Q4 2024 Sprinklr Inc Earnings Call

Participants

Eric Scro; VP, Finance; Sprinklr Inc

Ragy Thomas; Chairman of the Board, Chief Executive Officer, Founder; Sprinklr Inc

Manish Sarin; Chief Financial Officer; Sprinklr Inc

Arjun Bhatia; Analyst; William Blair & Company LLC

Raimo Lenschow; Analyst; Barclays Capital Inc

Pinjalim Bora; Analyst; JPMorgan Chase & Co

Elizabeth Porter; Analyst; Morgan Stanley Inc

Presentation

Operator

Greetings, and welcome to the Sprinklr fourth-quarter fiscal year 2024 earnings call. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Eric Scro, Vice President of Finance. Thank you. You may begin.

Eric Scro

Thank you, Camilla, and welcome, everyone, to Sprinklr's fourth quarter and full year fiscal 2024 results financial call. Joining us today are Ragy Thomas, Sprinklr's founder and CEO; and Manish Sarin, Chief Financial Officer. We issued our earnings release a short time ago filed the related Form 8-K with the SEC, and we've made them available on the Investor Relations section of our website, along with the supplementary investor presentation.
In addition, during today's call, we'll be making some forward-looking statements about the business and about the financial results of sprinkler that involve many assumptions, risks and uncertainties, including our guidance for the first fiscal quarter and full fiscal year of 2025. Actual results might differ materially.
With that, let me turn it over to Roger.

