Sprinklr Aktie

Greetings, and welcome to the Sprinklr Q1 Fiscal Year 2027 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. [Operator Instructions]

It's now my pleasure to turn the call over to Eric Scro, Head of Investor Relations. Eric, please go ahead.

Ladies and gentlemen, I do apologize. I will now turn the call over to Head of Investor Relations, Eric Scro. Please go ahead.

Thank you, operator, and welcome, everyone, to Sprinklr First Quarter Fiscal Year 2027 Financial Results Call. Joining us today are Rory Read, Sprinklr's President and CEO; and Anthony Coletta, Sprinklers Chief Financial Officer. We issued our earnings release a short time ago filed the related Form 8-K with the SEC, and we made them available on the Investor Relations section of our website, along with the supplementary investor presentation.

Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP.

In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the second fiscal quarter and full fiscal year of 2027, the impact of our corporate strategies, the benefits of our platform and our market opportunity. Our actual results might differ materially from such forward-looking statements.

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

With that, I'll now turn it over to Rory.

Thank you, Eric, and hello, everyone. It's great to be with you today. In the first quarter, total revenue grew 7% year-over-year to $219.5 million, and subscription revenue grew 6% to $194.8 million. We delivered $31.7 million in non-GAAP operating income, representing a 14% non-GAAP operating margin. I want to thank our global teams, customers and partners for their trust and ongoing support.

We are making meaningful progress in building a stronger, more customer-centric company and actions we've taken since my arrival at Sprinklr are beginning to translate into meaningful and tangible momentum. While transformations of this scale take time, we remain on track with the milestones we've outlined and are confident in our trajectory toward driving durable long-term value creation.

We are firmly in the second phase of our transformation, which we call transition and execution. This phase will continue through fiscal year '27 and is focused on embedding the changes we put in place the last year to build a stronger foundation for scale, efficiency and durable growth. As we successfully complete this transition, we expect to move to the third phase acceleration as we head into fiscal year '28. This transformation is a deliberate multiyear journey, and we're increasingly confident in the direction we're headed.

While we continue to clean up and improve previously challenged accounts, Underlying trends are moving in the right direction. This is driven by our Bear Hug initiative with larger customers a reacceleration of our innovation and paying down years of technical debt. Visibility began to improve in the second half of last year and continued into 1Q where we achieved our best renewal rate since fiscal year '24, reflecting sharper go-to-market execution and stronger customer engagement.

While we saw some pressure in the Middle East during this quarter, overall demand remains healthy. We're seeing more customers commit to larger multiyear agreements reflecting growing confidence in our platform and long-term partnership. A clear example this quarter was the largest software deal in Sprinklr's history. A multiyear platform agreement with a leading global consumer electronics company signed in the first quarter. This win underscores our ability to deliver differentiated value at enterprise scale reflecting strong execution by our team and help push total RPO past $1 billion, a key milestone that reinforces our position in a large and expanding market.

We are also increasingly differentiated by our technology leadership. Sprinklr's unified AI native platform connects insights into actions across customer feedback, service, brand intelligence and marketing. In CFM, customer feedback management, the market is moving beyond surveys to a unified 360-degree view across surveys, social contact centers and reviews. We're seeing momentum here supported by analytics recognition, a recent 7-figure displacement win that closed in 4 weeks and a solid pipeline.

Our platform's advantage is also driving traction in our agentic offerings with outcomes improving as adoption scales. For example, 1 large customer is achieving a 90% containment rate with our AI agents. And customers with more than 6 months of full co-piloting deployment are seeing a 55% reduction in handling times on average with some exceeding 70%. Lastly, another customer successfully automated over 85% of their presales conversations across 11 markets while improving CCaaS and AI-led engagements are delivering 4x higher conversion rates.

Beyond the contact center, our upcoming summer release will bring LLM insights to general availability, enabling brands to track their presence sentiment and citations across platforms like chat GTP (sic) [ ChatGPT], Gemini and Perplexity and act on those insights directly within our Sprinklr platform. This flywheel powered by rich contextual data and span use cases from copilot to full Agenetic continues to drive traction.

Our purpose-built AI SKUs are gaining momentum with over 180 AI projects underway. We are deepening engagement and expanding our long-term opportunity with our customers. We recently announced the acquisition of the team and assets a ViralMoment, a leading AI native video analytics company. As short-form video becomes a primary channel for brands engagement and discovery. This product-focused acquisition strengthens our platform and accelerates our AI video capabilities. We will continue to pursue strategic opportunities to enhance our technical platform.

Now I'd like to share a couple of examples of why we're winning and how iconic global brands are using Sprinklr. The first story is a key enterprise win that underscores our ability to execute at scale. We recently deployed one of the world's leading industrial companies through one of our most complex implementations to date, spanning multiple business units nearly 3,000 users and a broad product footprint.

We replaced a highly fragmented stack with our unified platform, supported by deep partnership hands-on enablement and tailored training. The results have been strong with multiple 10 out of 10 health scores accelerating adoption and growing confidence across senior stakeholders. This customer is now expanding into our marketing suite reinforcing our ability to land, scale and build durable enterprise relationships.

Our second story highlights an expanded partnership with a leading multi-brand telecom and media provider, a big win that reflects both platform strength and improved execution. Over the past year, we've deepened executive engagement and demonstrated consistent value, earning trust as they define their CX strategy.

In a rapid 3-week cycle, we replaced legacy survey tools with a unified AI native approach combining structured and unstructured customer signals and an enterprise scale solution. Like differentiated Sprinklr was our ability to deliver real-time AI-driven insights across the full customer journey. This CFM win underscores a broader shift toward unified platforms and positions us for continued expansion as we scale additional use cases.

In closing, we're making solid progress toward becoming a more customer-centric execution-driven company. with momentum building each quarter as we move toward the acceleration phase of our strategy, driven by our AI native platform, we're seeing improving renewals, rising customer sentiment and a strengthening pipeline.

Clear signs, our strategy is taking hold backed by a debt-free balance sheet and consistent free cash flow we believe sustained execution over the coming quarters position us to enter the acceleration phase as we approach FY '28, translating platform strength and measurable outcomes and building a foundation for durable growth.

With that, I'll turn it over to Anthony for the financials. Anthony?

Thank you, Rory, and good morning, everyone. First, I want to recognize the commitment and passion for our customer success of our teams across the company, the driving force behind our continued progress and growth. Quarter marks another step forward and Q1 results came ahead of expectations across the board.

Now let me turn to our financial performance. In Q1, total revenue was $219.5 million, up 7% year-over-year. Subscription revenue was $194.8 million up 6% year-over-year. The outperformance in Q1 was driven by better linearity and improving renewals. Operational Services revenue came in at $24.7 million. This was better than anticipated due to increased activity for completion of some of these labs global projects that we've talked about for the past few quarters.

Our subscription revenue-based net dollar expansion rate in the first quarter was 104%. After a few quarters of stabilizing the dollar expression, this is the second consecutive quarter showing steady improvement. One comment I'd like to make on our $1 million customer core metric, our business has evolved through the years and the shift to a pot-based go-to-market structure changes how comps are owned, expanded and measured. Given this shift, coupled with the fact that it is not a focus internally now tied to sales incentives or our AI-driven growth strategy, we will no longer be disclosing this metric.

I will note, however, that the net dollar expansion rate for the $1 million customer cohort remained at 115% in Q1, which we view as a better measure of increased share of wallet. More relevant to how we are transforming the business is our Bear Hug focus that has been yielding dividends. We believe this will continue to solidify our baseline and contribution from the top-tier enterprise customer base of time. For example, our Q1 renewal rate was the highest renewal rate in more than 2 years.

Furthermore, a majority of our renewal dollars are multiyear deals, which is driving an increase in the average contract length for our overall customer base. We like to see such an uptick as this will compound over time. Total RPO crossed the $1 billion mark in the quarter, reflecting the depth and quality of contracting demand and increasing visibility into the future. As Rory said, we remain focused on converting the backlog efficiently. At the end of Q1 FY 2027, total RPO was $1.04 billion, up 10% versus Q1 last year and up 5% quarter-over-quarter. And current RPO was $627.1 million, up 5% year-over-year and up 1% quarter-over-quarter.

Most of these metrics are at record levels for Sprinklr and pointing in the right direction. We consider RPO to be a leading indicator, and we typically pair it with other metrics to better appreciate underlying business momentum. Considering the current RPO growth and improvement in main dollar expansion, we see this as a great shot.

Regarding gross margins for the first quarter. On a non-GAAP basis, our subscription gross margin was 74%, and the services gross margin was breakeven resulting in a total non-GAAP gross margin of 66%. As noted in previous calls, we are experiencing higher data and hosting costs in response to business opportunities especially in Sprinklr Service and our expanded AI capabilities.

In particular, the ARR for our AI native SKUs was up 47% year-over-year. and we're seeing outsized growth with our Agentic contract center intelligence and copilot products. We are prudently investing to capture this opportunity, and as we are seeing an increasing number of AI engagements in flight for the platform.

Turning to profitability for the quarter. Non-GAAP operating income was $31.7 million or a 14% margin, which drove non-GAAP net income of $0.11 per diluted share. We generated $65.8 million in free cash flow in Q1, representing a 30% free cash flow margin. The strong sequential improvement in free cash flow was driven by cost discipline, a quarterly record for cash collections and improved cash flow measure.

Our balance sheet remained strong with $442.8 million in cash, cash equivalents and marketable securities and no debt. During the quarter, we repurchased 17.1 million shares as part of our accelerated share repurchase program. As of May 29, we have $75 million remaining in our $200 million authorized repurchase program.

As Roy noted, we are excited to welcome the ViralMoment team to Sprinklr. We believe the technology and the team will help accelerate our video intelligence offering. We paid for this acquisition with cash on hand here in the second quarter and have included ViralMoment's financial impact in our guidance, which I'll discuss shortly. Even after completing the authorized repurchase and this acquisition, we remain well capitalized to execute our strategy and drive our growth agenda.

Now I'd like to shift to our financial outlook for fiscal year 2027. As Rory shared in his remarks, we are in the second phase of our transformation and mindful of the current macro and geopolitical environment, which has caused a handful of deals to be delayed. Our expectations as of today regarding the dynamics are factored in the following guidance figures. We remain confident in our strategy and are excited about the medium and long-term trajectory that is forming for Sprinklr.

For Q2, we expect total revenue to be in the range of $214 million to $215 million, representing 1% growth over year at the midpoint. Within this, we expect subscription revenue to be in the range of $193.5 million to $194.5 million, representing 3% quarter-over-year at the midpoint. The Q2 guide implies $20.5 million in professional services revenue, which is down 13% year-over-year.

The pro services line has been trending down as we've been making progress with previously challenged accounts and have completed some of the large projects we've referred to in recent quarters. We expect Professional Services gross margin to be negative 10% in Q2 due to continued investment in Sprinklr Service delivery and the completion of some higher-margin projects. We believe this is worthwhile as these implementations will yield dividends in terms of increased consumption and customer satisfaction in the future.

We expect non-GAAP operating income to be in the range of $29.5 million to $30.5 million, resulting in a non-GAAP net income per diluted share approximately $0.10, assuming 241 million diluted weighted average shares outstanding. The sequential moderation in non-GAAP overcalling income is pressured by lower pro services revenue in Q2 but more importantly, it's a structural shift for the long term. It reflects strong adoption of our products, which is driving higher cloud and data costs, as noted in prior quarters. We are also investing in future growth by expanding AI and R&D talent, particularly forward deployed engineers in key regions.

For the full year FY '27, we are flowing through the subscription bid from Q1 and raising our subscription revenue guide to be in the range of $779.5 million to $781.5 million, representing 3% was year-by-year at the midpoint. I'd note that we are seeing some downward pressure in the Middle East with certain deals being delayed. So at this point, we feel it's more prudent to see how the situation plays out. We estimate that the sequential increase in quarterly subscription revenue. We resumed in Q3 even improving renewal rates and pipeline conversion compared to prior year.

We now expect total revenue to be in the range of $866.5 million to $868.5 million, representing 1% growth year-over-year at the midpoint. This total revenue guide now assumes professional services revenue of $87 million. We expect for services revenue to normalize now due to a successful completion of some Bear Hug projects. This new level of services is approximately 10% of total revenue, which is in line with the trading 3-year average.

For the full year FY '27, we now estimate non-GAAP operating income to be in the range of $139 million to $141 million, driving a 16% non-GAAP operating margin. This equates to non-GAAP net income per diluted share between $0.48 and $0.49, assuming 242 million diluted weighted average shares outstanding. This new range of non-GAAP operating income reflects our current assumption for services and incremental AI investment, including ViralMoment's, we estimate non-GAAP operating income to improve gradually in the second half of the year as we expect some efficiency gains.

Deriving the net income per share for modeling purposes, a total tax provision of approximately $42 million needs to be added to the non-GAAP profit before tax line. [ Get ] to non-GAAP profit before tax, start with the non-GAAP operating income ranges provided and had an estimated $20 million in other income for the full year with $5 million of that to be earned here in Q2. This other income line primarily consists of interest income. We estimate a tax provision of approximately $9 million in Q2. This equates to approximately a 26% effective tax rate on our non-GAAP profit before tax for both the quarter and the year. We estimate we will generate full year free cash flow of $150 million with about $10 million to come here in Q2. This is consistent with our free cash flow seasonality in prior years.

In summary, Q1 was another step forward as we continue positioning the business for future acceleration. We are seeing positive signs in renewal rates, customer engagement and overall execution which we believe should progressively translate into improved profitability as we move to the latter portion of the year. Our fundamentals remain solid with a healthy balance sheet, from cash generation and improving come. As we progress through this transition, we are building momentum with greater focus and operational discipline, supporting a more durable growth trajectory. We believe FY '27 represents an inflection point driven by the expanding potential of our AI native platform.

And with that, we'll open the line for questions. Operator?

[Operator Instructions] Our first question today is coming from Catherine Trebnick from Rosenblatt.

Could you unpack the Middle East for me a little bit more and give us more color on that? I just wanted to understand how that's impacting revenue.

Yes. Sure, Catherine. When we did the look at the guidance at the beginning of the year, we took into consideration the macro environment. Middle East definitely had some challenges in terms of that pressure. I want to acknowledge, though, the team, our team in the Middle East and our customers in the Middle East have been amazing. They've engaged, they've had a very difficult and unsafe environment. They've all worked together.

There were challenges that impacted some of the cloud delivery centers we had to move 54 customers on the fly out of a damaged cloud infrastructure environment in the Middle East to Ireland on the fly, 54 of them. The team rose to the occasion, the customers work well, and that team really responded in a tough and dangerous environment.

Good news is the environment is improving. So we're encouraged and we're hopeful it's not over, so there's still more concern. We saw about $3 million to $4 million of slipped deals that could have closed in the quarter. that moved. We have a very healthy pipeline in the Middle East, Catherine. If you look at our 12 regions across 3 geographies, it's in the upper middle and it's got a very healthy pipeline. There are several very large deals over the next 2, 3 quarters in the region. And I'm confident with the focus and the dedication and commitment of our teams there, the customers are very resilient. We're not out of this environment, this macro cut yet.

So our thoughts and prayers are always with our team member safety first. But I think we're encouraged that the pipeline remains strong. The engagement of the customer is good. And in the first quarter, we saw about $3 million to $4 million upslipp deals. Anything else you want to hit, Catherine?

Yes. I do want to hit Germany and the U.K., you had some really nice cloud contact center deals in the areas and give us an update on how those are doing and then how you're focused on that particular product segment.

Yes. I think Central Europe and U.K. have been strong performers. Those are 2 of our other strong upper middle regions, no question. We've seen a significant uptake in our CCaaS and our end-to-end platform solutions in the region. There were some challenged accounts there last year when I came in, and we definitely have made significant progress across those customers. We kept them all so far, knock on wood. And most all have already extended. So good news. And we're seeing good as you might have noticed, I mentioned over 180 AI customer engagements, we're seeing them on many of those base deals in Europe.

I'm also encouraged in U.K. There are some very interesting opportunities here in the second quarter for us there in the region. And we've been building these deeper relationships around the platform play in the telco, the gaming space, and I see significant traction. I'm hopeful that we'll be able to talk about some of that and the next quarter or 2 earning announcement. So I like the progress there, good demand, good uptake.

We're seeing the engagement of customers across the planet increase. They see us as a relevant player even in this world where there's kind of skinning down the number of IT providers, because of our broader platform play and our ability to do social conversational commerce, customer feedback management, digital service and then voice service, I think they see us really as a platform.

And with the improvement of bearhug they're seeing a different Sprinklr. And we're seeing that in terms of improved renewal rates, and we're seeing it in terms of length of deals, and we're seeing it in terms of the engagement work in with the iconic brands having important discussions about real transformation, real AI engagement on the Agenetic and copilot side.

Our next question today is coming from Jackson Ader from KeyBanc Capital Markets.

My first question is, Anthony, you mentioned that the you expect a sequential build in the subscription revenue starting kind of in the back half for the third quarter. And part of that was based on pipeline compression. Just curious about like what underpins your confidence that pipeline conversion is going to compress? And are there risks that it might not?

Yes. No, thanks for the question. I mean it's a number of factors. First, on the -- we are building the subscription revenue, as you know, also on the back of strong renewals now over the past couple of quarters. So this is a mix effect also as we build up and with compound. So I think on the pipeline, it's just we have this kind of diffuse situation in the Middle East, as I highlighted. But overall, the pipe remains healthy on the back end of the year. So we still have good conversion, and it's actually improving in terms of conversion, if I look at the past couple of quarters.

But in terms of the buildup and why I'm confident now is that when I look at the net dollar expansion and the renewals pointing in the right direction. And you see that -- I mean, you get a feel for that when you look at the total RPO and CRPO direction. It's now heading and pointing in the right direction for next year. So I feel confident about the buildup. And obviously, we got some moderation this quarter, relatively speaking, in terms of the quarter-over-quarter development, but I expect this to form and to continue to shape up on the back end of the year, which will lay out the foundation for next year.

So I think this is very consistent with what we have been seeing. But the strong execution in Q1, both in terms of the pipe conversion but also in terms of the renewals, gives me confidence on the shape.

Yes. And I'd just add a little bit to it, Jackson. From my perspective, I'm seeing a stronger base to work from in a much more predictable base. As we laid out the transformation and we're midway through that second phase, we're looking to get acceleration phase, third phase, vinyl phase toward the end of the year, beginning of next year. We knew these next couple of quarters are really about building that execution.

The good news is we're seeing the continued bend up in the renewal rates. Quite interesting, where we've applied Bear Hug from our largest accounts now to $250,000 and above accounts. we've seen double-digit improvement in renewal rates or better in each of those cohorts. The last frontier now is the [ $250,000 ] and below account, and we're addressing them right now with a strategy we call a cornerstone which we're seeing good indication.

So we're very interested to see how the next 2, 3 quarters lay out. But I think we're on a stronger, more predictable foundation, and we're seeing better analytics and better customer engagement. And if we continue to execute well, and remember, I'm from Missouri, so I want to see it. I'm really not from Missouri, but you get the joke. The point is, let's get the next 2, 3 quarters under our belt and then we move to the next phase.

Got it. And then a quick follow-up. The -- I guess, just since you mentioned Project Bear Hug and kind of trying to get your arms around, right, like to continue the bad jokes like around your largest customers, I'm surprised that the $1 million customer count and kind of cohort is not a part of sales incentives, it's not a part of how you run the business and not going to be part of the disclosures going forward because I think Project Bear Hug should be about maintaining and growing your largest customer cohort, and it seems like the disclosures are going the other way. So what am I missing?

I think Bear Hug has been a tremendous success. There's no question whatsoever. If we squeeze them so tight that they can't talk to other customers, other competitors, that's a good place to be. We're engaging those customers 24/7. We're seeing it across the portfolio. What you should see is an expanding RPO and total number day, you should see net dollar expansion expand down through the cohort. As I said, I've already seen the progress in terms of the $250,000 and above account all seeing double-digit or better improvements in renewal rates when they got Bear Hug. Now we're going to address that last frontier $250 and below.

I think what we want to talk about is the overall trajectory of the business. how we're driving the AI expansion, how we're becoming a platform on broader, larger accounts. And we got to continue to generate that combination of NAR and better renewal rate that's going to ultimately, over the next 3, 4 quarters, 3 quarters move us into the acceleration phase. So anything you want to add, Anthony, on that one?

No, you said it very clear. And just to illustrate that, I mean, when you see the net dollar expansion at 115%, and you see the share of wallet and the renewals, it's all heading in the right direction. We're just not kind of driving this as a pure customer count per se internally. So that's not something we monitor or drive internally. And I think the reporting should reflect that.

But that doesn't mean that we are not focusing on the cohort. In the opposite, I mean, we keep focusing on that cohort and on the platform play and the share of wallet expansion. So that will continue. That's the focus.

Our next question is coming from Patrick Walravens from Citizen JMP.

