Sprinklr Inc

NYSE:CXM

Earnings Call Analysis

Record Q4 Caps Strong Year, Optimistic FY '25 Outlook

The company celebrated a strong Q4 with total revenue surging 17% to $194.2 million and subscription revenue climbing 19% to $177 million. They boasted a record non-GAAP operating income of $32.4 million and a robust 17% non-GAAP operating margin. Despite anticipating a decline in FY '25's revenue growth, new leadership hires and a more disciplined approach are expected to streamline operations and bolster growth. Customer base growth of 21% year-over-year hints at a significant market opportunity. Strategic investments in AI-driven product enhancements demonstrated their commitment to transformative technology. A strong year concluded with an 18% revenue boost, record profitability, and a marked increase in free cash flow. Q1 FY '25 forecasts predict a revenue range of $194 to $195 million, while full-year expectations set subscription revenue growth at 11% and total revenue growth at 10%.

A Solid Finish Fueled by Subscription Growth

The year marked a successful chapter for the company, characterized by a robust 18% increase in total revenue alongside record-setting profitability and strong free cash flow. The fourth quarter was impressive in its own merit, showcasing total revenue of $194.2 million, which constituted a 17% growth compared to the same quarter in the previous year. This growth was primarily driven by the subscription revenue that soared to $177 million, marking a 19% year-over-year increase.

Sustained Performance Amidst Mixed Signals

While the company achieved considerable success, it faced a renewal headwind that started in the third quarter, persisting through the fourth. Revenue generated from services was $17.2 million for the quarter, thus maintaining a net dollar expansion rate at 118%. Potential challenges lie ahead as the company anticipates continued renewal pressure in the initial half of FY '25.

Growth and Profitability: A Dual Achievement

The company witnessed a customer base expansion of 21%, ending the year with 1,735 customers. Noteworthy is the non-GAAP operating income which hit a record $32.4 million, resulting in non-GAAP net income of $0.13 per basic share. The company celebrated a non-GAAP operating margin of 17% for the quarter, marking the sixth consecutive quarter of non-GAAP profitability. Total revenue for the full year was $732.4 million, up 18% year-over-year, with subscription revenue increasing to $668.5 million, a 22% rise from the previous year.

Free Cash Flow and Share Buyback: Strong Balance Sheet

The free cash flow generated showed a considerable increase to $51.1 million, 7% of total revenue and reflecting an improvement of more than 500 basis points from FY '23. The balance sheet has remained robust, highlighted by $662.6 million in cash and marketable securities, and the absence of any outstanding debt. A share buyback program was actively pursued, with an expansion of $100 million authorized by the Board, signaling confidence in the company's value.

Moderate Growth with Cautious Optimism

Heading into Q1 of FY '25, the company offers guidance conservatively, projecting total revenue in the range of $194 to $195 million, equating to a 12% year-over-year growth at the midpoint. Expectations for subscription revenue stand at $177.5 to $178.5 million, indicating a 13% increase over the same period.

Future Roadmap Amidst Economic Uncertainties

For the full FY '25, the company forecasts subscription revenue to grow by 11% to the range of $740.5 to $741.5 million and total revenue targeted to increase by 10% to between $804.5 and $805.5 million. These projections come amidst deliberate tighter guidance due to the prevailing cautious macroeconomic environment, hinting at a prudent approach towards anticipated challenges and opportunities.

Earnings Call Transcript 2024-Q4

[Operator]

Greetings, and welcome to the Sprinklr Fourth Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions].

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Scro, Vice President of Finance. Thank you. You may begin.

[Eric Scro, executive]

Thank you, Camilla, and welcome, everyone, to Sprinklr Fourth Quarter and Full Year Fiscal 2024 Results Financial Call. Joining us today are Ragy Thomas, Sprinklr's Founder and CEO; and Manish Sarin, Chief Financial Officer.

We issued our earnings release a short time ago, filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation. In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the first fiscal quarter and full fiscal year of 2025. Actual results might differ materially.

With that, let me turn it over to Ragy.

[Ragy Thomas, executive]

Thank you, Eric, and hello, everyone. Thank you for joining us today. We're pleased that Q4 was another strong quarter that exceeded guidance across all key metrics. Q4 total revenue grew 17% year-over-year to $194.2 million, and subscription revenue grew 19% year-over-year to $177 million.

We generated a record $32.4 million in non-GAAP operating income, which resulted in a 17% non-GAAP operating margin for the quarter. The end of the fiscal year is often a good time to reflect on how far we have come and where we are going. The opportunity we saw when we founded Sprinklr is coming to fruition in an accelerated fashion because of generative AI. After investing 14 years of unifying the back end of customer-facing functions with our AI-powered platform, we're beginning to see customers bring our vision of unifying to life with generative AI and conversational AI.

Generative AI has accelerated conversations happening at the brand's digital edge where the customer buys gives feedback and engages for support and service. Anyone can use Gen AI to build a chatbot. But on the engine, the foundation behind it is unified to sell, to serve and to gain actionable insights, siloed chat bots can't manifest significant value for a brand.

