Sprinklr Inc

NYSE:CXM

Earnings Call Analysis

Sprinklr's Strong Q3 and AI-Driven Growth

Sprinklr has exceeded Q3 expectations with total revenue up 18% to $186.3 million and subscription revenue climbing 22% to $170.5 million, resulting in a record 15% non-GAAP operating margin. Companies have executed over 170 AI deployments using Sprinklr Service this quarter, enjoying significant efficiency gains like a telecom customer's 90% improvement in response time. Sprinklr's AI strategy, infused across its product suites, drives real-world productivity and customer satisfaction enhancements, facilitated by integrations with major AI platforms such as Google Cloud's Vertex AI and OpenAI. Furthermore, Sprinklr's Unification approach to AI ensures a seamless front office experience, blurring the lines between marketing, sales, and service teams, thereby transforming customer engagement. The company's proactive AI integrations and visionary partnerships position Sprinklr as a cutting-edge leader in enterprise-grade AI solutions for forward-thinking businesses.

Customer Expansion and AI Integration Drive Quarter Growth

In the third quarter, the company successfully expanded its customer base, adding globally recognized brands such as Alaska Airlines, AstraZeneca, Ford, Mercedes Benz, and others. Noteworthy expansions include a top global cosmetics company leveraging the company's AI for conversational commerce across over 20 channels, aiming to surpass 50% digital sales by 2025. Additionally, a leading North American home improvement retailer and a global food and beverage company have integrated the company's AI-first solutions for improved customer experience and brand engagement. These partnerships and the company's product development reflect a commitment to operational efficiency, scalability in the Customer Care as a Service (CCaaS) market, and customer-centric innovation.

Healthy Financials Indicate Sustainable Growth

The company's total third-quarter revenue hit $186.3 million, marking an 18% increase from the previous year, with subscription revenues growing 22% to $170.5 million. The company achieved a new record of 123 customers contributing more than $1 million each in subscription revenue over the past 12 months, which is a 15% increase year-over-year. The net dollar expansion rate for subscription revenue was at 118%, reflecting healthy customer retention and spend. Efficiency improvements in cloud operations led to robust subscription gross margins at 83%, contributing to a non-GAAP operating margin of 15%, the fifth consecutive quarter of profitability. The free cash flow saw a positive uptrend with $15.9 million generated in Q3, a stark contrast to the previous year's $1.7 million cash burn. The balance sheet strengthened with $656.4 million in cash and marketable securities, sustaining growth without relying on debt.

Bullish Outlook Despite Market Headwinds

While acknowledging the challenging macroeconomic environment that puts pressure on customer renewals, the company remains optimistic. Its pioneering status in CCaaS and the pursuit of operational excellence have laid the groundwork for continued success, with a strong forecast of 18% revenue growth and a projection of becoming a multibillion-dollar company in the future. Additionally, they have a robust order backlog with total remaining performance obligations (RPO) increasing by 34% to $774.5 million, ensuring a pipeline of future revenue. These factors suggest a resilient strategy and dedication to delivering long-term shareholder value.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to Sprinklr's Third 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, SVP Finance. Thank you, Eric. You may begin.

[Eric Scro, executive]

Thank you, Alicia, and welcome, everyone, to Sprinklrs' Third Quarter Fiscal Year 2024 Results Financial Call. Joining us today are Ragy Thomas, Sprinklrs' 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 non-GAAP 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 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.

In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the Fourth fiscal quarter and full fiscal year 2024 and our initial framework for fiscal year 2025, and our actual results might differ materially.

Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC also posted on our website.

With that, let me turn it over to Ragy.

[Ragy Thomas, executive]

Thank you, Eric, and hello, everyone. Thank you for joining us today. We're pleased that Q3 was another strong quarter that exceeded guidance across all key metrics. Q3 total revenue grew 18% year-over-year to $186.3 million, and subscription revenue grew 22% year-over-year to $170.5 million. With our continued focus on operational efficiency, we generated $27.4 million in non-GAAP operating income, which resulted in a record 15% non-GAAP operating margin for the quarter.

We are going through what I believe is the most exciting time in recent history for the modern front office. Many AI experts agree that AI is going to boost human productivity significantly over the next few years. For many industries, customer-facing functions are the most labor intensive. And we believe that 20% to 40% productivity improvements are a real possibility in the next 5 years. We also believe that the data to train the AI models and the unification of siloed teams technology and processes are required to unlock the power of predictive and generative AI. I'd like to share more details on these three key areas, given the benefits customers are experiencing in terms of their operating cost, risk management and improved customer experiences.

Let's start with everyone's favorite topic, AI. We continue to believe that we are at the forefront of a very long-term durable growth opportunity, given our deep investments in AI more than 5 years ago. Today, I'm sure no one is debating the fact that we have an early mover AI advantage given our decision to design Sprinklr on a single architectural code base, where AI has been infused across all product suites, Sprinklr Service, Sprinklr Social, Sprinklr Marketing, Sprinklr Insights, our self-service offerings and our entire platform.

During the third quarter, customers executed over 170 AI deployments in Sprinklr Service alone. This includes auto speech recognition, advanced intent detection and speech to text models, along with agent assist features like smart responses and other generative AI enablement.

I met with more than 70 customers around the world this quarter. And while everyone is universally excited about the possibilities of AI, the customers I spoke with wanted more than AI in theory. They wanted practical, actionable real-world AI that works safely and reliably and produces measurable business results now. This is what Sprinklr is doing for them.