Rory, can you talk about what your AI initiatives look like both externally in terms of what you're planning to do with the products. You're not going to give too much away, but maybe give an idea. And then internally coding go-to-market how are you improving your efficiency of this business?

Yes. Absolutely, Pat. Great to talk to you. Let's do internals first. Internal, we're driving enablement across the entire company. This is a company for the last 10 years that has been leveraging AI and creating that capability because of the huge amount of unstructured data that flowed into this platform because of the big social channels.

And one of the reasons we've been so successful in customer feedback management, digital support and even contact center work is because of the AI component. We bring a modern solution and then the ability to link the customer contextual data across all those sources creates an unmatched view of the customer internally.

Every Sprinklr, a team member must be fluent in AI. They must live it every day in terms of creating more efficiency how they write contract, how they do support, how we leverage information and knowledge to speed or execution on the engineering side, code development, test case development, all relevant and in terms of our ability to do technology patches, systems upgrades, releases.

AI is one of the large technology waves I've seen in my 4-decade technology career. It's a generational wave. It's a 25-year wave. Technology waves are built on top of each other. Every person in our company will become skilled in this space and bring that capability to bear. On the product side, the beauty of the vision that our founder, Ragy and the team build was this scalable unbelievably configurable platform with AI in its core.

And now what we're doing is we're linking all that contextual data about the customer. That's why our largest deal ever was closed in the quarter with a huge global player that took us to 42 divisions around the world, the entire suite. Now that enables them to see that voice of the customer and engagement in a unified way. with AI capability on top of it. Where we're going to double down is the ability to accelerate the 180 engagement. This is a must win territory over the next for to 8 quarters.

We have to continue to grow that engagement count and to drive that capability. That's how we ultimately win. And we're going to focus on Ingentiv, with forward deployed engineers. We're already seeing a huge uptake with our existing customers, and that's enhancing the engagement. They don't see us as a spot little tower and 1 functional area.

They see us as a platform with AI capabilities at our core. And they are starting to believe that we're getting to enterprise-grade execution. We do that over the next 3 quarters, that engagement goes up, and that opens the opportunity. Every bit of our focus has to be on paying down that technical debt that we've been doing in the last 1.5 years, finishing that, getting the maturation of our processes and becoming AI first that leverages this amazing platform of capability and contextual customer data that gives the insights and actions to our customers to win. That's our destiny. That's our future. That's where we're going in a deceleration in FY '28. Sorry, I got a little fired up there, Pat.

Good. A quick follow-up for Anthony. Anthy, what was just the overall NDR? I think last quarter it was 103%. What was it this quarter? Did I miss that.

104%.

Yes. And again, as we Bear Hug and pull it down through the thing, I'm very interested over the next couple of quarters using our cornerstone program to get those 250 and below accounts, then we'll have everybody Bear Hug and that's definitely going to pay dividends.

Next question operator?

Certainly, our next question today is coming from Arjun Bhatia from William Blair.

I'm Willow on for Arjun Bhatia. So I appreciate operating margin expansion will look different this year as the company balances investing in growth. But can you walk me through if anything changed quarter-to-quarter in terms of cost expectations? I'd like to better appreciate the revision and the operating income guide for the full year.

Thanks, Willow. It's great to talk to you as always. I think one of the things that we are seeing is there's no question on the COGS side, we want to be smart on the expansion. It's a must-win battle and AI. We're seeing strong growth at 40% been percent year-over-year in those SKUs, 180 engagements. We're not going to be wild on tokens. I mean that it almost was like a [indiscernible]. I'm blowing out my token numbers. No.

I mean, what we want to do is strategically advance the innovation and the insights and the actionability of our using this technology. To do that, we're going to continue to invest in some forward deployed engineers. We're going to make sure that the infrastructure is redundant that we have the ability to reach the key LLMs that our customers want to use. You may have noticed in my remarks that our ALM insights innovations, a part of our innovation acceleration are coming here this summer as going to give a lot of insights to our customers on that space.

I think it's really basically a prudent set of investments that continues to accelerate in that space, but we're making sure that we control it. And I'll be tight on that as we go through the balance of the year. And we're trying to do it in a prudent, balanced way.

Anthony, anything you want to add on color?

Yes. So yes, this moderation next quarter, I think it's temporarily we still have some higher data costs and so some COGS that are still kind of up year-over-year. And obviously, there's the mix effect also. So you have the provisional services that is normalized this quarter, and this is also kind of heavy lifting on the margin side. So we expect this to be in negative territory.

Temporarily, we will revert back to a normal kind of breakeven margin profile later on. And there is also this ViralMoment impact that we have to capture in the short term. So when you combine all those small effects, you have this kind of employee mix in the quarter, but I expect this to improve significantly in the upcoming quarters as we have a number of initiatives also internally to continue to reduce headcount, for example, so that you see that already slowing down.

So we continue also to be diligent in our approach in our hiring and making sure we have the right capacity in front of customers. And as we will leverage some of this AI initiatives also internally, we expect further productivity gains. So a few kind of things that are playing out temporarily in Q2, and there is a mix effect in that, but I expect this to improve on the back end of the year.

Our next question today is coming from Raimo Lenschow from Barclays.

Congrats on the ongoing progress team. It's good to see the. If you think about the shift on the macro side that you kind of pointed out with the Middle East, et cetera, like how quickly do they usually come back? So if we kind of see a resolution of the events and like let's hope that it does happen at some point. How quickly do these kind of come back to you? And then I have 1 follow-up.

Yes, no worries, Raimo. I think what we're seeing here in 2Q is a very good pipeline. 3Q and 4Q look good. It's a resilient set of cultures there. And our team is very impressive, as I thank them for their work. I'm hopeful that we're going to see improvements here in the second quarter. And then I think that it can be back to normal or better in 3Q and 4Q.

Now that's assuming that everything kind of stabilizes. It's bouncing around a little bit, but it's clearly better over the past days than it was at the earlier onsets. So I'm looking for progress this quarter, and I'm looking for progress. And remember, those are bookings, so they are going to translate into revenue over the next 1 to 4 quarters. So it's -- that's all about what's the key here. We're still dealing with clean -- yes, go ahead. What's your follow-up question?

And the follow-up question was on the $1 million disclosure. I hear you on the incentive structure internally, but it's also obviously a metrics we kind of will follow. So the questions you could get is like, are you taking that away because some customers on renewals are dropping below that. Can you maybe speak to that dynamic, please?

My only view on it is, I think as we're kind of looking at the overall mix here. I think what's really key is how we build the differentiation between renewal and NAR and really creating that consistent growth rate. That's how you get the flywheel. That's what we're looking. As we've stabilize the base. And I think over the last 3, 4 quarters and paid down some of that debt, I think we're much more predictable. I think we're on that base.

I think in terms of how we're moving forward, I think there's no question that we're -- the next 3 quarters are key, and that will then allow us -- you should be looking at that total RPO data, you should be looking at the renewal rate, you should be -- and we should start to see that translate as we've guided through this year, the transition at the end of the year, beginning of next year.

And then the mix underneath it, the real key is how do we grow that whole base because I had my best renewal rates at $1 million above, I mean, in terms of renewal percentages. I already had that. But the problem is if I just focus on that, I've still got -- now as I've worked down with the Bear Hug, 250 and below is underperforming. I have to fix that with Cornerstone, and I think I have line of sight I've seen that 10-plus percent point improvement in every cohort I brought to it.

I'll give you more data as we get along. And let's see how the next 2, 3 quarters. But as I said in my prepared remarks, I think it's going to schedule, I think, is going to schedule.

Our next question today is coming from Matt VanVliet from Cantor Fitzgerald.

So good to see the largest deal ever signed. Curious if that was an existing customer making an expansion or net new? And then more importantly, just like what other types of deals approaching that size or in the pipeline? How are you continuing to push to larger and larger scale on the large deals?

Yes. I love that question. So that customer has been around for a number of years. They started on the social side. We expanded then into service, a digital service, a voice service in a geography, and they like the platform, they like what we were able to do, and then they took it across the planet. 42 divisions everywhere around the world. It was a huge implementation. Right now, there's opportunity to upsell in terms of the AI components, co-piloting, more genetic, the community space. So I think there's more work to do there.

When I look at the business and I think about NAR, one of the things over the last 18 months, I turned down the amount of new logos to about 20% of our volume. The reason I did that is I wanted to clean up the underlying execution I'm seeing a better improvement. And as I've shared, I think we're a different company by the time we get to the latter part of this year. I'm looking to increase new logo participation back into the mid-30s range, right?

So I think I'm getting -- as I get into -- and I want to turn it on now because if I've had 3-, 6-, 9-month sales cycles, I want to make sure I'm ready towards the end of the year to kind of accelerate in that space.

The other thing I get a general run rate of smaller deals and expansion, that's a lion's share of our NAR in a year. We get one of these very deals usually each year. And then we get somewhere around 5 to 7 that are in the $3 million to $8 million a year range kind of -- even could be $10 million, they could be, et cetera. Good news on that, I'm seeing good numbers there. I've seen the most of those over the next 3, 4 quarters. I've seen in my time here. And I -- if I can convert that at even 50% or 45% or 40%, I can yield that -- those 6, 7 key projects over the next 3, 4 quarters.

I think there's some large opportunities probably somewhere in the range of 3 to 5 customers that could potentially be that next megadeal that next mega deal. And they usually come from someone that's already in place, and then we expand, we get to the right level and grow. Does that help, Matt?

Yes, very helpful. And then obviously, the acquisition of ViralMoment makes a ton of sense as short-form video takes off. But as you look at your M&A strategy on a go-forward basis and balancing that with whether it's share repurchases or other capital allocation components, was this just an opportunistic sort of gap in the product portfolio and we should think about share repo as maybe a more higher priority capital allocation? Or where does M&A fit in over the next couple of years?

Yes. A couple of thoughts there. I love the balance sheet, right, pristine, no debt whatsoever. We are free cash flow positive even with the share repurchases, we're going to be back approaching $0.5 billion later in the year, beginning of next year. And that's a good story.

ViralMoment's is part of our innovation acceleration. We want to make sure we're continuing to create new use cases and build out the platform. The opportunity long term over the next 2, 3 years is us becoming the enterprise platform for unified customer experience. We do that. It's a very powerful story. I think by building out that capability and continuing to innovate makes us more and more relevant to the customer. I think ViralMoment is a good addition and in the right spot. And I think there's small ones like that, that we can continue to tech in and add really interesting capability.

If there is an opportunity in the AI side at the right prudent structure that at our ability to do even more and increase the 180 engagement, enhance the number of our over 300, 350 AI engineers. I think all of those have to be considered as we go. And if there's an opportunity where we continue to see the stock lagging what we think its ultimate value is continue to leverage some of those dollars where it makes sense and the Board believes that we should acquire back. I think it's a combination, and it has to be balanced based on the return we see for our shareholders.

Our next question today is coming from Elizabeth Porter from Morgan Stanley.

This is Jamie on for Elizabeth. Great to see another quarter of strong growth in the AI SKU ARR. So just curious how we should view sort of that base, the time line for that to become big enough to more meaningfully contribute to acceleration in subscription revenue? And then as a follow-up, should we be viewing this quarter's gross margin level in subscription gross margins is kind of the trough? Or should we kind of expect further declines through the rest of the year?

Okay. So the first quarter -- the first question was on the AI SKUs. I think what you want to think about is the company had a huge execution show over 3, 3.5 years. And that continues to manifest itself in kind of accelerated churn through the middle of last year. That takes 3, 4 quarters to work out. I mean while we've seen the ban and the bend is forming nicely, and we had best renewal rates in first quarter and over 2 years, and we are seeing Bear Hug pay dividend.

We have to work through that hole in the boat that occurred last year because anything that happened takes 4 quarters to wash through. We -- what you want to think about is as we get towards the end of the year and if we continue to execute nicely in terms of improving renewal rate, improving engagement with the customer and we get to that acceleration phase next year. And I think that gives us the stronger foundation then the AI work is the adder and the real differentiator. The fact that it's growing and it's material and there's 180 of these engagement are the reason that we're relevant to the customer.

If we were just in 1 little hour, I wouldn't want to be that software company. I believe being a platform with a robust native AI capability to create action and insight gives us the foundation to win over time, 2, 3 years out. If we do that, you'll see that benefit as we move into the acceleration phase at the end of this year and next. And AI is going to be for Friday. Is it going to be forefront for the next to 10 years. It is a transformational wave. And I like how things are setting up. We still got to execute, but that's where we are.

And then Anthony, maybe you want to touch on for Jamie, the concept around gross margin.

Yes, of course, and great question. Yes, I expect this to be kind of the pot, so to say. So as I indicated, there's a margin mix effect is the impact of services also, but again, on the back end, we have a number of initiatives in subguarding measures and actions that we have. We had to take also some AI investment and cost because of the traction we see there. But we expect, let's say, other initiatives to offset that.

So I think on the subscription gross margins will be pretty steady. And overall, as a mix, I expect this to improve sequentially in Q3 and again in Q4. So that will be kind of the bottom from my perspective based on what we are putting in place and also based on the normalized situation of services on the revenue side that will then be better on the gross margin side. And if subscription holds, then we increase on the revenue, which is the plan, then we will have kind of different kind of trajectory on the back end of the year. So I expect this really to bounce back next quarter after Q2.

I want to thank everyone for joining the call today. I appreciate your interest in the company. We're very interested to see our execution over the next 2, 3 quarters as we move through transition and execution phase, Phase 2 of our transformation, and they were excited to the outlook of moving into acceleration at the end of the year, beginning of the year. These things take time. I think we're making good progress, and we're really on track to where I expect to be at this point.

I hope you continue to look at what we're doing, and we're excited about the future. Thanks for joining us today, and have a wonderful day.

That does conclude today's teleconference and webcast. You may disconnect your lines, and have a wonderful day. We thank you for your participation today.

Greetings. Welcome to Sprinklr's Fourth Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

At this time, I'll turn the conference over to Eric Scro, Head of Investor Relations. Thank you, Eric. You may now begin.

Thank you, operator, and welcome, everyone, to Sprinklr's Fourth Quarter Fiscal Year 2026 Financial Results Call. Joining us today are Rory Read, Sprinklr's President and CEO; and Anthony Coletta, Sprinklr's 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 the supplementary investor presentation.

Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP.

In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the first fiscal quarter and full fiscal year of FY '27, the impact of our corporate strategies, the benefits of our platform and our market opportunity. Our actual results might differ materially from such forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC also posted on our website.

With that, I'll now turn it over to Rory.

Thank you, Eric, and hello, everyone. It's great to be with you today. In the fourth quarter, total revenue grew 9% year-over-year to $220.6 million, and subscription revenue grew 6% to $193.4 million. We delivered $37.7 million in non-GAAP operating income, representing a 17% non-GAAP operating margin. I wanted to thank our global teams, customers and partners for their trust and ongoing support.

FY '26 was a year of meaningful operational progress. While churn was higher than we would have preferred, particularly in the first half, we achieved key transformational objectives we set out at the start of the year. We optimized our cost structure, revamped our go-to-market model, streamline processes and strengthen our leadership team. The combination of these improvements along with Project Bear Hug is driving a cultural shift towards greater accountability, customer centricity and operational discipline. We are now in the second phase of our transformation, transition and execution, which will continue through FY '27. This stays is about embedding last year's changes to build a stronger foundation for scale and efficiency. As we complete this transition, we'll move into the third phase, acceleration as we head into FY '28.

Key indicators are moving in the right direction. Fourth quarter delivered our best renewal rates over the past 4 quarters, and we expect continued improvement here in Q1 and Q2. Demand remains healthy considering recent macro events, our pipeline remains solid, and we're seeing more multiyear commitments from our customers. FY '27 marks the pivotal year for Sprinklr as customer experience is at an inflection point. Consumers now expect brands to recognize them instantly and maintain context across every interaction. Sprinklr is uniquely positioned to lead in this shift.

We are finding unified customer experience management, one platform that connects insights, predictions and actions across the entire customer journey. Our enterprise-grade metadata and business application layers gives us the structural advantage as workflows, contacts and AI agents come together. There has been a lot of discussion about whether AI will pressure enterprise software budget. From what we're seeing, customers aren't cutting core software spend to fund AI. Instead, they expect it to be built onto the platform they already trust with security and compliance protocols, and where their key data already resides.

In FY '26, ARR from our generative AI-native Sprinklr service SKUs grew 50% year-over-year, driven by strong demand for AI agents, contact center intelligence and agent copilot. And because AI is native to our platform, our omnichannel portfolio continues to drive robust enterprise-wide AI adoption among our customers. In FY '27, we're executing against 4 core innovation priorities, one, unified customer intelligence. This includes integrating surveys, social, messaging, videos and reviews into a single actionable insight engine. Two, enterprise-wide automation, including scaling AI agents, no-code AI studio and over 100 connectors automate workflows at scale. Three, AI-driven marketing and commerce, we're powering engagement with AI copilots, conversational interfaces and real-time content generation. And four, next-generation AI and insights, advancing LLM based listening, generative engine optimization and agentic commerce to meet customers wherever they are.

We're building this on a powerful foundation. More than 180 billion customer conversations a year and over a decade of language and intent modeling across 30-plus channels and more than 400 million websites. That scale lets us tie predictive and generative AI directly to action, providing faster results to customers. We're not building a set of tools, we're building an operating system for modern customer experience. We're also benefiting from constructive industry trends. Marketing budgets appear to stabilizing, and spending is shifting toward return on investment, automation and measurable impact. According to the CMO survey, AI adoption and marketing is expected to grow significantly over the next several years.

We believe this environment favors unified platforms. Sprinklr helps brand activate first-party data, automate engagement and drive better outcomes. More broadly, AI is accelerating usage of enterprise systems of record and platforms built for enterprise workflows are proving they can grow profitably in this new era.

Let me share a couple of examples of why we're winning and how iconic brands are using Sprinklr today. This past quarter, Sprinklr landed a flagship partnership with a leading global payments company operating in over 200 markets, 4 major teams, corporate communications, global brand, social care and MarTech, will standardize on Sprinklr's unified AI native platform. By consolidating multiple [ legacy ] tools into one governed real-time environment, this customer gains a single source of proof for global marketing data, unified measurement across channels and markets, stronger brand governance and instant ROI visibility.

Most importantly, by working with Sprinklr, this customer will be able to convert vast social signals and actionable intelligence that sharpens global strategy, enhances creative effectiveness and enables cultural, relevant engagement at sale, ultimately accelerating this customer sustainable global growth. Our second story highlights a major U.S. telecommunication provider that recently deepened its partnership with Sprinklr. As a result, ARR has doubled year-over-year, and increased sixfold over the past 2 years with marketing, communication and customer insights already unified on Sprinklr the latest investment brings the customers care organization onto the same platform. This expansion equips more than 600 social care specialists with advanced AI-powered listening, conversational analytics and dedicated strategic and technical support. This will help manage inbound social volumes more efficiently and improve customer sentiment.

Earlier in the year, when this customer abruptly lost access to a critical social channel through his previous vendor, Sprinklr stepped in. We were able to immediately restore business continuity and strengthen our role as a trusted partner across business operations and IT. These are just a couple of recent examples of how customers are increasingly turning to Sprinklr as a strategic partner, recognizing that our AI native platform can unify marketing, customer insights and care to power their long-term customer experience strategy.

So in closing, we've made meaningful progress this past year in transforming Sprinklr, into a stronger, more customer-centric company. We're encouraged by the improvements in renewal rates in the fourth quarter, and we expect that momentum to continue into the first half of this new year. Customer sentiment is improving, and we have a solid pipeline to build on.

Our full year guidance reflects that we are now passing the midpoint of the second phase of our 3-phase transformation transition and execution. And as I have covered in previous calls, we saw elevated churn in FY '26. The broader macro environment has also become fluid, particularly with the events in the Middle East, where we have a meaningful business and good pipeline. With that in mind, we're staying diligent and approaching FY '27 with discipline and focus, positioning Sprinklr for the third phase of our transformation acceleration as we move towards FY '28. There is more work to do, but we remain confident in our strategy and are committed to delivering durable growth and long-term shareholder value.

With that, I'll turn it over to Anthony for the financials. Anthony?

Thank you, Rory, and good morning, everyone. First, I want to tokenize the commitment and passion for customer success of our teams across the company, the driving force behind our continued progress and growth. This quarter marks another step forward and Q4 results came ahead of expectations.

Now let me turn to our financial performance. Total revenue was $220.6 million, up 9% year-over-year. Subscription revenue was $193.4 million, up 6% year-over-year. Professional Services revenue came in at $27.1 million as we continue working on some large CCaaS rollouts for our customers. So this is when you came in better than anticipated due to more hours led to some of these large global projects.

Our subscription revenue-based net dollar expansion rate in the fourth quarter was 103%, this is a slight increase sequentially, pointing in the right direction. At the end of the fourth quarter, we had 141 customers contributing $1 million or more in subscription revenue over the past 12 months, which is forecasted as less than in Q3. These results from a few customers seeing the trailing 12 months revenue crossing below the 1 million mark for this metric.

