Sprinklr Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
September 3, 2025

Key Takeaways

  • Positive Sentiment: In Q2 the company delivered 8% year-over-year revenue growth to $212 million, achieved a record $38.2 million in non-GAAP operating income (18% margin), and completed its $150 million share buyback program.
  • Negative Sentiment: Customer churn and longer sales cycles persisted with a flat 102% net dollar expansion rate, and Q3 revenue guidance implies just 4% growth amid ongoing renewal headwinds.
  • Positive Sentiment: Having completed phase one of its transformation—cost optimization, go-to-market realignment and product roadmap strengthening—the company is now investing in phase two, accelerating AI functionality, adding channels and bolstering regional implementation skills.
  • Neutral Sentiment: CFO Manish Sarin will depart on September 19, with CEO Rory Read assuming interim finance duties while the board conducts a search for his successor.
AI Generated. May Contain Errors.
Earnings Conference Call
Sprinklr Q2 2026
00:00 / 00:00

There are 6 speakers on the call.

Operator

Greetings. Welcome to Sprinklr's second quarter fiscal year 2026 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Eric Scro, Head of Investor Relations.

Speaker 1

Thank you, operator, and welcome everyone to Sprinklr's second quarter fiscal year 2026 financial results call. Joining us today are Rory Read, Sprinklr's President and CEO, and Manish Sarin, 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 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.

Speaker 1

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 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.

Speaker 2

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 Sprinklr on September 19, 2024. Manish has been an important member of the executive leadership team, and I want to thank him for his contributions during his three and a half years at Sprinklr.

Speaker 2

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. 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 two previous earnings calls, fiscal year 2026 is 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 one 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 strengthened our product delivery roadmaps.

Speaker 2

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 FY26 and into FY27.

Speaker 2

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 2026 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 in 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.

Speaker 2

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 Rambusch 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 lifecycle. Furthermore, as you saw in today's earnings release, I'm happy to announce that we have hired Scott Millar 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.

Speaker 2

Most recently, Scott served as a 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 Sprinklr 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 cycles and continued scrutiny of enterprise spending. This heightened scrutiny, coupled with inconsistent operational execution and lingering technical debt from the past several years, continued to pressure our renewal cycles.

Speaker 2

Churn is a major focus for us, and to address this directly, we have been working hard to clean up and fix troubled engagements 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 Sprinklr feels seamless, easy, connective. Our Sprinklr team operates like an extension of our internal team.

Speaker 2

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 Sprinklr's powerful value. Let me now pivot to our technology and product innovation, which is fundamental to what we do at Sprinklr.

Speaker 2

We believe our unified platform enables our customers to provide consistent, personalized, and data-driven customer experiences. As we had mentioned earlier 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 are 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 Sprinklr.

Speaker 2

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 datasets, Sprinklr combines domain-specific and generative AI to power use cases, agents, and copilots 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 standards 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.

Speaker 2

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 transcriptions through one unified AI taxonomy, all on one platform. Additionally, upcoming product releases will further enhance our ability to disrupt at scale and deliver the technology teams need to reimagine the customer journey. First, Sprinklr AI Agents, or our Agentic AI offering, help brands scale 24/7 customer support, reduce cost, and boost efficiency across channels. Built on our powerful AI and designed specifically with key personas and customer workflows in mind, they are designed to help ensure fast, consistent, and improved service experiences.

Speaker 2

Our Agent Copilot is an intelligent assistant powered by Sprinklr AI+, designed to streamline and elevate the customer service experience by supporting live agents with task automation and quick insights. 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're 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 in recent customer wins. In Q2, we continued landing and expanding with many iconic brands.

Speaker 2

As of July 31, we have now 149 customers generating at least $1 million in annual subscription revenue, which is an additional three companies from our last quarter. In closing, we're making progress on our transformational journey as we're building a better Sprinklr that best serves our customers. As we all know, transformations 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 indications of better engagement and improving customer satisfaction based on my personal interaction with hundreds of customers and partners over my first nine months. We now have better analytics to help guide our actions, drive deeper customer impact, and improve our business predictability.