For example, one of our leading telecom customers using Sprinklr's conversational AI bots and AI routing achieved over 90% improvement in the response time. And more than 60% reduction in average case handling time after enabling our chatbot. One of our luxury goods customers has seen a 25% improvement in their CSAT score, along with a 50% reduction in their average handling time using Sprinklr's conversational analytics product.

As you know, we have taken a very open approach to AI. This is why you've seen us announce our integrations with Google Cloud's Vertex AI and OpenAI in addition to our proprietary Sprinklr AI+. We offer customers the greatest choice in how to utilize generative AI with accuracy, privacy and security in just a few clicks. We maintained that Sprinklr is the fastest and the most effective ways for many enterprise customers and prospects to get actionable and practical AI across a global brand front office today.

The breadth of the Sprinklr platform enables us to bring practical, actionable, AI-powered insights to a brand's front office. This can only be achieved with AI that is pretrained with bound real-world data and is secure for use in enterprises given their compliance and risk profile. We've been working for over 5 years across a dozen industries to pretrain AI for brand insights, product insights, location insights, crisis insight and competitive insight.

Given the enormous amount of data that Sprinklr has access to outside of the traditional CRM and CDP data and our industry-leading AI, we can generate and provide actionable insights out of the box right after implementation.

Let's talk about Unification. Since our inception in 2009, we've been talking about unifying the front office. If you aren't able to make AI and insights actionable in customer-facing functions, you really aren't moving the needle. How do you take a negative customer review or a comment and automatically converted into a customer service ticket, if your product feedback isn't unified with customer service. How do you take a competitive or a content insight, and translate that to a marketing campaign that works if your Insight product isn't unified or integrated with your marketing stack.

This makes unifying the front office, one of the most critically important and strategic things any brand can do today to improve customer experiences. Now those who don't have -- those who don't unify have numerous point solutions, which creates inconsistencies in interpretation and reporting and trying to infuse these point solutions independently with siloed AI models, that aren't coming off the same training data, makes it even worse. The result is just AI point solution caves. To create better experiences for the customer and to improve everything from marketing and sales and service and compliance and growth opportunities, brands of the future must unify their digital edge where their customers meet a customer-facing employees and have their different customer-facing teams, market and geographies work together.

As many of you know, we've been on a multiyear journey to transition each one of our product suites into a large mainstream replacement market. Over the past few quarters, you have heard us talk about how we are taking our Service product suite and successfully transitioning it from a social/digital solution to a complete CCaaS solution, by adding voice as a channel. That's telephone lines.

The second is our insights product suite, where we have started transitioning that from a social digital listening product to a full-blown customer feedback management or a voice of the customer suite as I call it, by adding surveys. The power of unifying unstructured, unsolicited feedback with structured and solicited feedback is endless. It makes the feedback real time, actionable and one that can be validated.

This quarter, we started definition partnership for our Customer Feedback Management suite with a select few brands and have been demonstrating our early success to industry analyst. We're pleased to announce that Sprinklr was recently named by IDC's Research Director, Lou Reinemann, in the major players category in the 2023 IDC MarketScape Assessment for Worldwide Voice of the Customer Applications.

IDC noted and I quote "Sprinklr has grown its capabilities to have a fully featured VoC platform for listening, analyzing and acting on customer feedback. Sprinklr aims to bridge functional silos, sales, marketing, support, et cetera, to seamlessly manage whole customer journey experiences". We are very pleased with the momentum and the progress we've made in our Service suite. Our vision is to help customers transform the contact center from a reactive voice-first cost center to a more efficient AI-powered proactive omnichannel revenue center by unifying it with marketing and sales.

We are excited to share the launch of Conversational AI+ in the Sprinklr Service suite. We can now empower our enterprise customers to deploy and scale generative AI-powered bots. For human like text and voice conversations in effortless three easy steps. This is a leading and innovative way for customers to train a bot in their brand's voice, automate and deflect call volume and provide a natural conversational experience to their customers.

We also announced a partnership with infinit.cx in Germany, to help customers in the DACH region, facilitate the seamless migration to cloud-based unified customer service in the contact center. Together with infinit.cx, we will help the most innovative companies in the region, harness AI to its full extent, and be able to act on insights and unify the front office functions.

During the third quarter, we continued to add new customers and expand with existing customers. This includes world-class brands like Alaska Airlines, AstraZeneca, Ford, Mercedes Benz and [ Shine ]. Here are some examples. In Q3, one of the world's top 5 cosmetics companies, expanded its long-standing partnership with Sprinklr to now include conversational commerce. With over 65 brands working on over 20 channels, the company has integrated Sprinklr's Conversational AI and Conversational Commerce to enhance customer interactions support care agents and transform conversations into sales and long-term value. Sprinklr is helping the company to achieve its goal of generating more than 50% of its revenue through digital sales by 2025.

In Q3, a top 3 North American home improvement retailer, selected Sprinklr's AI first CCaaS solution to provide customers with a unified seamless customer experience across channels. The retailer will consolidate all digital channels onto the Sprinklr platform to provide a more consistent customer experience while simplifying the lives of its customer service agents. Sprinklr AI-powered agent assist capabilities will enable the company to reduce the number of open applications and screens at the agent level and provide the proactive support needed to resolve customer needs faster. Integrations with the company's knowledge base and order management systems ensure that agents have all the data and information at their fingertips compared to their previous set of solutions.

