Q4 2024 Sprinklr Inc Earnings Call
Greetings and welcome to the sprinkler fourth quarter fiscal year 2024 earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Eric Squirrel, Vice President of Finance.
You may begin.
Thank you Camilla and welcome everyone to sprinkler, its fourth quarter and full year fiscal 'twenty 'twenty four results financial call. Joining us today are Roger Thomas Sprinklers, founder and CEO and many serene Chief Financial Officer, We issued our earnings release, a short time ago filed the related form 8-K with the S. E T and we've made them available on the investor.
<unk> 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.
The financial results of sprinkler that involve many assumptions risks and uncertainties, including our guidance for the first fiscal quarter and full fiscal year of 2025 actual results might differ materially with that let me turn it over to Rajiv.
Yeah.
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.
Subscription revenue grew 19% year over year to 177 million, we generated a record $32 $4 million and non-GAAP operating income, which resulted in a 17% non-GAAP operating margin for the quarter.
The end of the fiscal year is often a good time to reflect on how far we've come and where we are growing the opportunity. We saw when we founded sprinkler is coming to fruition in an accelerated fashion because as the general debate.
After investing 14 years of unifying the backend of customer facing functions with our AI powered platform, we're beginning to see customers bring our vision of unifying to life with generate debate in conversational AI.
General debate has accelerated conversations happening at the brands digital edge, where the customer buys gives feedback and engage us for support and service.
Anyone can use Jenna Qian AI to build a chatbot.
But unless the engine or the foundation behind it is unified to sell to serve and to gain actionable insights.
I load chat bots can't manifest significant value for the brand in.
In today's Hyperconnected world customers must expedient, 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 an integration across our core portfolio see Cas in AI.
We have even more conviction today for our long term vision and success and a platform strategy that we have ever had before.
As many of you know we've been committed to this vision for quite some time now.
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 'twenty five revenue growth rate will be driven by a combination of execution that needs to be improved.
Clearly on the go to market friend as we over rotated to see gas.
And a difficult macro and economic condition that drove elevated churn.
We believe we now have the clarity on how to best position. This company for our next phase of growth and I've 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 Chad Trac Pham a member of our board of directors. Since June of 2023 has been appointed as the interim C O O where he's focused on Oregon.
This station on structure getting our teams to better collaborate cross functionally and bringing operational rigor to sprinkler.
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.
Two accelerated go to market efficiencies and better serve customers. Scott has been actively onboarding several new leaders across the Americas, Europe, and a P J I as well as our partner.
And today, we are very very pleased to announce that Amit Mishra has been appointed as our new Chief Technology Officer effective April 1st.
Amit that joins us from Adobe where he.
Led our global R&D organization.
That was responsible for their experience cloud platform.
To that he was the founder and CEO of go throw dot com and the CTO chief architect and head of engineering at Snap deal Dot Com. He has invaluable industry expediently extensive experience in scaling businesses and a deep understanding of Hey, I V.
None: We're excited to have him onboard soon.
We will continue working towards recruiting top tier talent with proven track records of success and operational excellence as we built out.
Bench strength to help us drive this company and growth 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.
None: Road 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.
None: The results of this work will take some time to manifest through the P&L.
Well, we feel very good that'd be have a clear plan and we brought in the right people with the right experience and we are heads down focused on executing as of January 31, 2024, We had 1700 35 customers, which is up 21% compared to the previous year.
None: While we are pleased with this growth it's important to know that we're only at a 4% penetration.
Our target market of 43000 names of companies as we shared during our Investor Day last July this indicates significant untapped potential for sprinkler.
Turning our focus to our technology platform, we're known for placing pace of innovation and this year was no different.
<unk> and engineering team's unwavering commitment to customers sets sprinkler apart in the marketplace in FY 'twenty four alone. We released over 2000 features and platform enhancements to further advance our vision ambition, we believe that has the potential.
To dramatically transform our brands Trento fish with AI.
A few highlights from Q4 for sprinkler, social we launched auto image and video optimization that reduces publishing failure and Optimizes q's ability for sprinkler insights we have extensively deployed AI to reduce time to insight for example.