Ragy Thomas

Thank you, Eric, and hello, everyone. Thank you for joining us today. We're pleased that Q4 was another strong quarter that exceeded guidance across all key metrics. Q4 total revenue grew 17% year over year to $194.2 million and subscription revenue grew 19% year over year to $177 million. We generated a record $32.4 million in non-GAAP operating income, which resulted in a 17% non-GAAP operating margin for the quarter. The end of the fiscal year is often a good time to reflect on how far we've come and where we are going. The opportunity we saw when we founded sprinkler is coming to fruition in an accelerated fashion because of general debate after investing 14 years of unifying the back end of customer facing functions with our AI-powered platform, we're beginning to see customers bring our vision of unifying to life with generative AI and conversational AI generative. Ai has accelerated conversations happening at the brand's digital edge, where the customer buys guest feedback and engages for support and service. Anyone can use Jenna JNI to build a checkbook, but under the engine or the foundation behind it is unified to sell to serve and to gain actionable insights. Siloed chat bots can manifest significant value for the brand in today's hyper-connected world, customers must experience a unified approach across all touch points with the brand. As you know, we're on a journey to create a new category of enterprise software that we call unified customer experience management. And we believe that will revolutionize the front-office and after continuous building and integration across our core portfolio, seek as an AI. We have even more conviction today for our long-term vision and success and our platform strategy than we have ever had for.
As many of you know, we've been committed to this vision for quite some time now. But to make this vision a reality, we must deliver consistent and repeatable results as we shared in our prepared remarks on our Q3 call in December we anticipated that the decline in our FY25 revenue growth rate will be driven by a combination of execution that needed to be improved, particularly on the go-to-market front as we over rotated to Sika and a difficult macro and economic condition that drove elevated churn, we believe we now have the clarity on how to best position this company for our next phase of growth and has made several substantive changes across the organization. This includes investment in our leadership team and enhancements to our operational rigor.
Let's begin with the investments in our executive leadership, we've recently brought on experienced leaders from high growth companies that are known for their execution. They have expertise in helping companies scale revenue and profitability significantly beyond our current levels.
As we have shared Trac Pham, a member of our Board of Directors since June of 2023 has been appointed as the interim CO., where he is focused on organizational structure, getting our teams to better collaborate, cross-functionally and bringing operational rigor to sprinkler. Scott Harvey was promoted to the role of Chief Customer Officer, a role that did not exist where he needs a unified global customer facing organization, including all sales and delivery and service teams to accelerate go-to-market efficiencies and better serve customers. Scott has been actively onboarding several new leaders across the Americas, Europe and APJIN. as well as our partner team.
And today, we are very, very pleased to announce that Mr. Misra has been appointed as our new Chief Technology Officer effective April first. And with that joins us from Adobe where he led a global R&D organization that was responsible for their experience cloud platform. Prior to that, he was the founder and CEO of GoPro.com and the CTO, Chief Architect and Head of Engineering at Snapdeal.com. He has invaluable industry experience extensive experience in scaling businesses and a deep understanding of AI. We are excited to have him onboard soon. We will continue working towards recruiting top-tier talent with proven track records of success and operational excellence as we built out of bench strength to help us drive this company and growth forward.
In terms of a go to market strategy, progress is underway we have established a more structured, cross-functional and disciplined approach for fiscal year 2025. Under this new leadership, we're now focused on emphasizing a more balanced strategy to pursue growth opportunities in both our core as well as service suites. There is work in process with renewals, customer engagement and solution selling pretty much across the board that the result of this work will take some time to manifest through the P&L, but we feel very good that we have a clear plan and we've brought in the right people with the right experience and we are heads down focused on executing.
As of January 31, 2024, we had 1,735 customers, which is up 21% compared to the previous year. While we are pleased with this growth, it's important to note that we're only at a 4% penetration of our target market of 43,000 named companies as we shared during our Investor Day last July. This indicate significant untapped potential for sprinkler.
Turning our focus to our technology platform, we are known for a blazing pace of innovation and this year was no different. Our product and engineering teams unwavering commitment to customers set sprinklers apart in the marketplace. In FY24 alone, we released over 2,000 features and platform enhancements to further advance our vision of vision. We believe that has the potential to dramatically transform brand front office with a eye here are a few highlights from Q4 for sprinkler social, we launched auto, imagine video optimization that reduces publishing failure and optimizes usability for sprinkler insight.