In today's hyper-connected world, customers must experience a unified approach across all touch points with the brand. As you know, we're on a journey to create a new category of enterprise software that we call Unified Customer Experience Management. And we believe that will revolutionize the front office. And after continuous building and iteration across our core portfolio, CCaaS and AI, we have even more conviction today for our long-term vision and success and our platform strategy than we have ever had before.

As many of you know, we've been committed to this vision for quite some time now. But to make this vision a reality, we must deliver consistent and repeatable results. As we shared in our prepared remarks on our Q3 call in December, we anticipated that the decline in our FY '25 revenue growth rate will be driven by a combination of execution that needed to be improved, particularly on the go-to-market front as we over-rotated to CCaaS and a difficult macroeconomic conditions that drove elevated churn.

We believe we now have the clarity on how to best position this company for our next phase of growth and have made several substantive changes across the organization. This includes investment in our leadership team and enhancements to our operational rigor.

Let's begin with the investments in our executive leadership. We've recently brought on experienced leaders from high-growth companies that are known for their execution. They have expertise in helping companies scale revenue and profitability significantly beyond our current levels.

As we have shared, Trac Pham, a member of our Board of Directors since June of 2023, has been appointed as the interim COO, where he is focused on organizational structure, getting our teams to better collaborate cross-functionally and bringing operational rigor to Sprinklr. Scott Harvey was promoted to the role of Chief Customer Officer, a role that did not exist, where he leads a unified global customer-facing organization. including all sales and delivery and service teams to accelerate go-to-market efficiencies and better serve customers. Scott has been actively onboarding several new leaders across the Americas, Europe and APJI as well as our partner team.

And today, we are very, very pleased to announce that Amita Mishra has been appointed as our new Chief Technology Officer, effective April 1. Amita joins us from Adobe, where he led a global R&D organization that was responsible for their Experience Cloud platform. Prior to that, he was the Founder and CEO of GoFro.com; and the CTO, Chief Architect and Head of Engineering Snapdeal.com. He has invaluable industry experience, extensive experience in scaling businesses and a deep understanding of AI. We are excited to have him on board soon. We will continue working towards recruiting top-tier talent with proven track records of success and operational excellence as we build out a bench strength to help us drive this company and grow forward.

In terms of our go-to-market strategy, progress is underway. We have established a more structured cross-functional and disciplined approach for fiscal year 2025 under this new leadership. We're now focused on emphasizing a more balanced strategy to pursue growth opportunities in both our core as well as service suites. There is work in process with renewals, customer engagement and solution selling pretty much across the board.

The results of this work will take some time to manifest through the P&L. Well, we feel very good that we have a clear plan, and we've brought in the right people with the right experience, and we are heads down focused on executing. As of January 31, 2024, we had 1,735 customers, which is up 21% compared to the previous year.

While we are pleased with this growth, it's important to note that we're only at a 4% penetration of our target market of 43,000 named companies as we shared during our Investor Day last July. This indicates significant untapped potential for Sprinklr. Turning our focus to our technology platform. We are known for our blazing pace of innovation, and this year was no different. Our product and engineering teams unfavoring commitment to customers set Sprinklr apart in the marketplace. In FY '24 alone, we released over 2,000 features and platform enhancements to further advance our vision. Our vision, we believe that has the potential to dramatically transform a brand's front office with AI.

There are a few highlights from Q4. For Sprinklr's Social, we launched auto image and video optimization that reduces publishing failure and optimizes usability. For Sprinklr Insight, we have extensively deployed AI to reduce time to insights. For example, something that would normally take an average of more than 4 hours to read and understand in a graph and chart in data form now is just simplified with a click of button, to generate insights in human readable form.

In marketing and advertising, we have deepened our integrations with leading platforms such as Meta, Snap and Reddit to enable advertisers to diversify media coverage and access these platforms latest capabilities. And lastly, with Sprinklr's service, we've expanded our channel offerings for Microsoft Teams and Slack and deployed AI in our conversational analytics module to do root cause analysis for top coal drivers faster. These enhancements within our architecture, especially our Gen AI solutions are helping customers improve productivity in their front office across the boat dramatically, in some cases, a large electronics retailer that recently implemented our contact center solution reported a whopping 45% increase in customer service productivity because of our conversational self-service AI capability.

During the fourth quarter, we continued to add new customers and expand with existing customers. This includes world-class brands like BT, British Telecom, where we were selected to be the strategic customer service technology partner. We also added and expanded with brands like AT&T, Canada Goose, Kia, Sephora and UBS across all our product suites. Major global enterprises are seeking tangible evidence of AI's efficacy and its potential to drive measurable productivity gains. There's plenty of hype around AI and plenty of conversations around the theory and infrastructure, and it's time now to make it real and customer-facing functions.

We'd like to share a few use cases where our customers are making it real by leveraging our platform. Our resin partnership with a major European telco company, underscores a commitment to delivering next-generation CCaaS solutions. This telecommunications leader aims to be the #1 telco in their market and wants to replace more than 10 existing point solutions in the contact center with our comprehensive unified service suite that's enhanced by our AI. This includes over 30-plus integrations with their existing customer service support systems.