Or something that would normally take an average of more than four hours to read and understand and a graph in charter and data form now is just simplified where they click a 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 read it to enable advertisers to diversified media coverage and access these platforms latest capabilities and lastly, with sprinkler service, we've expanded our channel offerings for.
Microsoft teams and slack and deployed AI in a conversational analytics.
You to do root cause analysis for top call drivers faster.
These enhancements within our architecture, especially our <unk> 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 tier sephora and UBS across all our product suites.
Global enterprises are seeking tangible evidence of efficacy and its potential to drive measurable productivity gains there is 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 like to share a few use cases, where our customers are making it real by leveraging our platform.
Our recent partnership with a major European Telco company.
Underscores our commitment to delivering next generation <unk> solutions. This.
<unk> telecommunications leader aims to be the number one telco in their market and wants to replace more than 10 existing point solutions in the contact center with our comprehensive unified service suite, that's enhanced by our AI. This includes over 30 plus.
Integrations with their existing customer service support systems. The timing of this collaboration is pretty strategic.
As it aligns with their new cloud strategy to optimize the seacoast environment. This customer is now running sprinkler to support 2500 agents in eight countries across social digital and voice channels. This is all geared to improve efficiency cost effectiveness.
And overall customer experience for this telco leader.
Next we have a leading pharmaceutical company that recently had their weight loss drug approved for sale in the market.
Anticipating an obvious increase in customer interactions and needed a partner to scale their front office technology with AI.
Discussions on updating their display technology quickly expanded to comprehensive migration to our social suite.
Or are we displacing income incumbent legacy solution. They also invested in understanding millions of public data mentioned across social competitive and digital conversations without adding additional people or resources, our innovative approach commitment to collaboration and expertise.
And navigating complex legal requirements required for regulated industries to mitigate brand risk.
Key factors in their decision by choosing sprinkler they gain a trusted partner committed to improving their customer experiences and generating ROI better ROI for their business.
The third example is about one of the world's leading health care companies that embarked on a transformation journey, which frankly many years ago. Their continued expansion and leveraging our unified <unk> platform. Now includes all of our product suite they have more than 450 <unk>.
Search and consume more than 2 billion mentioned to get competitive in product insights and to measure the effectiveness of their brand.
This most recent expansion last quarter was to execute against the new marketing strategy that included better content orchestration and strategic collaboration sprinkler is notwithstanding <unk> partner for this company across three of their key businesses.
Through our definition partnership agreement, we're also collaborating with them to significantly enhance our marketing suite.
We're introducing critical capabilities.
And resource management in our marketing suite.
I also want to remind all the few that we'll be hosting our first flagship customer event as a public company on may seven through nine.
<unk> unifies the edge AI will be in New Orleans, and we will have some of the worlds 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 friends.
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 are strengthening our foundation this year with top tier leadership.
By fostering innovation and by enhancing our execution capabilities critical elements that would fuel our sustained success and drive value for our customers and shareholders.
Our confidence is grounded in the conviction that we have for our long term vision.
So grounded.
And the AI powered unified <unk> platform, we've developed the global customers we serve.
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.
Thank you Rajiv and good afternoon, everyone. As you heard from Rajiv FY 'twenty four was a solid year for sprinkler punctuated by strong financial results with noted opportunities for operational improvement.
Starting with our Q4 financial results.
Revenue was $194 2 million up 17% year over year.
Rajiv: 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 'twenty five.
Our subscription revenue base net dollar expansion rate in the fourth quarter held steady at 118%.
As a reminder, we calculate <unk> on a trailing 12 month subscription revenue basis, which makes it a lagging indicator.
While we do not forecast MBE, 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 than subscription revenue over the preceding 12 months, which is a 17% increase year over year.
And as Roger stated we ended the year with 1735 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 13 cents per basic share.
This 17% non-GAAP operating margin for the quarter was a result of revenue over performance strong subset of 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 eight cents 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 RPM, 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 <unk> was <unk>.