Speaker 2

We've taken an ambidextrous approach to re-energize and grow our leading Sprinklr core while we harden and expand our disruptive Sprinklr Service solution in our march toward 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?

Speaker 3

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 two 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.

Speaker 3

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 three 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 BearHug focus on customers at the high end of the market could positively impact our seven-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 break-even, resulting in a total non-GAAP gross margin of 69%.

Speaker 3

As noted in previous calls, we are experiencing higher data and hosting costs as we are launching new cloud environments 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 $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.

Speaker 3

On a reported basis, for the first half of FY26, we generated $110.5 million, and when excluding the restructuring charges for the first half of FY26, 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 August, 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.

Speaker 3

As of July 31, 2025, total remaining performance obligations, or RPO, which represents revenue from committed customer contracts that have not yet been recognized, was $923.8 million, up 4% compared to the same period last year. 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. Within 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.

Speaker 3

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 -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 two factors affecting non-GAAP operating income in the second half of the year. First, we are experiencing a strong uptake in our AI products, leading to higher cloud costs in the second half of the year.

Speaker 3

Second, 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 be closer to our customers, as well as enabling additional go-to-market and implementation capabilities. For the full year FY26, 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.

Speaker 3

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 FY26, 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.

Speaker 3

In deriving 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 ranges provided, add an estimated $22 million in other income for the full year, with $4 million of that to be earned here in Q3. This other income line primarily consists of interest income. We estimate a tax provision of approximately $9 million in Q3. This equates to approximately a 26% 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 FY26, consistent with our performance over the past few years.

Speaker 3

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's 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 Rory 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 Sprinklr team for making it a truly memorable journey. Let's open it up for questions. Operator?

Operator

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For a participant using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Arjun Bhatia with William Blair. Please proceed.

Speaker 4

Hey, Jane and Willow Miller, I'm for Arjun Bhatia. Thanks for taking your question. We appreciate the color of the prepared remarks about where Sprinklr is in its transformational journey, but want to ask, what do you think we'll see, the bend, to use your wording? Is it fair to frame the bend as occurring in the back half of this year, or is this more of a fiscal 2027 dynamic? Can you point to what business metrics we should look at to see this bend?

Speaker 2

Yeah, thanks, Willow. That's a great question. I think the real key to this is that we've been building this transformation roadmap for the past several quarters. I think as we look forward, we've built a better management system, better analytics. We have a better understanding of our customer position. We're looking several quarters out now in terms of renewals, our customer usage. I'm spending a disproportional amount of time with customers. What we're looking for in terms of the metrics, 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 the 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 FY26 into the beginning of FY27.

Speaker 2

I'll give you an update as we cover in Q3, the Q3 earnings call, as well as in the Q4 earnings call. Any indications that I'm seeing look positive. 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.

Speaker 4

That's great to hear. Thank you.

Speaker 2

Thanks, Willow.

Operator

Our next question is from Patrick Walravens with Citizens JMP. Please proceed.

Speaker 5

Oh, great. Thank you. I guess I'll start with the, Rory, maybe start with the churn, which is sort of the biggest issue. Can you, 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?

Speaker 2

Sure, Pat. I think the key here is that this kind of renewal pressure that we've seen has gone on for several, two, three 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, but we weren't always able to do that in a very consistent way. How we deliver our roadmap, how we deliver our implementation, our level and engagement with our customers. What we really focus with Project BearHug and all of the operational discipline that we're putting in place here is to really get closer to that customer, to understand exactly how they're using this powerful AI-native platform and how we can work with them to unleash new modern use cases as well as grow the adoption of the current use cases.

Speaker 2

I can tell you that as we've engaged these customers, their reaction is very positive. I think they are seeing a different Sprinklr. 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 two, Pat. I think the key here is as we work through this, we're focused on getting longer renewals. We're focused on getting the right use cases in place. We're focused on really creating the right C-level engagement. 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 nine months.

Speaker 2

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 downsells where we have organizations that had pressure on their financial performance, where they might have a lower investment in marketing, so they reduce some of their seat counts. We had, for example, a large ELA where they clearly had purchased way more during the COVID time period than they were really consuming. We made those adjustments and cleaned 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. For the most part, we've been able to convert those into renewals and move forward. I hope that helps, Pat.