The timing of this collaboration is pretty strategic as it aligns with the new cloud strategy to optimize the CCaaS environment. This customer is now running Sprinklr to support 2,500 agents in 8 countries across social, digital and voice channels. This is all geared to improve efficiency, cost effectiveness and overall customer experience for this telco leader.

Next, we have a leading pharmaceutical company that recently have their weight loss drug approved for sale in the market. They are anticipating an obvious increase in customer interactions and needed a partner to scale their front office technology with AI. Discussions on updating the display technology quickly expanded to comprehensive migration to our social suite, where we displays an income legacy solution. They also invested in understanding millions of public data mentions across social competitive and digital conversations without adding additional people or resources, our innovative approach, commitment to collaboration and expertise in navigating complex legal requirements required for regulated industries to mitigate brand risk were key factors in the decision.

By choosing Sprinklr, they gain a trusted partner committed to improving their customer experiences and generating ROI, better ROI for their business. Our third example is about one of the world's leading health care companies that embarked on a transformative journey with Sprinklr many years ago. their continued expansion in leveraging a unified CXM platform now includes all our product suites. They have more than 450 users and consume more than 2 billion mentions to get competitive and product insights and to measure the effectiveness of their brand.

This most recent expansion last quarter was to execute against their new marketing strategy that included better content orchestration and strategic collaboration. Sprinklr is now a strategic partner for this company across three of their key businesses. Through a definition partnership agreement, we're also collaborating with them to significantly enhance our marketing suite. We're introducing critical capabilities like budget and resource management in our marketing suite. I also want to remind all of you that we'll be hosting our first flagship customer event as a public company on May 7 through 9.

CX Unifiers, the edge of AI will be in New Orleans, and we will have some of the world's most forward-thinking brands, like Amazon, like L'Oreal, like Cartier, like Google, like Microsoft and Deutsche Telekom, talking about how AI is transforming their front office. We look forward to sharing these customer stories and their tangible results, along with practical usable advice with you.

In closing, we delivered a strong year. marked by an 18% growth in revenue, record profitability and strong free cash flow. As we look to the future, we're strengthening our foundation this year with top-tier leadership with by fostering innovation and by enhancing our execution capabilities. Critical elements that would fuel our sustained success and drive value for our customers and shareholders. Our confidence is grounded in the conviction that we have for our long-term vision. It's also grounded in the AI-powered unified CXM platform, we've developed the global customers we serve and with the substantial market opportunity that lies ahead of us.

Thank you to our customers, partners, our employees for their hard work and their results. And thank you to all of you, our investors, for believing in our vision. Let me now hand over the call [indiscernible].

[Manish Sarin, executive]

Thank you, Ragy, and good afternoon, everyone. As you heard from Ragy, FY '24 was a solid year for Sprinklr, functuated by strong financial results with noted opportunities for operational improvement. Starting with our Q4 financial results. Total revenue was $194.2 million, up 17% year-over-year. This was driven by subscription revenue of $177 million, which grew 19% year-over-year. Services revenue for the quarter came in at $17.2 million as we completed several key project implementations during the quarter.

As noted on our Q3 earnings call, we began to see incremental pressure on renewals in Q3 as certain customers adjusted their spending levels with us. This renewal pressure lingered into Q4 and our current expectation is that we will continue to see some renewal pressure in the first half of FY '25. Our subscription revenue-based net dollar expansion rate in the fourth quarter held steady at 118%. As a reminder, we calculate NDE on a trailing 12-month subscription revenue basis, which makes it a lagging indicator. While we do not forecast NDE, we estimate this number to keep coming down over the next few quarters as the renewal pressure rolls through the revenue waterfall and works its way through the calculation.

As of the end of the fourth quarter, we had 126 customers contributing $1 million or more in subscription revenue over the preceding 12 months which is a 17% increase year-over-year. And as Ragy stated, we ended the year with 1,735 total customers, which is a 21% increase in new customers for the year. Turning to gross margins for the quarter. On a non-GAAP basis, our subscription gross margins came in at 83% with total non-GAAP gross margins of 76%. Non-GAAP gross margins for professional services were better than expected, coming in at 5%.

Turning to profitability for the quarter. Non-GAAP operating income was a record $32.4 million resulting in non-GAAP net income of $0.13 per basic share. The 17% non-GAAP operating margin for the quarter was a result of revenue over performance, strong subscription gross margins, coupled with broad-based expense discipline and is the sixth consecutive quarter of non-GAAP profitability. Lastly, on the topic of profitability for the fourth consecutive quarter, we posted positive GAAP net income totaling $21.1 million or $0.08 per basic share.

In terms of free cash flow, we generated $12.3 million during the fourth quarter. Our balance sheet has become stronger each quarter now standing at $662.6 million in cash, and marketable securities with no debt outstanding. Calculated billings for the fourth quarter were $271 million, an increase of 17% year-over-year. And just as a quick reminder, our fourth quarter billings have historically been the largest for us given the timing of our renewals and the quantum of new business booked in the quarter.