$587 million up 21% year over year.
During the fourth quarter pursuant to the company's stock buyback program. We purchased two 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 one 2024 and March 26, 2024, we purchased an additional two 1 million shares for a total cost of $27 1 million.
And as disclosed in our earnings release I am happy to report that Sprinklers Board has authorized a $100 million expansion of the existing stock buyback program.
As such as of March 26, 2024, we now have $143 3 million remaining in our share buyback authorization and we intend to complete the full buyback here in FY 'twenty five.
Turning to a quick summary of financial results for the full year FY 'twenty for.
Total revenue was $732 4 million up 18% year over year with subscription revenue of $668 5 million up 22% versus the prior year Cal.
Calculated billings for the full year was $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 <unk> 41 cents and.
And our 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 FY2023.
Before moving onto guidance I would like to provide additional details on the go to market initiatives Raj you mentioned, starting with renewals, we're implementing a more systematic approach to renewals with a dedicated renewals team.
In terms of our customer engagement models, we're creating pods of customer facing teams and investing deeper in sales and skills enablement and training the best equip our people in the field.
And with regards to solution selling we're developing solution packages that best align to customers' priorities and their strategic technology roadmap.
Moving now to our Q1 and full year, FY, 'twenty <unk> 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 'twenty five.
Before we walk through FY 'twenty <unk> 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 'twenty five 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 <unk> <unk>.
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 'twenty five.
The change from basic to diluted shares which represents about half of a penny in Q1 EPS calculations.
Note that the sequential decrease in Q1 non-GAAP operating income is typical for us as we have larger expenses at the start of the year for sales kickoff marketing campaigns and selective hiring.
For the full year FY 'twenty five we expect subscription revenue to be in the range of 745 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.
For modeling purposes assume the quarterly revenue distribution follows the same trend as FY 'twenty four.
These guidance ranges imply.
425 professional services revenue of $64 million flat with the numbers that we posted for FY 'twenty four.
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 see cash delivery capabilities and as such we estimate our professional services gross margin to be largely breakeven throughout the course of FY 'twenty five.
I would now like to touch on the billings topic for FY 'twenty five.
We have been working diligently to improve billings duration for new deals such that we no longer estimate billings growth to lag revenue lags subscription revenue growth.
For FY 'twenty five we estimate billings to grow in line with subscription revenue.
Given this new dynamic we estimate total billings for FY 'twenty five of approximately $868 million and 193 million for Q1.
For modeling purposes. This total billings number can be spread across the arc of the four quarters largely following the same trend as FY 'twenty four.
For full year FY 'twenty five for non-GAAP operating income we are forecasting a 13% non-GAAP operating margin similar to what we posted for full year FY 'twenty four.
Rajiv: This equates to a range of $104 million to $105 million on a non-GAAP net income per diluted share of 38.
239 as.
Assuming 291 million weighted average shares outstanding.
Rajiv: Change from basic to diluted shares which represents about two cents per share in the full year FY 'twenty five EPS calculation.
Note that we expect subscription gross margins to come down by approximately two percentage points in FY 'twenty five driven by one time setup costs associated with new cloud environments to serve new sea gas customers.
These costs are baked into the 13% non-GAAP operating margin highlighted earlier.
In driving 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 beyond here in Q1. This other income line primarily consists of interest income first.
Furthermore, a $14 million total tax provision for the full year FY 'twenty five 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, 'twenty, five which would equate to a free cash flow metric of $18 million for the full year.
This will be a 300 basis point improvement over FY 'twenty four.
We will not be updating our free cash flow guidance quarterly, but we will provide an update as needed throughout the year.
For the second consecutive year, we expect to be net income positive for the full year on a GAAP basis.
We are also reiterating our long term financial targets for FY 2007, 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.
Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue.
And you May press Star two if he would like to move your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Arjun Bhatia with William Blair. Please proceed with your question.
Thank you guys appreciate it Steve.
As detailed here.
Wanted to start off with.
I know last quarter and this quarter. Its when you were talking about some of those.