We have extensively deployed AI to reduce time to insight. For example, something that would normally take an average of more than four hours to read and understand and graphs and charts and data form now is just simplified with a click of a button to generate insight in human readable form in marketing and advertising. We have deepened our integrations with leading platforms such as META Snap and ready to enable advertisers to diversify media coverage and access these platforms, latest capabilities.
And lastly, with sprinkler service, we've expanded our channel offerings for Microsoft Teams and Slack and deployed AI in our conversational analytics module to do root cause analysis for top call drivers faster. These enhancements within our architecture, especially our G&A solutions, are helping customers improve productivity in their front office across the board dramatically in some cases, a large electronics retailer that recently implemented our contact center solution.
We reported a whopping 45% increase in customer service productivity because of our conversational self-service AI capability during the fourth quarter, we continue to add new customers and expand with existing customers. This includes world-class brands like BT, British Telecom, where we were selected to be the strategic customer service technology partner. We also added and expanded with brands like AT&T Canada goes here, Sephora and UBS.
Across all our product suite, major global enterprises are seeking tangible evidence of AI. efficacy and its potential to drive measurable productivity gains. There's plenty of hype around AI and put plenty of conversations around the theory in infrastructure, and it's time now to make it real and customer facing functions. We like to share a few use cases where customers are making it real by leveraging our platform. Our recent partnership with a major European telco company underscores our commitment to delivering next-generation seeker solutions. This telecommunications leader aims to be the number one telco in their market and wants to replace more than 10 existing point solutions in the contact center with our comprehensive unified service suite that's enhanced by our AI.
This includes over 30 plus integrations with our existing customer service support systems. The timing of this collaboration is pretty strategic as it aligns with the new cloud strategy to optimize the C cash environment. This customer is now running sprinkler to support 25 hundred agents in eight countries across social, digital and voice channels. This is all geared to improved efficiency, cost effectiveness and overall customer experience for this telco leader.
Next, we have a leading pharmaceutical company that recently had their weight loss drug approved for sale in the market. They are anticipating an obvious increase in customer interactions and needed a partner to scale their front office technology with AI discussions and updating the display technology quickly expanded to comprehensive migration to our social suite, where we displaced an income company legacy solution. They also invested in understanding millions of public data mentions across social, competitive and digital conversations without adding additional people or resources. Our innovative approach commitment to collaboration and expertise in navigating complex legal requirements required for regulated industries to mitigate brand risk were key factors in the decision by choosing sprinkler. They gain a trusted partner, committed to improving the customer experiences and generating ROI better ROI for the business. Our third example is about one of the world's leading health care companies that embarked on a transformative journey, which sprinkler many years ago, their continued expansion in leveraging our unified CXM platform now include all our product suites. They have more than 450 users and consume more than 2 billion mentions to get competitive and product insights and to measure the effectiveness of their brand. This most recent expansion last quarter was to execute against their new marketing strategy that included better content orchestration and strategic collaboration. Sprinkler is now a strategic partner for this company across three of their key businesses through a definition partnership agreement. We are also collaborating with them to significantly enhance our marketing suite. We're introducing critical capabilities like BUDGET and resource management in our marketing suite. I also want to remind all of you that we'll be hosting our first flagship customer event as a public company on May seventh through nine CX unifies. The edge of AI will be in New Orleans. And we will have some of the world's most forward-thinking brands like Amazon, like Lori out, like RDA like Google like Microsoft and Deutsche Telekom talking about how AI is transforming their front office. We look forward to sharing these customer stories and their tangible results, along with practical usable advice with you.
In closing, we delivered a strong year, marked by an 18% growth in revenue, record profitability and strong free cash flow. As we look to the future, we're strengthening our foundation this year with top-tier leadership by fostering innovation and by enhancing our execution capabilities, critical elements that would fuel our sustained success and drive value for customers and shareholders. Our confidence is grounded in the conviction that we have for our long-term vision, total grounded and the AI powered unified, the XM platform.
We've developed the global customers we serve and with the substantial market opportunity that lies ahead of us. Thank you to our customers, partners, our employees for the hard work and their results. And thank you to all of you our investors for believing in our vision.
Let me now hand over the call to Manish.