More importantly, the net dollar expansion for the 1 million customer cohort in Q4 was 115% and average revenue per customer in that same cohort is now above $3 million. We don't intend to disclose this metric quarterly going forward, but I wanted to give you a sense of some of the underlying traction.

We certainly believe that our Bear Hug focus will solidify our baseline and contribution from top-tier enterprise customer base over time. For example, our Q4 renewal rate was the highest of any quarter in full year '26. Furthermore, majority of our full year '26 dollars are multiyear deals, which is driving an increase in the average contract line.

Regarding gross margin for the fourth quarter. On a non-GAAP basis, our subscription gross margin was 76%, and the professional services gross margin was 1%, resulting in the total non-GAAP gross margin of 67%. As noted in previous calls, we are experiencing higher data emerging costs in response to business opportunities, especially in Sprinklr service and our expanded AI capabilities.

Turning to profitability for the quarter. Non-GAAP operating income was $37.7 million or a 17% margin which drove non-GAAP net income of $0.13 per diluted share, incurred $1.2 million in restructuring and nonrecurring litigation costs that are billed to be core to the operations of the business, and as such, discussed are not included in our non-GAAP figures. We generated $15.9 million in free cash flow in Q4 and $142 million for the year on a reported basis.

The strong improvement in free cash flow was driven by [indiscernible] from collections and improved cash conversion. Our balance sheet remains strong with $502.5 million in cash and marketable securities and no debt. As indicated in our earnings release, our Board has authorized a new $200 million share buyback program, which we expect to complete by March 15, 2027. This will include a $125 million accelerated share repurchase launching shortly, supplemented by open market repurchases.

Given our confidence in the strategy and the strength of our balance sheet, we see the current share price as a compelling opportunity. We'll continue to evaluate our capital needs and allocate cash to the highest return initiatives even after completing the authorized repurchases, we remain well capitalized to execute our strategy and drive our growth agenda.

Calculated billings for the fourth quarter were $317.4 million, up 6% year-over-year. Minor variance versus the $320 million we had anticipated was mainly due to 1 deal, which was expected in the quarter, and that ultimately closed in February. This pickup in billings is now reflected into an outlook.

As of January 31, 2026, total remaining performance obligation, or RPO, were $986.5 million stable versus Q4 last year and up 15% sequentially, and current RPO or cRPO was $618.8 million, up 1% year-over-year and up 10% quarter-on-quarter.

Before moving to guidance, I'd like to provide a quick recap of the financial results for the full year '26. As we've said throughout the course of the year, FY '26 was a transitional year for Sprinklr, and we've made significant operational and structural improvements to establish a better foundation for Sprinklr next phase of growth. We've seen some encouraging signs and clarity for what's ahead.

For the year, total revenue was $857.2 million, up 8% year-over-year, with subscription revenue of $756.3 million, up 5% versus the prior year. Offshore & Services revenue was $100.9 million, up 29% as we continue to improve and build our Sprinklr service delivery capabilities.

The reported non-GAAP operating income for the full year of $146.2 million equating to a non-GAAP net income per diluted share of $0.49 and a non-GAAP operating margin of 17%. Non-GAAP operating income was up 63% year-over-year showing our commitment to operating efficiency. And as noted above, we generated $142 million in free cash flow for the year up 140% versus the prior year and equating to a free cash flow margin of 17%.

I would like to shift to our financial outlook for fiscal year 2027. As Rory said in his remarks, we are in the second phase of our transformation and mindful of the current macro and geopolitical environment. Our expectations as of today regarding these dynamics are factored into our guidance figures. For Q1, we expect total revenue to be in the range of $215.5 million to $216.5 million, representing 5% growth over year at the midpart. Within this, we expect subscription revenue to be in the range of $193 million to $194 million, also representing 5% growth year-over-year at the midpoint.

The Q1 guide implies $22.5 million in professional services revenue which is up 5% year-over-year. This is a step down sequentially because of large projects performed in Q4. We expect professional services gross margin to be slightly negative to breakeven in Q1 due to continued investment in service delivery. We believe such investment is worthwhile as these implementations will yield dividends in terms of increased consumption and customer satisfaction in the future.

We expect non-GAAP operating income to be in the range of $28.5 million to $29.5 million, resulting in non-GAAP net income per diluted share of approximately $0.09, assuming 245 million diluted weighted average share outstanding. This equates to an approximately 13% non-GAAP operating margin at the midpoint. This profit range will moderate sequentially from Q4 peak, considering our continued focus on innovation and customer success and some discrete items.

As noted over the past few quarters, we are expensing a solid uptake in our AI products leading to higher cloud data costs. Secondly, we are investing to position the company for revenue growth in the future to AI and R&D talent, particularly in targeted regions with forward-deployed engineers to best serve key customers as well as additional go-to-market capabilities.

And finally, with our sales kickoff event in Q1. These factors are reflected in the guide for Q1 and the full year. For the full year FY '27, our initial guide for subscription revenue is to be in the range of $778 million to $780 million, representing 3% growth year-over-year at the midpoint. We expect total revenue to be in the range of $869 million to $871 million, representing 1% growth year-over-year at the midpoint. This total revenue guide assumes professional services revenue of $91 million. We estimate prof services revenue to be at a lower level compared to FY '26 due to a successful completion of Bear Hug initiatives over the past year. This level of prof services is approximately 10% of total revenue, which is in line with the trailing 3-year average, it's a value catalyst for our customers.

For the full year FY '27, we estimate our non-GAAP operating income to be in the range of $144 million to $146 million, driving a 17% non-GAAP operating margin. This equates to a non-GAAP net income per diluted share between $0.47 and $0.48 assuming 244 million diluted weighted average shares outstanding.

Deriving the net income per share for modeling purposes, our total tax provision of approximately $42 million needs to be added to the non-GAAP profit before tax line. To get to non-GAAP profit before tax, start with the non-GAAP operating income ranges provided and had an estimated $15 million in other income for the full year with $3.5 million of that here in Q1. This other income line primarily consist of interest income. We estimate a tax provision of approximately $8.5 million in Q1. This equates to approximately a 26% effective tax rate on our non-GAAP profit before tax for both the quarter and the year.

Our initial estimate is to generate full year free cash flow of $150 million with $40 million to come in Q1. In summary, full year '26 was a turning point for the company, and we've laid out a solid base towards the next leg of our journey. We delivered P&L guidance for the full year. We have maintained solid fundamentals to the healthy balance sheet, no debt and strong cash flow generation with increased cash conversion.

We are encouraged by the tangible progress made over the past months and the quality of our customer landscape, underpinned by improving renewals and increased commitments in the top-tier customer category. As we continue with our transition, we are building positive momentum with renewed focus and operational discipline in support of our durable growth trajectory. So year '27 is a pivotal moment for the company, which we believe should pave the way for enhanced growth prospects and for expanded potential of our AI native platform.

And with that, we will now open the line to take questions from the audience. Operator?

[Operator Instructions] And our first question is from the line of Arjun Bhatia with William Blair.

I'm Will on for Arjun Bhatia. Anthony, I appreciate the team's comments on supporting growth and balancing strategic investments. As we think about the full year margin guide, would you frame the outlook as conservative? In other words, is there maybe a built in cushion to allow investing as needed as margin expansion looks flat in fiscal 2027 based on the outlook?

Thanks, Willow. Willow, I think what we've always tried to do here is to be prudent and disciplined in how we look at the future. We want to make sure that we're building a Sprinklr that's positioned for long-term future growth. We're also looking for the ability to address the technical debt, the innovation that we need to do. So we're trying to run this transformation at a very balanced and focused approach.

I think what we try to do always is to make sure that we have the latitude to make the appropriate investments to drive long-term innovation, the extension of our AI-agentic agents, our co-piloting, our core innovations and then obviously, the hardening of our CCaaS solution. We also want to make sure that we continue to make -- deliver the right returns to our investors. So I think we run a balanced structure here. I think we've been prudent in the way we've looked at the future to give ourselves the latitude to continue this transformation. And Willow, as I said in the prepared remarks, we're in that second phase. We're just passing that midpoint of that second phase transition and execution. This is where we're burning in these changes. That should position us for the acceleration phase as we move into FY '28. So my feedback would be, I think we've contemplated the right focus and the right balance across that to give ourselves the latitude to continue to properly deliver the innovation and changes we need to do to drive long-term durable growth, but also to deliver a healthy return in the tactical future.

Our next question is from the line of Catharine Trebnick with Rosenblatt Securities. .

Could you break out internationally versus U.S., what the percentage revenue is? I'm trying to pinpoint because you do have a large installed base in the Middle East. I'm just trying to understand how much of the geopolitical might be the conservative guide?

Yes. Good to speak with you. From the standpoint of the Middle East, this is -- if you look at -- I run 12 regions across 3 geographies, what we call DVPs, right? Those regions, there's 12 of them. The Middle East would be in the upper middle okay? So they're not the largest, but they're definitely one of our healthy regions. They have a good pipeline. They've executed well over the past 2 years. I will call out that they've been extremely resilient. I want to recognize that team in a very difficult environment right now. They have rallied together. All of Sprinklr is supporting them and they're intensely focused on helping our customers in a very difficult environment.

So I would put them in that kind of upper middle of our geographies. It has meaningful business, and it's an important business to us. I think if we looked at worldwide, I kind of describe us as about in that 50, 55 range for Americas, that 35-plus kind of range for Europe, and then about 10 in Asia, APJI. That gives you a sense of kind of how the structure works. And again, I run 12 regions, Middle East and Africa in the upper middle, meaningful business, good pipeline.

The next question is from the line of Jackson Ader with KeyBanc Capital Markets.

So if I look at total revenue, the run rate is actually above where you're expecting to be for fiscal '27, the run rate ending fiscal '26. And I realize some of this is a little mix, meaning subscription versus services, but is there the elevated churn that you saw last year, is that expected to continue in fiscal '27? And that's why we're looking at possibly by the time we exit fiscal '27, the run rate might be flat to maybe even a little down compared to where we are today?

Yes. No. That's not what we expect at all. So I think what we saw, as I said in the prepared remarks, Jackson, that we saw elevated churn in FY '26. I mentioned that in every earnings call, I told you in 3Q that I began to see a more predictable environment around renewal rates, and that was a good sign. Here in 4Q in the prepared remarks, I called that we had our best renewal rates that we've seen over a year. And I also shared that I expect 1Q and 2Q to be again, another step up. So I'm starting to see a bend in that renewal rate that I began to see in 4Q. I expect to see in the first half.

I'll also tell you that we're intensely focused on bear hugging our top 900 customers now. So that represents about 90% of our revenue. We are working on renewals in 3Q, 4Q and even 1Q of FY '28. So we're getting a much deeper view of that. I saw a better predictability in 3Q. I saw at the beginning of the end in 4Q. And then 1Q, 2Q, I expect that to continue, and indications and all my data is pointing in that direction. What I think you're seeing is I think based on that, that's a lagging indicator. And I think you've got some of that macro environment kind of outlook. And as I said, I'm at the midpoint of the second phase. I have work to continue to do here as a team, I feel very good about the progress we made. And I want to make sure that we're diligent in what we guide and how we produce it so that we're making sure that we continue to do the things we say we're going to do.

Okay. All right. Fair enough. And then a quick follow-up maybe for you, Rory, maybe for Anthony, on the -- just on the margin, I mean, outside of the restructuring that you did, I think, at the start of -- at the start of the year, what can you do just regularly running the business, not -- again, outside of restructuring, just incrementally, what are your plans for increasing margin just as you run the business day to day?

Jackson, so there are a couple of things. So first off, there is this element of revenue mix. So as you know, we have now a different mix of products, and we have invested also in some CCaaS business which is picking up. So there is this element also in the margin mix. There is also underlying so -- overall at the surface, if you look at the revenue mix, we expect also services to play into this and you have -- so we have highlighted the services margin that we are projecting. So you see that there is also that element.

Now to your question on what we're doing. First, at the macro level, you've seen that we have kind of a flat headcount decreasing over the past 2 years. So we continue to monitor that -- and monitoring our investment into the right buckets and make sure we invest in innovation and go-to-market capabilities, but diligently and -- so that's one element of -- or one lever for the margin.

And then on the other side, so obviously, we're investing in AI solutions, in AI products, but also for our customers. So you have still some significant hosting costs and, let's say, running costs on the innovation side that we we have to factor into the margin profile here. But underlying, we have really some very strong discipline on the expense side and strong initiatives on every area across the company.

So operationally, I think we are leaning towards a more agile and more effective organization. But at the macro level, obviously, you have other factors in terms of revenue mix, in terms of product mix, et cetera, that are playing in. And as we pick up on the AI wave, I think you will see that productivity gains. But obviously, the main opportunity for ahead of us is really the sales productivity, and we see that now with the renewals heading the right direction. I think this should support the margin profile in the years ahead. But you can be ensured that we are doing everything to build that foundation that will expand on the margin profile for the following years as we deliver on this second wave of transformation.

Yes. And I'd add just a little bit of color, Jackson on Bear Hug. One of the things that we've done during this phase of transition and execution. And as we see renewal rates improve in 4Q and expect it to improve again in 1Q and 2Q, I think that reflects a lot of the work we're doing. I think some of these accounts over the past 3 years were a bit neglected. I think what we've done is making sure that we're investing the time and effort the services work to support them through Bear Hug to make sure those renewal rates increase and we position ourselves for expansion. I think that work will finish up as we go through this year. We'll get to -- people ask when is this renewal cycle. I think as we move through this year and finish this phase, I think we become a more standard kind of execution engine, and we clean up a lot of that debt and customer focus from the past.

Our next questions are from the line of Patrick Walravens with Citizens JMP.

Okay. Great. And congratulations on getting the renewal rate to get better. So Rory, I feel like previously, we thought the acceleration phase would happen in the second half of fiscal '27 and now we're talking about fiscal '28. Is that fair?

I think what I've always said that the first phase is generally somewhere between 6 and 9 months, that's business where we do the business optimization, the go-to-market restructuring, that's where we did the cost takeouts last year. We always talked about the second being in that 12- to 18-month range. I think that kind of puts us in the second half. I'm looking for a better Sprinklr toward late summer, beginning of fall, but there's no question that I think that, that phase as we move toward the end of this year and beginning of next year is kind of in that range.

Best case, it was 12 months longer, it's at 18 months, it's kind of tracking where we expected to be. And having done this several times, I like the progress we made last year. I think if we do that again this year, I think we're in a very good position as we move through the end of this year and in FY '28.

Renewal rates, Pat, that's like having a hole in your boat, you have to fix that. And that drags you and that issue sticks around for a while. We have seen that begin to bend. I was very clear in 3Q that I saw us be more predictable with the data and analytics. 4Q now I see it bend. I see the best results in over a year, and I'm calling again that I'm seeing the opportunity for us to improve again in 1Q, 2Q. And I can promise you we're working on renewals and expansions in 3Q -- I mean, 4Q of this year and 1Q of next year. That's so different than when I got here. We talked about renewals within the month. So I think when we get that, we should start to see ARR continue to build throughout the year. We should see -- CPR whatever that thing. We see that continue to improve. Those are the key longer-term items. I think that's how I look at it.

Okay. Great. And if I could ask a follow-up. You previously said when we get to the acceleration phase, then you'll try putting more logs on the fire. What will be putting more logs on the fire look like?

So that we're already starting to do because each phase overlaps a little bit. What you're trying to do is you're trying -- as you move through each of these 3 phases, you're trying to do the work that prepares you for the next phase. Here is some good information. We're beginning this year with more ramped AEs, more in-seat ramped AEs than we have had in over 3 years, okay? That says we're getting better retention. We're at the highest level that we've been in more than 3-plus years. That means we have people in seat, and they're definitely working the client and building that bear hug 24/7, 365 relationship.

We're investing in innovation. We're making sure that not only are we're cleaning up the technical debt, but we're investing in our agentic work, our forward-deployed engineers. You have to do that all throughout this year, and it should accelerate as you go into the second half to position you for that acceleration phase. You don't wait to the end or it's not like a hard line. You're doing that work as you go through. So you're kind of doing it in parallel.

And I'm excited about that work. I think we're seeing real kinds of progress in terms of better feedback from our customers. Our customers are noticing a different Sprinklr. We're putting Sprinklr support on Sprinklr. And each of these items moves us. I've met with what more than 600 customers now and many over and over again. The things I heard when I first got here 15 months ago, that's much less. Now they're talking about we noticed that this is much different. We appreciate it. Now take us to the next generation of capability and finish up this work that you're doing in this phase. That's how I kind of see a path.

Our next questions are from the line of Raimo Lenschow with Barclays.

Perfect. Great update guys and congrats as well on a solid Q4. Can you talk about services next year? If I look -- you talked a little bit about the projects you're doing for clients, there's still some cleaning up, but like it does seem to decelerate quite a lot, which kind of seems odd. Can you talk a little bit about that role that services has played so far and going forward?

Yes, Raimo, 2 thoughts on that one. One, we want to build an ecosystem with partners. By the way, we've got the analytics and the data. When we partner with a trusted adviser, one of these great global system integrators or great regional integrators that really understand Sprinklr, we see a win rate about a 75% higher win rate than if we don't. So it makes sense to do that. And we don't want to dilute the margin long term -- remember last year, as I went through FY '26, I told you the acceleration in services, our core -- our own services was driven by a very large Global 50 implementation, that's going to finish up and move into regular execution and software work that subscription revenue.

That will talk about at the end of this quarter because that deal actually closed recently. I'm excited about that because all of that work positions us for that key win. What I want to do is I want to keep growing that ecosystem and have a balanced piece of that for our own because we have some real experts, we have great team there. That team is doing some phenomenal work but I don't want to become a service business. This is a software AI platform that's going to create a unified platform for customer experience. Service is a key adder but it can't be the core of the business. And we need that ecosystem so those trusted advisers. When we go together like one of the world's largest retailer in 3Q, we won a great deal. That was because of one of our amazing global system integrator partners. We have to do more of that. And we want to make sure that we're feeding both sides, but I don't need to grow the services so fast. Good news that big project, it's kind of gotten to the place where it's moved into that win in 1Q, and that's great.

And maybe adding to that from a modeling standpoint, Raimo, essentially, what we are saying is that you should expect that the acceleration compared to current level also more back to where we were 1 year ago in terms of the next quarters, what we expect. So we want to -- this to continue to be an unlock of value for our customers, and we will continue to execute on that. But now that we have less of the bear hug effort to do, and we have a very good level of utilization within services. We expect this to be a bit lower in the following quarters compared to what it was last year.

Our next questions are from the line of Elizabeth Porter with Morgan Stanley.

This is Keith Weiss on for Elizabeth. Maybe just rounding that quickly to Jackson's question. I guess it right, like on a subscription revenue basis, you guys are looking for growth over the run rate exiting Q4. It's the services side of the equation that you guys are looking to come down. Can you talk to us a little bit about where does that signal? Is that just like you're saying like pushing more stuff to your partners? And given this low-margin business, you're willing to push that out? Or is there any kind of demand signal, either forward-looking or backwards looking in that services side of the equation? That's question number one.

Question number 2 is on the 50% growth in the Gen AI SKUs. Can you talk us a little bit about where that budget comes from? How are your customers funding these AI initiatives? And for the particular AI functionality, where are you competing with there? Is it just external vendors or in any way is like DIY initiatives and by coding starting to become more of a competitive dynamic?

Sure. So I'll take the first question and then Rory, you can comment on the second. So on your first topic, again, we said that we expect this to lower. But what does that signal on the services side is essentially the progress we've made on the bear hug front. So you have less effort to do going forward, and you have a more -- so we have invested in delivery and in productivity in the services space. So you get the fruits of that in -- going forward, but you have also less effort on the services front that you had over the past 5, 6 quarters. So this is what that signals. That's also a more stable environment, a more normalized services revenue line.

We continue to see that as a value enablers. So we continue to invest in that, but to a lower extent and less dilutive again to the overall mix and the margin, but obviously, from a compare perspective, from a baseline perspective, that's a bit lower than what we had last year. But I think it's a good thing that signals to progress on the journey and the transformation efforts. Maybe, Rory, you want to comment on the AI?

Yes. And again, Keith, on that point, there was that very large implementation that I mentioned throughout the previous earnings calls, that's finishing up and moving into as it completed in the 1Q time frame and moving into software at that time. So I think that's a very good thing.

Now let's talk about the generative AI SKUs and AI SKUs in general. What we're doing here is a combination of generative work around deflection, using the contextual data that's in this amazing platform that we've built. AI -- real AI unlock is driven by the use of contextual data. AI is not a computational compute model. That's not what it does. What it needs is contextual data to really interpret and create generative ideas and thoughts from that contextual data. That's why we believe our platform and this huge amount of customer data, we think is so powerful. We see it in several phases. We see it where we use intelligent collaboration. You know that we're doing work around marketing insights, social insights, the work on our amazing set of contact center wins. These are using this for the agents for the marketing teams, the revenue teams to really understand the insights. And they're linking together data across surveys, social touch points within the contact center, digital deflection to create a holistic view of that voice of the customer, that's where intelligent collaboration. And that's why we win the CCaaS deals. And that's why we've seen a very steep acceleration in the usage of this capability and our social tools.