<unk> and <unk>.
There are pressures that we're seeing in the base, but when I look at the numbers.
CRP umbrella and the low Twenty's billings growth was strong.
I'm not sure I've always seen anywhere where that pressure is coming.
At least in Q4. So can you maybe just walk us through what Youre seeing in terms of demand and is there something thats, maybe offsetting yet from a new customer perspective.
Rajiv: Where you are seeing some tailwind so I suppose that's all sorts.
Some of the term headwinds.
Thanks Arjun.
I think the way we look at this as you would note that in the past we have said, we endeavor to get to a 90% and above gross retention rate of renewal rate and I think the pressure. We're seeing now is just what's happening in the macro.
Definitely driven by usage patterns Wilson.
Below that.
In terms of what we shared in the Q3 earnings call. Some of that had obviously caught us by surprise and so we wanted to just be transparent there.
So I think a lot of this is driven by where we want to be now certainly it's.
Rajiv: It's not yet fully reflected in the numbers and I was saying even when you look at the <unk> calculation. It is going to start to show up because some of these are lagging indicators, but as I'm sitting where I sit and looking into at least the first half of this year.
Do expect to experience our keep experiencing renewal pressure just the way I think <unk> spoken in the December call.
Okay.
Understood.
And then just in terms of as you're thinking about fiscal 'twenty five.
It sounds like you are making quite a few investments in our free cash.
Our product set but when you think about growth.
Some of the go to market.
Changes that are being made how do you think growth should fare between your core social solutions versus <unk>.
And then.
Fiscal 'twenty five.
Yes, John I'll take that this is rajeev.
We have.
Rajeev: We designed our go to market it should be what we think is.
Fairly high quality multi product company with multiple buying centers and and so those changes are so we've just kicked off our new year's so those changes are have been rolled out.
That means we have specialist focus on our core offerings and specialists focused on <unk>.
We expect <unk> to be a growth driver, but we also expect that renewed focus to start.
Yielding better results in core.
As the quarters.
Yes.
Okay perfect. Thank you very much.
Thank you again.
Our next question comes from the line of Raimo <unk> with Barclays. Please proceed with your question.
Thank you congrats from me as well.
Two quick attrition Monesia, 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 narrowing the ranges that you've given can you just talk me through that logic in theory I would think it's broader reinsurer in the smaller range I'm just trying to understand that and then I had one follow up.
None: Yes, hi, Raimo, so deciding 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're certainly felt that.
You will also note last couple of years, we've 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 were looking to get into a lot more operating discipline. It just felt the right time for us to introduce a much tighter range for the full year as well.
Okay. Okay. Thank you and then.
Rajeev one for you if I think about the CCAR space like a lot of players want to kind of play the AI angle and thing like what we have done et cetera can you talk a little bit about like who you're running into on those.
<unk>.
Like what's the main difference between who is real or like what are you offering that is more real than what others have to offer. Thank you.
Well I can confirm that.
We are running into the traditional incumbent large CCAR seek as competitors who've been around for a while.
Look I can't comment on.
Other people are doing with AI, but I can tell you that our win rate is pretty high and when we get.
A chance at bat 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 six and 20 applications that they use in the contact center that usually connected to somewhere between 15 and 100 and some cases external applications that they have to go look at.
And these.
510, and 15 point solutions from a knowledge base to quality management to workforce management to ticketing to two two agent console and supervisor console and all of those community knowledge base them not being mesh together, even the big.
Hey, guys.
Some of them don't even have a.
Okay agent console that appeared ticketing capability. So what we are encountering as this mishmash of solutions from competitors that are in woven together and ours is clean pure everything worked with everything else and then we integrate with all the external systems and everything is based on.
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 IV or with the conversational expedient imagine not having to pass one and say Hey, I just wanted to know what my credit card balances when you pick up the phone.
And so its fairly dramatic right at the onset with the customer goes through the community will be using AI when the agent logs on with automatically summarized all the previous assignments. We've looked at the knowledge base not you don't have to search we found you the right to lines that you can use being taken through guided workflows.