As of the end of Q4, total remaining performance obligations or RPO, which represents revenue from committed customer contracts that has not yet been recognized was $966.6 million, up 34% compared to the same period last year and CRPO was $587 million, up 21% year-over-year. During the fourth quarter, pursuant to the company's stock buyback program, we purchased 2.4 million shares of our Class A common stock for a total cost of $29.6 million. All the shares repurchased have been retired.

Furthermore, between February 1, 2024 and March 26, 2024, we purchased an additional 2.1 million shares for a total cost of $27.1 million. And as disclosed in our earnings release, I'm happy to report that Sprinklr's Board has authorized a $100 million expansion of the existing stock buyback program. As such, as of March 26, 2024, we now have $143.3 million remaining in our share buyback authorization, and we intend to complete the full buyback here in FY '25.

Turning to a quick summary of financial results for the full year FY '24, total revenue was $732.4 million, up 18% year-over-year, with subscription revenue of $668.5 million, up 22% versus the prior year. Calculated billings for the full year were $781.9 million, up 19% year-over-year. We reported non-GAAP operating income for the full year of $92 million equating to a non-GAAP net income per basic share of $0.41 and a non-GAAP operating margin of 13%.

In terms of free cash flow, we generated $51.1 million in free cash flow for the year, equating to a free cash flow margin of 7%. This is an increase of over 500 basis points from FY '23. Before moving on to guidance, I would like to provide additional details on the go-to-market initiatives Ragy mentioned. Starting with renewals, we are implementing a more systematic approach to renewals with a dedicated renewals team. In terms of our customer engagement models, we're creating parts of customer-facing teams and investing deeper in sales and skills enablement training to best equip our people in the field. And with regards to solution selling, we're developing solution packages that best align to customers' priorities and their strategic technology road map.

Moving now to our Q1 and full year FY '20 guidance and business outlook. We recognize that the macroeconomic environment continues to be cautious. And our current assumption is that the broader macro trends from last year are likely to continue throughout FY '25. Before we walk through FY '25 guidance, I would like to point out that our guidance range for next year is deliberately a tighter range than what we have done in the past.

For Q1 FY '25, we expect total revenue to be in the range of $194 million to $195 million, representing 12% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $177.5 million to $178.5 million, representing 13% growth year-over-year at the midpoint. This implies a professional services revenue of $16.5 million for the quarter. We expect non-GAAP operating income to be in the range of $19.5 million to $20.5 million and non-GAAP net income per diluted share of approximately $0.07, assuming 289 million weighted average shares outstanding. We are now guiding on a diluted share basis, given our expectation to remain profitable for the full year FY '25.

The change from basic to diluted shares represents about half of $0.01 in Q1 EPS calculations. Note that the sequential decrease in Q1 non-GAAP operating income is typical for us as we have larger expenses at the start of the year for sales kickoff, marketing campaigns and selective hiring. For the full year FY '25, we expect subscription revenue to be in the range of $740.5 million to $741.5 million, representing 11% growth year-over-year at the midpoint.

We expect total revenue to be in the range of $804.5 million to $805.5 million, representing 10% growth year-over-year at the midpoint. For modeling purposes, assume the quarterly revenue distribution follows the same trend as FY '24. These guidance ranges imply an FY '25 professional services revenue of $64 million, flat with the numbers that we posted for FY '24. As we grow our partner ecosystem and work closely with implementation partners, we expect growth in our professional services to remain range bound. In addition, as we have stated in the past, we will continue to invest in critical CCaaS delivery capabilities. And as such, we estimate our professional services gross margin to be largely breakeven throughout the course of FY '25.

I would now like to touch on the billings topic for FY '25. We have been working diligently to improve billings duration for new deals such that we no longer estimate billings growth to lag revenue -- lag subscription revenue growth. For FY '25, we estimate billings to grow in line with subscription revenue. Given this new dynamic, we estimate total billings for FY '25 of approximately $868 million and $193 million for Q1. For modeling purposes, this total billings number can be spread across the arc of the 4 quarters, largely following the same trend as FY '24.

For full year FY '25, for non-GAAP operating income, we are forecasting a 13% non-GAAP operating margin similar to what we posted for full year FY '24. This equates to a range of $104 million to $105 million or a non-GAAP net income per diluted share of $0.38 to $0.39, assuming 291 million weighted average shares outstanding. The change from basic to diluted shares represents about $0.02 per share in the full year FY '25 EPS calculation. Note that we expect subscription gross margins to come down by approximately 2 percentage points in FY '25 driven by one-time setup costs associated with new cloud environments to serve new CCaaS customers. These costs are baked into the 13% non-GAAP operating margin highlighted earlier. In deriving the net income per share for modeling purposes, we estimate $20 million in other income for the full year, with $5 million of that to be earned here in Q1. This other income line primarily consists of interest income.