I think it's been to -- and then I'll talk about agentic. Agentic both bots, voice, digital full agentic, these are the next generation of SKUs that were driving that allows those customers with forward-deployed engineers to really create those differentiated capabilities. Again, because we have this robust platform with all of this customer data and contact, you run that through the agentic AI as well as the intelligent collaboration and you create those different outcomes, that's the flywheel of change that we're driving.

I think it's going well so far. Would I like to see it accelerate? Absolutely. 50% growth is good, but we want to drive that harder and faster. I'm incenting the sales team to do more of that. We're making sure that we're investing both in innovation, our engineers, where we have over 350 of these kinds of skills in the engineering team as well as forward deployed engineers. And I think this is a key area for us to focus on over the next 9, 12 months that will definitely position us for the acceleration phase as well, kind of tying back to Pat's question.

Next question is from the line of Matt VanVliet with Cantor.

I guess, Rory, curious what what you need to see? Or what sort of the action plan to move from the transmission -- or the execution phase now to the acceleration phase? Is that just a matter of seeing bookings and revenue start to accelerate? Or are there other elements that you have built in that sort of move from Phase 2 to Phase 3?

Yes, Matt, that's an awesome question. There's many kind of considerations as you go through a transformation like this, you want to make sure you pay down your debt, okay? You want to make sure that some of that historical tech debt that we have, we've been paying that down in the past 15, 16 months. We're going to continue doing that in the next 9 months. I think we'll see a different Sprinklr.

On the support side, putting us on Sprinklr on Sprinklr, another good example. Getting that the cohort of our AEs and our pod or go-to-market with more ramped AEs being at a point where we're seeing that be at the highest level in over 3 years. That's another good indicator. You want to make sure that all those components, we are developing run books, you've got to continue to see the renewal rates improve. I can see line of sight and my metrics are becoming more and more predictable. I called it in 3Q last year, I told you I was expecting to see it improve in 4Q, I did. I expect it to approve again in 1Q and 2Q. If that continues through the whole year, that's perfect. That's where you want to be. You want to make sure that the customer sentiment remains strong. We've got to continue to accelerate in the AI space. Each of these factors come into this kind of transition, and you're working this on a multidimensional kind of concept to get the organization to a better place. We're more profitable, we run more efficiently. And I think as we pay down that debt, we can yield even more of that as we go into FY '28. But you're right. It's not just one thing, yes, you want to see the renewal rates. You want to see the net NAR. You want to see the ARR. We've got a good pipeline, and we're winning some really interesting large customers.

As Anthony talked about, the net dollar expansion rate at that top of the queue where we bear hug first, that 115, that's a good number. And now we have to take it through that entire stack. That's why we're bear-hugging that group I think we're on schedule. I think, yes, Pat, we could be 3, 6 months, give or take, either way. That's just how these transformations go. But we're at the midpoint of this. We're building a better Sprinklr. We have more work to do, but that's what we need to do. And when we get that and we get the underpinnings on each of these components then you're ready for durable sustained performance and predictability.

The next question is from the line of Clark Wright with D.A. Davidson.

I recognize that the $1 million-plus customer cohort is an output of multiple factors. But we have seen 2 consecutive sequential declines. And I wanted to understand if you think this metric has stabilized at these levels? And if possible, how much of this cohort is already utilizing Sprinklr services?

Yes. I look at this. This is a kind of a lagging indicator because it's like a 12-month kind of number. We're not -- we're seeing much more where we see some variation from $1.4 million to $900,000, $800,000, some of that happens. I do want to grow that. I can tell you that this cohort now on average, is generating over $3 million a client. That's good.

I think we want -- and we're seeing good progress. And we're seeing the right kinds of engagement. And we're getting much less surprises. As I entered into last year, I could see through the year, indications of significant churn issues 3, 4 quarters out. I'm a fraction of that level of issue as I enter this year. So I feel that that's moving in the right direction.

And to clarify on that, what we like also is the quality. So you have increased rates in dollar expansion, but you have also increased amounts and average lengths of relationships. So I think this is where you want to be also. So the qualitative elements underneath, I think, are more important than the absolute number of customers. Obviously, we don't want this to continue in terms of trajectory for the absolute number. But the quality and the traction that we see underneath is more important and more meaningful for the years ahead. So we like that in terms of the buildup of those customer relationships at the top tier of the pyramid.

Yes. And I absolutely want to grow that. And at the top, we're seeing some really big clients. I mean we continue to grow at the top. And I think that's a very good indication that this platform concept is real. Unified customer experience, I think, for enterprise customers is going to definitely happen over the next 3 to 5 years. And I think we're positioned well for it. Let's get our house in order. Let's get this transition execution phase done and dusted and then we can go prosecute that for the next 2, 3 years. It should be exciting.

Got it. And just a follow-up, if possible, here around the social insights, how do you see that product continuing to evolve, given what we're seeing in the changes in social media and other agentic means impacting that broader category?

Yes. Thanks, Clark. I think there's definitely emerging trends. I kind of alluded to it in the innovation, the 4 areas of innovation. There's going to be more LLM listening. There's going to be different channels in that space. There's going to be more video. There's going to be a number of -- each of those we're addressing. I think there's no doubt, those signals continue to be relevant and important as you knit together all the social signals, the conversational commerce signals, the survey signals, which I'm excited about that product. We've now moved into full production in that area. We got recognized at the right quadrants in that. I think that's an exciting new set of tools. Our digital support and obviously, our contact center support, that pulls that whole set together and gives you that total view. I think with any scenario I see moving forward, listening and insights across all social websites and interactions are key.

Will they evolve and change? Absolutely. And we'll continue to innovate with new sources and more omnichannel capabilities to support the customer. But you've got to know what people are saying about your brand. You've got to know what they're talking about. And that's going to be -- continue to be increasingly important. And I've highlighted the areas where I think we have to invest in innovation to support that.

At this time, we've reached the end of our question-and-answer session. I'll turn the floor back over to Rory for closing comments.

I appreciate everyone's interest in Sprinklr. We have more work to do. We're a work in progress, pleased with the progress that we're making. We're at the midpoint of that second phase. I think that this is an important year as we continue to build on what we did in FY '26. And I look forward to giving you a clear and concise updates as we move through this transition. Thanks again for your interest in our work, and we have more work to do. Thanks, everyone, and have a great day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time.

Greetings. Welcome to the Sprinklr Third Quarter Fiscal Year 2026 Financial Results Call. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I'll turn the conference over to Eric Scro. Thank you, Eric. You may now begin.

Thank you, operator, and welcome, everyone, to Sprinklrs' Third Quarter Fiscal Year 2026 Financial Results Call. Joining us today are Rory Read, Sprinklrs' President and CEO; and Anthony Coletta, Sprinklrs' Chief Financial Officer. We issued our earnings release a short time ago filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation.

Please note that on today's call, management will refer to certain non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of the information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and investor presentation for a reconciliation of such measures to GAAP.

In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, including our guidance for the fourth fiscal quarter and full fiscal year of 2026, the impact of our corporate strategy and changes to our leadership, the benefits of our platform and our market opportunity. Our actual results might differ materially from such forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC also posted on our website.

With that, let me now turn it over to Rory.

Thank you, Eric, and hello, everyone. It's nice to be with you today. Third quarter total revenue grew 9% year-over-year to $219.1 million, and Subscription revenue grew 5% year-over-year to $190.3 million. We generated $33.5 million in non-GAAP operating income, which resulted in a 15% non-GAAP operating margin for the quarter. I wanted to thank our global Sprinklr team as well as our customers and partners for trusting us to help solve some of their most pressing business challenges.

I'm excited to welcome two new leaders to our executive team, Anthony Coletta as CFO; and Karthik Suri as Chief Product and Corporate Strategy Officer. Both bring deep experience in scaling operations, driving growth and building world-class products at leading technology companies. We've been intentional about strengthening our leadership team. And with these additions, we're nearly complete. Anthony and Karthik join us as we sharpen execution and continue our work to drive Sprinklr into its next phase of durable growth.

When I became CEO a year ago, we set a clear strategy to improve Sprinklrs' position in a rapidly evolving customer experience market, to leverage our AI-powered platform through an ambidextrous approach, reenergizing and growing our core, while expanding and strengthening our disruptive Services. The rise of first-party data is transforming this landscape. Brands and consumers now have unprecedented access to own data, tools and channels, fueling a shift from transactional interactions to personalized omnichannel engagement powered by AI and analytics. Third-party data enables granular segmentation and real-time personalization across every touch point, making hyper-personalization not optional, but essential.

Customers expect their experiences that reflect their entire relationship with the brand, tailored to their unique needs. Delivering this requires moving beyond basic personalization toward an immersive engagement across discovery, commerce, support and service. Sprinklr makes this possible. Our AI-native platform turns first-party data into actionable insights, enabling brands to anticipate customer needs and delivering meaningful value across all customer interactions. Through our Social, Insights, Service and Customer Feedback Management suite leading brands, leveraging real-time behavior and sentiment to recommend content and products that drive engagement and loyalty.

With Sprinklr brands gain a unified voice and holistic customer view, which is unique and unmatched in the industry. These evolving dynamics require a different Sprinklr, leveraging our robust technology platform, iconic customer brands and strong balance sheet. We've used fiscal '26 as a transitional year as we transform the company.

At the beginning of this year, we recognized the need for foundational change, and we've taken decisive action. Since then, we've made significant operational improvements, streamlining processes, modernizing systems and enhancing cross-functional alignment. We've also strengthened our leadership team and welcome new talent across the organization, bringing in expertise to drive durable growth. While these changes are the right ones, and we believe will deliver long-term value. Real transformation takes time. We're entering the second phase of our transformation, transition and execution which will extend into next year. This phase is about embedding the actions from Phase 1 into our operations and culture, creating the foundation for scale and efficiency. Key indicators and customer engagement trends are moving in the right direction, and we're seeing some early momentum.

Importantly, we are in a stronger position today than at the start of the year. While more work remains, we are confident in our strategy and committed to driving sustainable growth and long-term shareholder value over the next couple of years. One of our most important initiatives is Project Bear Hug focused on deepening engagement with our top 700 customers, representing more than 80% of our total revenue. In the first 10 months, we've established a steady cadence and held many meaningful engagements with key accounts. We also hosted our second Annual CX Unifiers Conference in Nashville, bringing together hundreds of attendees, including leading customers for advisory sessions and an analyst summit. The event showcased our latest innovation and thought leadership in AI and customer experience. Early results from Project Bear Hug are telling stronger C-suite relationships, tighter alignment with customer priorities and clear demonstration of Sprinklrs' value. We expect these efforts to improve renewal rates into FY '27.

Sprinklr is the system of record for customer engagement across Social, Digital, Customer Feedback and Voice Channels. Our AI-native platform is purpose built for customer experience with deep industry and application integrations to meet enterprise needs. As we shared in prior earnings call, we had continued to invest strategically to help customers navigate rapid industry shifts and meet evolving expectations in real time. These investments strengthen our leadership position across both Core and Sprinklr Service and will continue through FY '27, reinforcing our commitment to innovation and customer success.

Now I'd like to share a couple of customer stories. We recently signed an expansion deal with a leading Latin American bank that is scaling digital-first customer service for tens of millions of customers. The partnership began in early 2024, with Sprinklr Service and Insights in one country and rapid success drove expansion. AI-powered automation delivered a 35% increase in case deflection. 50% faster handling times and a 500% boost in agent productivity. CSAT scores rose significantly and the insight to action cycle drop from days to minutes, enabling faster decisions on service and campaign adjustments. Building on these results the bank doubled channel coverage in the next market, managing 4 x more cases and unlocking millions of dollars in value through efficiency, risk mitigation and retention.

Today, Sprinklrs' Unified platform consolidates customer care and marketing intelligence across three regional markets, creating a single source of truth for CX and marketing teams. The latest expansion in AI Agent underscores the bank's confidence in Sprinklrs' ability to secure, scalable and efficient digital services as it expands across Latin America.

Our second customer story highlights our commitment to improve delivery and execution and partnership with one of the world's premier streaming and entertainment companies. We've come a long way since the initial implementation. In 2024, we launched the first phase of their global contact center transformation in Asia using Sprinklr Service and Knowledge Management. We had some initial challenges and the customer let us know. Ahead of the North America EMEA and LatAm rollout in early 2025, we met regularly face-to-face to address these challenges and to drive improvement. We made key personnel changes, tightened processes and strengthen quality controls with each phase delivery improve. By September, the customer was fully live, 5,000 agents across 210 countries supporting 40-plus languages, handling over 40 million contacts annually.

The result, a new multiyear commitment. This turnaround reflects our values. We showed up and we made it right. We executed with excellence, and that's how we earn trust and drive growth.

In closing, we made strong progress in our transformation to build a stronger, more customer-centric spring. Retention rates are beginning to show improvement and our pipeline remains strong. Clearly, more work remains but we are executing with new discipline and prudence to enable future and sustainable growth. As brand face rising customer expectation, first-party data has become mission-critical creating new opportunities for loyalty and monetization. Sprinklrs', AI-native platform is uniquely positioned to unify this data across all channels, delivering consistent connected experience at scale. Our dual focus on transformation and execution is gaining momentum. 3Q marked another important step forward. And while some challenges remain, we are confident these initiatives will continue to improve our business.

Now I'll turn the call over to Anthony for the financials. Anthony?

Thank you, Rory, and good morning. It is great to be with you today, and I look forward to a constructive dialogue with the financial committee. I would like to start by thanking everybody at the company for delivering such a strong Q3. This quarter marks another step in the transformation focused on business continuity as we solidify our position. It is a step forward on the [indiscernible] path, one that sets the tone for consistent performance. The leadership team, we are very much aligned and focused on scaling this business with clarity and operational discipline. As we progress towards the end of fiscal year we are laying out the ground work for the next phase to share the trajectory that compound value over time.

I'm excited to join Sprinklr at this pivotal moment. What stands out for me so far is the competitive edge and the quality of our customer base, including some of the world's most iconic brands speaks volumes about the differentiated value of our Unified CXM platform. Consistent with Rory's comments, we have a clear strategic vision, and we are committed to executing it with transparency. We are actively working through a transformation that we believe will position us for sustained growth coupled with quality of earnings. I want to thank the investors who have placed their trust in Sprinklr so far, you should expect a steady [indiscernible] from us [indiscernible] about the state of play and will be intentional in our approach. Now let me dive in into the financial performance.

In Q3, total revenue was $219.1 million, up 9% year-over-year. Subscription revenue was $190.3 million days at 5% year-over-year. While this was ahead of expectations, there has been downward pressure from renewals for more than 2 years now. In the third quarter, we continue to make tangible progress on previously challenged accounts, driving consumption and securing renewals from an [indiscernible] agenda. Official and Services revenue came in at $28.8 million as we are working on some large CCaas rollouts our customers that we expect will translate into software subscription revenues in future quarters.

Services revenue came in better than anticipated due to more [indiscernible] led to some of these large projects. Our Subscription revenue base net dollar expansion rate in the third quarter was 102%. This is flat sequentially, showing some encouraging stabilization. At the end of the third quarter, we had 145 customers contributing $1 million plus or more in Subscription revenue over the past 12 months, which is a modest decrease of 4 customers from Q2. Given the level of [indiscernible] over the past year, some customers have seen the trailing 12 months revenue dip below $1 million level for this metric. However, and I believe more importantly, I would like to note that the revenue contributed by the $1 million customer cohort was up 9% year-over-year, and the net dollar expansion for this cohort in Q3 was 113%. We don't intend to disclose these metrics quarterly going forward, but I wanted to give you a sense of some of the progress we see in terms of cross-selling.

We firmly believe that our Bear Hug focus will solidify our baseline and contribution from the top-tier enterprise customer over time. Regarding gross margin for the third quarter on a non-GAAP basis, our Subscription gross margin was 77%, [indiscernible] Services gross margin was 5% resulting in a total non-GAAP gross margin of 67%. As noted in previous calls, we are expensing higher data and housing costs in response to business opportunities, especially in Sprinklr Service and our expanded AI capabilities.

Turning to profitability for the quarter. Non-GAAP operating income was $33.5 million or 15% margin, which was non-GAAP net income of $0.12 per diluted share. It incurs $0.8 million in restructuring and nonrecurring litigation costs that are deemed to be non-core to the operations of the business, and as such, discussed are not included in our non-GAAP figures.

We generated $15.5 million in free cash flow in Q3 and $126 million year-to-date on a reported basis. Excluding restructuring payments made mostly in the first half of the year, free cash flow for the first 9 months was nearly $140 million. Our balance sheet remains strong with $480.3 million cash in marketable securities and no debt, providing optionality for future capital allocation. Calculated billings for the third quarter were $158.4 million, an increase of 7% year-over-year. As of October 31, 2025, total remaining performance obligations or RPO were $857.6 million down 5% compared to the same period last year in Q3.

Full year '25, there were a couple of large deals that were put forward and reported in the quarter leading to a higher baseline. Excluding these outliers, total RPO will be flat year-over-year. And current RPO and cRPO was $562.2 million, up 3% year-over-year. Now i like to shift to our financial outlook and guidance for the remainder of the year.

For Q4, we expect total revenue to be in the range of $216.5 million to $217.5 million, representing 7% growth year-over-year at the midpoint. Within this, we expect Subscription revenue to be in the range of $191 million to $192 million representing 5% growth year-over-year at the midpoint. The Q4 guide implies $25.5 million in proficient Services revenue, which is growing by 25% year-over-year. This is a set-down sequentially because of onetime positive impact from large projects [indiscernible] for in Q3. We expect Professional Services gross margin to be slightly negative in Q4 due to continued investment in service delivery and capabilities. We believe such investment is worthwhile as these implementations will yield dividends in terms of increased consumption and customer satisfaction in the future.

With respect to billings, Q4 is traditionally the strongest quarter given business seasonally and overall technology spending. So we estimate total billings of approximately $320 million for the quarter. We expect non-GAAP operating income to be in the range of $29 million to $30 million, resulting in non-GAAP net income per diluted share between $0.09 and $0.10, assuming 254 million diluted weighted average shares outstanding. This equates to an approximately 14% non-GAAP operating margin at the midpoint.

As noted earlier in the year, we are experiencing a strong uptake in our AI product leading to higher cloud costs. Secondly, as Rory noted in his remarks, we are investing to position the company for revenue growth in the future, through hiring AI and R&D talent, particularly in targeted regions to best service customers as well as enabling additional go-to-market capabilities. These factors are reflected in the guide for Q4.

For the full year FY '26, we are raising our expectations for both Subscription revenue and total revenue estimates. We now expect Subscription revenue to be in the range of $754 million to $755 million, representing 5% growth year-over-year at the midpoint. We [indiscernible] all the Q3 EBIT. We now expect our revenue to be in the range of $853 million to $854 million, representing 7% growth year-over-year at the midpoint. This is a $15.5 million increase from prior guidance, driven by an increase in our Professional Services revenue expectation to $99 million and the corresponding flow-through and ways for Subscription revenue. For the full year FY '26, we are raising our non-GAAP operating income to in the range of $137.5 million to $138.5 million, driving a 16% non-GAAP operating margin. This equates to non-GAAP net income [indiscernible] share between $0.43 and $0.44, assuming 265 million diluted weighted averages outstanding.

Deriving the net income per share for modeling purposes, a total tax provision of approximately $42 million needs to be added to the non-GAAP profit before tax line. To get to non-GAAP profit before tax, start with the non-GAAP operating income ranges provided and add an estimated $24 million in other income for the full year with $4 million of that to be earned here in Q4. This [indiscernible] income line primarily consists of interest income. We estimate a tax provision of approximately $8.7 million in Q4. This equates to approximately a 26% effective tax rate on our non-GAAP profit before tax for both the quarter and the year.

We are maintaining our full year free cash flow estimate of $125 million, excluding restructuring costs. This implies approximately negative $50 million in Q4 driven by collections on a smaller Q3 book of business and targeted investment this quarter. On a reported basis, we expect full year free cash flow of about $110 million, up over 80% year-over-year. Given the recent leadership changes and our diligence in the approach, we will provide a detailed financial outlook for FY '27 on our Q4 earnings call, which we expect to be scheduled for mid-March.

In summary, Q3 came in better than anticipated across the board. We are encouraged by the tangible progressive so far and see signals of some green shoots. We are raising the full year top line and non-GAAP bottom line guidance, reflecting our Q3 performance and business prospects. As we transition into Q4, move with velocity and our laser focus on trimming our growth engine, sustaining innovation and on staying the course towards the net leg of our journey. And with that, we will now open the line to take questions from the audience. Operator?

[Operator Instructions] Our first question comes from the line of Jackson Ader with KeyBanc.