Speaker 5

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

Speaker 2

Oh, it's kind of, I'll take it first, Pat, and Manish can give you a little bit of color if you want. I think what's really cool is, we've been introducing these advancements in our AI innovations around Agentic AI offerings, around our copilot work and our AI studio work for them to develop. We've implemented it in a number of our customers, and we've seen a very sharp uptick in their utilization of those functions. 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. I like that. It's going in the right direction. What we're trying to do, Pat, is not kind of make AI for AI.

Speaker 2

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 the 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. If we can beat them, that's even better. That's how we're going about this planning.

Speaker 5

Okay, thank you.

Speaker 5

Yep.

Speaker 2

Of course. Thanks, Pat. Always a pleasure.

Operator

Our next question is from Elizabeth Porter with Morgan Stanley. Please proceed.

Speaker 4

Great. Thank you so much. 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. 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? I'm just trying to square some of the outlook in the guidance versus the progress that you saw here in Q2. How should we think about that bending of the demand curve into the back half of the year?

Speaker 2

Thanks, Elizabeth. I think the real focus here is to create a prudent guidance and one 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 jog in 3Q, that's a kind of a reflection of the cleanups that we did in terms of the first half. 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.

Speaker 2

I think we want to be prudent and not lean until 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. We want to make sure that we're executing well and we're prudently guiding so that there's no negative surprises. That's how we went about doing it. Does that help, Elizabeth?

Speaker 4

Yes, that's very helpful. Thank you very much for that. Just as a follow-up, I wanted to dive into that ambidextrous strategy to re-energize the core and harden CCaaS. You know, we heard a lot about the investment, particularly in the core. 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 and the go-to-market side? Where are we on the roadmap to deliver some of those changes?

Speaker 2

That's a great question, Elizabeth. 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 FY26 in 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. 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. We've been able to execute more cleanly across that.

Speaker 2

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, continue to expand our security activities, our release processes, test environments, adding more technical skills closer to the customer. All of those are producing better outcomes. Where we go in FY27 is we start to open the spigot and really start to accelerate that growth once we see that hardening. That's been very consistent of what I've shared with you all over the past several earnings calls. It's tracking just the way we would like it so far. That's what we're actually doing. Does that help, Elizabeth?

Speaker 4

It does. Thank you very much.

Speaker 2

Of course.

Operator

Our next question is from Matt Dembley with Cantor Fitzgerald. Please proceed.

Speaker 5

Good morning. Thanks for taking the question. I wanted to dig in a little bit on the hybrid pricing model that you talked about and maybe what that ultimately looks like. I don't know if you have customer examples of a customer moving from old pricing to new pricing or at least, you know, similar-sized customers. What the pricing ultimately shakes out at, you know, 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? Thanks.

Speaker 2

Yeah, 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 to 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. We want to make sure we test it properly and then we'll expand it to the rest 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, you know, a super premier capability.

Speaker 2

They have usage kinds of tokens that they're able to consume and they can actually trade those across offerings. We want to make it seamless, easy. We believe that this should increase customer satisfaction. They'll understand where they sit. With the increased focus of Project BearHug, we understand where the customer's usage is, how they can apply new kinds of use cases to really be able to do it. 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'd 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.

Speaker 5

Okay, very helpful. 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?

Speaker 2

Yeah, 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. 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 LLMs and across new video capabilities. We want to continue to hold the number one position in number of channels, number of capabilities, as we want to be the unmatched leader and voice of the customer, so that any of our global iconic brands can understand what people are talking about their brand.

Speaker 2

When we link it together across the platform, using the newly releasing customer feedback management capability, the digital support work, or the CCaaS work, we can create, again, an unmatched voice of the customer that links all vectors of customer engagement together on one single AI-native platform. I think that's pretty cool, and I think it's a dependable moat. 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 of the customer. I think you'll see, I'll talk about this in some detail about some global 50-type customers that are applying this.

Speaker 2

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. More to follow when we get to 3Q and 4Q.

Speaker 5

All right, thank you.

Operator

Our next question is from Parker Lane with Stifel. Please proceed.