Manish Sarin

Thank you, Ragy, and good afternoon, everyone. As you heard from Ragy, FY24 was a solid year for sprinkler punctuated by strong financial results with noted opportunities for operational improvement.
Starting with our Q4 financial results, total revenue was $194.2 million, up 17% year over year. This was driven by subscription revenue of $177 million, which grew 19% year over year. Services revenue for the quarter came in at $17.2 million as we completed several key project implementations during the quarter. As noted on our Q3 earnings call, we began to see incremental pressure on renewals in Q3 as certain customers adjusted their spending levels with us. This renewal pressure lingered into Q4, and our current expectation is that we will continue to see some renewal pressure in the first half of FY 25. Our subscription revenue base net dollar expansion rate in the fourth quarter held steady at 118%. As a reminder, we calculate nd on a trailing 12 month subscription revenue basis, which makes it a lagging indicator. While we do not forecast NDE., we estimate this number to keep coming down over the next few quarters as the renewal pressure rolls through the revenue waterfall and work its way through the calculation. As of the end of the fourth quarter, we had 126 customers contributing $1 million or more than subscription revenue over the preceding 12 months, which is a 17% increase year over year. And as Roger stated, we ended the year with 1,735 total customers, which is a 21% increase in new customers for the year.
Turning to gross margins for the quarter on a non-GAAP basis, our subscription gross margins came in at 83% with total non-GAAP gross margins of 76%. Non-gaap gross margins for professional services were better than expected coming in at 5%.
Turning to profitability for the quarter, non-GAAP operating income was a record $32.4 million, resulting in non-GAAP net income of $0.13 per basic share. A 17% non-GAAP operating margin for the quarter was a result of revenue overperformance, strong subscriber subscription gross margins, coupled with broad-based expense discipline and is the sixth consecutive quarter of non-GAAP profitability.
Lastly, on the topic of profitability, for the fourth consecutive quarter, we posted positive GAAP net income totaling $21.1 million, or $0.08 per basic share.
In terms of free cash flow, we generated $12.3 million during the fourth quarter. Our balance sheet has become stronger each quarter now standing at $662.6 million in cash and marketable securities with no debt outstanding and calculated billings for the fourth quarter were $271 million, an increase of 17% year over year.
And just as a quick reminder, our fourth quarter billings have historically been the largest for us, given the timing of our renewals and the quantum of new business booked in the quarter as of the end of Q4. Total remaining performance obligations or RPO, which represents revenue from committed customer contracts that has not yet been recognized, was $966.6 million, up 34% compared with the same period last year. And CRPO was $587 million, up 21% year over year.
During the fourth quarter, pursuant to the company's stock buyback program, we purchased $2.4 million shares of our Class A. common stock for a total cost of $29.6 million. All the shares repurchased have been retired. Furthermore, between February 1, 2024 and March 26, 2024, we purchased an additional $2.1 million shares for a total cost of $27.1 million. And as disclosed in our earnings release, I'm happy to report that sprinklers Board has authorized a $100 million expansion of the existing stock buyback program. As such as of March 26th, 2024, we now have $143.3 million remaining in our share buyback authorization, and we intend to complete the full buyback here in FY25.
Turning to a quick summary of financial results. For the full year FY24 total revenue was $732.4 million, up 18% year over year, with subscription revenue of $668.5 million, up 22% versus the prior year. Calculated billings for the full year were $781.9 million, up 19% year-over-year. We reported non-GAAP operating income for the full year of $92 million, equating to a non-GAAP net income per basic share of $0.41 and a non-GAAP operating margin of 13%.
In terms of free cash flow. We generated $51.1 million in free cash flow for the year, equating to a free cash flow margin of 7%. This is an increase of over 500 basis points from FY23.
Before moving on to guidance, I would like to provide additional details on the go-to-market initiatives. Raj mentioned, starting with renewals. We're implementing a more systematic approach to renewals with a dedicated renewals team in terms of our customer engagement models, work, creating pods of customer facing teams, and investing deeper in sales and skills enablement training to best equip our people in the field. And with regards to solution selling, we're developing solution packages that best align to customers' priorities and their strategic technology roadmap.
Moving now to our Q1 and full year FY25 guidance and business outlook, we recognize that the macroeconomic environment continues to be cautious and our current assumption is that the broader macro trends from last year are likely to continue throughout FY25.
Before we walk through FY25 guidance, I would like to point out that our guidance range for next year is deliberately a tighter range than what we have done in the past. For Q1 FY25, we expect total revenue to be in the range of $194 million to $195 million, representing 12% growth year-over-year at the midpoint. Within this, we expect subscription revenue to be in the range of $177.5 million to $178.5 million, representing 13% growth year-over-year at the midpoint. This implies a professional services revenue of $16.5 million for the quarter. We expect non-GAAP operating income to be in the range of $19.5 million to $20.5 million, and non-GAAP net income per diluted share of approximately $0.07, assuming $289 million weighted average shares outstanding. We are now guiding on a diluted share basis given our expectation to remain profitable for the full year FY25.
The change from basic to diluted shares represents about half of a penny in Q1 EPS calculation. Note that the sequential decrease in Q1 non-GAAP operating income is typical for us as we have larger expenses at the start of the year for sales kickoff marketing campaigns and selective hiring for the full year FY 25 we expect subscription revenue to be in the range of $740.5 million to $741.5 million, representing 11% growth year-over-year at the midpoint, we expect total revenue to be in the range of $804.5 million to $805.5 million, representing 10% growth year-over-year at the midpoint for modeling purposes, assume the quarterly revenue distribution follows the same trend as FY24.
These guidance ranges imply a FY25 professional services revenue of $64 million, flat with the numbers that we posted for FY24. As we grow our partner ecosystem and work closely with implementation partners, we expect growth in our professional services to remain range bound. In addition, as we have stated in the past, we will continue to invest in critical SI cast delivery capabilities, and as such, we estimate our professional services gross margin to be largely breakeven throughout the course of FY25.
I would now like to touch on the billings topic for FY25. We have been working diligently to improve billings duration for new deals such that we no longer estimate billings growth to lag revenue lags subscription revenue growth for FY25, we estimate billings to grow in line with subscription revenue. Given this new dynamic, we estimate total billings for FY25 of approximately 868,000,193 million for Q1.
For modeling purposes, this total billings number can be spread across the arc of the four quarters, largely following the same trend as FY24 for full year FY25 for non-GAAP operating income, we are forecasting a 13% non-GAAP operating margin similar to what we posted for full year FY24. This equates to a range of $104 million to $105 million, or a non-GAAP net income per diluted share of $0.38 to $0.39, assuming $291 million weighted average shares outstanding. The change from basic to diluted shares represents about $0.02 per share in the full year FY25 EPS calculation.
Note that we expect subscription gross margins to come down by approximately two percentage points in FY25, driven by onetime set-up costs associated with new cloud environments to serve new C gas customers. These costs are baked into the 13% non-GAAP operating margin highlighted earlier in deriving the net income per share. For modeling purposes, we estimate $20 million in other income for the full year with $5 million of that to be earned here in Q1. This other income line primarily consists of interest income.
Furthermore, a $14 million total tax provision for the full year FY25 needs to be added to the non-GAAP operating income ranges provided we estimate a tax provision of $3.5 million here in Q1. But regarding free cash flow, we believe we can achieve a 10% free cash flow margin in FY25, which would equate to a free cash flow metric of $80 million for the full year.
This will be a 300 basis point improvement over FY24. We will not be updating our free cash flow guidance quarterly, but will provide an update as needed throughout the year. And for the second consecutive year, we expect to be net income positive for the full year on a GAAP basis. We are also reiterating our long-term financial targets for FY27, as highlighted during our Investor Day in July 2023.
Before we open it up for questions, I would also like to thank all our employees for their dedication. I'm also grateful for the confidence that our customers have placed in us. We remain focused on building a track record of successful execution and operating discipline across the business.
And with that, let's open it up for questions. Operator?