The first one, I guess, for Rory, I understand we're moving into kind of a second phase here. But with the revenue performance in the quarter, I'm just curious in the here and now or in the short run, like how sustainable do you view this kind of performance like this quarter's performance as we head into next year?

Sure. Jackson, great to hear from you. I think Jackson, the key here is you're in the three phases of a transformation, you do the optimization work, then you're into the execution and transition phase, and that's the key phase that you're burning in the changes, you're getting the organization to the right set of processes, the right execution, you have the Bear Hug work, that will eventually move into an acceleration phase.

In that transition-execution phase, it's not as predictable as you want it to be. I guided that -- I mentioned on the last call that we began to see improvements in our metrics and our predictability. I'm very interested to see how 4Q, 1Q 2Q perform. This was a good quarter, no question. And then we saw a better performance on [indiscernible] better performance in terms of the predictability on renewals, all of those pointed in the right direction. But it's 1 quarter. We need to see several quarters in a row. We need to manage this transition. We have still the significant improvements in all our key initiatives that we need to execute. We're expanding Bear Hug to more than 800 customers now. We want to make sure that we're driving the changes in the technology base with the enhancement we're seeing significant improvements across our major implementations, but we're still a work in progress, and there's more work to do.

And sometimes it's three steps forward and one step back. I mean we're moving in the right direction. Let's run several quarters together. Let's see how 4Q on Q2 perform, that's when I think we see how sustainable this all is. It's moving in the right direction. But again, work in progress, more work to do. Good 3Q.

Yes, that's helpful color. And then a quick follow-up. Project Bear Hug or when you go into some of these, I think the phrase you used was like, you go into troubled accounts, right, and you're trying to -- through Project Bear Hug kind of like reengaged, get your arms around them literally and maybe salvage some things. Can you give us an idea, just like what -- what is at risk? And what are you able to actually like deliver once Project Bear Hug works? Are we talking about the customer might be down -- you might expect them to be down 20% and you're able to only negotiate something that's down 5%. Is it down 10% and it ends up being flat? Like what are we talking about here?

Yes. Bear Hug is a really important initiative. And it came from my time when I worked at IBM back when Lou Gerstner transformed the company, and he drove the organization back to the field. He used to say the customer is the final arbiter. Bear Hug is about creating deep, deep relationships with your customer every single day. You're engaged with customer, your competitors can't be and that's key. Sometimes, it's about growing the relationship, getting closer and higher level into the C-suite understanding their next-generation usage. Sometimes it's understanding that the count is challenged and how we can fix it. I think there's a couple of interesting data points in Anthony's prepared remarks.

When he talked about the $1 million plus customers being as a cohort growing 9% year-over-year with a net dollar expansion rate of 113%. That's a very important metric that shows the impact of Bear Hug. Now we're pulling Bear Hug down the top 500 and ultimately, the top 700, 800 accounts. That will represent about 90%. When we do have a troubled account, if we do Bear Hug well, we can -- we have seen situations where we were looking at a downsell or even a significant downsell. And we've been able to change that outcome. We've been able to renew, extend the contract we've been able to understand better what the customer needs. It's really a real variety of outcomes, but the key is the more you spend with your customer and you're focused on their impact and creating value for them, you are going to get a better outcome. Whether it's better growth, whether it's less churn, whether it's higher renewals or longer renewals, all of those are things that we're seeing at Bear Hug.

But we have the next several quarters. Bear Hug will be about a year in place when we get to spring. That's when I think we should see the full impact of Bear Hug taking hold at the end of 1Q, beginning of 2Q. All signs are good.

Our next questions are from the line of Elizabeth Porter with Morgan Stanley.

Welcome, Anthony. We're really forward to working with you. Rory, a question for you. There's been a fair amount of leadership change in the organization over the past couple of quarters as you've just gone through the transformation journey across CFO, CRO, CPO roles, most recently. So could you just talk about how you're stabilizing the leadership bench and what early indicators you're watching to ensure that productivity isn't disrupted through fiscal '27 and we are minimizing the risk of any sort of step back after some really encouraging step forward?

Yes. Thanks, Elizabeth. It's always great to chat with you. I think, as I've signaled throughout the past couple of earnings calls, pretty much all of the senior leadership changes are complete at this point. I think what's key is we have a nice mix of existing experienced players. Sure, there'll be other changes down the road, you always have to be ready and people make decisions, you never know. But I think we have a strong team. I think we have a team that's got experience and knowledge in the space. They know how to scale. They're used to rolling up their sleeves and getting their hands in the gearbox. And that transformation like this, we need team members that want to be part of this for the next 3 or 4 years and that want to create something unique. We're on a journey, and we're a work in progress.

Sure I think there could be other changes in the future. But for the most part, we're fairly pretty much done on the major leadership changes. I'm excited to be running sales now again. I love doing that, especially in 4Q and 1Q. I think these are pivotal quarters after a solid 3Q. I'm not seeing any indication that we'll have problems because of changes in the organization in the tactical time frame. Our drivers are better customer relationships, paying down our technical debt engaging our customers more effectively streamlining our processes, implementing the changes that I've been talking about, that's going to yield the better performance as we move through 4Q, 1Q, 2Q. And we get to the middle of next year, I think we start to see a different sprinkler.

Great. And then just as a follow-up. You've shown a lot of art expansion this year. And as we look into next year, understanding we'll get a more formal guidance in a couple of months. Just do you reinvest in the go-to-market and you're investing in AI and product, how should we think about the trend into margin next year as you're balancing discipline but also investing behind growth?

Yes. I think Elizabeth the key on the bottom line. You can always stretch it out any time you want. I think we're in a good general position, and we'll share more about where we are for FY '27 when we get to the next earnings call. I think it's a prudent balance between making some reasonable investments and running around the rates that we are today. I think that's a good place to be. I think we can be profitable, return value to the bottom line and our pristine balance sheet. But at the same time, make those spot investments.

Now if we did come across that opportunity that we could seize on and we wanted to spend a little bit more, we would talk about that, and we would definitely, definitely slant toward growth. But right now, I think we have a very nice balanced approach. I think we're in the right kind of space today. Does that help?

Yes, it does.

The next question is from the line of Patrick Walravens with Citizens.

And let me add my congratulations. Rory, for you first. I mean, it seems to me the big thing to get done initially at least, is renewals. So how did renewals in Q2 compared to your expectations? And do we have some big ones coming up in Q4? .

Yes. I think renewal rate is the key for us over the next several quarters. As I've always talked about the bend in the business, I think we have a very interesting technology platform. We have iconic brands that we have -- that really when we get it right, they spend a lot of money with us. And I think the indications on that one million cohort is powerful. I think the key on renewals is 3Q, our metrics, our forecasting predicted where we were going to be, and we came in there or better. So that was good. That's the first time we've seen real predictability in the numbers, and I think that's reflecting a better management system.

As we look forward to 4Q, 1Q, 2Q, that's where I think we start to see that bend in that renewal rate. And I think what we want to do is run several quarters together. We have big renewals every quarter. The good news, Pat, is that -- we are managing our renewals 3, 4 quarters out. I have forecast now on renewal rate for 1Q, 2Q and I'm working on 3Q right now. So we actually have bear hug plans, account level plans to manage those engagements months and months in advance. I mean that's just got to yield better results.

And I think what we got to do is see where we go in 4Q. It's a big quarter, good pipeline, good momentum coming out of 3Q but we have work to do. And then seeing the renewal rates in 1Q, 2Q, I think, are going to be fundamental that we see that continued improvement. This has been a 3-, 4-year decline. We're now starting to be able to predict it, and we're starting to see the benefits. I really like those numbers, Pat, in that $1 million cohort. That's where we focus [ bearhug ] first. And we see net dollar expansion 113%, that's where you want to be. Good stuff.

All right. Fantastic. And then, Anthony, I covered -- nice to chat to you again. I covered SAP the 18 years you were there. It was already a big company when you joined in 2006 and then 18 years later, it's 4x bigger. So it's interesting to me that you took this role, what attracted you to Sprinkler?

Pat, I appreciate the question. Obviously, Sprinkler is very attractive in terms of the space, the product and also the quality of these customers. So I'm very impressed by what I've seen so far. What motivated me is obviously, I see the opportunity in this market, I see Sprinkler as a leader and with some products also that are driving kind of the way up the market or we can lead this market and move it really in the right direction.

On the -- on the financial aspect, I think the balance sheet is healthy. The fundamentals out there. It's solid, but I see potential also in terms of the evolution. I've been doing transformation in my prior company, and I see how it looks on the other side. So I believe also in the execution and what you can get on the other side of our transformation story.

And obviously, I click with the leadership team. So I had great connection and great kind of alignment with what I heard from -- in terms of strategy and philosophy around the business from Rory and the team. So many elements, but that's in a short kind of what motivated me to join.

And what I've seen so far validates that. So the quality of the customers, the logos that I see and also the power of our product is pretty and pretty impressive. And I give you one example which gives you also kind of validating that. When I looked at the 5 most valued companies in the U.S. are the most valued companies they are all using Sprinkler today. So that gives you a sense of the relevance of sprinkler in the enterprise space, in the large enterprise space. So there is work to do here, but I think we know where we are going. We have a clear strategy, and we're very well aligned on how to execute on it. But I see the potential of growing this business and, obviously, optimizing the margin profile. So we are now [indiscernible] -- but very good start so far, and I appreciate the question.

Our next question is from the line of Catherine Trebnick with Rosenblatt Securities.

Congratulations on the new role. So I have a question back last March talked about how in going through Phase 1 and into 2 that you were going to really do a lot of pricing and bundling on your sales enablement. Can you update us on that?

Sure, Catherine. Great to speak with you. As we did the work that I talked about on the last earnings call, we did implement the first phase of our new pricing and bundling package work. We did it on new tech core, martechs' tech core, the whole social listening insight space. Early feedback over the first quarter has been good. Customers liked did. We saw good acceptance of it, good feedback. It wasn't crazy positive. It wasn't negative at all. It was good. It was a step forward.

What we're doing now is in the next quarter after this, will continue to burn it in, make sure it's performing the way we want to, then we'll expand into all existing martechs' stack customers. So we'll begin to move them to the new pricing model, not just on the new offerings, but on the existing base.

And then finally, later next year, we'll move the Service function in that direction. So we implemented the first phase. It's going reasonably and good as well, and we're seeing good feedback. Next phase is to expand it from the new implementations to the existing for the martech stack in the Core space. And then later next year, we'll move it to Service probably midyear, second half.

Okay. And then just a follow-on question more tactical, I think you did win that Deutsche Telekom, a pretty large deal on contact center for your Services. Where are you in the deployment of that, if you can give us an idea?

Yes. I think there's a number of large deployments that I focus a lot of time on with the team over the past 10 months. We've seen a significant improvement in our execution. I highlighted one customer example in my prepared remarks and the progress we made and the progress was really material. And the customer super appreciated.

We've been doing the same thing with some of the larger implementations. Some of those were a bit choppy before -- as I was arriving and some more challenged. The good news is as we fix those implementations and as they're rolling out to the agent, the agents love the solution. They like technology. They like the offering. I think that's the most encouraging thing. I don't think some of these customers would have stuck it out with us if the solution wasn't really interesting and good. I think we've made great progress. We're rolling out in production across many of the customers in Europe and they're accelerating. In the telco space, DT, Telefonica, that sunrisers of the world, they're all moving in a good direction. And I think we made good progress. I think we're moving right through the implementation and the feedback has been good.

The next question is from the line of Arjun Bhatia with William Blair.

Yes. Perfect. Rory, just one question for you on AI capabilities. I'm curious just where you think you are in terms of the capabilities you already have on the platform where you need to make investments still? And just as you look out, what sort of margin impact should we expect over the next year or so as more AI use cases get into production?

Yes. Thanks, Arjun. I think the AI discussion is really a good one. And I think you have to understand that this is an AI-native platform for the last 9 or 10 years because of its history in social and unstructured data, it was key. When you bring the voice of the customer together across all these vectors, whether it's social or conversational commerce or customer feedback or digital support or voice support you begin to see the total 360-degree customer signal, and that's going to be critical. That's why I firmly believe the unification of customer experience is going and is happening. And we're in a unique position to play in that space.

Many of our competitors in each of those towers they can't knit it together. They can't pull the data together. We can show our customers, large enterprises, the whole view across all of those interactions and AI is fundamental to that. Our AI is embedded into the platform. And when you see data -- you get to see the data that pulls together social information, conversations around commerce activity, maybe it's feedback data, maybe it's the contact center. Now you're getting to see that holistic view of that customer and AI is analyzing it across a broader set of data, making it more valuable and impactful. And our approach in AI is all around context. You must have context, and we want intelligent collaboration.

We see this idea of having a studio, the ability to build and use the AI technology on our platform, check. Two, be able to then implement cold tilting, intelligent collaboration, augmenting the experience for the agent for the marketing leader, but the C-suite person. We have customers at one of the world's largest retailer using our analytics to understand buying patterns in their stores today, in places like Arkansas, New York, et cetera. This is creating the insights that allow them to drive an outcome. I think it's a powerful concept.

Then we have the Agentic capability, where we can drive the deflection. And I mentioned the bank reference in Latin America in my prepared remarks. I think that's powerful, but there's a number of those. We see AI as built on top of a powerful platform that allows us to augment the experience of the agent and the human collaboration an intelligent collaboration and the work to have the agentic deflection that to move some of the workload. It's the combination and the context across that set of data that truly unlocks the value. That's why our customers who are implementing or AI are seeing that impact. Where we're going to continue to invest, we'll add more capabilities in terms of more skills. We have over 300 AI skills in the organization at the engineering level, we'll add more.

If we get a good tuck-in, we'll tuck one in. We're not going to spend crazy money on it, but we have opportunity to add skills, we're going to add them. And the second part is we'll put more in region forward-deployed skills that will help the implementations with the customer. But again, the real point here, Arjun, is it's the combination of this platform and data that's there and using AI to take it to a new level. That's the power of AI.

That's very helpful. And then you've been pretty clear that this year, 2026 is a transition year I'm curious like how we should think about fiscal 2027 qualitatively? Is that going to be a transition year as well? It seems like you're making quite a bit of progress on some of your initiatives. It's still maybe a little bit early. But how do you just feel about the work that's still left to be done next year and beyond as we think about where the company is in its turnaround?

Sure. I think we'll give very specific guidance for FY '27 at the next earnings call. I think we got to remember, this is a journey, and we have to keep our powder dry. We need to string several quarters together. I think we've been doing a good job of setting the right prudent expectations and managing. But as I said, it's two, three steps forward and another step back. I mean we're not fully in that acceleration phase. We're still fixing a lot of things. So we need to be patient.

One of the things that I think is that, that execution and transition phase that's this part of the transformation journey, as I said in prepared remarks, we'll move into next year. At some point next year, I'm hopeful that we'll move into the acceleration phase, but we had a solid 3Q, solid. We saw better performance on NAR and more predictable and better performance on renewal rates. Good, check. Now we need to execute 4Q and more -- even more importantly, we got to execute 1Q and 2Q. That will string several quarters together and really form the foundation. At that point, I think then we can kind of talk about when do we move into Phase 3. But I think in terms of expectation, I think -- The Street has us in a general right vicinity as they think about next year. It's still part of the transition year. At some point, we'll move toward acceleration -- but at this point, we're still cleaning up things. We're making good progress but lets string a few quarters together. Let's go execute 4Q now, and that 1Q and 2Q really important in terms of the renewal rates as we move into next year. I hope that helps.

The next question is from the line of Raimo Lenschow with Barclays.

Anthony all the best from me as well. Rory, one for you, like you talked in the prepared remarks about the Services organization just helping you at the moment, just more leading. How do you think about that time frame between services, doing more handholding, driving projects forward and then that translating into better Subscription revenue growth? Like how do you see that link there between that? And I had one follow-up.

Yes. Raimo, I think what you're -- we've talked about this a couple of times in the past around Services and implementations. One of the two challenged areas when I came here, both from the service and support areas. One was around implementations. Sometimes they were great and sometimes they were not great. And then on the support side, we had a very mixed set of stories on support. Over the past couple of quarters and into the next future quarters, we've been implementing transformation of initiatives in the service and support areas. One of the things we're doing in support is we're moving our support function on to sprinkler I mean that's a great idea. Don't you think?

I mean, we do it for some of the world's biggest brands, let's do it for ourselves. That implementation is underway. We're going to bring all of our support on to Sprinklr and use enhanced processes and flows to give better support to our customers. They have highlighted this in the past as an area of gap. That will see an increase in coverage in the late -- at the end of this calendar year, beginning of next year calendar, and we're implementing Sprinklr in this fiscal fourth quarter into 1Q next year. So we will be moving that support. That's an important step.

On the Services side, we're [indiscernible] transformational. We're moving to new technology to track. Do you know that we tracked our Services projects and skills with spreadsheets? Come on. That's not modern. We're implementing a real technical solution from a third party that's going to allow us to really understand it, where our skills are, how they're being used, how the projects are going, exactly where our capacity is. And we're expanding our relationship with our partners. Our partner win rate is almost a double, other channels win rate. We saw in the quarter some outstanding wins where we partnered with some of the usual suspects. The NTT data, the Accentures, the Deloitte, the SAMYs, the premium blends, and list goes on. And if I offend any of my partners, I apologize. I love my partners and they're key.

We're seeing good traction there. We're going to build that out over the course of the year, and we're going to continue to build stronger practices with that. And then finally, we're implementing run books around all of our implementations. And our new products are going through new product introduction process. So they actually have document and implementation plan. One of the things that's frustrated me while I was here is some of our implementations are a amazing. They go -- just perfect, and the customer loves it. And then others are all over the floor. Why? We don't do it consistently. And every day, we're working to make that consistency better with those three areas. Again, I think those initiatives time out in that early spring, early summer time frame, mid-summer time frame next year. All of those are all working in that period.

Okay. Perfect. And then, Anthony, on the -- if you think about the communication you want to do, like I [indiscernible] SAP, there was a very strict way of kind of guiding. If you think about the situation here that we are going to try to get obviously leading indicators of where things are going. There's billings, and you talk a little bit to that, there's cRPO, which might be a bit broader, et cetera. What's your initial thinking as you kind of think about how to communicate going forward?

That's a great question. I mean, in terms of guidance philosophy, we will be focusing really on being realistic and transparent on what we do on the assumptions and the risk. So we want to have a clear modeling and clear narrative. So -- and obviously, most importantly, we want to deliver on it. So you can expect that -- we say what we do and we do what we mean at the end of the day, and you can expect really that we'll be focusing on consistency and transparency. So that's the philosophy.

And around the key metrics, I mean, there is -- it's fairly simple. We'll continue to focus on Subscription revenue that's kind of key indicator for us. But obviously, the quality of the cRPO, the quality of the growth of the platform, the net dollar expansion are also key elements for me in terms of -- on one end, when you see the upsell and cross-sell traction that we have, you see that we have the right product market fit. But when we think of this NDA amongst the key cohorts, to me, that's showing also the growth on the platform and the opportunity ahead.

So I think I will continue to focus on that. And when it comes to the financials, the operating margin, we need to continue to make progress on that, and we'll have some key initiatives to explore that, and the free cash flow generation. So there is good cash flow combination so far. But we continue to make -- to grow that metric, and that will be a key element for me suggesting the success that we have going forward. We have a healthy balance sheet, so we need to continue to fuel that growth and the free cash flow generation. But that's kind of what you can expect. It's consistency in the performance, transparency and execution and deliver on it and focusing on the right metrics to support the sustained growth of this company.

[Operator Instructions] The next question is from the line of Matt VanVliet with Cantor Fitzgerald.

Welcome Anthony. I guess I wanted to double bone and ask about the comment you made about the RPO change. Can you give us just a little more detail in terms of what the contracts that were booked last year, how maybe the renewal cycle on those are? And how we can sort of square together the pretty significant sequential decline in total RPO?

Sure. I think one of the keys on that space is we saw last year, as I was just coming on that we had some larger deals that came in, in the telco space. We saw some timing issues in terms of that. We are looking out over the next couple of quarters. And as Anthony suggested in his prepared remarks, we expect that to move in a positive direction. We also see that the progress that we're seeing in terms of our NAR and in terms of our renewal rates. We're seeing that guidance. We don't -- we saw that same drop. We think that's really more timing. If you get to an apples and apples. Its basically a slight increase or about the same. I think we should start to see that move in a positive direction. I think we'll see some very interesting renewals in the telco space over the coming quarters. And I think that's going to reflect on our approved execution that we've been delivering this year. But again, I think it's a work in progress. I think you got to see the next several quarters unfold. And I think everyone needs to be patient and focused on that, that's the key.

Great. And then as you think about moving to a larger cohort on the Bear Hug initiative, any, I guess, a couple of learnings from the first go round that you think will either be faster to execute or even more, I guess, fixated on certain metrics as you go into those customers and ultimately what the outcome could be there?