Another example of unification and transformation powered by AI comes from a top 3 global food and beverage company. A Sprinklr customer for over 10 years. Last year, the company began to globally transition their social teams to Sprinklr Service suite, to empower a closer, more meaningful brand experience for all its customers. To understand and build brand love further, in Q1 this year, they made the decision to move all their social insight, just the listening part, more than 1.5 billion brand mentions over to Sprinklr. This includes social listening, benchmarking and product insights. This past quarter, they doubled their competitive insight scope and now monitor over 2,000 digital accounts.

As a partner in our AI Plus Beta Program this year, the company has also harnessed the power of Sprinklr's generative AI reply assistance. By unifying these solutions onto a single powerful platform, the company now has access to deep actionable insights and Gen AI capabilities that enable it to provide personalized experiences to each of their many brands that they sell around the world.

Before wrapping up, I'd like to take a moment to celebrate our incredible product and engineering teams. As always, we make this possible. Their speed of innovation and dedication to serving customers continues to differentiate Sprinklr in the marketplace.

In closing, we had two primary goals this year. The first was to build and establish a foundation to scale in the exciting CCaaS market. And second was to meaningfully improve the operational efficiency and margins of our business. There's no question that we've been very successful in achieving both of these goals, and we're on track to deliver a solid year with 18% revenue growth, record profitability and strong free cash flow generation. We believe that the product suites we've built, the customers we serve and the size of the market opportunity ahead of us, put us in a great position to become a multibillion-dollar revenue company in the years ahead.

Since our IPO in the June of 2021, we've continued to expand our product portfolio and market focus from social to digital and transitioning to Unified-CXM. The investments we've been making over the last 18 months are enabling us to mainstream our product suites into large obvious replacement markets, starting with establishing ourselves as a disruptor in CCaaS.

As we've diversified the business and focused on scaling our CCaaS business, we'd like to acknowledge that we have made slower progress on some of our other go-to-market initiatives focused on our core product suites. We expect this will have a near-term impact on growth, which Manish will review in more detail in his remarks as he shares initial framework for FY '25.

We maintain our conviction for the long-term vision of what we are building. And like so many companies that have successfully built billion-dollar businesses. We're navigating through the normal cohorts of resource allocation and investment cycles required to balance short-term success metrics with long-term growth objectives. We're committed to innovating and developing a new category of software that we call unified customer experience management and executing for growth and profitability to deliver for our customers and our shareholders. Thank you to our customers, partners and our employees for their hard work and results, and thank you to our investors for believing in our long-term vision.

Let me now hand over the call to Manish.

[Manish Sarin, executive]

Thank you, Ragy, and good afternoon, everyone. As you heard from Ragy, we're pleased with this quarter's results which exceeded the high end of our guidance range on the top and bottom line. For the third quarter, total revenue was $186.3 million, up 18% year-over-year. This was driven by subscription revenues of $170.5 million, which grew 22% year-over-year. Subscription revenue benefited by $1 million from new business being booked earlier than expected in the quarter.

Professional services revenue for the quarter came in at $15.9 million. In terms of new logos, we are pleased with the number of new customers that joined the Sprinklr platform in Q3. This is particularly true with our Sprinklr Service product suite as many of the deals in this product suite over the last few quarters have been with new customers. As of the end of the third quarter, we had 123 customers contributing $1 million or more in subscription revenue over the preceding 12 months, an increase of 3 customers sequentially and a 15% increase year-over-year.

Our subscription revenue-based net dollar expansion rate in the third quarter was 118%, while NDE was healthy in the quarter, I would note that we began to see incremental pressure on renewals in Q3 as certain customers that are impacted by the difficult macro environment adjusted their spending levels with us. As a reminder, the NDE statistic is not something we monitor as part of growing our business, but rather a byproduct.

Turning to gross margins for the third quarter. On a non-GAAP basis, our subscription gross margins came in at [ 83% ] as we continue to drive efficiencies in our cloud operations with total non-GAAP gross margins of 75%. Non-GAAP gross margins for professional services were slightly negative, coming in at minus 2%. As we have discussed in the past, we continue to invest in CCaaS delivery capabilities and build out our expertise in that area.

Turning to profitability for the quarter. Non-GAAP operating income was a record $27.4 million resulting in non-GAAP net income of $0.12 per basic share. This 15% non-GAAP operating margin for the quarter was a result of revenue over-performance strong subscription gross margins, coupled with broad-based expense discipline and is the fifth consecutive quarter of non-GAAP profitability.

Lastly, on the topic of profitability. For the third consecutive quarter, we posted positive GAAP net income totaling $17 million or $0.06 per basic share. In terms of free cash flow, we generated $15.9 million during the third quarter compared to a cash burn of $1.7 million in the same period last year. With this result in Q3, our free cash flow generation during the first 9 months of this year now stands at $38.9 million. Our balance sheet has become stronger each quarter, now standing at $656.4 million in cash and marketable securities with no debt outstanding.

Calculated billings for the third quarter were $161.2 million, an increase of 16% year-over-year. 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 $774.5 million, up 34% compared to the same period last year, and cRPO was $491.4 million, up 19% year-over-year. Moving now to our Q4 and full year FY '24 non-GAAP guidance.