Furthermore, a $14 million total tax provision for the full year FY '25 needs to be added to the non-GAAP operating income ranges provided. We estimate a tax provision of $3.5 million here in Q1. Regarding free cash flow, we believe we can achieve a 10% free cash flow margin in FY '25 which would equate to a free cash flow metric of $80 million for the full year. This will be a 300 basis point improvement over FY '24. We will not be updating our free cash flow guidance quarterly, but we'll provide an update as needed throughout the year.

And for the second consecutive year, we expect to be net income positive for the full year on a GAAP basis. We are also reiterating our long-term financial targets for FY '27 as highlighted during our Investor Day in July 2023. Before we open it up for questions, I would also like to thank all our employees for their dedication. I'm also grateful for the confidence that our customers have placed in us. We remain focused on building a track record of successful execution and operating discipline across the business. And with that, let's open it up for questions. Operator?

[Operator]

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

[Arjun Bhatia, analyst]

Thank you, guys, and I appreciate all the detail here. Maybe I wanted to start off with, I know last quarter and this quarter, too, you were talking about some of the downsell and maybe churn pressures that you're seeing in the base. But Manish, when I look at the numbers, CRPO growth in the low 20s, billings growth was strong. I'm not sure I fully see where that pressure is coming at least in Q4. So can you maybe just walk us through what you're seeing in terms of demand? And is there something that's maybe offsetting it from a new customer perspective, where you are seeing some tailwinds, I suppose, that offset some of the churn headwinds?

[Manish Sarin, executive]

Thanks, Arjun. I think the way we look at this is, you'd note that in the past, we've said we endeavor to get to a 90% and above gross retention rate or renewal rate. And I think the pressure we're seeing now is just what's happening in the macro, definitely driven by usage patterns we're sort of below that. In terms of what we shared in the Q3 earnings call, some of that had obviously got us by surprise.

And so we want to just be transparent there. So I think a lot of this is driven by where we want to be. Now certainly, it's not yet fully reflected in the numbers. And I was saying even when you look at the NDE calculation, it is going to start to show up because some of these are lagging indicators. But as I -- sitting where I sit and looking into at least the first half of this year, I do expect to experience or keep experiencing renewal pressure, just the way I think we've spoken in the December call.

[Arjun Bhatia, analyst]

Okay. Understood. And then just in terms of -- as you're thinking about fiscal '25, it definitely sounds like you're making quite a few investments in the CCaaS product set. But when you think about growth and maybe some of the go-to-market changes that are being made, how do you think growth should fare between your core social solutions versus CCaaS in fiscal '25?

[Ragy Thomas, executive]

Yes. Arjun, I'll take that. This is Ragy. We have redesigned our go-to-market to be what we think is a fairly high-quality, multiproduct company with multiple buying centers. And so those changes are -- we've just kicked off our new year. So those changes have been rolled out. That means we have specialist focus on our core offerings and specialists focused on CCaaS. We expect CCaaS to be a growth driver, but we also expect that renewed focus to start yielding better results in core as the quarters progress.

[Operator]

Our next question comes from the line of Raimo Lenschow with Barclays.

[Raimo Lenschow, analyst]

Congrats from me as well. Two quick questions. Manish, if you think about guidance for the next year. The thing that puzzles me a little bit is like you still have all the uncertainties. You have to go to market changes, but you're narrowing the ranges that you're giving. Can you just talk me through that logic in theory, I would think it's a broader range, even in a smaller range? I'm just trying to understand that. And then I have one follow-up.

[Manish Sarin, executive]

Yes, Raimo. So I think what's driving it is as we look at, again, what's happening in the broader macro environment and obviously, a lot of our peers, they certainly felt that given the visibility that we have, at least for the quarter, we could tighten the range. You would also note last couple of years, we have had a broader range for the full year and then we have had to adjust the range as we got into the second half of the year that added a little bit more confusion as analysts were trying to figure out what was happening to the range.

And I just felt entering this year I ended our prepared remarks by saying we're looking to get into a lot more operating discipline. It just felt the right time for us to introduce a much tighter range for the full year as well.

[Raimo Lenschow, analyst]

Okay. Perfect. Okay. And then the -- Ragy, one for you more. If I think about the CCaaS space, like a lot of players want to kind of play the AI angle and things like all we have that, et cetera. Can you talk a little bit about like who you're running into on those assignments? And like what's the main difference between who is real or like what are you offering that is more real than what others have to offer?

[Ragy Thomas, executive]

Well, I can confirm that we are running into the traditional incumbent large CCaaS competitors who've been around for a while. Look, I can't comment on what other people are doing with AI. But I can tell you that our win rate is pretty high when we get a chance at that. And that comes from the fact that we have built a unified platform from the ground up. So when you look at the contact center stack, it's usually somewhere between 6 and 20 applications that they use in the contact center, that's usually connected to somewhere between [ 15 ] and 100 in some cases, external applications that they have to go look at.