The agent is determined using spot response smart assignments, which is AI base has prompted with this mantra response nudged with better things that there can be up sold and better responses and so it's just a completely end to end AI and summarized when you close the call and what's happening now is there a startup that offer.
These.
None: Some of these capabilities, but it's an add on and you have to go figure out how to bolt it with your existing infrastructure, whereas our legacy is in conversation management and AI in over 100 languages that we've been developing modeled for in financing for the last six seven years.
Okay that makes sense. Thank you.
Thanks Amy.
Our next question comes from the line of pendulum borrow with J P. Morgan. Please proceed with your question.
Hey, guys. This is <unk> on for pendulum. Thanks for taking the questions on the net revenue retention side. It was great to see that holding stable at 118%.
As we're thinking about going forward I mean, how should we think about the trend for.
For the rest of this year given the.
The reiteration of the 10% revenue growth.
For the year and I also have a quick follow up.
Yes, I think this is where I did say in the prepared remarks that we do expect this to come down over the next few quarters.
I won't be able to give you an exact number of where I think it should land, but I think.
Just looking at the way this metric is calculated for US and this is why I take pains to walk through every quarter that this is done on a trailing 12 month subscription revenue basis. So as some of the renewal pressures that I spoke about earlier work through the revenue waterfall I do expect this to keep coming down.
Again, no point of guessing, where it's going to come down, but it will come down.
Got it and then one of the customer wins you highlighted during the quarter was with DTE.
I mean, just doing a quick Google search it seems like <unk> supports over 80000 service agents.
From what we see on our end and I think thats.
<unk>.
Deutsche Telekom does which is also a customer so just curious how that.
Relationship came to fruition.
If you can unpack any details around that that deal. Thanks.
They looked at the <unk> right.
I think the number one brand in the UK one of the top brands.
OLED everybody with.
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 when for US hard fought one and the great validation of the vision. He can't go into any of the details. Unfortunately, but I can tell is very strategic and it's something that.
Is along the lines of other big pop bigger partnerships, we are signing off very very early but we see a lot of potential.
Our next.
<unk> comes from the line of Elizabeth border with Morgan Stanley. Please proceed with your question.
Great. Thank you very much I wanted to hit on some of the productivity savings you mentioned you referenced the customers 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.
This impacting kind of your own cost initiatives I'd be curious to hear how you've changed your own view on spending and how that may play out in your margin expansion. Thanks.
Oh Elizabeth I have to thank you for that question.
We are we are running several implementations of our own AI technology for ourselves.
And obviously, they're smaller than many of the customers we serve and we're seeing some very very dramatic.
Pak.
Give you a quick example, and by the way don't model any of this into this year's guidance.
Because this is very early.
But it's a big focus for our sprint launched into is a big focus for us this year and I'm personally focused on it but I'll give you. An example, we just model the process from beginning to end was going to take a week.
For every one of our.
Outbound outreach is.
And this involves very interesting and what's I mean like all companies BBB companies do you have to research everything that's out there.
Externally we need.
None: <unk> public filings investor opposed to news.
People Love.
Figure out a point of view, what the focus areas for the company then you got to translate that into what products fit.
And then you got to put that into an email and send it out if youre, an SDR NAND prices to do it really well.
We're taking a week across all the stakeholders and we just finished our internal pilot and literally now you click a button and ask our internal go on teams ask our internal.
Conversational AI.
None: Product and you get the answer in seconds. So we're talking about a dramatic and this is where we get excited about our own ability to use it now granted it's too early and we are not modeling any of this but I would guess.
Italy hope that in the out years, we're going to we're going to be able to grow without without adding resources and drop that to the bottom line.
Great. Thank you so much and just as a follow up.
On the go to market changes.
The Stakes in Canada over Correctional, and you see cash 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 pitch deficiency. Your pipeline that you can speak to him.
I mean look I think of the leadership changes are the most important one tied to start there.
I mean no plan.
He is going to work unless you have great leaders so.
This is I can tell you. This is the most direct most focused most substantive set of changes that we've made.