Speaker 5

Hey guys, good morning. Thanks for taking the question. Rory, if you look at those top 700 customers, 80% of revenue that you're tackling with Project BearHug, what percentage of them or pieces of them have some form of troubled engagement today? What are you learning as you progress through Project BearHug about how to best mitigate some of those challenges?

Speaker 2

Yeah, that's a great question, Parker. Really interesting. You know, that top 700 customers that we want to deeply cover, we want to make sure that we have every bit of Sprinklr 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 are. 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. We want to protect them. 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. With our current investments and our current structure, we can cover those customers well, and we can engage them in a very detailed, deep way. They appreciate that. These are real iconic brands.

Speaker 2

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. We have a process each week where we track that. I can tell you that the number of challenged accounts was in the 10s, 10s and 10s at the beginning, and now it's drifted down into the teens. We're seeing an improvement in terms of those really challenged accounts, and I track them each week. They probably peaked back in May, June timeframe, 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. 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.

Speaker 2

I'll cover more of that when we get to 3Q, 4Q in the beginning of next year.

Speaker 5

Understood. 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 that subscription gross margin line or levels that are similar to what we've seen through the first half of the year?

Speaker 3

Hi, this is Manish. Let me start. 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. There is additional cloud hosting costs, other costs that come with it. I would assume a, call it, 2 to 3 point reduction in gross margins in the second half.

Speaker 5

Understood. Appreciate the feedback here, guys. Thank you.

Operator

Our next question is from Chris Lynch with Barclays. Please proceed.

Speaker 5

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

Speaker 2

Yes, sure, Raymond. I think that really the most important factor is actually not the renewal. I mean, the renewal's key and multi-year is even better, and we're seeing an uptake in our number of longer-term renewals. Those are good. Nothing's going to change unless you change the depth of your relationship. That's why the back-to-the-field focus and the Project BearHug 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. 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.

Speaker 2

We're going to come up on my one year in November. We should start to see some of that bend in that 3Q, 4Q time period in the 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. If you don't change your behavior and how you engage the customer and understand how they're using the platform and help them expand 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.

Speaker 2

We have to make sure that that's all complete as we go through that journey. That's the part that's really key. 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.

Speaker 5

Perfect. Thank you. Thank you. That's very clear. Thank you. The other question I had was on if you think there's a lot of AI getting thrown at customers at the moment, like there's Agentic AI from Salesforce, ServiceNow has it, et cetera, 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? Where are they on that journey in terms of kind of understanding and then kind of adopting? Thank you.

Speaker 2

Yeah, I think AI is an important technology. It's one of those technology waves in my 42-year technology career that I think is 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 four plus decades. I've seen these a number of times. I think AI is important. 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 two, three, four years. I think that's important. Customers see it as an important technology, which it is. I think we're sort of like in the 2008, 2010 timeframe, like in cloud. Got a lot of energy, a lot of momentum.

Speaker 2

The real growth will come over the next several years, I think. The key, though, is tying it. 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. Many people are just kind of clipping on an AI thing. That's not the answer. You want an AI-native platform like Sprinklr that's been doing this for eight or ten years. It's embedded in everything we do. 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 personas that they particularly need. That's how I think you unlock it. The Agentic piece about deflection and moving some support to digital, we've been doing that for some time.

Speaker 2

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 personas 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.

Speaker 5

Okay, perfect. Thank you.

Operator

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

Speaker 5

Great, thanks, guys. We're spending a lot of time talking about renewal activity, but Rory, I'm curious what you're seeing on net new. 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.

Speaker 2

Yeah, I like that question, Jackson. Thank you for that. Two things on that front. One, when we built the plan for this year, and I talked about hardening and expanding the base and really growing, expanding the social and the services front, we basically built a plan where we were looking at a mix of about 25% new logo and 75% expansion. We knocked that down. Usually, it's a little higher on new logo. 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 challenged customers. Our rate of challenged accounts has definitely slowed, right? I mentioned that earlier in the Q&A section.

Speaker 2

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 $2,575. It's executing. Next year in FY2027, and whenever we kind of get ready for that acceleration phase, I'd probably slide that up to $3,565 and kind of look for that bend. 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 Plumbing Supply Company for $5,000. 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.