And these 5, 10, 15-point solutions from a knowledge base to quality management to workforce management to ticketing to agent console and supervisor console. And all of those community knowledge base, them not being meshed together. Even the big, big guys, some of them don't even have like agent console or a pure ticketing capability. So what we are encountering is this mismatch of solutions from competitors that are involving together. And ours is just clean, pure, everything work with everything else. And then we integrate with all the external systems and everything is based on AI.

So right from the conversational interface, the bank that we

have talked about in the past and many other customers, in many cases, are replacing their IVR with the conversational experience. Imagine not having to press one and say, "Hey, I just want to know what my credit card balance is." When you pick up the phone, and so it's fairly dramatic right at the onset with the customer go through the community where we're using AI. When the agent logs on, we've automatically summarized all the previous assignments. We've looked up the knowledge base, not -- you don't have to search. We found you the right two lines that you can use. You're being taken through guided workflows.

The agent is [indiscernible] using smart response. smart assignments, which is AI-based. It's prompted with a smart response nudged with better things that can be upsold and better response. And so it's just completely end-to-end AI and summarize when you close the call. And what's happening now is there a start that offer like these some of these capabilities, but it's an add-on and you have to go figure out how to bolt it with your existing infrastructure, whereas legacy is in conversation management in AI in over 100 languages that we've been developing models for [indiscernible] the last 6, 7 years.

[Operator]

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

[Noah Herman, analyst]

This is Noah on for Pinjalim. On the net revenue retention side, it was great to see that hold in stable at 118%. But as we're thinking about going forward, I mean, how should we think about the trend for that for the rest of this year given the reiteration of the 10% revenue growth guide for the year? And I also have a quick follow-up.

[Manish Sarin, executive]

Yes. I think this is what I did say in the prepared remarks that we do expect this to come down over the next few quarters. I wouldn't be able to give you an exact number where I think it should land. But I think just looking at the way this metric is calculated for us, and this is why I take pains to walk through every quarter that this is done on a trailing 12-month subscription revenue basis.

So as some of the renewal pressures that I spoke about earlier, work through the revenue waterfall, I do expect this to keep coming down. Again, no point guessing where it's going to come down, but it will come down.

[Noah Herman, analyst]

Got it. And then one of the customer wins you highlighted during the quarter was with -- and I mean, just doing a quick Google search, it seems like BT supports over 80,000 service agents from what we see on our end. And I mean I think that's double what Deutsche Telekom does, which is also a customer. So just curious how that relationship came into fruition. And if you can unpack any details around that? That deal?

[Ragy Thomas, executive]

Pinjalim, I, can tell you that it's a strategic partnership. I can tell you that it was a very long, tough evaluation process where they looked at -- the BT, right? The -- I think the #1 brand in the U.K., one of the top brands. So everybody with any AI from the small to the big to the cloud providers all participated in the process. So we think of this as a very momentous win for us, [indiscernible] and the great validation of the vision, we can't go into any of the details, unfortunately, but I can tell you it's very strategic, and it's something that is along the lines of other bigger partnerships we're signing off very, very early, but we do see a lot of potential.

[Operator]

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

[Elizabeth Elliott, analyst]

I wanted to hit on some of the productivity savings you mentioned. You referenced a customer seeing a 45% increase. And then you previously talked about 20% to 40% savings in the front office. And given that you guys are leveraging your own tools internally, how is this impacting kind of your own cost initiatives, I'd be curious to hear how you've changed your own view on spending and how that may play out in your margin expansion?

[Ragy Thomas, executive]

Elizabeth, I have to thank you for that question. We are running several implementations of our own AI technology for ourselves. And obviously, we're smaller than any of the customers we serve. And we're seeing some very, very dramatic impact. I'll give you a quick example. And by the way, don't model any of this into this year's guidance because this is very early and -- but it's a big focus for us. Sprinklr is a big focus for us this year, and I'm personally focused on it.

But I'll give you an example, we just modeled the process that from beginning to end was going to take a week for every one of our outbound outreaches and this involves a very interesting. It involves, I mean, like all companies, B2B companies do, you have to research everything that's out there. Externally, we the public filings, investor report news look people up, figure out a point of view on what the focus areas are for the company, then you got to translate that into what products fit and then you got to put that into an e-mail and send it out if you're an SDR. That process to do it really well. was taking a week across all the stakeholders.

And we just finished our internal pilot. And literally now you click a button, ask our internal go-on teams as our internal conversational AI product and you get the answer in seconds. So we're talking about dramatic and this is where we get excited about our own ability to use it. Now granted, it's too early, and we're not modeling any of this. But I would definitely hope that in the out years, we're going to be able to grow without adding resources and drop that to the bottom line.

[Elizabeth Elliott, analyst]

Great. And just as a follow-up on the go-to-market changes. You made the fix and kind of the overcorrection into CCaaS and refocusing on the core. Any update on the progress you can share that drives confidence that these changes are getting you back to balance? Or any metrics as it relates to sales and efficiency in your pipeline that you can speak to?

