CXM - Sprinklr Shows Large Customer Growth As Operating Breakeven Nears

2023-08-10 13:13:03 ET

Summary

• Sprinklr sells customer experience management software globally to organizations of all sizes.
• The global customer experience management market is projected to reach $21.3 billion by 2024, driven by the need for personalized customer experiences.
• Sprinklr's recent financial trends show rising revenue, improving gross profit margin, and positive earnings per share.
• My outlook is a Buy at around $13.00 per share.

A Quick Take On Sprinklr

Sprinklr (CXM) sells customer experience management software to organizations of all sizes worldwide via unified suites of applications.

Having reached close to operating breakeven and with strong large customer growth, good retention and growing gross margin, my outlook on CXM is a Buy at around $13.00.

Sprinklr Overview And Market

New York, NY-based Sprinklr was founded to develop full-featured suites of software to enable enterprises to manage various aspects of their operations that touch customers.

The firm views its four suite packages as unifying the following four functions:

• Insights

• Service

• Marketing

• Social

Management is headed by founder Chairman and CEO Ragy Thomas, who previously held various roles at Epsilon, a division of Alliance Data Systems.

The firm pursues new client relationships with medium and large enterprises via direct sales and marketing approaches (land and expand) and through partners and agencies.

According to a 2018 market research report by ResearchAndMarkets, the global customer experience management market is projected to grow to $21.3 billion by 2024.

This represents a forecast CAGR of 22% during the period between 2018 and 2024.

The main factor driving the market growth is the increasing need for personalized customer experience.

Also, the growth in the use of machine learning promises to provide greater software value to enterprises by offering recommendations and vertical industry focus.

Major competitive or other industry participants include:

• Adobe

• Avaya

• CA Technologies

• IBM

• Medallia

• Aon Hewitt

• Towers Watson

• SurveyMonkey

• Qualtrics International

Sprinklr’s Recent Financial Trends

• Total revenue by quarter has continued to rise; Operating income by quarter has made significant progress toward operating breakeven.

• Gross profit margin by quarter has trended higher; Selling, G&A expenses as a percentage of total revenue by quarter have fallen in recent quarters.

• Earnings per share (Diluted) have exceeded breakeven in the most recent quarter.

(All data in the above charts is GAAP)

In the past 12 months, CXM’s stock price has grown 7.69% vs. that of the iShares Expanded Tech-Software Sector ETF’s (IGV) rise of 12.53%, as the chart indicates below:

For the balance sheet , the firm ended the quarter with $604.4 million in cash, equivalents and short-term investments and no debt.

Over the trailing twelve months, free cash flow was $41.0 million, during which capital expenditures were $7.1 million. The company paid $56.3 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.

Valuation And Other Metrics For Sprinklr

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

CXM’s most recent unadjusted Rule of 40 calculation rose to 19.0% as of FQ1 2024’s results, so the firm has improved in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Sprinklr

In its last earnings call ( Source - Seeking Alpha ), covering FQ1 2024’s results, management highlighted the growth in its large customer (> $1M year) acquisition, which grew by 28% year-over-year.

Leadership also focused remarks on the firm’s history in training AI models for its various software for over five years, so the company has significant expertise in this area.

However, sales cycles are increasing a bit, although management believes that it isn’t due to macroeconomic headwinds; rather, it is more due to moving into the CCaaS market with some of its offerings and these deals involve more formal RFP processes.

The company’s most recently reported net dollar retention rate was 122%, indicating strong product/market fit and good sales & marketing efficiency.

Total revenue for FQ1 2024 rose 19.6% year-over-year and gross profit margin increased by 4.5%.

Selling, G&A expenses as a percentage of revenue dropped an impressive 9.6% YoY, indicating increasing efficiency operating losses were reduced by 86.1% to just $3.2 million in the most recent quarter.

The company's financial position is quite strong, with substantial liquidity, no debt and strong free cash flow.

CXM’s Rule of 40 performance has improved year-over-year. Quarterly sequential revenue growth is decelerating but gross profit margin is growing as the company appears to be transitioning to margin-focused operating economics.

Looking ahead, total revenue for fiscal year 2024 is expected to grow at a rate of 15.3%.

If achieved, this would represent a drop in revenue growth versus FY 2023’s growth rate of 25.5% over FY 2022, indicating a slowing growth rate.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Uncertain’ three times and ‘Macro’ eight times.

Analysts questioned company leadership about its AI approach. Management believes many companies now are putting a few AI features into their products, while Sprinklr has been building AI into the core of all of its various suites and thinks that will make a difference to customers over time.

Regarding valuation, the market is valuing CXM at an EV/Sales multiple of around 4.6x on TTM revenue growth rate of 22.8% against a median Meritech SaaS Index implied ARR growth rate of 21% ( Source ).

The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 9.3x on July 19, 2023, as the chart shows here:

So, by comparison, CXM is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of July 19, 2023.

Risks to the company’s outlook include an economic slowdown that may be underway, reduced credit availability which may affect customer/prospect spending plans and lengthening sales cycles which may reduce its revenue growth potential in the near term.

Also, the comparatively low valuation of the company may be due to slowing topline revenue growth, now projected to be around 15% for the fiscal year ahead.

However, having reached close to operating breakeven and with strong large customer growth, good retention and growing gross margin, my outlook on CXM is a Buy at around $13.00.

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