top vendors for CX. So, this becomes -- to your point, it's a little bit more of a clearer articulation to value with fewer variables to play.

Thank you. And 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 2020 to next year, fiscal 2024. So, many companies aren't doing it. And I think it's a real service to us and to investors when you do. Now, that being said, no good deed goes unpunished. So, 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. So, let's step back a little bit. So, if you look at what we did last year, we grew -- in FY 2022 subscription revenue, 26%. Even with the slightly reduced Q4 guide for this year, subscription revenue growth is going 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 would not be prudent for us to start conjecturing call it 60 months before FY 2024 ends, what that full year ought to look like, which is part of the reason you're seeing us taking a prudent view just using the same sequential growth rate for Q4 and applying that for the rest of the year. Now, you would be correct in assuming that our operating margin ought to move up, and it most likely would. But again, given where we sit it doesn't make sense for us to conjecture what it would be for the full year. We're obviously 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 will get a number like $28 million, which is much higher than I think where consensus is. And you've got to give us a little bit of room to maneuver as we see how the book of business builds here inQ4 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. No. Listen, I think we -- with the portfolio like we have, Patrick, it's kind of -- you should not get excited with green shoots [ph] and you should not get pessimistic when the region doesn't do well in a product with so many variables. We feel good about where we are. And I actually 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. So, we feel good. So spend was good, and I think it's all in line with what we are telling. We -- you know that we want to build a fundamentals-driven company. We want to be as transparent as we humanly can and just do what you all expect us to do and what you would expect from a good company that's focused on 10 years, 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. So, just going back to some of the prior questions around the assumptions that you're assuming in your outlook. Maybe you could just kind of clarify how much of this is what you're seeing today in terms of deal delays? Are you anticipating that maybe there'll be some down sell pressure on renewals? Or is this simply, kind of, deal delays based on what you're seeing in the macro or what you're seeing in your customer base? Just really want to get at exactly what you're assuming in terms of how Q4 plays out and the assumptions for next year.

I'll confirm that it's mostly based on macros. I think we're focused on our optimizing our go-to market, which -- Tyler, you know that's relatively new for us, for a company of our scale. It's -- most other companies would have been a little bit ahead. So, we feel pretty optimistic. So, it's mostly based on the macros. We think it will be a clear strategy. Leading with Care in this recessionary environment is something that we think we can apply across markets. And where we've -- further ahead, we're seeing better results. So, we think we have an antidote to deal with it. We just don't know. And every quarter, we've been watching this. Q3 is the first time where -- which is clear to us that Europe is slowing down, and the decisions are not being made, but it's like another layer and deals just like not getting approved after very clear business cases. And the answer is, let's just wait a little bit, right? Now, is that really weighting is that -- people are going to pull the budget? We don't know. So, we have a lot of uncertainties, mostly based on macros. Internally, we feel pretty good about how we're optimizing our go-to-market and becoming more and more efficient. So, I'll comment to you that Rule of 40 is kind of -- or the metrics that drive towards the Rule of 40 is something that the executive team here is very, very squarely focused on.

Thank you. And 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 where that metric is starting to revert back a little bit. Can we first just kind of focus on what's driving the stabilization at least so far? And then given the guide for next year, it does sound like you'd expect that metric to revert going forward. So, can we just talk a little bit about the push-pull between getting customers to consolidate onto the platform and expand? And then what you're seeing in the macro and how that informs maybe the delta between the15% assumed and the 125% and expansion you're seeing? Thank you.

So, let me start and Manish can add more details. Look, I think the push-pull you've said is very clear. Now, I submit to you that we have -- we're probably one of the few companies, right, that literally has a play in sales marketing research and care, voice of customer and care. So, it's a little more broader portfolio. That's what's driving the ups and the downs. I can tell you that we're seeing traction with care, like I said, and that's driving the upsell. I can tell you that our customer satisfaction rates, both the way we measure it and then totally speaking to a lot of customers is kind of almost at an all-time high, customers are consistently happy. And so I would tell you that it's just directly attributable to the macro environment that we see. That's where our conservatism is coming from. And we're doing things internally, but the variables are too many for us to kind of predict beyond what we are predicting.

Yes. And just to add to that. So, I think we have said publicly that just around two-thirds of our new business comes from existing accounts. So, 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. So that, by definition, ought to grow. You're seeing that show up even in the $1 million customers and above, which is growing at a much nice -- and so you're correct in that, that metric has maintained a very healthy growth trajectory. We also mentioned earlier in the call that we are now beginning to focus more on new logos. We don't want to just be farming the existing installed base. So, that metric will ebb and flow, partly driven by macro, as Ragy was saying, partly driven by our push towards getting additional sort of large enterprise logos. So, there's a number of things baked into that metric. It's hard for us to project what that number would look like next year. But certainly, given the existing go-to-market motion, the plethora of products that we bring to our existing installed base that metric has remained rather healthy over the last several quarters, if that makes sense.

Thank you. And 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 Europe. But maybe looking at it from a little different lens, are there any particular verticals that continue to be very strong? Or any that stand out as already showing material weakness that maybe give you some additional reason to have the prudence in your guidance? Thank you.

We are not seeing any pronounced vertical trends. Our top verticals as we've mentioned before, our technology. And financial services, travel, hospitality, the ones that we'd expect -- we have 12 verticals that make up about 90% -- around 90% of our business. And I can tell you that post-COVID travel and hospitality has rebounded quite strongly. I can tell you -- well, we don't have that much exposure. But the crypto meltdown will -- I'm sure will impact companies that are focused on start-ups. But we're not seeing any sector-specific trends that's materially affecting us.

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

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

No, I think the only nuance from my perspective is, given the investments already made, both in terms of product development as well as 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 very clear that we are focused on productivity, and that is across the board. And I think, as you can imagine, in any enterprise software company, there needs to be some gestation period before we get productive. And we're sort of in that phase where we had 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 a strong one. We're going into uncertainties. We think we have a strategy to play it out and we are taking a slightly more defensive posture to next year. We think it's still very, very early in the category. We're very excited by more and more analysts now referring to front office and CXM the way that we are referring to it. So, we're excited about what the future has. It's great to see all of you. And I'll just remind you that we are here trying to build a long-term business based on fundamentals. Thank you.