Yes. Absolutely. There's a couple of things that jump right out at me I've met with over 450 customers over the first year directly at extended times and many of them multiple times. The feedback that we've gotten, where we've gotten ourselves in trouble, it was because of poor execution not delivering on commitments we made, choppy levels of support and too many changes in the organization at the field level. I think we've been addressing each of those items.

And Bear Hug is about engaging that customer. As we expand to -- from the first several hundred to go to the 700, 800 kind of range and really cover 90% of our revenue, that's going to be the foundational growth that enterprises that we can grow into big accounts. We have accounts in $10 million, $20-plus million a year spending. That means that we're doing it really well with some tough customers. We have to do that on a broader scale.

The key is that you see having done Bear Hug the past 4 or 5 months, build the right account team, make sure you create consistency. Get an ongoing discussion with the customer every week, every month, be way ahead of renewals, don't even focus on the concept of renewals, focus on the concept of creating value and upsell all along, be RFPs, get ahead of them, extend and extend the customer earlier. We have a bag of tricks, a utility belt like Batman. We have a utility belt of programs that we're giving to the team, bring in service skills to augment and get next-generation usage, redo the platform. These are all items that Bear Hug we've learned over the first 6 months that we're applying at scale now.

And I think by the time we get through 1Q and 2Q, I think we're going to have very interesting proof points at that time. Do not get ahead of ourselves. We have work to do. We're a work in progress. We're making good progress, but it's still a transition-execution. And as you know, some steps forward, some steps back. We are generally moving in the right direction. We're not in the full acceleration phase. The next couple of few quarters, building on a solid 3Q is the path forward for us.

At this time, this will conclude our question-and-answer session. I'll hand the floor back to management for closing comments.

Yes, I want to thank everyone for joining today, and I want to acknowledge our Sprinklr team members around the world for their hard work. And really importantly, our partners, we love our partners. They make a huge difference. Our customers who trust us with some of the most difficult work. They're giving us the time and space to make a better Sprinklr, they see the future. This unified customer experience trend built on an AI-native platform linking the voice of the customer and a 360-degree Ubiquitive structure, it's huge. And it makes a big, big difference and is going to change the marketplace. I think we're uniquely positioned with a competitive moat if we improve our execution, improve our technical debt and become a fully mature enterprise software company that enables enterprises to do the right thing. We're showing the right steps forward and moving in the right direction. Give us time, be patient. And I thank our investors who have shown interest and keep following us. We're a work in progress, but I think it's a very interesting work in progress with significant opportunities in the future.

Thanks, everybody. Have a wonderful day, and thank you for joining us.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines, and have a wonderful day.

Citi's Co-Head of U.S. Software and counting down the last two sessions of the day, but we're excited to have Rory Read, the CEO of Sprinklr, and you reported results just yesterday. So I appreciate you coming to the conference the day after. I'm sure you've been busy this week.

Absolutely. Busy on the transformation.

Exactly. Yes, not just this week, this whole year. So maybe it would be great just to get an overview. I think you It's been about 1 year since...

9 months.

Since you took over. Yes, a little under a year. What has you kind of set out to do when you first joined? How are we tracking against that? And what are your goals from here?

Yes. I think one of the key things, Tyler, when you take on a transformation like this, you really want to lay out a game plan. I kind of look at it across the three phases of a transformation.

The first phase is around business optimization. It's really improving the execution, making sure you have the business management system, the capabilities. You want to make sure you're building a company that can really execute more cleanly. You want to take out cost, you create that business management system, change the culture, you create better road maps, you create better execution. That's all about that optimization phase. Most of that's done in the first 6 to 9 months of a transformation.

Once that transformation is going, then you really focus on burning that in. That's really the transition phase. That lasts somewhere between 4 and 6 quarters. So you do that business optimization work for the first 6 to 9 months. These are overlapping. Then you go into transition phase. Then you're burning that in, you're really creating the energy around the transformation, you're getting the buy-in from the teams, you're meeting all the customers, you're understanding that dynamic. You're leveraging the culture, the business management, the capabilities that you're putting in place from the optimization phase, you're doing some reinvestment work. And you're really kind of getting the organization fit to fight and ready to accelerate. And that usually goes over like a 4- to 6-quarter transformation.

I think transition period, the first half is a little more choppy than the second half. You're looking for a bend in the business as you move through that transition period. As you come out of that transition period, you move into the third phase of the transformation, which is really around acceleration. I think the acceleration work is really focused on, now I can invest heavier into the go-to-market, the marketing positioning, you add structure and capabilities to accelerate your growth as you come out of that first spin. That's really the three-phase approach I've applied across seven transformations I've done in my career, most recently at Vonage.

If you listen to Vonage's first 5 or 6 earnings call, you'll hear exactly the same messaging. I'm following that same playbook. I've done seven times before. I think that -- and if you reflect it on the first 9 months. I think I'm right where I would expect to be. I've done the optimization work. I've set the culture. I've set the strategy. I've got the organization moving in the right direction. I met with over 250 customers around the planet. I'm getting direct feedback on how to make a better Sprinklr. I'm seeing better business management and metrics, and now I'm beginning to burn that in. In the first half, a little bit more choppy than the second half.

And as I talked about in each earnings call. I expect that we'll start to see a bend in the business in that 3Q, 4Q, 1Q timeframe. I think it's kind of progressing the way we would expect. And what's really encouraging, I love the technology. The platform is AI first. It's AI native. It's been using AI for now for the past 8, 9 years, huge amounts of unstructured social data was foundational. Now it's one platform across CCaaS, Customer Feedback Management, Digital Support, all of the social leadership capabilities, all of that in place. And I think you've really -- if we execute better and we really implement better, we're going to see dramatically better execution and better results.

Got it. Okay. And so that transition phase that we're in, that's kind of the longer part of this journey. What -- I guess, what sort of underpins that bend in the business that you're expecting? Is this kind of more on the go-to-market side? I know there's various initiatives like Project Bear Hug for instance, but just help us understand where we are?

Yes. I think if you think about that transitional period, you really are looking to improve all facets of the company. In a transformation like this and a turnaround, it's all about incrementally improving the performance of business, and it's a day-by-day thing.

Every day, you're looking to make incremental progress across each function. So I'm looking across the product area, that my road maps are highly reliable. I'm delivering on time. I'm adding great innovation and new product capability. And I'm creating more maturity in my enterprise process. I'm putting our Support structure on Sprinklr -- on Sprinklr so that we have a full robust global support structure. I'm looking at creating a culture, a culture inside of a Sprinklr that's focused on enabling, a focus on customer obsession. The customer wins, we win.

I'm looking for accountability, accountability that I do what I say, and I own what I do. Three, no silos. It's about teamwork and collaboration. It takes a village. And then I really focus on building trust, building trust with those customers. I get that go-to-market. And you think about our business, if I properly cover the top 700 accounts, I cover 90% of my revenue. And my biggest challenge is really growth and making sure my renewal rates are strong. I think that's been a bit neglected over the past 3 years, and they've had kind of a slowdown in that space. What we're seeing is with the focus on Bear Hug which is a go-to-market initiative to get deep with our customers.

First, we're targeting our largest customers and then those with the most interesting renewals that are coming up and putting in the business management so that we know the health of the count, what's the adoption? What's the usage? We look at all of the renewal data. And we know now 4 quarters out, all of our renewal activity. Are we engaging that customer in a powerful way that's changing the way they're using the tool and the structure of the solution?

What I get excited about and what I'm really fired up about -- Bear Hug is that Bear Hug with 700 top customers, I cover almost 90% of my revenue. All of my early data is beginning to show that when I engage those customers, I only began this 4 or 5 months ago. I'm getting better results. I'm getting better renewals. I'm getting better utilization. I'm getting more adoption, I'm getting faster and positive customer satisfaction. All of them are pointing in a positive. The second thing I see is my pipeline building and pipeline generation. The company had some weak generation, the last year. Our 1Q and 2Q pipeline generation are significantly better back to pre 3Q, 4Q levels last year. That gives me a good indication for the second half.

So I'm seeing all the right data in terms of pipeline, my analytics around vectors and what I'm going to yield in terms of success and yield out of the pipeline, my results in terms of Bear Hug in terms of the impact that that's going to have, Tyler, all of them are showing that the indications are in the right direction to show that bend is coming. And I think that's the key to really creating that energy. Each of those programs, whether it's in the product area, the support, the implementation, the go-to-market all of them are moving in a positive direction to make a better sprinkler. And I think you're going to see a fundamentally different Sprinklr when we get to the spring next year and summer.

Yes. And I'd love to just kind of hear some anecdotes of some of these large customers. I mean, I know the traditional Sprinklr usage, a lot of this was for social media monitoring and CCaaS and contact center was a big push. But when you're engaging these customers like what are kind of the pain points that they have? How do you translate that into a better outcome for Sprinklr in terms of new products, retention et cetera?

I think one of the key things you have to think about Sprinklr, this is an AI native platform. And on top of it, it's the historical core marketing martech stack. So it's that social leadership, broad channels, marketing insight, marketing placement, it's where the company originated. Then we're building out CCaaS over the last 3 years. CCaaS -- we've been very disruptive. We've won huge implementations, 1,000 seats, 10,000 seats. Those implementations are going well. Since I've come in, we've improved our execution. I believe that we're going to have all of those major customers as potential references as we get to the end of this year.

And where we've had challenges in the past around execution and delivery, I think we're in a position where we're going to see that really kind of continue to improve, and those customers are going to accept that. Then we're introducing, and we have leadership digital support structure. We're introducing Customer Feedback Management. We have the social conversational commerce activities, all of those fit together. And if you think about that, you could knit together the most powerful voice of the customer across a single AI-driven platform.

In 3 years, how did we win 10,000 seats with some 10,000-seat implementations in CCaaS against competitors in the space for 20 years, because it's a disruptive, differentiated AI-driven solution, and they're excited about it as we become better at executing it. They like the solution. When we get it right, we get large customers. $10 million, $20 million, $25 million plus a year in our customers. That's powerful. And we already have 149 over $1 million in our customers for just a relatively small -- a little less than $1 billion software company. This says there's an opportunity for us to sell into social, sell into digital deflection, sell into CCaaS.

And then once we're successful there, I think there's a C-level discussion that says, Hey, I can create you across this platform, a view of the voice of the customer across all channels. So that you could see and leverage that customer interaction across discovery, commerce, support, service in a way that's truly differentiated. And we have customers that are taking us global across those vectors at scale at this point. And we're starting to see that in terms of the increase of our service activity that are setting up several of these large transformational projects with some very large customers. So I do think it's a cool time.

And I'd love to talk a little bit more about the CCaaS stuff.

Please.

Because -- there's some big deals there. You talked about the 5,000, 10,000 type seat deals. Like are you displacing kind of the full stack there? Obviously, you got voice and routing, et cetera...

Work Force Management, Reporting the whole 9 yards. Yes, one of the things that makes it powerful, that it's one screen. The screen links you across and that agent is able to see all that information across those functions on one platform. And then they get all of the AI capabilities to create intelligent collaboration around Copilot, around nudges around -- not nudges, and around creating that kind of one screen where they link together 7, 8, 10 different solutions today.

And when you get that implemented, the feedback from the agents is very powerful. And then we combine that with a deflection technology to drive to digital support and lower cost channels, so you get the better intelligent collaboration with the agents. Then you get -- which is through more of the Copilot and developed through our AI Studio and then you get the whole agentic capability to drive them to the digital lower-cost solution. So you get cost savings you get the voice of the customer and you get the capability to do it on one screen. And that's what the agents like. The cost savings are what the owners like and the best better customer experience is what the business likes. That's how we've been able to win in that space. Now we've hardened that and we're improving our enterprise maturity, that's our focus. We'll turn on the spigot more aggressively as we go into FY '27. We're growing very well in that space, but we can grow even faster, but I wanted to make sure we got our processes in place, our support capability, that we got the structure in place that would enable us to really capture it.

Got it. Okay. And then on the AI front, you referenced just kind of the origination of Sprinklr and how I was kind of built into the platform from an early days perspective. But how are you seeing customers just sort of evolve there? I mean one of the big concerns out there is that AI is disrupting a lot of these software companies. How have you seen that in the conversation with Sprinklr?

Yes. It's interesting. I've been in technology space now for 42 years, over 4 decades. I've seen seven huge technology waves, mainframe to client server, client server to the Internet and dot-com, mobility, I've seen cloud. I've seen a whole series of activities. AI is the next big wave. It's an important wave. It's going to play an important role for the next 5, 10 years and the next 20, 30 years. These waves do not displace the other waves. IBM still makes a huge amount of their profit from mainframes. Cloud is a huge player. They're streams and that weaves are built on top of each other, at the point that these new waves come out, there gets to be an overhyped situation usually where everyone thinks they're going to take over everything.

And it's not a binary discussion. Remember in dot-com, there was not going to be any more brick-and-mortar solution. They were going to take over the world. And everything was going to be dot-com and it was going to be Internet. That didn't happen. There's plenty of brick-and-mortar, actually, more of it in some cases. But if dot-com and the whole Internet, an important factor and driver now for 30 years, absolutely. And it will continue to be.

Same thing on AI. Everyone believes that it's going to completely displace everything. Wrong, not going to happen. And you can go read reports today. Is it having the impact that it wants to have? Is it really manifesting exactly? Yes, there's going to be questions. And as that euphoria kind of peaks, there'll be an adjustment in valuation and then there'll be a steady incline in growth a bit because this is an important technology wave. But it's not binary, and it's not going to replace things.

The companies that are going to take advantage of this take this AI and embed it as an AI-native solution, and they're going to leverage the workflow and data to create a differentiated experience. Why am I winning in CCaaS with a 3-year-old product competing against the usual suspects that have been there for 20 years. Because I can go in there and create a better experience with intelligent collaboration for the agent through Copilot and our AI Studio work, and then I can do the genic work on top of that to deflect and drive to lower cost channels. So i get cost savings, better experience for the agents and I get better experience for the customers. That's how to best leverage this.

A bolt-on is going to make some fast progress, but it's not going to fully leverage. Everyone says that software is going to be completely displaced. It's the same discussion as brick-and-mortar during the dot-com phase. It's not going to happen. What's going to happen is those that have it embedded and truly as an AI native platform, have a definitive advantage to take advantage of this technology wave. And i think Sprinklr is that kind of company. It's a company that was built on this technology for 8, 10 years now. And we've now created this platform end-to-end in this very relatively small billion dollar company that now can leverage that across this spread. I think that's a really interesting outcome.

And when I meet with customers, they're excited to leverage the investment that they have. They -- we're bringing that solution. We're seeing rapid uptake in terms of the implementations of our social AI skills, AI capabilities in the CCaaS. That's why we've won these accounts. It's a 3-year-old solution. How did we win 10,000 with the largest company? Because it's a differentiated, disruptive AI-based solution. And then you take that and you combine that and say, okay, now on that single platform, Mr. Large enterprise or Mrs Large enterprise, I can hit that whole customer experience and voice of the customer across all those channels and show you every experience your customer's having. You know what that's worth? That's worth gold.

And there's -- that's a defendable moat. And that's something that very few people can do. Cloud can do it, maybe, but it's going to be lowest common denominator. You're going to see it in a couple of players like Salesforce and Adobe are going to try to do. But in the customer experience, you look at who we compete in social? They can't do anything but social. What can Qualtrics and Medallia do in the customer feedback? A little bit of customer zero data, but I can link data with Social, Feedback, Digital, CCaaS. CCaaS players? Who they're going to get their data from? I can show the entire voice of the customer across that, and I can suck it in from each of those into one platform. I have customers very interested in that space. That, I think, is the next wave of Unified Customer Experience. I think we're very well positioned.

Got it. And just the -- I mean as you think about the growth potential of the business, I mean, you talked about some very large customers and just highlighting the scale and which you can operate. I mean, how would you sort of size the opportunity for Sprinklr? $1 billion business today, like where can this business grow?

Yes. I mean -- I think what's really interesting about this company, iconic brands. huge enterprise, the best of the best in technology and they like the solution and the technology scales and it's very progressive. I think Ragy and the team did a beautiful job in that space. I think we improve our execution, our go-to-market, our delivery, our culture, our execution. I think there's significant upside. This company trades at what, 2x revenue, that's low.

If you get that, I can stretch out the bottom at any time. Our bottom has improved significantly with the cost optimization that we did. But I want to make sure that I'm also investing to get growth. You got to move into double digits. You've got to get that into a healthy space. There's no question I can do that in CCaaS but I have to do that across social, which was neglected for a period of time. Can it be a $1 billion company for sure? Can it be $1.5 billion? I'm hiring the leadership team that will be here for the next 3, 4 years that have that scale and experience to grow that business that way. We throw off a ton of cash. We have a pristine balance sheet. We can acquire other assets and other combinations.

But the key to unlocking this in the tactical timeframe is improving execution. Deeper engagement with our customers, being trustworthy, being a company that does what it says and owns what it delivers and making sure that we're creating the value for the customer. That will open up faster growth, both for the Social platform, the Digital Support, the Customer Feedback Management, which is a new product, I think, will be very disruptive and CCaaS which was off to a very good start. You combine that and you say, where can this company go? If you're in a Rule of 40, somewhere in the 30s, some of our competitor -- some of the players in the software space, knock a better trade in that what, 4.5x to 6x. That seems like some significant upside, if we execute well.

And we've done this before at companies like Vonage, Dell, Boomi, at Lenovo, at AMD, all of those companies have gone through these transformations and they've come out the other side in a much better place.

Right? One of the areas you emphasized earlier was just around culture. And obviously, with these transformations, you can have personnel changes and sort of responsibility changes how would you sort of evaluate where the culture is now, where you want to go, just kind of in the context of employee retention and in attrition.

That's a great question, Tyler. If you look at these transformations and you think about it in terms of the journey, right? And I told it's three phases. You do the business optimization get that burned, then you go into a burn-in phase the transition, and then you begin to bend the business and you go into an acceleration phase. You're really trying to win the culture of the company. You're doing the same thing with customers because you want them to be excited about Sprinklr. And I hear from them talking about they see a different Sprinklr. And I've met with over 250 of our customers directly multiple times over the first 9 months. They're telling me they're noticing a different Sprinklr.

On the team member side and within the company, when you take over a transformation like this, 25% of the company is very excited they come along for the journey on day 1. They're excited, they're energized, and they're ready to go. If you -- on the other side, about 15% of the company is negative. They're not positive. They're not going to change. You could say, well, well, why don't you just fire them and get rid of them? Not the right answer because, by the way, they have some of the best ideas. They have a contrarian view and you want some contrarian view and some really good ideas come out. It's the middle 60% that you have to win over.

I saw this when Lou Gerstner did a transformation at IBM. You've got to get to about 55%, 60% of the organization, 25% plus another 30%, 35% to come together. Then it becomes a flywheel where they all talk to each other and they recruit each other and they become change agents. When they talk in pantry or at the water cooler or online, they begin to talk about a different Sprinklr. I'd say we're about 9 months in from the 25%, I think we've gone now to about 45% high 40%. I think over the next 6, 9 months, I get to that 55% ,60%, and it becomes a self-fulfilling engine. I've seen this in every one of the transformation. And that's the key.

Once you get there, it starts to feed on sell. And once you get in that 55% of the organization, they start to recruit and drive the whole organization. I'm getting close. I think I'm maybe 5 to 10 points from getting where I need to be. And it's definitely -- that's a real boost because then the whole organization, I can't be in every meeting, they become the voice. They do the driving. They do the recruiting. They act very differently in front of the customer. They see the future, and they begin to talk about it that way. That's where we're headed.

Okay. And other than maybe inertia just the way people are used to doing things, like they are some of the biggest, like road blocks to get more people over the line.

But they want to see proof points. So one of the things I do is I spend a disproportionate amount of time meeting with leadership teams, with staff members, we do a company all hand every month. We have opened 30 minutes where we cover the strategy of the business. We also have open questions where they vote up the questions. I don't manage the questions. It's anything they vote up and they vote them up, the top vote, they come off and I answer them and the leadership team. We want them to be part of this transformation. We want them to see it. And we lay out the proof points in advance and say, this is what you should see next. And this is what's coming.

And when they see more of that, they begin to buy in, and they say, okay, he told us about that. Is our results getting better? Are we seeing improvement in customer? Am I getting real talent to come and join. Is the customer reacting differently. Those are the things that give them the guide post the mile markers that show them what and be open and transparent because we're in this together, we have to create an organization that creates a different outcome. They have to be bought into this, and they have to feel that energy. This is a transformation. It's hard work. It takes time. When you're in a difficult situation, keep moving, keep going forward, you're going to get to the other side.

And we want to bring as many of those people with us as we can. But that transformation of this scale takes time. Everyone needs to be patient. I'm 9 months in. I've done this multiple times before, look at the other companies and see and then see where we are over the next 1, 2, 3, 4 quarters, you should start to see a very different Sprinklr as we progress through that. And definitely, as we get to spring and summer next year, it should be a very interesting time for us.

Okay. Great. And just as we think about the additional changes to -- in advance of that because 1 to 4 quarters is a bit of a range. Like are there additional personnel hires, obviously, CFO -- kind of announcement that came this week. But what other like personnel or process changes kind of have to take place before you get that running?