Speaker 2

That's where this product sings, where we can win a disproportional amount of business. That's how we're building the go-to-market with our Project BearHug and all of that work is to really create that kind of experience for our customers.

Speaker 5

Okay, great. That makes sense. A quick follow-up on the personnel changes, the management changes. I think there's any risk that the new hires you're making will, you know, 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. Would that possibly elongate the timeline to see that bend in the curve that you're hoping to see in the operation? Thanks.

Speaker 2

One of the things is I got through these transformations the previous seven times. Always there's some transition in terms of leadership. We have a particular process that we're implementing here. It's a three-phase transformation. There's always new leaders. We want to thank the leaders for the work that they've been doing. We congratulate people like Manish and thank them for the work. 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. They 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 deployments. This is the key to building that clock speed and that execution. I see it quite the opposite. I see it as an accelerant.

Speaker 2

I think it's key. I want to get all of that. I'm basically through this. Maybe there's a little bit more to do in terms of leadership work. 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. 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. I think it actually uplifts our execution.

Speaker 5

Okay. All right. Thank you.

Operator

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

Speaker 5

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

Speaker 2

Yeah, a couple of things. First, on logo churn versus downsell, it's more predominantly downsell. 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. That's less than 1% of our revenue. 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 clearer, better use of the resources. In our top 700 customers, it's over between 80% and 90% of our revenue. It's a big number. That's where we need to focus.

Speaker 2

At the low end, that is not where this product sings. Our product sings in enterprises. Small enterprises, large, very large. This is where we're going to focus. 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. That ties back to Raymond'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. Thanks, Clark.

Speaker 5

Awesome. Thank you. If I can just add one more, it was great to see the buyback activity this quarter. What was the thought process around not re-upping the authorization versus potentially pursuing other capital allocation strategies?

Speaker 2

Yeah, I think it's really straightforward. I think, you know, 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 CCaaS, 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 on a regular basis. If they think there's a continued opportunity and that's the best use of allocation, we'll announce something. At this point, we think that's the prudent look, and we'll continue to assess that as we go each month, each quarter.

Speaker 5

Thank you.

Operator

Our final question is from Andrew King with Rosenblatt Securities. Please proceed.

Speaker 5

Hey there. Thanks for taking my question. I just wanted to ask a quick one on what you just touched on about the M&A comments. I just wanted to see if you could 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 level of need for that is right now. Thank you.

Speaker 2

Yeah, I think the key focus, Andrew, is to continue to accelerate our buildability, our roadmap, and our ability to do what we say and own what we do and execute on those roadmaps. I've seen better improvement over my nine months here. 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 acqui-hires or some technology capabilities we could add on in social, CCaaS, or AI, I think AI, you're going to see some consolidation and some smaller entities fail. Maybe we could grab a couple of one or two 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.

Speaker 2

We're not going to do M&A for M&A's sake. We're going to focus on building our innovation. If we get the right asset or the right acqui-hire at the right.

Operator

That's our focus.

Speaker 1

Got it. If you could just give us a little reminder of how your priorities lie to balance the investing for growth versus driving margin expansion, that would be great. I mean, we've really seen some really nice margin expansion through the operating margin this year, despite gross margin impact. If you could just give us a little balance there, that would be great. Thank you.

Operator

Yeah. I mean, we can stretch out the bottom line anytime we want. I mean, that's, you know, you can always do that. The key in the March of the Rule of 40 is that it has to have a combined growth component. You know, we got to get to double-digit plus growth rate over this transformation. That's key. 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 FY2027, that we can do some acceleration.

Operator

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. I think that's the long-term durable growth that we're looking to establish. That's how we're looking at the balance. I can stretch out the bottom anytime. I really want to make sure I have a combination and a really robust both sides of the equation.

Speaker 1

Got it. Thank you.

Operator

Thanks, Andrew. With that, I think we've concluded our Q&A. 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 updates so I can share more on the progress that we're making. Thank you, everyone, for joining today. With that, I think we can conclude the call. Thank you, operator.

Speaker 2

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

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