Sprinklr, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended October 31, 2022; comparative periods ended October 31, 2021. Sprinklr provides enterprise cloud software for customer experience management (Unified-CXM), primarily through subscriptions. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Revenue | $157.3 | $127.1 | $452.9 | $356.7 |
| Subscription revenue | $139.9 | $109.9 | $400.3 | $310.0 |
| Professional services revenue | $17.3 | $17.1 | $52.6 | $46.7 |
| Gross profit / margin | $116.7 / 74% | $88.4 / 70% | $328.5 / 73% | $249.0 / 70% |
| Operating loss / margin | $(4.6) / (3)% | $(24.8) / (19)% | $(49.4) / (11)% | $(63.7) / (18)% |
| Net loss | $(5.9) | $(27.7) | $(55.1) | $(74.6) |
| Net loss per share, basic | $(0.02) | $(0.11) | $(0.21) | $(0.43) |
- Quarterly revenue grew 24% year over year, led by subscription growth of 27%; nine-month revenue rose 27%, with subscription revenue up 29%. Management attributed subscription growth to new customers and expansion of existing customers’ purchases.
- Quarterly gross margin improved to 74% from 70%. Subscription gross margin was 81% versus 79%; professional-services gross margin increased to 18% from 7%. For the nine months, subscription margin rose to 81% from 79%, while professional-services margin fell to 9% from 11% amid investments in delivery capacity.
- Operating cash flow was $4.6 million for the nine months, compared with cash used of $17.9 million a year earlier. Free cash flow, as defined by the company, was negative $6.1 million versus negative $27.3 million; adjusted free cash flow was positive $5.9 million versus negative $27.3 million, including an add-back for a $12.0 million litigation settlement.
- Cash and cash equivalents were $156.0 million and marketable securities were $388.1 million at October 31, 2022. Combined, these totaled $544.1 million. Current assets were $757.6 million and current liabilities $368.5 million. The company reported no borrowings under its $50 million revolving SVB facility.
- Total liabilities were $379.6 million, including $258.7 million of deferred revenue. Accumulated deficit was $496.7 million. Shares outstanding at October 31 were 114.3 million Class A and 146.6 million Class B; the filing reports 116.7 million Class A and 144.3 million Class B outstanding as of November 30.
Material changes and business indicators
- Remaining performance obligations were $586.1 million, up from $459.4 million a year earlier; $420.2 million was expected to be recognized over the next 12 months, versus $329.6 million. Net dollar expansion rate rose to 125% from 117%.
- Sprinklr reported 107 large customers, defined as customers with at least $1 million in trailing-12-month subscription revenue, compared with 80 a year earlier.
- Sales and marketing expense rose 6% in the quarter and 24% for the nine months, primarily reflecting increased personnel, commissions, travel and office activity. Research and development expense rose 16% and 26%, respectively. General and administrative expense rose 3% and 7%.
- Cash and cash equivalents declined from $321.4 million at January 31, 2022, while marketable securities increased from $211.0 million. Investing cash outflow largely reflected purchases of marketable securities and should be distinguished from operating investment.
- The company adopted lease accounting standard Topic 842 on February 1, 2022, recognizing approximately $14 million of operating lease assets and liabilities at adoption. At October 31, operating lease liabilities totaled $14.3 million.
Outlook, risks and unusual items
- The filing gives no specific revenue, earnings or cash-flow guidance. Management said it expects operating expenses to increase in absolute dollars as it invests in product development, sales and marketing, customer support and growth. It expects gross margin to fluctuate and potentially increase modestly over the long term, and cautioned that losses may continue.
- Management believed cash, marketable securities and operating cash flow would be sufficient for working capital, capital expenditures and financing obligations for at least the next 12 months and over the long term. This assessment is subject to the risks described in the filing.
- The $50 million SVB revolving facility was due to expire December 19, 2022, shortly after the reporting period. It carried financial covenant requirements; no amount was drawn at October 31. The filing does not state in this text whether the facility was subsequently renewed or replaced.
- Minimum guaranteed commitments to data and service providers included $57.0 million remaining on a five-year commitment entered into in June 2022, in addition to previously disclosed commitments. These commitments may constrain future cash use.
- On February 25, 2022, Sprinklr and Opal Labs agreed to settle claims; the $12.0 million settlement was paid March 30, 2022. Sprinklr reported no provision for existing litigation at October 31, while noting that an unfavorable outcome in a matter could materially affect results in a particular period.
- Prior-period financial statements were revised for immaterial corrections involving capitalization of customer-contract acquisition costs. The company said the cumulative effect would have been material if corrected in the fourth quarter of FY2022. It also changed the estimated benefit period for capitalized commissions from three to five years, with an immaterial reported-period impact.
- Management concluded disclosure controls were not effective at a reasonable assurance level because of a material weakness in controls over identifying and monitoring costs to obtain customer contracts under ASC 606. Remediation controls had been implemented but had not operated long enough to demonstrate remediation.
- Sprinklr identified macroeconomic uncertainty, inflation, higher interest rates, reduced customer IT spending, competition, customer renewals and expansion, cybersecurity and privacy, dependence on third-party cloud infrastructure and data partners, and foreign-exchange exposure as significant risks. It expects additional compliance costs after losing emerging-growth-company status and becoming a large accelerated filer on January 31, 2023.
Key facts investors should verify
- Whether the SVB facility was renewed, replaced or allowed to expire after December 19, 2022, and the status of its covenants and availability.
- Progress and testing results for remediation of the material weakness, and whether additional accounting corrections or restatements become necessary.
- Whether RPO, cRPO, customer expansion and large-customer growth translate into recognized revenue and improved operating cash flow.
- Whether gross-margin improvement is sustainable, particularly given cloud-hosting costs and the lower nine-month professional-services margin.
- Cash deployment against the remaining data and service-provider commitments, and the effect of ongoing operating losses and stock-based compensation.
- Potential customer, service or cost impacts from macroeconomic conditions, data-provider relationships, cybersecurity and privacy requirements, and the company’s dual-class voting structure.