Yes. Most of the senior leadership work has done. I'm deep into the discussion on the CFO. Probably down select. I do like to run each function before I do a replacement. I'd like to get deep into it, really understand what's happened. I get to meet everybody. I get to help recruit them for the journey. I get to help understand exactly how each part of the business runs. I've run every part of the functions of the business and my 42-year technical career. I used to be the youngest person always in the room now I'm the oldest, I can't believe, I'm 63 years old with 8 grandchildren and I've been through a few journeys.

But I generally want to get the leadership team in place by my 1-year anniversary plus or minus a couple of months. I have most of that work done. I think I've added some interesting players that add scale and expertise so our transformation can run a much bigger organization. I think that we're in a very interesting spot in terms of that. I think the CFO work, I really appreciate the work that Manish and the team have done. But I think I'm deep in that search, like I ran the sales organization for 2-plus months, I think something like that would be appropriate. It could be anywhere from 1 to 6 months.

But like I said, I'm deep in that search. I'd like to run it. I'd like to get it all in place for my 1-year anniversary, plus or minus a month or so, which is November 5.

Coming up.

Yes it is coming up not that far away. And so I think I have it in the right spot, and I like where we're going. A lot of work to do and people have to be patient and see the progress they're making. We're making each day, each month, each quarter, that's how they should matter and they should keep track of us.

Sure. Well, I know we only got a couple of minutes left. So I just wanted to see if there was any closing remarks you wanted to make or anything you wanted to get across the folks that we didn't cover.

No, I'd just say this. I repeat everybody's interest in the company. I also appreciate you hosting us here today and being part of the event. We had a lot of interesting meetings, in our one-on-ones, some very good discussion. I think that it's an interesting AI-native based platform that's really in a unique position to knit together the vectors of customer engagement that will position us for future growth. And I think that's a really good place to be. And I look forward to really leveraging the Bear Hug work, the transformational activities to build a better Sprinklr over the coming months and quarters.

This isn't done in one day. It's like -- if you follow baseball and you think about a 33 hitter, they get 200 hits and 600 a bat. That's a Hall of Fame career. You can't get 200 hits in one day. It's courses -- this is accumulated over the three phases of the transformation. Business optimization, transition and burn-in and then acceleration. I think if you look at how we've done it at many other companies, you listen to the first 5 or 6 earnings calls at Vonage, you're going to hear exactly the same playbook that I'm running gear at Sprinklr. And I think that was a great outcome.

This company has got great technology, iconic brands, real passionate team members and really customers when we get it right that love the solution. Now if we execute better and we create great innovations and leverage this technology and this platform well, and we really execute better, I think we can create significant value here as a company, and we can create real business impact for our customers. I think it's a very cool time, keep track of us.

We certainly will. Rory, thank you so much for your time and thanks to the audience.

All right. Appreciate it. Thank you.

Greetings. Welcome to Sprinklr Second Quarter Fiscal Year 2026 earnings call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Eric Scro, Head of Investor Relations.

Thank you, operator, and welcome, everyone, to Sprinkler Second Quarter Fiscal Year 2026 Financial Results Call. Joining us today are Rory Read, Sprinklers President and CEO; and Manish Sarin, Sprinklr Chief Financial Officer. We issued our earnings release a short time ago filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation. Please note that on today's call, management will refer to certain non-GAAP financial measures.

While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for financial information presented in accordance with GAAP. You are directed to our press release and supplementary investor presentation for a reconciliation of such measures to GAAP.

In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of Sprinklr that involve many assumptions, risks and uncertainties, and including our guidance for the third fiscal quarter and full fiscal year of 2026, the impact of our corporate strategies and changes to our leadership, the benefits of our platform and our market opportunity.

Our actual results might differ materially from such forward-looking statements. Any forward-looking statements that we make on this call are based on our beliefs and assumptions as of today, and we disclaim any obligation to update them. For more details on the risks associated with these forward-looking statements, please refer to our filings with the SEC also posted on our website. With that, let me turn it over to Rory.

Thank you, Eric, and hello, everyone. It's nice to be with you today. Second quarter total revenue grew 8% year-over-year to $212 million and subscription revenue grew 6% year-over-year to $188.5 million. We generated a record $38.2 million in non-GAAP operating income, which resulted in an 18% non-GAAP operating margin for the quarter. I want to thank Sprinklr team members from around the globe and our customers and partners for trusting us to help them solve some of their most important business needs.

As we disclosed in today's earnings release, our CFO, Manish Sarin will be leaving Sprinkler on September 19. Manish has been an important member of the executive leadership team and I want to thank him for his contributions during his 3.5 years at sprinkler. We wish him the best in his future endeavors and I will assume responsibility for the financial organization on an interim basis while we finalize the search for our next CFO. We I'll now move to an update on our Sprinklr transformation.

At Sprinklr, we want our customers to leverage our technology to reimagine how brands connect with people making every experience extraordinary. As I've shared in 2 previous earnings call, fiscal year '26 as a transitional year for the company. And I'd like to provide you with an update on our progress. To date, we have largely completed Phase 1 of the transformation, which has been focused on business optimization. We have established a clear ambidextrous strategy, implemented a new business management system, optimized our cost structure realigned our go-to-market coverage model and strengthen our product delivery road maps. This is the foundation from which we intend to strategically invest and efficiently run Sprinklr to improve our business and better serve our customers.

Given the scope of this necessary and wide-ranging transformation, we anticipated some near-term challenges, especially during the first half of this year as we've implemented a series of strategic and operational changes to directly address past execution issues and to position the company for the long term. As a team, we've tackled these challenges head on, and we're making good progress but we still have more work to do across our business to elevate the consistency of our execution, improve the predictability of our results and drive durable growth.

We are now entering the second phase of our transformation, the transition phase, which we anticipate will continue through the back half of FY '26 and into FY '27. This is where we will see many of these actions noted above, flow through and shape our business practices and the culture of the company. Building on our progress to date and as we've stated on prior earnings calls, we are making incremental investments here in the second half of fiscal year '26 to continue to meet the needs of our customers. These investments are designed to extend the enterprise leadership of our platform across both core and Sprinklr service.

Some of these targeted investments include: one, the acceleration and deployment of AI functionality and marketing insights and CCaaS products; two, the addition of more channels and enhanced video capabilities to our leading core suite, and three, we're adding more in-region technical and implementation skills to the go-to-market motion to bring us closer to our customers. We are also continuing to strengthen our leadership team with individuals deeply experienced in driving exceptional customer experiences at scale.

In August, we hired [ Bit Rambus ] as our new Head of Global Services and Support reporting directly to me. Bit joins us with more than 25 years of experience. Most recently, as the Senior Vice President at Philips Healthcare, where he led an organization of over 3,000 people responsible for all facets of customer relations and retention throughout the customer life cycle. Furthermore, as you saw in today's earnings release, I'm happy to announce that we have hired [ Scott Lahr ] as our Chief Revenue Officer. With more than 30 years in the tech industry, Scott brings a proven track record of driving growth and a passion for building high-performing teams.

Most recently, Scott served as the Senior Vice President, Global AI Sales at Dell Technologies, where he led a $15 billion revenue organization driving some of the largest AI deployments globally. Scott's arrival marks a pivotal moment for sprinkler as we sharpen our go-to-market strategy and position ourselves to accelerate the path forward. Bit and Scott are seasoned technology executives who bring proven expertise, leadership capabilities and experience delivering strong results at scale which we believe will accelerate our transformational journey.

Let's now turn to our business execution. As I covered in the first quarter earnings call, we have seen some longer sales cycle and continued scrutiny of enterprise spending. This heightened scrutiny coupled within consistent operational execution and lingering technical debt from the past several years continued to pressure our renewal cycle. Churn is a major focus for us. And to address this directly, we have been working hard to clean up and fix troubled engagement for those customers who have experienced past implementation and execution issues.

This leads us to project Bearhug, our key back to the field initiative to combat and help minimize churn which we launched back in March. Project Bearhug is focused on deeply engaging our top 700 customers, who collectively represent more than 80% of our total revenue. Through the first half of this year, we've had detailed engagements with nearly half of these customers and have established a regular cadence with scores of our top customers.

One of those customers recently quoted the whole experience with Sprinkler feels seamless, easy, connective. Our sprinkler team operates like an extension of our internal team. We share goals and ideas and they're just as impacted by our struggles and excited about our wins as we are. This is exactly the type of experience we are striving to deliver every time, every day. As part of our go-to-market transformation, we're aligning our products to where they fit best and where we believe we have a disproportional ability to win and expand with customers.

We believe Sprinklr delivers the most value to scaled global enterprises. We will focus on these enterprise customers who can best leverage the breadth and depth of our AI native unified platform. We are encouraged by the early results of Project Bearhug, which is enabling us to cultivate stronger relationships with the C-suite, better understanding of our customers' priorities and to demonstrate sprinklers powerful value. Let me now pivot to our technology and product innovation, which is fundamental to what we do with sprinkler.

We believe our unified platform enables our customers to provide consistent, personalized and data-driven customer experiences. As we had mentioned early in the year, we have now launched our new core pricing and packaging for new logos. This is a hybrid model consisting of seat-based pricing and a commitment model based on consumption. We believe these simplified new bundles will enable us to deliver more transparency and feature sets that help unlock the value and power of the Sprinklr platform for our customers in an easier, seamless way.

We also understand that companies working to determine how to successively deploy AI technology to help their teams move faster and elevate customer experiences. By investing and developing robust AI features and offerings, we are helping our customers realize the impact of AI in a truly meaningful way. This type of innovation leadership is not new to sprinkler. Sprinklr is an AI native platform that is purpose-built for customer experiences with dozens and dozens of industry and application integrations, backed by over a decade of expertise in analyzing complex structured and unstructured data set Sprinklr combined domain-specific and generative AI to power use cases, agents, copilot that augment teams and unlock intelligent collaboration.

This helps to drive efficiency and scale across our customers. Our AI is grounded in our customers' business context evolving alongside their teams while maintaining the highest standard of security, transparency, governance and trust. Our advancements in AI are fueling enterprise wins and improving customer satisfaction. Here are just a few of upcoming developments on our R&D front.

With the latest enhancements of our customer feedback management or CFM product, Sprinklr will provide customers with a unique ability to leverage AI to analyze structured and unstructured customer feedback from numerous data sources, social reviews, blogs, surveys, voice and chat transcription through one unified AI taxonomy, all on one platform. Additionally, upcoming product releases will further enhance our ability to disrupt that scale and deliver the technology teams need to reimagine the customer journey.

First, Sprinklr AI agents or our genic AI offering, help brands scale 24/7 customer support, reduce cost and boost efficiency across channels built on our powerful AI and design specifically with key personas and customer workflows in mind, they are designed to help ensure fast, consistent, improved service experiences. And secondly, our agent copilot is an intelligent assistant powered by sprinkler AIs designed to streamline and elevate the customer service experience by supporting live agents with task automation and quick insight.

We are encouraged by the impact that these technologies are having on our customers based on the uptake and usage of our early users. We believe these updates and our continued investments will help our customers see faster time to value, deepen confidence in our shared solutions and unlock expansion opportunities aligned to our customers critical priorities. As such, we are making targeted investments in infrastructure and implementation services to support our AI and service offerings.

We are starting to see the positive impact of our investments. Results from Project Bearhug and our focus on execution, culminating and recent customer wins. In 2Q, we continued landing and expanding with many iconic brands. As of July 31, we have now 149 customers generating at least $1 million in annual subscription revenue, which is an additional 3 companies from our last quarter. So now in closing, we're making progress on our transformational journey as we are building a better sprinkler that best serves our customers.

As we all know, transformation of this scale take time, and we have more work to do to properly execute this program. churn remains a challenge for us and improving our retention rate is a key priority. We're seeing early indication of better engagement and improving customer satisfaction based on my personal interaction with hundreds of customers and partners over my first 9 months. We now have better analytics to help guide our actions, drive deeper customer impact and improve our business predictability.

We've taken an ambidextrous approach to reenergize and grow our leading Sprinklr core, while we harden and expand our disruptive Sprinklr service solution in our march towards the rule of 40. We believe the investments we are now making and our continued focus on improving execution should begin to show a bend in our business over the next few quarters. Now I'd like to turn the call over to Manish to go through the numbers in a bit more detail. Manish?

Thank you, Rory, and good morning, everyone. For the second quarter, total revenue was $212 million, up 8% year-over-year, while subscription revenue was $108.5 million, up 6% year-over-year. We have seen downward pressure on renewals for more than 2 years now. In the second quarter, we made further progress on the necessary cleanup to previously challenged accounts. As we have discussed improving implementations, deployments and customer satisfaction is a primary focus of our transformation as historically our pace of innovation has outpaced our ability to deliver on customer commitments.

Professional services revenue came in at $23.6 million as we are working on some large CCaaS implementations for our customers. Our subscription revenue-based net dollar expansion rate in the second quarter was 102%. This is flat sequentially but reflects the ongoing impact of the elevated customer churn and downsell activity. At the end of the second quarter, we had 149 customers contributing $1 million or more in subscription revenue over the preceding 12 months which is an increase of 3 customers sequentially.

I would also like to note that the trailing 12 months revenue contributed by our $1 million customer cohort was up both year-over-year and sequentially. We believe our bar and focus on customers at the high end of the market should positively impact our 7-figure customer count and renewal rates over time. Regarding gross margins for the second quarter, on a non-GAAP basis, our subscription gross margin was 78%, and the professional services gross margin was breakeven resulting in a total non-GAAP gross margin of 69%.

As noted in previous calls, we are experiencing higher data and hosting costs as we are launching new cloud environment in response to business opportunities, especially in sprinkles service and our expanded AI capabilities. Turning to profitability for the quarter. Non-GAAP operating income was $38.2 million or an 18% margin, which drove non-GAAP net income of $0.13 per diluted share.

We incurred $0.8 million in litigation costs that we deem to be non-core to the operations of the business. And as such, these costs are not included in our non-GAAP figures. With respect to free cash flow, we generated a reported $29.8 million in free cash flow or $31 million during the second quarter after adjusting for $1.2 million in cash payments related to the restructuring we announced in Q1. On a reported basis, for the first half of FY '26, we generated $110.5 million and when excluding the restructuring charges for the first half of FY '26, we have generated a total of $123.5 million in free cash flow.

We have a healthy balance sheet with $474 million in cash and marketable securities with no debt outstanding. During the second quarter, pursuant to the company's stock buyback program, we purchased 16.5 million shares of our Class A common stock for a total cost of $140.4 million. At the end of the first week of largest we completed the full $150 million buyback that was authorized by the Board. A total of 17.6 million shares will be returned to the company's authorized but unissued share reserve.

Calculated billings for the second quarter were $200.6 million, an increase of 4% year-over-year. As of July 31, 2025, total remaining performance obligations, or RPO, which represents revenue from committed customer contracts that has not yet been recognized was $923.8 million, up 4% and compared to the same period last year. And current RPO or CRPO, was $597.1 million, up 7% year-over-year.

Moving on to guidance. For Q3, we expect total revenue to be in the range of $209 million to $210 million, representing 4% growth year-over-year at the midpoint. More than this, we expect subscription revenue to be in the range of $186 million to $187 million, representing 3% growth year-over-year at the midpoint. The step down from Q2 to Q3 subscription revenue is driven by the continued necessary cleanup of challenged accounts from the past that we mentioned earlier.

Q3 guide implies $23 million in professional services revenue, which is growing by 15% year-over-year. As we have signaled on prior earnings calls, we continue to invest in our professional services delivery and implementation capabilities and expect Professional Services gross margin to be approximately negative 3% in Q3. With respect to billings, Q3 is traditionally our weakest quarter, and we estimate total billings of approximately $150 million.

We expect non-GAAP operating income to be in the range of $28.5 million to $29.5 million, resulting in non-GAAP net income per diluted share of approximately $0.09, assuming 257 million diluted weighted average shares outstanding. This equates to an approximately 14% non-GAAP operating margin at the midpoint. There are 2 factors affecting non-GAAP operating income in the second half of the year. First, we are experiencing a strong uptake in our AI produce leading to higher cloud costs in the second half of the year.

Second, as Rory noted in his remarks, we are investing to position the company for revenue growth in the future to hiring AI and R&D talent, particularly in targeted regions to be closer to our customers as well as enabling additional go-to-market and implementation capabilities. For the full year FY '26, we are raising our expectations for subscription revenue to now be in the range of $746 million to $748 million representing 4% growth year-over-year at the midpoint. We flowed through the entire Q2 beat as the incremental revenue in Q2 becomes a part of our recurring revenue stream.

We now expect total revenue to be in the range of $837 million to $839 million, representing 5% growth year-over-year at the midpoint. This is a $12 million increase from prior guidance, driven by an increase in our professional services revenue expectations to now $91 million and the flow-through and raise for subscription revenue. For modeling purposes, you can assume approximately $23 million in professional services revenue for both Q3 and Q4.

For the full year FY '26, we are raising our non-GAAP operating income to be in the range of $131 million to $133 million. This equates to non-GAAP net income per diluted share of $0.42 to $0.43, assuming 266 million diluted weighted average shares outstanding. This implies a 16% non-GAAP operating margin at the midpoint. When modeling the spread of non-GAAP operating income, you can assume a slight decrease in Q4 relative to our Q3 guide of $29 million as the investments we are making flow through the income statement in driving the net income per share for modeling purposes.

A total tax provision of approximately $40 million needs to be added to the non-GAAP profit before tax line to get to non-GAAP profit before tax start with the non-GAAP operating income range is provided at an estimated $22 million in other income for the full year with $4 million of that to be earned here this other income line primarily consists of interest income. We estimate a tax provision of approximately $9 million in Q3. This equates to approximately 26% and effective tax rate on our non-GAAP profit before tax for both the quarter and the year.

We also expect to be GAAP net income positive for the full year FY '26 consistent with our performance over the past few years. Regarding free cash flow, we generated $123.5 million in the first half of the year, excluding the restructuring payments. We estimate the full year free cash flow to remain at $125 million, given the incremental investments mentioned earlier.

We estimate free cash flow to be slightly negative in Q3 with the balance generated in Q4. As Roy noted earlier, I will be stepping down from my role at Sprinklr. I want to express my heartfelt gratitude to the management team, the Board and the broader Sprinkler team for making it a truly memorable journey. And with that, let's open it up for questions. Operator?

[Operator Instructions] Our first question is from Arjun Bhatia with William Blair.

Willow Miller on for Arjun Bhatia. We appreciate the color in the prepared remarks about where Sprinkler is in its transformational journey but want to ask what do you think we'll see the band to use your wording? Is it fair to firm the band that's occurring in the back half of this year? Or is this more of a fiscal 2027 dynamic? And can you point to what business metrics we should look at to see this end.

Yes. Thanks, Willow. That's a great question. I think the real key to this is that we've been building this transformation road map for the past several quarters. I think as we look forward, we've built a better management system, better analytics. We have better understanding of our customer position. We're looking several quarters out now in terms of renewals, our customer usage.

I'm spending in a disproportional amount of time with customers. What we're looking for in terms of the metrics that we're looking for improvements in renewals, improvements in customer satisfaction, the number of challenged accounts. And we're looking for improvements in terms of growth across the business. I think right kind of expectation that we've been looking for is we are looking for that bend to occur here in the second half of FY '26 into the beginning of FY '27.

So I'll give you an update as we cover in the 3Q earnings call as well as in the 4Q earnings call. But in the indications that I'm seeing -- look positive, but we're making good progress. We have more work to do, as I've said, but I like our positioning as we move forward, and I'm optimistic that we can continue to build on the momentum and the improvements that we're making.

Our next question is from Patrick Walravens with Citizens JMP.

Great. I guess we'll start with the -- Rory, maybe start with the churn, which is sort of the biggest issue. Could you maybe give us an example of one of these bigger churn situations just so we can sort of wrap our heads around exactly what it is you guys are dealing with?

Sure, Pat. So I think, Pat, the key here is that our this kind of renewal pressure that we've seen has gone on for several 2, 3 years here at Sprinklr. I think a lot had to do with our focus on our customers, our ability to execute consistently. When we get it right, we're able to grow accounts very well. I think -- but we weren't always able to do that in a very consistent way, how we deliver our road map, how we deliver implementation. Our level in engagement with our customers.

What we really focus with bearhug and all of the operational discipline that we're putting in place here is to really get closer to that to understand exactly how they're using this powerful AI native platform and how we can work with them to lease new modern use cases as well as grow the adoption of the current use cases. And I can tell you that as we've engaged these customers, their reaction is very positive. I think they are seeing a different sprinkler I think they're seeing a real dedication around our team to get in front of that customer, understand their needs and to do what we say and own what we do. It's a real focus on accountability.

I think some of these challenges have been in place for the better part of a year or 2, Pat. And I think here is as we work through this, we're focused on getting longer renewals. We're focused on getting right use cases in place. We're focused on really creating the right C-level engagement. And I can tell you, I've met with well over 250 of our customers and our partners in very detailed sessions multiple times over the first 9 months.