Question and Answer Session

Operator

(Operator Instructions) Arjun Bhatia, William Blair.

Arjun Bhatia

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

Manish Sarin

And Thanks, Arjun. I think the way we look at this is you'd note that in the past we have said we endeavor to get to a 90% and above gross retention rate or renewal rate. And I think the pressure we're seeing now is just what's happening in the macro, definitely driven by usage patterns were sort of below that in terms of what we shared in the Q3 earnings call, some of that had obviously caught us by surprise.
And so we wanted to just be transparent there so I think a lot of this is driven by where we want to be. Now, certainly it's not yet fully reflected in the numbers. And I was saying even when you look at the in the calculation, it is going to start to show up because some of these are lagging indicators. But as I'm sitting where I sit and looking into at least the first half of this year. I do expect to experience our keep experiencing renewal pressure just the way I think we'd spoken in the December call.

Arjun Bhatia

Okay, understood. And then just in terms of as you're thinking about fiscal 25, it doesn't sound like you're making quite a few investments in the C cast style products that but when you think about growth and maybe some of the go-to-market changes that are being made, how do you think growth should fare between your core social solutions versus because, in essence, no interest about 25?

Ragy Thomas

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

Arjun Bhatia

Okay, perfect. Thank you very much, encouraging.

Operator

Raimo Lenschow, Barclays.

Raimo Lenschow

Thank you, and congrats from me as well.
And to Chris' question, Manish, if you think about guidance for the next year, the thing that puzzles me a little bit is like you still have all the uncertainties yet to go to market changes, but you narrowing the ranges that you've given. Can you just talk me through that logic and theory?
I would think it's a broader range rather than the smaller range. I'm just trying to understand that. And then I had one follow-up.
Yes.

Ragy Thomas

Hi, Raimo. So sizing what's driving it is, as we look at again, what's happening in the broader macro environment. And obviously a lot of our peers there certainly felt that given the visibility that we have at least for the quarter, we could tighten the range of you'd also note last couple of years, we have had a broader range for the full year and then we have had to adjust the range as we got into the second half of the year that added a little bit more confusion as analysts were trying to figure out what was happening to the range. And I just felt entering this year, you know, I ended our prepared remarks by saying we're looking to get into a lot more operating discipline. It just felt the right time for us to introduce a much tighter range for the full year as well.

Raimo Lenschow

Okay.
Perfect.
Okay, thank you. And then the Ragy one for you more if I think about the semi-cap space, like a lot of players want to kind of play the AIN. goal and thing like, oh, we have that, et cetera. Can you talk a little bit about like who you're running into on those assignments and like what's the main difference between who is Rio or like, what are you offering that is more real than what others have to offer?

Ragy Thomas

Thank you.
I can confirm that we are running into the traditional incontinent large seeker seek as competitors who've been around for a while. And look, I can't comment on what other people are doing with AI., but I can tell you that our win rate is pretty high when we get a chance at that. And that comes from the fact that we have built a unified platform from the ground up. So when you look at the contact center stack, it's usually somewhere between six and 20 applications that they use in the contact center that usually connected to somewhere between 15 and 100 in some cases, external applications and they have to go look up and these, you know, five, 10, 15 point solutions from a knowledge base to a quality management to Workforce Management to ticketing to to to agent console and supervisor console and all of those community knowledge base them not being matched together, even the big guys in on the top, some of them don't even have a third, they can agent console or pure ticketing capability. So what we are encountering, it's a mishmash of solutions from competitors that are in woven together.
And ours is just clean pure.
Everything worked with everything else and that we integrate with all the external systems and everything is based on AI So right from the conversational interface. You know, the bank that we have talked about in the past and many other customers, in many cases are replacing their IVR with the conversational experience, imagine not having to press one and say, hey, just want to know what my credit card balances when you pick up the phone. And so it's fairly dramatic right at the onset with the customer goes to the community where we're using a I when the agent logs on, we automatically summarize all the previous assignments. We've looked at the knowledge base not you don't have to search. We found the right two line. Could you can use being taken through guided workflows and the agent is determined using SMART Response, SMART assignments, which is a high base is prompted with the smart response, not just with better things that there can be upsold and better responses. And so it's just completely end-to-end AI and summarize when you close the call and what's happening now is there are startups that offer like this keep some of these capabilities, but it's an add on and you have to go figure out how to bolt it with your existing infrastructure, whereas our legacy is in conversation management and AI. in over 100 languages that we've been developing models for financing for the last six, seven years.