I can tell you that in every area. We brought in leaders in there and done that you can go look them up on Linkedin.
Second we've spend a lot of time getting everyone on the same page mapping out our 16 stages of the customers 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 am very optimistic but I can also tell you. This is going to take several quarters to rollout.
And then these leadership changes are cascading and it takes even though just to flow through.
The team that we want everywhere, it's going to take us.
A couple of quarters and so.
We feel very good about where we go in and how we're approaching this I can tell you. This was always a priority right. Now this is the priority and so that's all I can tell you about what's different.
Great. Thank you so much.
Thank you.
Our next question comes from the line of Brett.
No block with Cantor Fitzgerald. Please proceed with your question.
Hi, guys. Thanks for taking my question.
I guess the first one is maybe on the annual customer count metric I guess is there any way for.
Additional color into maybe what was the bigger bigger driver of that this year and between C.
Cast and maybe your kind of core social media products.
And how has that changed maybe compared to years past.
I would say look at what I can tell you is it was didn't see cash or core.
We had outlined last year that we were.
We've put together a team that's focused on new logos.
Small team.
And have a limited capacity, but.
We're seeing success with that model. So that's something that we're going to double down on.
Got it and then maybe.
I can just touch on the I think if I heard you correctly, you are expecting a two percentage point headwind to call us or gross margin this year.
Due to one time implementation costs, where your CCAR solution like as soon as maybe on a bit more detail.
A 2% headwind kind of sounds like a lot.
Yeah. So this is many should I said approximately 2%, but what is what is going on here is that our data residency requirements in many geographies across the globe and largely this is driven by as we spin up new instances and without hyper scaler.
Partners that are one time fees for a lot of them there are.
The initial cost is setup these instances.
Again.
They really estimating approximately up two 2% hopefully it will be lower.
But that's what's baked into the model right now.
Perfect. Thank you.
Our next question comes from the line of Michael Berg with Wells Fargo Securities. Please proceed with your question.
Hi, there congrats on the quarter and thanks for taking my questions I guess just in terms of.
The relationship between free cash flow and operating margin should we expect that this study moving forward.
Thank you.
Yes, I think that that's a terrific question as billings get.
Sort of in line with subscription revenue and I'll also note that as the professional services, which many a times as sort of build upon completion, so that as a separate element, but over time, you should expect our free cash flow to get closer in line to operating income wherever they are.
<unk> will be as <unk>.
Many times, we have to repay for lot of.
Cloud use it 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've 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 couple of years ago.
The positive $51 million in FY, 'twenty, four and I think based on where we sit we're more comfortable with an $80 million number for FY 'twenty five again, all all steps in the right direction, but you should see the narrowing of the two margins overtime.
Got it helpful. And then just a quick follow up to that <unk>.
The implied margin expansion for this year.
Or in the 150 bps range pretty meaningful step down from last year.
I know, there's all the go to market changes happening in the background, but anything for us to point to as to why there is not.
More margin expansion here.
Gross flows or just natural offset the.
Realignment of the go to market organization. Thanks.
And just to make sure I understand so we ended FY 'twenty four with.
Around 13% non-GAAP operating margin.
And that's what we are using the guide for the full year FY 'twenty five.
Maybe I'm not following the question.
Sure just the <unk>.
Incremental step function in operating margin progression is much less implied for fiscal 'twenty guidance relative to what was done in fiscal 'twenty four.
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 is the go to market changes happening in the background, but there's just something also play.
Yeah and.
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. 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%.
None: Helpful. Thank you.
Our next question comes from the line of Jackson Ader with Keybanc capital markets. Please proceed with your question.
Great. Good evening guys. Thanks for taking our questions.
The first one rajiv.
How can we or I guess can we quantify how much of either bookings.
Dollars or growth actually.
<unk> is being generated from generative AI and.
And then.
And how much maybe going forward do you expect to come from general demand.
Jackson, Thank you for that question.
Have taken the approach.
Of like infusing everything we do with AI.
In the past.