Our Q4 guidance assumes the go-to-market dynamics Ragy mentioned and the renewal headwinds I discussed earlier will have an impact on revenue growth in the quarter. As a reminder, Q4 is our biggest book of business for both new business and renewals. Given the macro environment, we are experiencing a higher level of down cells, as large customers rightsize their software spend. As such, we are mindful that this cycle of renewals may be one of the more challenging quarters to get through and is factored into the guidance numbers.

Given these dynamics for Q4, we expect total revenues to be in the range of $187.5 million to $189.5 million, representing 14% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $172.5 million to $174.5 million, representing 17% growth year-over-year at the midpoint.

We expect professional services revenue of approximately $15 million in Q4. We also expect non-GAAP gross margin from professional services to be approximately negative $2 million in Q4. From a profitability perspective, we expect non-GAAP operating income to be in the range of $20.3 million to $22.3 million and non-GAAP net income per share of $0.08 to $0.09 per share, assuming 275 million basic shares outstanding. The slight decrease in non-GAAP operating income sequentially is driven by our ongoing investments in Sprinklr Service product development and delivery.

For the full year FY '24, we are raising both our subscription and total revenue outlook for the year. We now expect subscription revenue to be in the range of $664 million to $666 million, representing 21% growth year-over-year at the midpoint. This is an increase of $6 million at the midpoint, which is higher than the full magnitude of the Q3 beat. We expect total revenue to be in the range of $725.5 million to $727.5 million for the full year FY '24 representing 18% growth year-over-year at the midpoint.

For the full year FY '24, we are raising our non-GAAP operating income estimate to now be in the range of $80 million to $82 million, equating to a non-GAAP net income per share of $0.36 to $0.37, assuming 273 million basic weighted shares outstanding. This implies an approximately 11% non-GAAP operating margin at the midpoint on a full year basis. Note the increase of $15 million at the midpoint is greater than the full beat for Q3 and the accompanying operating income raise for Q4.

In deriving the net income per share for modeling purposes, we estimate $24 million in interest income for the full year with $6 million of that to be earned here in Q4. Furthermore, a $6 million total tax provision for the full year FY '24 needs to be added to the non-GAAP operating income ranges provided. We estimate a tax provision of $2.5 million here in Q4. And given the performance throughout the first 9 months of the year, we will be GAAP net income positive for the full year FY '24, consistent with our comments on the past few earnings calls.

And lastly, I would like to provide some thoughts on billings. We estimate billings to grow 13% here in Q4, equating to total billings of approximately $262 million for the quarter. This translates to total billings of about $773 million for the full year FY '24, which is up a little over 17% on a full year basis compared to FY '23.

Before moving into Q&A, I would like to provide some high-level commentary on fiscal year 2025. As I just outlined, we are on track to deliver a very successful FY '24, with 18% revenue growth and 11% operating margins that will have expanded by more than 1,000 basis points year-over-year, and we accomplished all this while broadening our product portfolio.

Our primary strategic focus in FY '24 has been to rapidly scale our Sprinklr Service product suite. We are very pleased with the results, having made significant demonstrable progress with Sprinklr Service, gaining market share and customer momentum in the CCaaS market. As Ragy mentioned, our focus on succeeding in our CCaaS business slowed progress with some of our other go-to-market initiatives in our core product suites much more than we had anticipated.

Now that Sprinklr Service is at scale, we have developed a consistent and repeatable selling motion to that buying persona and built an enviable collection of reference customers. We're in a position to refocus our go-to-market efforts to better align our resources across all product suites. We expect it will take several quarters for the full impact of these changes to work its way through the P&L.

To put some numbers around these dynamics, if you adjust for the $1 million linearity benefit I mentioned for Q3, Q4 subscription revenue is expected to grow approximately 2.5% sequentially. At this time, based on what I just outlined, coupled with an unforgiving macro environment, we expect a sequential quarterly increase of 2.5% for each quarter of FY '25. This equates to approximately a 10% total revenue growth for the full year, which we believe is the appropriate starting point for FY '25.

From a profitability perspective, we have been pleased with the significant progress in our profitability performance this year. We expect FY '25 non-GAAP operating margins to continue to expand from our guidance for 11% operating margins for FY '24. I want to be clear that the dynamics I've just discussed here will be short term in nature and do not change our expectations for Sprinklr's growth potential across each of our four product suites. We have the strongest product portfolio in our history with an innovation flywheel that is consistently expanding our competitive differentiation.

Lastly, I would like to thank all our employees for their dedication and passion for what we are building at Sprinklr. I'm also grateful for the confidence that our customers have placed in us during these uncertain times. 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]

[Operator Instructions]

Our first question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.

[Arjun Bhatia, analyst]

Maybe to start just on the go-to-market adjustments that you're making in the macro pressures that you called out. Are there any products where you're seeing the greatest incremental pressure? Or any part of the customer base that sticks out here in Q4 where the downsell is greater than other areas just as we try to hone in on where the headwinds are increasing the most?

[Ragy Thomas, executive]

Yes. Arjun, I'll -- let me take a first pass at it. It's Kind of the obvious culprit is what most people would guess it is. One of our product suite is a Marketing and Advertising product suite. And as you know, in difficult times, Marketing is one of the first budgets and teams to be impacted with layoffs, cutting back on spend, what's going on with some of the networks that isn't helping. And so that's an obvious place where we're seeing some additional pressure.