Raimo Lenschow

Okay, that makes sense. Thanks, Emma.

Operator

Pinjalim Bora, JPMorgan.

Pinjalim Bora

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

Ragy Thomas

Yes, I think this is where I did say in the prepared remarks that we do expect this to come down over the next few quarters, I wouldn't be able to give you an exact number of where I think it should land. But I think just looking at the way this metric is calculated for us. And this is why I take pains to walk through every quarter that this is done on a trailing 12-month subscription revenue basis. So as some of the renewal pressures that I spoke about earlier, worked through the revenue waterfall. I do expect this to keep coming down again, no point guessing where it's going to come down, but it will come down.

Pinjalim Bora

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

Ragy Thomas

Thanks.
I can tell them. I can tell you that it's a strategic partnership.
I can tell you that who is a very long, tough evaluation process where they looked at the EBIT line, the high to the number one brand in the UK, one of the top brands. So although everybody with NAI. from the small to the big, the cloud providers all participated in the process. So we think of this as a very momentous win for us, hard-fought one and the great validation of the vision. I can't go into any of the details, unfortunately, but I can tell you it's very strategic and is something that and is along the lines of other big pop, bigger partnerships. We're signing of very, very early, but we see a lot of potential.

Operator

Elizabeth Porter, Morgan Stanley.

Elizabeth Porter

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

Ragy Thomas

We are we are running several implementations of our own AI technology for ourselves. And obviously we're smaller than many of the customers we serve. And we've seen some very, very dramatic impact. And I'll give you a quick example. And by the way, don't model any of this into this year's guidance because this is very early, but it's a big focus for us. Sprint launched and was a big focus for us this year, and I'm personally focused on it but I'll give you an example. We just model the process that from beginning to end was going to take a week for every one of our, you know, outbound outreaches and this involves very interesting. And what I mean, like all companies, B2B companies doing, you have to research everything that's out there. And externally, we dove for public filings, investor report news and look, people love, you know, figure out a point of view on what the focus areas are for the Company. Then you got to translate that into what products fit and then you got to put that into an e-mail and send it out. If you're an SDR. nine process to do really well on was taking a week across all the stakeholders in. We just finished our internal pilot and literally now you click a button, ask our internal goal and teams ask our internal conversational AI product and you get the answer in seconds. So all talking about dramatic, and this is where we get excited about our own ability to use it. Now, granted, it's too early and we're not modeling any of this. But I would definitely hope that in the out years, we're going to we're going to be able to grow without without adding resources and drop that to the bottom line.

Elizabeth Porter

Great.
Thank you so much. And just as a follow-up on the go-to-market changes, you made the fix and kind of an overcorrection and to seek out and refocusing on the core. Any update on the progress you can share that drives confidence that these changes are getting you back to balance or any metrics as it relates to sales and fish efficiency or pipeline that you can speak to?

Ragy Thomas

I mean, look, I think the leadership changes are the most important one type start there. I mean, no plan is going to work and as you have great leaders. So this is I can tell you, this is the most direct, most focused, most substantive set of changes we've made. And I can tell you that in every area we've brought in leaders in there and done that, you can go look them up on LinkedIn and second, we've spent a lot of time getting everyone on the same page mapping out our 16 stages of the customer, the customer's journey with us all the teams. And we've been leveraging an external consulting firm to bring all of us together and get on the same page and the plans are being formulated. And we've got ownership in a way that this company has never done before. So I'm very optimistic, but I can also tell you this is going to take several quarters to roll out. And then each of these leadership changes a cascading and it takes more even just to flow through and get the team that we want everywhere. It's going to take us in a couple of quarters.
And so it will feel we feel very good about where we're going and how we're approaching this.
I can tell you this was always a priority right now. This is the priority. And so that's all I can tell you about what's different.