[Ragy Thomas, executive]

I mean, look, I think the leadership changes are the most important ones I start there. I mean, no plan is going to work unless you have great leaders. So -- this is -- I can tell you, this is the most direct, focused, most substantive set of changes that we've made. I can tell you that in every area, we've brought in leaders who've been there and done that. You can go look them up on LinkedIn. Second, we've spent a lot of time getting everyone on the same page mapping out our 16 stages of the customer's journey with us, all the teams. And we've been leveraging an external consulting firm to bring all of us together and get on the same page and the plans are being formulated and we've got ownership in a way that this company has never done before.

So I'm very optimistic, but I can also tell you this is going to take several quarters to roll out. And then these leadership changes are cascading and it takes even just to flow through and get the team that we want everywhere. It's going to take us a couple of quarters. And so -- but we feel very good about where we're going and how we're approaching this. I can tell you, this was always a priority. Right now, this is the priority. So that's all I can tell you about what's different.

[Operator]

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

[Brett Knoblauch, analyst]

I guess the first one is maybe on the annual customer count metric. I guess is there any way or provide additional color into maybe what was the bigger driver of that this year in between CCaaS and maybe your kind of core social media products and how has that changed maybe compared to years of the [ past ]?

[Ragy Thomas, executive]

I'd say, look, what I can tell you is it was in CCaaS or core. We had outlined last year that we were we put together a team that's focused on new logos. There's a small team in sort of a limited capacity. But we're seeing success with that model. So that's something that we're going to double down on.

[Brett Knoblauch, analyst]

Got it. And then maybe I could just touch on the -- I think if I heard you correctly, you're expecting a 2 percentage point headwind to cost or gross margin this year due to onetime implementation costs or your CCaaS solution. I guess maybe in a bit more detail a 2% headwind kind of down to go out?

[Manish Sarin, executive]

Yes. So this is Manish. I said approximately 2%, but what is going on here is there are data residency requirements in many geographies across the globe. And largely, this is driven by, as we spin up new instances with our hyperscaler partners, there are onetime fees for a lot of them. There are initial cost is set up these instances that, again, I'm conservatively estimating approximately up to 2%. Hopefully, it will be lower. But that's what's baked into the model right now.

[Operator]

Our next question comes from the line of Michael Berg with Wells Fargo Securities.

[Michael Berg, analyst]

Congrats on the quarter. I guess just in terms of the relationship between free cash flow and operating margin, should we expect that the study moving forward? Now it seems like billings are mostly annualized and the growth should be in line with subscription revenue? And I have a follow-up.

[Manish Sarin, executive]

Yes. I think that's a terrific question. As billings get sort of in line with subscription revenue. Now also note there is the professional services, which many a times is sort of build upon completion. So that is a separate element. But over time, you should expect our free cash flow to get closer in line to operating income, where the distinction will be is many at times, we have to prepay for a lot of cloud usage as an example. So there are those aberrations that do affect free cash flow, obviously, don't affect operating income to that same extent.

But I think that's part of the reason you would have seen over the last couple of years, the steady improvement in free cash flow. So you've gone from, obviously, I believe, negative $45 million a couple of years ago, to positive $51 million in FY '24. And I think based on where we sit, we're comfortable with an $80 million number for FY '25. Again, all steps in the right direction, but you should see the narrowing of the 2 margins over time.

[Michael Berg, analyst]

Got it. Helpful. And then just a quick follow-up to that. The implied margin expansion for this year is in the 150 bps range, a pretty meaningful step down from last year. I know there's all the go-to-market changes happening in the background, but anything for us to point to you as to why there's not more margin expansion here as gross flows or just natural offset the realignment of the go-to-market organization?

[Manish Sarin, executive]

And just to make sure I understand. So we ended FY '24 with around 13% non-GAAP operating margin, and that's what we are using to guide for the full year FY '25. Maybe I'm not following the question?

[Michael Berg, analyst]

Sure. Just the incremental step function in operating margin progression is much less implied for fiscal '25 guidance relative to what was done in fiscal '24. And the nature of the question is, is there a particular reason or driver as to why there's not more margin accretion here as growth slows. I understand there's the go-to-market changes happening in the background, but there's something else at play?

[Manish Sarin, executive]

Yes. And I think in the December call, I also mentioned and I've been saying it to investors that we obviously had a lot of near-term success as we went from where we were a couple of years ago to last year. So there was a lot of low-hanging fruit that we were able to go take care of. Margin expansion from here will be subdued. Again, let's be -- let's be candid that this is just the initial outlook for the year.

As we make progress during the year, we would, of course, update investors. But at this point, I'm most comfortable just stating the 13%.

[Operator]

Our next question comes from the line of Jackson Ader with KeyBanc Capital Markets.

[Jackson Ader, analyst]

The first one, Ragy, how can we -- or I guess, can we quantify how much would be their bookings dollars or growth actually comes or is being generated from generative AI? And then -- and how much maybe going forward, do you expect to come from generative AI?