[Arjun Bhatia, analyst]

Okay. Got it. And then just as we look to the other side of this, when you think about the go-to-market revamped. What are some of the steps that you need to take to, I guess, refocus on the broader suite? Is there incremental hiring that needs to happen? Or is it more a matter of internal resource allocation enablement, et cetera?

[Ragy Thomas, executive]

It's more of an internal resource allocation. And in hindsight, I think the most obvious explanation for this is the fact that we -- and I don't know whether we would have knowing everything we know, done it differently. We kind of over-rotated a little bit more on the CCaaS side. And so we took our field and we incented them strongly to go sell CCaaS. And essentially, there's a lot of people who jumped in and really are happy, and we're thrilled with the results. And there were some that didn't quite jumped, but didn't quite make it on the other side.

And the fix is quite obvious to all of us. You've got to take the field folks in sales and support and service that came from the social suite background of the marketing suite background or the research insight suite background. And we got to let them go back and focus on it. So what we are doing now is we think and plan for the next year is we are adjusting quarters, and we are just bifurcating or trifurcating the field to have -- to just fix the over-rotation we did, and we're pretty hopeful that in 1 or 2 quarters will begin to see some data that would allow us to just update you further.

[Operator]

Our next question comes from the line of Pinjalim Bora with JPMorgan.

[Noah Herman, analyst]

This is Noah on for Pinjalim. On the first part, Ragy, you mentioned that you met with over 70 customers globally this quarter. Just curious to hear some of the feedback from those conversations. Just any incremental takeaways from there? And then I have a quick follow-up.

[Ragy Thomas, executive]

[ Pinjalim ], I'm glad you asked that question. Look, I think our -- I've not seen this kind of excitement since the early days of social that I'm seeing now on the CCaaS side. I think we have a very differentiated product. And these -- and we've landed -- I mean, we're ahead of schedule in terms of our own expectations, which is why we rotated. And we're seeing like such an exciting reception to that. And the idea there is pretty simple, right? We're going into a market with vendors who have been there for a long time. And a market that's very fragmented.

If your knowledge base, your agent console, your supervisor console, you're routing and your bot and your quality and your workforce management, all this is unified and everything is based on AI. These results are fairly spectacular and it's cost advantageous as well, right? So we're bringing the average handling time down. And these demos are received really well.

And the #1 question we get it, that's not real is it, in the way like we are -- we'll set it up for you. I want you to know, though, that excitement is meted in months, not weeks, right, a social product [indiscernible] time, people are happy. Let's go.

In the CCaaS world, these are very time-consuming transformation. So there are long protracted RFPs. And so we're very pleased with where we are. The #1 excitement we're seeing in the field among customers is our CCaaS product. And so we know we've done the right thing.

Now if you play this movie in 3-year increments. I think most of us would agree we did the right thing. So excitement on AI, excitement on practical AI, excitement seeing the results, because we are walking into customers, I'll give you a large customer that I spoke to, who was on the track to kind of build their own LLM.

And after really understanding how we're approaching AI, they were like, "Oh my God, yes" we just got to work with you, and then you'll ensure that we can always use the best LLM and the best model that yields us the best results. So that's the most exciting thing that's going on. No surprise that AI and what it can do for you. And we're manifesting just easy, measurable results on the CCaaS side.

[Noah Herman, analyst]

Got it. And then maybe just focusing a little bit more on the model. As we sort of contemplate the preliminary 2025 guidance. How does that -- if anything, does that change at all the long-term model that you had outlined during your Analyst Day? How should we really think about that going forward?

[Ragy Thomas, executive]

Well, I'll start by saying No, and Manish, can you elaborate?

[Manish Sarin, executive]

Yes. It does not change our FY '27 long-term plan. And again, just to be clear, this is not our guide for '25. I will do that in our March earnings call. Just given the -- some of the renewal pressures we are seeing here in Q3. And as I said Q4, we expect it to be quite intense. Given the visibility that we have, and we just wanted to be clear that we laid out what we are seeing right now. It might change substantially when we talk in March, and we talk about the full year guide.

But sitting where we sit today, we don't feel any difference about FY '27 than we did 6 months ago.

[Operator]

Our next question comes from the line of Elizabeth Porter with Morgan Stanley. Please proceed with your question.

[Maxwell Osnowitz, analyst]

This is Max Osnowitz on for Elizabeth. So I'd love to just touch on some of the renewal headwinds that you all are seeing. You previously highlighted the expectations for our net dollar expansion to be under pressure from some of those moderating renewals and upsells. So I'm just curious, the downsell pressure incrementally more than you expected? And just any sense for why now when we've been hearing from a lot of your software peers over the last year, talk about this dynamic? So just curious around the timing of it now and also just versus your initial expectation.

[Manish Sarin, executive]

Yes. That's a good question. So let me start and then Ragy might chime in. So first, I want to be clear, we're not seeing logo change. We're just seeing a reduction in the number of seats as an example. And why now? Well, you've seen a lot of corporations pull back on head count. There have been layoffs across the economy. Q4 tends to be our biggest business, both in terms of renewals and new business. And I suspect what is happening is when those contracts are up for renewal, which, for us, happens to be in Q4 we're seeing a downdraft in terms of the number of seats being renewed. So I think that's point number one.

And then as Ragy was saying, there are quite a bit of macro challenges, particularly as we look at the marketing and advertising suite. We sell volumes here, so it's not really seat-based. And again, companies are looking to advertise less just given the macro, and that's pulling back the ARR that we ascribed to that product suite. Hope that helps.