Take the approach of trying to monetize it separately however.
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 it's this is a quite a bit of work. So again don't factor anything in for this year.
We think there is an opportunity to to charge a premium for at least for AI, plus offering and we're exploring that.
So right now no but.
Loading the possibility of being able to do that.
Our our position has always been that AI is a big differentiator for us across everything we do.
And but I think the market's willing to to absorb some.
Additional cost for it.
Okay, Alright, Gotcha, and then on the on the renewals pressure.
So expecting it to kind of persist here in the first half and then and then maybe start to go away I'm just curious like how do we know that the pressure will and 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.
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 that we have done in the past is is we think the majority of it is self inflicted and we are finding that is the best execution.
Our team.
Where is the best execution of any competitor in our core market and the C cap frankly, we win.
So we are finding is as I say it is self inflicted because weak execution weak execution on our side meeting strong execution of the competitor is won't be losing and so it gives us a lot of confidence that this is fixable things.
And it's a part of this big set of initiatives that we've 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 is addressed.
Okay I got you.
Process turnaround not necessarily like a customer journey, okay, alright, that's great. Thank you.
Correct correct. Thank you Jackson.
Okay.
Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.
Hi, This is Matt <unk> on for Tyler Radke I was just curious if you could comment on.
Just just dive more into the win rates for <unk>.
Free cash and what you expect moving forward.
Look I think we have taken.
Barry pointed approach right now given that we've only been in general availability for a short period.
Competitive RFP.
And follow on process that <unk>.
In the <unk> market I can confirm that the win rates are pretty high but it's not we're not able to deployed everywhere in every market across all teams.
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 analysts should approach, which will then allow us to be.
All participants right now is word of mouth and people being very impressed when they actually see the platform inaction and trying it out and doing a proof of concept can be convinced that a new comment like us can outperform.
Others. So.
It's more measured and it's more.
It's not around the world in all markets.
Got it and can you speak to the conversational AI.
Offering and how that's ramping.
Very well very well has one of the silver linings that we see are.
So we are able to now digitized voice and have conversational AI.
<unk>, not just text and chat and interaction so.
Many of the deals we are winning is because of variability to to manifest. This so there's a lot of talk about who's AI is better we challenge our customers to just put us 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 lapping those models specifically for industries and so we're able to start with the baseline of a much higher accuracy.
Level than others and then we.
Customize those models, we've done thousands of customer models, where it just gets too really really good percentage of it.
Accurate responses.
And our power as you know, we're not a point solution offering AI in the contact center right. We have a full blown age and experience sitting behind it. So the frustrating thing for a lot of customers in branches. If you just go in with AI.
<unk> takes you through 17 steps and then you hit a dead end and it's really frustrating because in the non unified contact center. The consumer is now repeating everything you did which is beyond first rate. So in our world that doesn't happen because all that context, youre seeing seamlessly transferred to an alien who picks up.
He was the when talking to them. So there's a few things that are strategically it is working very well for us.
Thank you.
Thank you.
Thank you.
Final question comes from the line of Austin <unk> with citizens JMP. Please proceed with your question.
Great. Thanks for taking our questions.
I guess I just wanted to ask kind of as you do this rebalancing and you look at the core products, you mentioned, what you're doing with insights and adding integrations.
With advertising and marketing.
Kind of what where do you see the roadmap for these products and what can you do to.
If theres anything you can do to add stickiness to these products.
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.
We are finding is the product.
When configured the way it's intended to be used.
And you used the right way creates a lot of value and it's very sticky.
Where we struggle is people changes on either side implementation is always and done the way. It was originally envisioned because something changed or seven.
Think of that as a priority so it's more self inflicted.
I think it will be in a better position to answer that question. After we feel like our execution.
Cost of 16 stages of touching a customer is more pointed.
<unk> across the stages.
Okay. That's helpful. Thank you.
Thank you.
We have reached the end of our question and answer session and with that I would like to turn the floor back over to Rajiv Thomas for closing comments.
Thank you Camilla.
And thank you all for joining us today again, I would 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.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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