[Ragy Thomas, executive]

Jackson, thank you for that question. We have taken the approach of like infusing everything we do with AI. And in the past, didn't take the approach of trying to monetize it separately. However, we're looking at what's going on in the industry, and we think that could be an opportunity. So we are currently evaluating, and this is quite a bit of work. So again, don't factor anything in for this year.

But we think there's an opportunity to charge a premium or at least for our AI offering, and we're exploring that. So right now, no, but we're exploding the possibility of being able to do that. Our position has always been that AI is a big differentiator for us across everything we do. And -- but I think the market is willing to absorb some additional cost for it.

[Jackson Ader, analyst]

Okay. All right. Got you. And then on the renewals pressure, so expecting it kind of to persist here in the first half and then maybe to go away. I'm just curious like how do we know that the pressure will end? Is there something -- is there some cohort? Or is there something specific about the renewals that are going to be happening over the next couple of quarters that you can point to and say like, they are different from what the renewals will look like after we get past this first half?

[Ragy Thomas, executive]

Okay. So I think first off, I got to tell you, we've put a lot of energy behind understanding what is going on. And what I can confirm as I've done in the past is we think the majority of it is self-inflicted. And what we're finding that is that the best execution of our team versus the best execution of any competitor in our core markets and the CCaaS frankly, we win. So what we are finding is -- and I say it self-inflicted because weak execution, weak execution on our side, meeting strong execution with the competitor is when we're losing. And so it gives us a lot of confidence that there's a fixable things.

And it's a part of this big set of initiatives that we have outlined. And like we said, it's going to take a few quarters. But right now, we're pretty optimistic that we should see our retention go back to our historic norms once our execution and what we can control is addressed.

[Jackson Ader, analyst]

Okay. I got you. So this is a process turnaround, not necessarily like a customer-driven thing.

[Operator]

Our next question comes from the line of Tyler Radke with Citi.

[Unknown Analyst]

This is Matt Pride on for Tyler Radke. I was just curious if you could comment on -- just dive more into the win rates for FCAS and what you expect moving forward?

[Ragy Thomas, executive]

Look, I think we have taken a very pointed approach right now given that we've only been in general availability for a short period. So I can confirm that when we are in a competitive and follow-on process that CCaaS in the CCaaS market. I can confirm that the win rates are pretty high. But we -- it's not -- we're not able to deploy it everywhere in every market across all teams.

And that's partly because we need to get to a critical mass of seats, which we should be getting through towards later this year. That will then allow us to be featured in analyst reports, which will then allow us to be default participant right now is word of mouth and people being very impressed when they actually see the platform in action and trying it out and doing a proof of concept and being convinced that a new [indiscernible] like us can outperform others. So it's more measured and it's more -- it's not around the world in all markets.

[Unknown Analyst]

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

[Ragy Thomas, executive]

Yes, very well, very well. It's one of the silver linings that we see -- so we are able to now digitize voice and have conversational AI called, not just text and chat and interaction. So many of the deals we are winning is because of our ability to manifest this. So there's a lot of talk about whose AI is better. We challenge our customers to just put this to task, and we show them that we can do a better job than others. .

So we have taken the approach of developing models across languages for each function and now developing those models specifically for industries. So we're able to start with a baseline of a much higher accuracy level than others. And then we customize those models. We've done thousands of custom models where that just gets to a really, really good percentage of accurate responses and our power is we're not a point solution offering AI in the contact center, right?

We have a full loan age and experience sitting behind it. So the frustrating thing for a lot of customers and brands is if you just go in with AI, the bot takes you through 17 steps and then you hit a dead end, and it's very frustrating because in the non-unified contact center, the consumer is now repeating everything you did which is beyond frustrated. So in our world, that doesn't happen because all that context you seamlessly transferred to an [ A ] and who picks up as the he was the one talking to them. So there's a few things that are strategically which is working very well for us.

[Operator]

Our final question comes from the line of Austin Cole with Citizens JMP.

[Austin Cole, analyst]

Great. I guess I just wanted to ask kind of as you do this rebalancing and you look at the core products, you mentioned what you're doing with insights and adding integrations with advertising and marketing. Kind of where do you see the road map for these products? And what can you do to if there's anything you can do to add stickiness to these products?

[Ragy Thomas, executive]

I mean the products are pretty sticky Austin when implemented correctly. So I think it brings us back to that execution that we have consistency and repeatability of execution we need to have. What we're finding is the product when configured the way they -- it's intended to be and use it right way, it creates a lot of value, and it's very sticky.

Where we struggle is people changes on either side, implementation wasn't done the way was originally envisioned because something changed or didn't think of that as a priority. So it's more self-inflicted. So I think we'll be in a better position to answer the question after we feel like our execution across the 16 stages of touching a customer is more pointed in repeatable across the stages.

[Operator]

We have reached the end of our question-and-answer session. And with that, I would like to turn the floor back over to Ragy Thomas for closing comments.

[Ragy Thomas, executive]

Thank you, Camilla, 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 on the next quarterly call as we continue on this exciting journey. We truly believe that the best is yet to come. Thank you very much, and have a wonderful evening. Thank you all.

[Operator]

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