[Maxwell Osnowitz, analyst]

Yes. No, that's very helpful. And just maybe as a quick follow-up. When you think about the pressure on some of those seat-based renewals, is there any opportunity to potentially move some of those seats into separate SKUs that maybe the customer will utilize more to maintain overall ACV? I'm just, I'm curious if there's any discussion internally about pursuing avenues like that to just maintain overall retention levels.

[Ragy Thomas, executive]

That's an exciting thought. Our approach here, as we kind of bring a fairly disruptive new product to a new buyer, is to not confuse them with a new model -- pricing model. So we've started by, there are some products that are just flat AI-based conversational bots, et cetera. But we've tried to keep the pricing model parity what the market sees. But I agree with him, and I think there is some upside for us as we as we get to scale in our CCaaS side, there is opportunity for us to revisit pricing. And that's not something we're willing to comment on right now.

[Manish Sarin, executive]

Yes. And let me make sure, was your question that at renewal time, are we trying to offer them additional SKUs to maintain ARR? Was that the question?

[Maxwell Osnowitz, analyst]

Yes, it's partly it. I think -- but your answer also addresses it.

[Manish Sarin, executive]

Yes. And I think to be clear, that is one of the plays we are running. So we are constantly, as you'd recall from our prior earnings calls, upsells, for us, has always been a very strong suit. So we are constantly figuring out ways to either maintain as what we're doing now or increase ARR and accounts.

So offering them additional product suites is one of the plays. There's a number of other players we are running, and again, this is part of the reason I was saying just given where we are and the limited visibility in how this plays out for the remainder of this year, what is captured in the guide is the situation we see.

[Operator]

Our next question comes from the line of Matt VanVliet with BTIG.

[Matthew VanVliet, analyst]

Yes. I guess when you look at the success of the contact center product on Sprinklr Service here. Any help in terms of the mix of existing customers that are buying that versus this as a tool to land at new logos? And how do you think about that going forward?

[Ragy Thomas, executive]

Not surprisingly, I think it's 50-50. We're surprised to see brand-new companies involved and include us in a context and the RFP. Usually a late addition is usually coming from an analyst who've seen the product saying, "You, guys got to take a look," or are reps calling in or someone who's tried us -- the few that have tried us that have been impressed. And so the answer is there is a surprising number of sort of net new RFPs we are beginning to get in. And then there is always a customers that have been using us for social and digital care and are also expanding into voice with us.

But I'll tell you a new category that potentially has some upside, and we're beginning to look at them, are the large BPO players. And these are things that there's an established market that's 20 years old. So we're seeing more traction early, but more traction from the partner-sourced, so the leads for us. And so that's something that we're excited about.

[Matthew VanVliet, analyst]

Okay. Very helpful. And then when you look at the partner community, it seems like they've been pretty instrumental in helping some of the growth here on the contact center side. But did, were you also sort of refocusing them in that direction and maybe they also took their eye off the ball on the social and marketing side? Or anything that you think your internal sort of sales focus influenced performance by the partner community as well?

[Ragy Thomas, executive]

Yes. Yes, it's a good question. And actually, let me just take a step back, right? It's obvious that we're going to go through an air pocket here. And that's the nature of the beast as we transition from a set of buyers that were largely marketing-based or, like, social customer service or digital customer service base. Now we're talking to the guy who runs the contact center, who, like, kind of didn't know that Sprinklr existed still about 3 to 6 months ago. And that curiosity and that growth is what we think was worth the effort. Having said that, the partner ecosystem is the same way.

They are transitioning off very long-term established partnership and trying us up. So I think a lot of this air pocket situation for, let's say, up to a year or so can be explained by making the transition and landing it right, where -- we're still developing our playbook and a blueprint to enable partners right?

So the people who are trying are loving it. We have to document our successes. We have to create the blueprint. We have to train the partners. So there's a -- let's say, any way you look at it, you're looking at a 6- to 9-month lag in that -- going from one to the other. And that's the way we look at it. So we're seeing very good early traction and that early traction to convert to steady, predictable growth on the bookings side, I think that's probably the 2 quarters or 3 that we need.

[Operator]

Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.

[Brett Knoblauch, analyst]

Congrats on the strong quarter. I guess last quarter, you flagged some very large deals with some of your largest customers and said that those kind of contract values were up 10%, 15% or double digit. But it seems like this quarter, large customers are more of a headwind. So I guess is there a bifurcation of, I guess, in terms of the type of customer? Maybe the industry of that customer that is expanding versus downselling?

[Ragy Thomas, executive]

Yes, these are two different bases, right? So some of the downsell pressure, we're talking about sort of the marketing side and advertising side. And the other thing to put in perspective, we did land some large implementations in contracts sort of brand-wise, size-wise. On CCaaS, we will continue to do so.

The thing though is there is, they go market by market, right? So these are companies, in many cases, they have executed a master agreement. But then you go market by market, and you'll start seeing those bookings and revenues only as markets come on board. And these markets are on different contract timing cycles, right? So you might have a set of markets in LatAm, whose renewal with their current solution is coming up in 6 months or 9 months.

It's actually good for us because these early implementations the 99 -- the Five9 uptimes and a whole bunch of things that we are just working through the system, we've done it before. That -- it's good to have that breathing room. So I just want to make sure that you understand the time lapse as you take those snapshots and try to put it together. And that should -- once the base is established through the rest of this year and next year, we should see that pipeline convert steadily, but you're going to see a little bit of a starting lag.

