Sprinklr Q1 Earnings: Painful Turnaround Continues as Macro Headwinds Increase (NYSE:CXM)

Sprinkler Company (New York Stock Exchange: CXM) Another shock for investors when the results of the first quarter of 2025 were announced this week. The company beat revenue and earnings per share estimates, but lowered its full-year guidance range by $25 million Midpoint due to higher customer traffic and greater overall headwinds. This guidance reduction comes on top of a December 2023 warning about a lower growth rate in fiscal year 2025 compared to Street expectations.

The stock is down about 17% since my previous article was published where I covered the growth warning in December and said we could see the stock in the penalty box until the situation improves and that the recovery could take some time.

However, I was wrong about the company paving the way for fiscal 2025. While this week’s update may be hard to digest yet I believe the December guidance cut is a result of unfortunate circumstances as the company’s go-to-market strategy adjustments came around the time of increased macro headwinds, and I expect Sprinklr to weather the storm and return to its fiscal 2026 growth path.

What led to the reduction in guidance and the withdrawal of revenue guidance for fiscal 2027?

In December 2023, Sprinklr warned of a difficult macro environment and acknowledged that it had made slower-than-expected progress on some of its go-to-market initiatives. At the time, it provided initial guidance for revenue growth of 10% compared to analyst consensus of 16%, but it appears that initial guidance was not conservative enough. Management appeared to have underestimated the headwinds the company was facing, and they said on their fiscal first-quarter earnings call that they were seeing higher-than-expected customer declines and longer sales cycles along with tightening customer budgets.

The $25 million reduction in subscription revenue guidance suggests we will see only modest sequential growth, at best, through the rest of fiscal 2025. Sprinklr also withdrew its 2027 financial guidance for reaching $1 billion in subscription revenue.

These headwinds appear to be the same as before, but worse than expected. There is continued pressure on renewals, and this coupled with downward changes in customer spending which is also partly driven by a decline in customer numbers, is resulting in a decline in the number of seats at Sprinklr.

On the internal side, the company said that go-to-market strategy changes will take time to implement and that results will take time to appear. To that end, it has brought in experienced people from successful companies like ServiceNow and Adobe, and this week’s earnings announcement also came with the promotion of Trac Pham to co-CEO alongside now co-CEO Ragy Thomas.

Pham joined Sprinklr last year from summary (SNPS) as Chief Operating Officer, and Sprinklr appears to have great respect and appreciation for Pham’s work since he joined, although the situation at the company deteriorated shortly after he joined. I’m not suggesting Pham is to blame, quite the opposite, I think he hasn’t had the chance to show what he can do. According to Pham, at Synopsis, as CFO, he led the company through two transformations — a total addressable market, or TAM, expansion and growth investment phase, and a value creation and operating margin expansion phase from 2014 to 2022. He seems to be the right person to help co-CEO Thomas bring back Sprinklr back on track.

Overall, we’ve known since December 2023 that fiscal 2025 will be a transitional year, but it appears to be more painful than the company expected. However, I expect Sprinklr to come out of this transition better and more prepared for the next expansion cycle.

A strong balance sheet, positive cash flow, stock buyback program, and accommodating valuation should help Sprinklr weather the storm.

Sprinklr ended its fiscal first quarter with $610 million in cash and cash equivalents and no debt. The company also generated $36.2 million in free cash flow in the quarter and repurchased 8.3 million shares for a total cost of $101.2 million. The Board added an additional $100 million to the buyback program, now leaving $128 million remaining in the overall $300 million mandate. The remaining amount will be enough to buy back approximately 5% of the outstanding shares.

A strong balance sheet and positive cash flow coupled with a buyback program should help Sprinklr get through this bad period, and a lower share count should help improve shareholder gains in the long term.

The price-to-earnings ratio is now near all-time lows, but we could still see the stock trade down to 3x sales or less if there are additional cuts to this year’s forecasts.

I had previously forecast a significant long-term upside for the stock, with the potential for it to reach the low to mid-20s per share based on renewed multiple expansion driven by continued growth and subscription revenues reaching $1 billion by the end of fiscal 2027. While this scenario if still the case Possibly, it will take longer to say the least. Some analysts took tough action – DA Davidson downgraded Sprinklr from buy to neutral and lowered the price target from $16 to $9, as did Cantor Fitzgerald, lowering the rating from overweight to neutral and lowering the price target from $16 to $10 per share.

I wouldn’t go that far, as I maintain a positive long-term outlook, but I no longer expect a renewed multiple expansion scenario to occur until we see signs of improved execution and a return to stronger growth. As such, I expect the stock to remain within a range bound in the following months and quarters, followed by a return to a multiple expansion scenario when macro conditions improve and when the company’s revised go-to-market strategy begins to pay off.

Based on the current situation, the closest that could happen is fiscal 2026 (which is roughly in line with calendar 2025), but we could see the stock start to recover faster if markets start anticipating a recovery based on results in the next two quarters. .

Conclusion

Unfortunately, the risks I outlined in my previous article have materialized in the past six months and have put Sprinklr in a difficult position in the near and perhaps medium term. The good news is that the difficulties are only partly company-specific and more macro-oriented, and when the macro headwinds subside, a realigned go-to-market strategy should improve the long-term outlook.

A strong balance sheet, positive cash flow, and stock buyback program should help the company and its stock price through this difficult period. I acknowledge the difficulties and believe the near-term upside potential is limited, but I remain positive about Sprinklr’s long-term prospects.