Sprinklr, Inc.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

Sprinklr provides a unified customer experience management (Unified-CXM) software platform that enables large organizations to manage all aspects of their customer interactions, from marketing and advertising, to sales and engagement, to service and support.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Sprinklr’s moat is rated a 2.5 out of 5, indicating a moderate competitive advantage, which is strong but does have vulnerabilities.

Here’s a detailed explanation:

Business Overview

Sprinklr operates a SaaS (Software as a Service) platform called the “Unified Customer Experience Management Platform”, which is designed to integrate and streamline all customer interactions across an organization. Their solutions can be broadly classified into 4 major pillars:

  • Sprinklr Insights: AI-powered, helps customers track and make sense of their customer data and analytics
  • Sprinklr Service: Provides omnichannel (across all channels) support for customers
  • Sprinklr Social: Enables social listening, engaging and marketing to customers on social media platforms
  • Sprinklr Marketing & Advertising: Integrated marketing campaign management including both content creation and advertising deployment, which can be targeted.

The company provides its platform to large enterprises, which they define as businesses with over $250 million in annual revenues, across a broad range of industries.

Sprinklr serves 1,400 enterprise customers, 60% of which are in the Fortune 1000. This translates to a large company with large complex customers. The company’s revenues are mainly generated through subscriptions for software access, as opposed to a la carte sales of individual modules, with professional services and support also accounting for a meaningful amount of income.

Moat Analysis: 2.5 / 5

  • Network Effects (Narrow Moat): Sprinklr benefits from a mild, but important, network effect. The more organizations use Sprinklr’s platform, the more comprehensive the customer data it collects. This comprehensive data could be a valuable source of insights for organizations, but these are only applicable to certain use cases, and does not create an overwhelming force to attract new business to their existing clients. Also it is relatively easy to switch the vendors, as there is no network effect between customers of companies using Sprinklr.
  • Switching Costs (Narrow Moat): It can be very expensive for large organizations to migrate away from their established system to a new platform. The cost of retraining personnel and the potential for data disruption are significant barriers to switching, which could result in lost productivity as well. However, many competitors exist that perform the similar functions that Sprinklr offers, making the switching costs not a big moat.
  • Scale: While Sprinklr’s platform is complex to create, economies of scale might provide competitive advantages over smaller entrants. However the company does not have a large market share, indicating a fragmented and competitive industry. This also points to a higher risk of competition in a very fast changing environment.
  • Intangible Assets: Although it has various patents and trademarks, the main value is in their brand recognition, but with the intense competition in the customer experience management software industry, brand recognition does not contribute to that large moat, it also doesn’t provide that level of stickiness that the other three moats provide.

Risks to the Moat and Business Resilience * Intense Competition: The customer experience management is a very competitive landscape with many large and smaller competitors. A new entrant could come and change everything, which can erode Sprinklr’s pricing power and lead to churn. Also the bigger competitors like Microsoft and Adobe can package a competitive product by combining a variety of services from their other product portfolios, increasing the competition. * Technological Disruption: The digital marketing and social media landscape evolves very rapidly. New technologies or platforms can make Sprinklr’s current software obsolete. Sprinklr also has to continuously spend on R&D to maintain its position, and could find it difficult to adopt to new and evolving trends. * Changing Economic Conditions: Economic recessions could lead to fewer subscriptions and cancellations. Large enterprises might put on hold the digital transformation projects and not make any new purchases. * Execution Risks: Sprinklr’s ability to execute on its growth strategy, maintain sales, and effectively monetize its platform can be impaired by their own decisions.

* **Acquisition Risk**: The company has grown primarily through acquisitions, meaning they have to integrate the acquired companies effectively. Any mishaps could turn the acquired assets into a liability.

Business Details

  • Revenue Distribution: *Subscription services are the core component of Sprinklr’s business model, and contribute to the majority of revenues. *Professional services, which include implementation, configuration, and training, also account for a reasonable chunk of revenues.

  • Industry Trends:
    • Rapid digital transformation and the rising importance of customer experience are important driving forces for Sprinklr.
    • Omnichannel engagement is becoming a necessity for businesses.
    • The use of AI in customer engagement is constantly increasing.
    • The importance of data analytics in deriving customer insight is also expanding.
    • The integration of marketing, sales and customer care is essential.
  • Margins:
    • Gross margins are good, over 70 percent. *Operating margins are relatively low because of the large investment in research and development and Sales and Marketing.
  • Competitive Landscape:
    • Intense competition with various players such as Adobe, Salesforce, and Microsoft, that offer different parts of the portfolio that Sprinklr offers. There are also numerous niche competitors that specialize in some aspect of the customer engagement lifecycle.
    • Sprinklr tries to differentiate themselves by their unified platform, which integrates all parts of the customer experience management, as opposed to other companies, who have to depend on a portfolio of different solutions. However, in practice, the customers have different levels of integration with other solutions, so it is not that big of an advantage.
    • While competitors have better market share than Sprinklr, the company tries to sell itself on a singular unified platform which reduces integration costs.
  • What Makes Sprinklr Different?:
    • The unified platform approach is the most distinguishable feature of Sprinklr.
    • Emphasis on large, complex enterprises that have global presence.
    • The company’s focus on AI and analytics to provide meaningful insights.

  • Financials

    • Revenue Growth: The most recent financial data shows that the company has seen a revenue growth of 13-17 percent, mainly driven by subscription revenues. These values are relatively in line with their past growth trends.
    • Cash Flow: Despite the high growth of revenues, the company had a negative operating cash flow of -$107 million and a negative free cash flow of -$137 million for the year ended in January 2023. This indicates that the company is not yet generating positive free cash flow and still depends heavily on external financing.
    • Debt: While the company has a large cash balance of $500 million, it has debt of $360 million, meaning it has a reasonable leverage.
    • Stock-based compensation: In their recent earnings call, the company noted they are focused on reducing the stock-based compensation expenses, in the coming years. This expense totaled around 32% of their revenue for 2022. This highlights the level of dilution for the shareholders, and if not controlled, can become a huge liability in the future.
  • Recent Concerns and Controversies
    • Slowdown in Growth: The company has seen a slowdown in growth, especially for new customers. Some analysts are starting to see the company as a mature company which is entering a slow growth phase, because of this, investors are becoming less interested in the company.
    • Profitability: They also face high costs in R&D and Sales and Marketing, and have a negative cash flow. It is questionable if the company can be profitable in the future, and this is one of the bigger risks that the company faces.
    • Management Changes: There are also been recent changes in the management, with their CFO and COO leaving the company, which brings uncertainty to the company’s operations.

Understandability: 3 / 5 * The concept of a unified customer experience management platform is easy to grasp at a high level. * However, the company’s various modules and their interconnections can become complex. * Understanding the accounting complexities and the impact of certain metrics, such as ROIC with and without goodwill, requires some financial expertise. * The complexity of the business model, with a significant reliance on professional services in addition to the subscription-based component, increases the understandability for an ordinary investor.

Balance Sheet Health: 3 / 5

  • Large cash balance provides the company with a cushion to undertake acquisitions.
  • The high debt levels and low current ratio make their balance sheet less robust. * The stock-based compensation is quite high and must be managed properly, else shareholders may see a large dilution in their holdings. * The profitability issue might strain their balance sheet in the future, if revenues don’t start growing considerably.