Elizabeth Porter

Great.
Thank you so much.
You have to have it.

Operator

Our next question comes from the line of now block one Cantor Fitzgerald. Please proceed with your call.

Eric Scro

Yes, guys, thanks for taking my question. And I guess the first one is maybe on the annual customer count metric. I guess, is there any way to provide additional color into May, what was the bigger bigger driver of that this year in between C. cast and maybe your kind of core social media products and how has that changed maybe compared to years past?

Manish Sarin

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

Eric Scro

And then maybe if I could just touch on the I think if I heard you correctly, you are expecting it two percentage point headwind to costs or gross margin this year due to one-time implementation costs or your C cast solution, I guess to maybe on a bit more detail at a 2% headwind, kind of sounds like a lot.

Arjun Bhatia

Yes, so this is Manish. I said approximately 2%. But what is what is going on here is there are data residency requirements in many geographies across the globe and largely this is driven by as we spin up new instances with our hyperscalers partners. There are one-time fees for a lot of them. There are initial costs to set up these instances that again, I'm conservatively estimating approximately up to 2% OP to be lower, but that's what's baked into the model right now.
Perfect. Thank you.

Pinjalim Bora

Our next question comes from the line of Michael Bird with Wells Fargo Securities. See with your question.
Hi there.

Eric Scro

Congrats on the quarter and thanks for taking my questions. I guess just in terms of the relationship between free cash flow and operating margin. Should we expect that the study moving forward as now? It seems like billings are mostly annualized and the growth should be in line with subscription revenue follow. Thank you.

Arjun Bhatia

Yes, I think that's a that's a terrific question. As billings get sort of in line with subscription revenue. And I'll also note there is the professional services which many times is sort of build upon completion. So that is a separate element. But over time, you should expect our free cash flow to get closer in line to operating income where the distinction will be is how many times we have to prepay for a lot of cloud, use it as an example. So there are those aberrations that do affect free cash flow, obviously don't affect operating income to that same extent.
Right? That's part of the reason you would have seen over the last couple of years. The steady improvement in free cash flow. So we've gone from RBC, I believe, negative 45 million couple of years ago to positive at 51 million in FY. 24. And I think based on where we said we're comfortable with an 80 million number for FY. 25. Again, all all steps in the right direction, but you should see the V narrowing off the to margins over time.

Eric Scro

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

Arjun Bhatia

And just to make sure I understand. So we ended FY 20 for Wave around 13% non-GAAP operating margin. And that's what we are using the guide for the full year FY 25.
Scott, maybe I'm not following the question.

Eric Scro

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

Manish Sarin

Yes.

Arjun Bhatia

And and I think up in the December call, I also mentioned and I've been saying to investors that we obviously have a lot of near term success as we went from where we were a couple of years ago to last year. So there was a lot of low-hanging fruit that we were able to go take care of margin expansion from here will be subdued.
Again, let's be let's be candid. This is just the initial outlook for the year as we make progress during the year. We'll, of course, update investors, but at this point, I'm most comfortable just stating the 13%.

Eric Scro

Helpful. Thank you.

Pinjalim Bora

Our next question comes from the line of Jackson Ader with Keybanc Capital Market. Please proceed with your question.

Raimo Lenschow

Great.

Manish Sarin

Good evening, guys.

Eric Scro

Thanks for taking our questions. On the first one, Raji, and how can we or I guess can we quantify how much of either bookings or dollars or growth actually comes or is being generated currently generated by Eike? And then how much maybe going forward do you expect to come from general debate on Jackson.

Ragy Thomas

Thank you for that question.

Manish Sarin

We have taken the approach of like infusing everything we do with a eye and in the past and take the approach of trying to monetize it separately. However, we're looking at what's going on in the industry and we think that could be an opportunity. So we are currently evaluating and this is quite a bit of work. So again, don't factor anything into this year, but we think there's an opportunity to to charge a premium for it least for our AI. Plus offering and we're exploring that and right now, no, but we're exploring the possibility of being able to do that on our part or our position has always been that AI. is a big differentiator for us across everything we do on that. I think the market's willing to to absorb some additional cost for aka our culture.