I believe that we're seeing real improvement in that execution. I'll look for the best in the second half, beginning of next year. I think those are all key points. I'll give you a couple of examples. We see down cells where we have organizations that had pressure on their financial performance. where they might have a lower investment in marketing, so they reduced some of their seat count. We had some , for example, a large ELA where they clearly had purchased way more during the COVID time period than they were really consuming.

And we made those adjustments and clean those up. We also had some execution issues, and we made -- where we were in challenged situations with certain customers. I can tell you that we've made good progress on those items. And for the most part, we've been able to convert those into renewals and move forward. I hope that helps, Pat.

That's super helpful. And Manish, can I just ask you a follow-up in your remarks, you had a comment about the impact on the about the investment due to the strong uptake in AI. I'm just wondering, is that investment -- your you're consuming tokens from LLM, is that what it is? Or is it something else?

Let's kind of -- I'll take it first, Pat. Manish can give you a little bit of color if you want. But I think what's really cool is so we've been introducing these advancements in our AI innovations around genic AI offerings around our co-pilot work at our AI studio work for them to develop. And we've implemented a number of our customers, and we've seen a very sharp uptick and their utilization of those functions.

So there's more cost in terms of hosting, more LLM costs. There's more support structure that we're putting in place. The good news is the growth in that consumption is really high, and I like that, and it's going in the right direction. And what we're trying to do, Pat, is not kind of make AI for AI. We're trying to embed our AI to create intelligent collaborations with our customers and their human talent on the ground to create more efficient, better customer experiences to really tightly integrate with their workflows and their data to create a very different outcome.

I think you're seeing some agentic work to offload and move to digital solutions, certain volumes of activities, and then you're augmenting human workforce with better information, nudges, data that allows them to create a better experience for the customer. I can tell you that the uptake that we're seeing from our customer set is positive.

What we want to do always in 3Q, 4Q as we give you guidance, is to prudently guide with numbers and data that we believe that we can achieve. And then if we can beat them, that's even better. But that's how we're going about this planning.

Our next question is from Elizabeth Porter with Morgan Stanley.

Great. Great to hear the progress on Project Bearhug. When we look at the revenue guidance, it does imply some deceleration through the year despite some easing comps and the progress that you saw in Q2 so is there anything we should be mindful of as it relates to potential drags on the back half growth, for example, any sort of bigger renewal cohorts where we're still seeing pressure. Just trying to square some of the outlook in the guidance versus the progress that you saw here in Q2? And how should we think about that bending of the demand curve into the back half of the year?

Thanks, Elizabeth. I think the real focus here is to create a prudent guidance and ones that we really understand and that we believe we can achieve. There's no reason to lean into any of the numbers at this point. What we're really trying to do is to orderly move through this transformation. We told you that it would take some time. We're making good progress. but we have more work to do. In terms of that kind of job in 3Q, that's kind of a reflection of the cleanups that we did in terms of the first half.

And I think if you look at 4Q, it starts to move up again as we kind of look out as we gave guidance for the full year as you calculate that. I think we want to be prudent and not lean into, we see that very clean bend in the business. I think indications are there that we'll see it in the second half, beginning of next year. But again, we want to make sure that we're executing well and we're prudently guiding so that there's no negative surprises. And that's how we went about doing it. Does that help Elizabeth?

Yes. That's very helpful. And then just as a follow-up, wanted to dive into that [ Imbadextra ] strategy to reenergize the core and hardened [indiscernible] we heard a lot about the investment, particularly in the core. So I wanted to ask on the CCaaS side, what are some of the biggest drivers to unlock demand? Is it more of the product side or the kind of the support in the go-to-market side kind of where are we on the road map to deliver some of those changes?

Well, that's a great question, Elizabeth. And as I look at the CCaaS business, it continues to grow well year-over-year. As I said at the beginning of my tenure here, we were going to actually kind of govern our growth rate in FY '26. That CCaaS space so that we could harden it. We wanted to make sure we kept our key customers and we grew them and they become references. That's the key. So as we move through the second half of the year, we're making sure that those large implementations are successful and that we're doing all the right things to harden the support level to make sure all the functionality has been expanded and that it's a great customer experience.

So far, on all of those major implementations, they have moved into a better position and we've been able to execute more cleanly across that. As that becomes more firmly embedded across 3Q and 4Q and all the product deliveries are completed that harden and expand. We're doing work around data protection and continue to expand our security activity, our release processes, test environments, adding more technical skills closer to the customer.

All of those are do think better outcomes. And then where we go in FY '27 as we start to open the spigot and really start to accelerate that growth once we see that hardening. And that's been very consistent of what I've shared with you all over the past several earnings calls. And it's tracking just the way we would like it so far. So that's what we're actually doing. Does that help, Elizabeth?

Our next question is from Matt VanVliet with Cantor Fitzgerald.

I guess I wanted to dig in a little bit on the hybrid pricing strategy that you talked about. And maybe what that ultimately looks like. I don't know if you have customer examples of sort of a customer moving from old pricing to new pricing or at least similar-sized customers, what the pricing ultimately shakes out at? Is this -- can this be an uplift over time if consumption really picks up? Or how should we think about it impacting from a revenue and profitability standpoint?

Yes, Matt. I think that's a really good question. As we talked about this, I think it was even on my first earnings call, we discussed the need improve our pricing and packaging. We've implemented that, as I mentioned, that started in the third quarter. We're beginning it on our core products for new logos. And we want to make sure we test it properly and then we'll expand it to the breast of core, and then we'll bring it to CCaaS next year. The concept was -- we have a very complicated set of product offerings, a lot of different SKUs. We wanted to simplify the ability for our customers to buy.

It's kind of a bundled concept of like a premier kind of capability and then a super premiere capability. And then they have usage kinds of tokens that they're able to and they can actually trade those across offerings. We want to make it seamless, easy, and we believe that this should that should increase customer satisfaction. They'll understand where they sit. And with the increased focus of Bearhug we understand where the customer usage is how they can apply new kinds of new kinds of use cases to really be able to do it.

And this is all subscription revenue. We've created it so that it's ratable and it's all in base so that we can move forward. I told you we do it at the beginning of my tenure, we've done it. We'll systematically implement it across the portfolio. simpler, seamless, easier for the customer, ability to consume all subscription revenue and allows us to create a better, cleaner relationship with our customers.

Very helpful. And then as you look at the changing dynamic of the search engine and sort of moving to AI search, is that impacting whether it's the core components of the platform or even on the service side, are your customers seeing a transformation in their own business models that you're adjusting to? How should we think about kind of what AI search is doing, if at all, to your business?

Yes. Let's talk about it first from the core side. We have the leadership core listening social marketing platform on the planet. That's a good thing. And I think what we're doing is pretty exciting. We're adding new channels, and we're doing work right now to add increased listening and capability across the LLPs and across new video capabilities. We want to continue to hold the #1 position in a number of channels, number of capabilities as we want to be the unmatched leader and voice of the customer that any of our global iconic brands can understand what people are talking about their brand.

And then when we link it together across the platform, using the new releasing customer feedback management capability, the digital support work or the SAS worked we can create, again, an unmatched voice of the customer that links all vectors of customer engagement together on 1 single AI native platform. I think that's pretty cool. And I think I'd say, defendable moat. And I think it's something that is going to happen and it's going to actually accelerate. One last kind of concept.

We're seeing enterprise customers be very interested in this ability to link this information across social, across digital support across social commerce and across the contact center to create one voice to the customer. And I think you'll see -- I'll talk about this in some detail about some global 50 type customers that are applying this and that's part of the reason we're seeing an uplift in our services revenue as we do some really interesting transformational work with some of those customers on a global basis. But more to follow when we get to 3Q and 4Q.

Our next question is from Parker Lane with Stifel.

Rory, if you look at those top 700 customers, 80% of revenue that you're attacking with Project Bearhug, what percentage of them or pieces of them have some form of troubled engagement today? And what are you learning as you progress through Project Bar Hog about how to best mitigate some of those challenges?

Yes, that's a great question, Parker. Really interesting. That top 700 customers that we want to deeply cover, we want to make sure that have every bit of sprinkler on top of that's where our bread is going to be buttered. That's where our growth is that's where the expansion opportunities. When we have customers that are spending $20 million, $25 million plus with us a year, that means a lot of those enterprise customers could grow to that over time. Want to protect them.

And it's actually getting closer to 90% of our revenue when you get to that 700 level. I think this is a very important feature. And with our investments and our current structure, we can cover those customers well. And we can engage them in a very detailed deep way, and they appreciate that. These are real iconic brands. These are true enterprise players. Now when I look at challenged accounts, one of the things I did when I got here was put in a program to look at challenged accounts. And we have a process each week where we track that.

I can tell you that number of challenged accounts was in the 10s, 10s and 10s at the beginning. And now it's drifted down into the teens. So we're seeing an improvement in terms of those really challenged accounts, and I track them each week. So they probably peak back in May, June time frame, and they've been kind of trending down since then. It's very similar to what I saw at other companies like [ Vonage, ] et cetera. But let's keep working it. We're trying to make sure that we're executing.

I'm a bit from Missouri, the Show-Me state. I want to make sure I see that execution happen, and I'll cover more of that when we get to 3Q, 4Q and the beginning of next year.

Understood. And maybe just circling back to the higher cloud costs you're seeing in the business. I think we're probably 300, 400 points off from where subscription margins were at this time last year. Are you saying that we should see further pressure on the subscription gross margin line or levels that are similar to what we see through the first half of the year?

This is Manish. Let me start. So I think as we were saying with respect to what we are looking at in the second half of the year, there is going to be pressure on the gross margin largely driven by, as we were saying, consumption of our AI product. So there is additional cloud hosting costs, other costs that come with it. So I would assume call it, 2 to 3-point reduction in gross margins in the second half.

Our next question is from Raimo Lenschow with Barclays.

Perfect. Rory, if you think about the challenged customers on the renewal, is there a way to think about when we kind of go through that just from a timing perspective in terms of once they have renewed once you kind of are back on a better cadence et cetera, so that we can see like -- you talked about the numbers going lower, but is there kind of a way they all have renewed now kind of much closer to them so we can move beyond that issue. Can you kind of speak to that, please?

Yes, sure, Raimo. I think that really the most important factor is actually not the renewal. I mean, the renewal is key and multiyear is even better, and we're seeing an uptake in our number of longer-term renewals, those are good. But nothing's going to change unless you change the depth of your relationship. That's why back to the field focus and the bear hug work is so critical and why we're focused on that top 700 every time you renew, you can renew, you can carry the day and you can make adjustments and you can get it done.

But how you create that long-term stickiness, that value creation, the impact of the platform is by engaging with that customer every day, every week, every month across the entire year -- that's how you break the back of this and you create a stronger renewal trend. We're going to come up on my 1 year in November. We should start to some of that bend in that 3Q, 4Q time period into next year. It's really not about going through the renewals. If we just did the renewals and got longer renewals, that's all good.

But if you don't change your behavior and how you engage the customer and understand how they're using the platform and help them that platform and show them the additional use cases and show them how you can expand into other areas like customer feedback management, which I think is going to be very disruptive or into contact center. These are the ways that you really break the back of that and begin to really change that trend. I see positive momentum.

The indications are there. But again, we have to make sure that, that's all complete as we go through that journey. That's the part that's really key. And that's what we're looking for is to make sure that on a daily basis, our teams are deeply engaged with our customers to make them successful. That's how you change renewals, that's how you change the long-term trajectory.

Perfect. That's very clear. And then the other question I had was on if you think there's a lot of AI getting frown at customers at the moment, like the agent from [indiscernible] for ServiceNow has [indiscernible] and all the other vendors as well. How do you see that customer understanding evolve in terms of where you fit in with your offering versus others? And where are they on that journey in terms of kind of understanding and then kind of adopting.

Yes. I think AI is an important technology. It's one of those technology waves in my 42-year technology career that I think it's right up there with cloud. It's right up there with the Internet mobility, the move to client server. I don't want to tell you how long I've been in the industry, but it's 4-plus decades. So I've seen these a number of times. I think AI is important. I think maybe it's a little overhyped at the moment. That's okay. I think you're going to see a consolidation of business players in the space over the next 2, 3, 4 years.

I think that's important. I think customers see it as an important technology, which it is. I think we're sort of like in the 2010 time frame like in cloud. Got a lot of energy, a lot of momentum. The real growth will come over the next several years, I think. I think the key though is the timing and if you look at my prepared remarks, I think the key is tying it to the workflow, the data, the customers' teams to make sure that we're really getting the impact.

And many people are just kind of like clipping on an AI thing that's not the answer. You want an AI native platform like sprinkler that's been doing this for 8 or 10 years. It's embedded in everything we do. So when you look at the customer voice across customer feedback management, social or the contact center. It all knits together and AI gives the guidance to each of the workflows and each of the persons that they particularly need.

That's how I think you unlock it. And the identic piece about deflection and moving support to digital -- we've been doing that for some time. You saw the announcements with BT and some of our other players. I think that's the key to really unlocking the value. Customers are bought into it. They think it's an important technology.

It is -- it might be a little bit overhyped right now. That's okay. Where we see the impact is AI native platforms, leveraging the data, workflows and persona to truly unlock intelligent collaboration and improve efficiencies and costs. That's where we're investing, and that's why we think we're well positioned.

Our next question is from Jackson Ader with KeyBanc Capital Markets.

We're spending a lot of time talking about renewal activity. But Rory, I'm curious what you're seeing on net new. I haven't had a ton of discussion on net new logos and what kind of the demand looks like for getting new customers in the door?

Yes. I like that question, Jackson. Thank you for that. 2 things on that. One, when we built the plan for this year, and I talked about hardening and expanding the base and really growing, expanding the base and really expanding social and services front. We basically built a plan where we were looking at a mix of about new logo and 75% expansion. We knocked that down. Usually, it's a little higher on new logo and we did that on purpose because we want to make sure we clean up some of our execution so that we're not introducing a whole bunch of challenged projects and challenge customers.

Our rate challenged accounts has definitely slowed, right? And I mentioned that earlier in the Q&A section. I think getting that right kind of balance and focus, we're seeing almost dead nuts on that mix so far through the first half of the year, about 25-75. So it's executing. Next year, in FY '27 and whenever we kind of get ready for that acceleration phase, I'd probably slide that up to 35-65 and kind of look for that then.

The other important factor about new logos is I don't want to focus on tiny companies. This platform is best for powerful enterprise brands. It's an unbelievably powerful AI native platform that knits together all vectors of customer engagement. I can't sell this to Joe's Midwestern pulping supply company for 50. That's not where this solution should focus, and that's a distraction.

Don't look at my total customer count, that's not what I want to focus on. I want to focus on the Global 2000, the Global 3000. That's where this product, things where we can win a disproportional amount of business. And that's how we're building the go-to-market with our bearhug and all of that work is to really create that kind of experience for our customers.

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Okay. Great. That makes sense. And then a quick follow-up on the personnel changes, the management changes. Do you think there's any risk that the new hires you're making will they'll want to put their own kind of stamp on things, right, like make their own changes to go to market or the investments. And would that possibly elongate the time line to see that bend in the curve that you're hoping to see in the operations?

So one of the things, as I've gone through these transformations, the previous 7 times, always there's some transition in terms of leadership -- we have a particular process that we're implementing here. It's a 3-phase transformation. There's always new leaders. We want to thank the leaders for the work that they've been doing and we congratulate people like Manish and thank them for the work. But as we bring in new leaders like Scott, Bit, Joy, Sanjay, the next CFO. They're part of a team, and they understand what we're trying to accomplish.

Their clock speed is fast, are used to doing this at scale. I mean look at the people that we brought in. They've run much bigger organizations. They've run much bigger transformations, huge AI deployment. This is the key to building that clock speed and that execution. I see it quite the opposite. I see it as an accelerant and I think it's key. I want to get all of that -- and I'm basically through this.

I mean, maybe there's a little bit more to do in terms of leadership work. But once I get the CFO closed in the final phases, I think then maybe there's a little bit more, but I'm really getting close to having the final team in place. And I think they have skill, they have experience. They have scale. I think they have a high clock speed. I think they have passion for the transformation. I'm excited to see where we go. And I think it actually uplifts our execution.

Our next question is from Clark Wright with D.A. Davidson.

Awesome. In terms of the churn headwinds that you've described, I just wanting to understand, is this primarily still concentrated at the mid-market level. And then in terms of clarifying additionally in terms of what you mean by churn, is this still down selling pressure? Are you also seeing logo churn as well?

Yes, a couple of things. So first, on logo churn versus downsell, it's more predominantly downsell. And there's some logo churn, but it's mainly on downsell. We saw our number of $1 million accounts increase. I think that's a good sign. I think this is mid-market, that lower end, the product isn't a great fit there. I mean that's not where our focus is. That's a very small percentage. You get down to the last several hundred accounts. There that's like less than 1% of our revenue.

And this product isn't really focused on that kind of offering. We're going to put our resources and our focus on the upmarket and where this product has a disproportional to win. I think that's a clear better use of the resources. And again, in our top 700 customers, is over -- between 80% and 90% of our revenue. I mean, it's a big number. That's where we need to focus. At the low end, that is not where this product sings. Our product, sings and enterprises. Small enterprises, large, very large. This is where this is where we're going to focus. And we've seen better performance as we go up that scale. When we put the right team on it, the right focus, we engage the customer right we get better renewal rates.

It's really that simple. And that ties back to Raimo's question about where we're seeing it. You put the right people on it, the right engagement that changes the renewal. It's not the renewal cycle. It's the engagement that matters. Clark.

Awesome. And then, I guess, if I could just add one more. It was great to see the buyback activity this quarter. I guess what was the thought process around not re-upping the authorization versus potentially pursuing other capital allocation strategies.

Yes. I think it's really straightforward. I think we have a pristine balance sheet. We're generating a lot of cash flow -- we're looking at tuck-ins and some innovation add-ons that might make sense. I think we want to make sure we're really exercising that space in terms of adding capability in the CCS, the AI and the social space that could augment our growth. It's all about driving growth.

We'll continue to look at buybacks and the Board looks at that at a regular basis. And if they think there's a continued opportunity and that's the best use of allocation, we'll announce something. But at this point, we think that's the prudent look, and we'll continue to assess that as we go each month, each quarter.

Our final question is from Andrew King with Rosenblat Securities.

I just wanted to ask a quick one on what you just touched on about the M&A comment. Just wanted to see how -- if you could just give us a little reminder as to where your priorities lie to expanding the portfolio, either via building, partnering or M&A and where your -- the level of need for that is right now?

Yes. I think the key focus, Andrew, is to continue to accelerate our buildability, our road map and our ability to do what we say own what we do and execute on those road maps. And I've seen better improvement over my 9 months here. In terms -- and so that's the primary focus because we have a large talented R&D team that I think creates really interesting innovations. That's going to be the core of our innovation strategy.

Now to augment that, if there's some tuck-in specific aqua hires or some technology capabilities we could add on in social CCS or AI, I think, hey, you're going to see some consolidation and some smaller entities failed. Maybe we could grab a couple of 1 or 2 of those and add some really interesting talent to the almost 300-plus AI skills we have on board already. I think that's interesting. I think there's an opportunity around social. But again, we're not going to do M&A for M&A stake. We're going to focus on building our innovation. And if we get the right asset or the right aqua hire at the right price, then we'll execute.

That's our focus.

Got it. And then if I could just slip in one more. If you could just give us a little reminder of how your priorities lie balance investing for growth versus driving margin expansion, that would be great. I mean we've really seen some really nice margin expansion on the operating margin this year despite gross margin impact. So if you could just give us a little balance there, that would be great.

Yes. We can stretch out the bottom line anytime we want. I mean that's -- you can always do that. The key, though, in the March of the Rule of 40 is that it has to have a combined growth component. We got to get to double-digit plus growth rate over this transformation. That's key. I mean you can't get there all on the bottom line. Like I said, you can always adjust your bottom line by how efficient you are. What I'm trying to do right now is I'm expecting to see some bend in the business over the next several quarters.

I'm looking to make some investments so that we're positioned for FY '27 and that we can do some acceleration, I'd like to get some stronger growth because as I get into the 30s, on my way to 40, I got to do that with some better growth rates. And I think that's the long-term durable growth that we're looking to establish. That's how we're looking at the balance. And again, I can stretch out the bottom any time I really want to make sure I have a combination and a really robust both sides of the equation.

Thanks, Andrew. With that, I think we've concluded our Q&A. And I want to thank everyone for joining the call today. I appreciate everyone's interest in our Sprinklr transformation. I think we're off to a strong and continued good progress in this transformation. We have more work to do.

Please give us the time to execute that. I'm encouraged with the progress and keep listening to our updates. I'm looking forward to our 3Q and 4Q update, so I can share more on the progress that we're making. Thank you, everyone, for joining today. And with that, I think we can conclude the call.

Thank you, operator.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.