[Brett Knoblauch, analyst]

Understood. Makes sense. And then maybe just on your kind of like net revenue retention and how we should think about that going forward, I guess to get to maybe the 10% growth that you guys were talking about next year, it seems like that's going to fall pretty sharply. Is that something that we should expect to maybe end '25 below 110%?

[Manish Sarin, executive]

Yes, this is Manish. So I have never given a number for net dollar expansion or retention. As I state on every earnings call, it's a byproduct of what's happening in the business. We have signaled even in the past, we do expect the 118% to keep coming down. I don't know where it's going to end up, but I think you can use the total revenue guide. You can use the billings number for next year to sort of know that it is going to come down from the 118%, probably maybe not very different from where you were expecting, but it's not something that I formally put out a number on.

[Brett Knoblauch, analyst]

Got it. And then maybe if I could just ask one more on the expense side, particularly with sales and marketing. It looks like kind of cash-based sales and marketing expenses are down a good bit from the first quarter. I guess how should we think about expense growth while you go through this go-to-market transition?

[Manish Sarin, executive]

I think at this point, we will probably provide more color in the March earnings call for next year. I did want to point out that non-GAAP operating margins ought to expand from here. So there will be more efficiencies across the business. I don't want to specifically call out for sales and marketing. But I think as Ragy answered in one of the other questions, we're not looking to incrementally invest a lot more. I think it's more around reallocation of existing resources.

[Ragy Thomas, executive]

Yes. I mean, and this might be premature, but look, we just -- I started the call by saying one should expect 20% to 40% productivity gains in the front office. And look, we intend, and let me be specific, I intend for us to be client 0. So there's a lot of things that we're doing now. That's going to take a few quarters. That it's just like we're going to eat our own dog food or drink our own champagne here. And so look, we're anticipating and working towards improving productivity. So I think I echo Manish's sentiment that we should be able to do both.

[Operator]

Next question comes from the line of Michael Berg with Wells Fargo.

[Michael Berg, analyst]

I wanted to ask, going back to CCaaS. When you think of the sales process for your CCaaS offering, it's primarily in the application layer. You do have the voice capabilities now. But maybe more holistically, how do you think about that piece of the business progressing to doing more, at least with how I imagine, augmentations today to more strategic holistic rip-and-replaces, at least that becoming more of a norm.

[Ragy Thomas, executive]

Sorry, Michael, can you -- what was your question? Is it -- can you repeat the question? I'm not sure I got it.

[Michael Berg, analyst]

Absolutely. I guess how do you think about the progression of -- in CCaaS moving from being an augmentation into more of the digital application layer within a CCaaS deployment being a more holistic strategic replacement of the legacy vendors from end to end moving forward? Or I guess, I guess what inning are you in that transition?

[Ragy Thomas, executive]

Got it. Got it. Got it. We -- I don't know when and what to expect in reality. So we have 2 sets of buyers, right? We have a set of buyers that use us to social customer service and is expanding to digital maybe as a next step. We have a bunch of those. The exciting development there, Michael, is our conversational AI capability. And that's becoming really, really good.

And so, and it's becoming more human-like. I'm not going to name the customer, but we have one customer where our bot, in a case that's closed by a bot has a higher NPS than a case that's closed by a human. So I think that speaks to the progress we've made in technology. So that's sort of the Class A digital customer service and mitigation of direction and call volume, and it just saves you money.

And the other one is where we are actually in a CCaaS replacement RFP. I can tell you, this is anecdotally because we don't have enough data to be specific here. Our win rate, when we are seriously considered, is pretty high. And you have this, "No one ever got fired for buying IBM," syndrome is the only reason why someone who sees it and believes it and tests it and kind of maybe says, "I'm going to give it more time."

So we know we have a very differentiated product. We know that -- the opportunities we are in, we're seeing very good win rates. We have to develop that muscle across the company. And that muscle development takes time. The good news is the parts of the world where that muscle seems to have developed quickly, either through hiring salespeople who have been at other CCaaS companies or leaders embracing CCaaS, they're doing really well. And so it's inconsistent at this point across the company. And one of our big goals for next year is to make that really consistent around the world.

[Operator]

Question comes from the line of Michael Turits with KeyBanc Capital Markets.

[Michael Vidovic, analyst]

This is Michael Vidovic on for Michael Turits. On the headwinds, you talked about seeing this quarter with the over rotation, the downsell pressure. I guess, were you not seeing those same dynamics in Q2 and Q3 in, like, a similar frequency? Or is that still relatively new for this quarter?

[Ragy Thomas, executive]

It's kind of consistent, right? But because, as Manish said, we have a much bigger base coming up in Q4, so we're not seeing the macro environment get better or get worse, and so I wouldn't characterize it as something changed in Q4.

[Manish Sarin, executive]

Yes. So let me clarify that. I think what Ragy is getting at is the level of downsells that we are beginning or we saw in Q3 and then we expect here in Q4 is much sharper than what we saw in the first half of the year. But to also add to what he said, when we look at the -- how the sales teams were organized, of course, a lot of this was things that we had wanted to do in terms of our focus on CCaaS, which was very successful.

But I think that whole sequence of moving the sales teams around, we probably didn't see at least till now that we were not getting the level of market momentum in our core products or traction in the core products that we should have had, so I think that's a bit of a new element.