Eric Scro

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

Arjun Bhatia

Okay.

Manish Sarin

So I think first off, I got to tell you, we've put a lot of energy behind understanding what is going on. And what I can confirm as we have done in the past is we think the majority of it is self-inflicted. And what we're finding that is to have the best execution of our team, you know, where is the best execution of any competitor in our core market and seek out, frankly, we win. So what we're finding is and I say self-inflicted because weak execution, weak execution on our side meeting strong execution. The competitor is when we're losing.

Ragy Thomas

And so it gives us a lot of confidence that this is fixable things.

Manish Sarin

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

Eric Scro

I got just a process turnaround, not necessarily like a customer driven thing.
Okay.

Raimo Lenschow

All right.

Arjun Bhatia

That's great.

Raimo Lenschow

Thank you.

Ragy Thomas

Correct correct.
Thank you, Jackson.

Pinjalim Bora

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

Eric Scro

This is Matt pride on for Tyler. Rocky. I was just curious if you could comment on that. Don't just dive more into that win rates for seats because and what you expect moving forward?

Manish Sarin

Look, I think we have taken a very pointed approach right now given that we've only been in general availability for a short period on. So I can confirm that when we are in a competitive RFP and follow-on process that seek us and in the CDS market. I can confirm that the win rates are pretty high, but we did not were not able to deploy it everywhere in every market across all teams and that partly because we need to get to a critical mass of seats, which we should be getting through towards later this year. And that will then allow us to be featured in analyst reports, which will then allow us to be default participants right now is word of mouth and people being very impressed when they actually see the platform in action and trying it out and doing a proof of concept and being convinced that a new comment like us can outperform others. So it's more measured and it's more that's not around the world in all markets.

Arjun Bhatia

Got it.

Manish Sarin

And can you speak to the conversational AI offering and how that's ramping it very well, very well has one of the silver linings that we see are on. So you know, we are able to now digitize voice and have conversationally our heat cold, not just text and chat and interaction. So many of the deals we are winning is because of variability too, to manifest as so there's a lot of talk about who's AI is better. We challenge our customers to just put to task, and we show them that we can do a better job than others. So we have taken the approach of developing home models across languages for each function and now clipping those models specifically for industries. And so we're able to start with a baseline of a much higher accuracy and level than others. And then we customize those model to introduce 1,000 discussed models where that interest gets to a really, really good percentage of accurate responses. And our power is, you know, we're not a point solution offering AI in the contact center, right? We have a full blown agent experience sitting behind it.
So the frustrating thing for a lot of customers and brands is if you just go in with a eye in on the bar takes you through 17 steps and then you hit a dead end. And it's very frustrating because in the non unified contact center, the consumer is now repeating everything you did which is beyond first rate. So in our world, that doesn't happen because all that context, you've seen seamlessly transfer to an E and pickup as though he was the one talking to them.

Ragy Thomas

So there's a few things that are strategically.

Manish Sarin

It is working very well for us.

Pinjalim Bora

Thank you.

Ragy Thomas

Thank you.

Pinjalim Bora

Thank you. Our final question comes from the line of Austin Cole with Citizen's GMP. Please proceed with your question.

Arjun Bhatia

Great.

Eric Scro

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

Manish Sarin

I mean, the products are pretty sticky often when implemented correctly. So I think it brings us back to that execution that we have consistency and repeatability of execution we need to have. What we are finding is the product and when configured the way they intended to be used the right way creates a lot of value and very sticky and where we struggle is people changes on either side of implementation or was it done the way it was originally envisioned because something changed or seven think of that as a priority.

Ragy Thomas

So it's more self inflicted.

Manish Sarin

So I think we'll be in a better position to answer that question.
After we feel like our our execution across the 16 stages of touching a customer is more pointed and repeatable across the stages.

Raimo Lenschow

Okay.

Arjun Bhatia

That's helpful.

Eric Scro

Thank you.

Operator

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

Ragy Thomas

Thank you, Camilla, and thank you all for joining us today. Again, I'd like to thank our employees and partners and most importantly, our customers for their trust and continued business, and we look forward to updating you all again on the next quarterly call. As we continue on this exciting journey, we truly believe the best is yet to come. Thank you very much and have a wonderful evening.

Operator

Thank you. All conclude today's teleconference. You may disconnect your lines at this. Thank you for your participation.