[Ragy Thomas, executive]

But I would -- again, to reconcile the two, right? The macro, we don't think is what's changing. It's really our over-rotation that's causing the change that, where Manish has articulated.

[Michael Vidovic, analyst]

Great. And then just on that over-rotation you called out, I guess, how significant on, like, a dollar or a resource standpoint, resource standpoint? Are you reallocating away from CCaaS? I guess I'm just trying to figure out, are you far enough along in the CCaaS expansion or growth that you can continue to, like, push into that market and grow the business despite that reallocation?

[Manish Sarin, executive]

I think the short answer is, yes. We have had several quarters here of looking at not just win rates, but the go-to-market model for CCaaS, what is working in the market. As Ragy was mentioning earlier, we've been successful in onboarding partners in that segment. So we now have, I'd say, enough of a science around what it's going to take for us to succeed in that segment. And I think this would be the appropriate time for us to refocus on all of our product suites, not just CCaaS.

[Ragy Thomas, executive]

And I would just say, though, I would, again, give ourselves -- the explanation for all of this is we'll probably need another quarter or 2 before the partner enablement, the scaling of that completely new product suite is just brought to the world, right? So now we're implementing these early partners working with that. So it's just, we're in the process of templatizing it and being able to do it with much less heavy lifting.

[Operator]

[Operator Instructions] Our next question comes from the line of Brian Schwartz with Oppenheimer.

[Ari Friedman, analyst]

This is Ari Friedman sitting in for Brian Schwartz. I'm just wondering, like, in the quarter, if you saw any strength in certain verticals or weakness? Our research suggests that there's been, like, some softness in, like, insurance and auto and tax and financials. Wondering if you're seeing the same thing? Or something different?

[Ragy Thomas, executive]

I mean I don't think there's anything super noticeable. If you, like, want to interpret it a certain way, I'd say maybe the media sector, right, media publishing channels who have been customers, we're seeing some sort of -- we can interpret that there are some extra softness there. There's been -- the streaming wars that have been going on has calmed down.

So these social networks are in a very different place than they used to be, and as you know, there are some -- these are all, like, onetime things that we -- for us, it's just unfortunate timing that they're coming together at the same time. But I'd say that's probably one way to interpret it.

[Operator]

Our next question comes from the line of Austin Cole with JMP Securities.

[Austin Cole, analyst]

So on Sprinklr Service, it sounds like customers are seeing pretty meaningful productivity improvements. I'm wondering if you could walk through how does Sprinklr Service handle automated call deflecting and routing to agents just maybe so investors can better understand kind of the technical pieces here. And how are those functions different from other CCaaS solutions? And how are customers benefiting? Anything there would be [ helpful ].

[Ragy Thomas, executive]

Austin, thank you for that question. I really mean it. Because I think when you see it action, it actually -- it just changes our perspective. I'll tell you the story of, you remember the big bank we talked about, right, one of the, I think the fifth largest bank that was one of our first CCaaS implementations, 15,000 agents. I met with the CEO, and they did a live demo for me, put the phone on the table and just dialed out 1 (800) bank. What you get when you call a big bank, press 1 for credit cards, press 2.

And after they finished implementing Sprinklr, for the most part, the question on the other side that the system poses, how can I help you? And you just say, I want to know my credit card balance. And then the follow-up question is, can you please put in your security code, we will recognize your phone number? And literally, you could just continue the conversation.

And there are, I don't know, 100-some journeys that they've identified, some of -- 50% to 80% of that, as we connect to more internal systems, have been automated, and the credit card balance inquiry is something that is automated. So literally, you now have an experience where it's very unlike traditional a experience where we're routing and calling.

And on the back end, if you did ask a question like, "I want to change my credit limit," that would go to a human. But we already understand from your speech and your text and your voice that -- what you want to do, so we know where to send you. And then we use smart AI to find the best agent who can do that.

And because you can do it across channels, let's say, you request a credit limit increase, at the bank, before you had Sprinklr, if that request was on the phone, they could ask you, hey, can you just send me a proof of your salary increase, blah, blah, blah, and you send it and get it done. But if that came on the phone on a Friday or a Sunday night, if that came on e-mail on a Sunday night, the agent that had an e-mail console -- remember, before Sprinklr these consoles were all different, right? And they were logging into 8 screens. The agent will reply back via e-mail saying, "Hey, can you send me a proof of your income?"

And that e-mail, you go to work and you reply back 5 days later, the SLA for the same call driver on e-mail was dramatically different than if it were on the phone. And with Sprinklr, that agent who's responding an e-mail because it's an omnichannel console, just clicks on, "call," and calls the customer. And those are the kind of magical things.

And by the way, in the demo, it was the head of CX who did the demo. He hung up before Sprinklr could bloat out the bank -- credit card balance and called back and Sprinklr picked up from where it left off and continued the transaction. Those are the kind of things that are not possible in a traditional point solution existing legacy contact center infrastructure. I hope that brings it to life.

[Operator]

There are no further questions at this time. I would now like to pass the floor over to Ragy Thomas for closing comments.

[Ragy Thomas, executive]

Thank you, Alicia, and thank you all for joining us today. Again, I'd like to thank our employees, our partners and, most importantly, our customers for their trust and continued business. We look forward to updating you all again in 90 days or so as we continue this exciting journey. I'm sure that's going to span years and decades of creating a new category that we call unified customer experience management. Thank you very much, and have a wonderful evening.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.