Sprinklr (NYSE: CXM) beat on Q1 revenue and earnings. The story underneath is more complex. Total revenue of $219.5 million topped consensus by 1.7%, while non-GAAP EPS of $0.11 beat the $0.095 estimate. But non-GAAP operating margin contracted to 14% from 18% a year ago. Free cash flow fell 18% to $65.8 million. Growth has a rising price tag.
The business's core, subscription revenue, rose 6% year-over-year to $194.8 million. Total revenue was up 7%. Professional services revenue grew faster, 16%, but at lower margins. This mix shift is critical. Services gross margin was negative 3.7%, as cost of services exceeded services revenue by $0.9 million. Subscription gross margin held at 74%. Overall gross margin slipped 500bps to 65%, with the subscription line absorbing most of the pressure. Cost of subscription revenue grew 21% against 6% subscription revenue growth.
This margin compression looks structural. Cost of subscription revenue jumped to $50.9 million from $42.2 million, a 21% increase that far outpaced subscription growth. The company points to higher infrastructure and hosting costs, likely from AI model deployment and data processing. Sales and marketing expense also grew 5% to $74.9 million, consuming 34% of revenue versus 35% a year ago. Management is investing in go-to-market capacity. The payback period is extending.
Forward indicators present a mixed picture. RPO reached $1.04 billion, up 10% year-over-year, and cRPO grew 5%. The deceleration from prior quarters is worth watching. cRPO growth has moderated from the high single digits of recent periods, suggesting new business bookings may be slowing. CEO Rory Read cited a healthy pipeline, but it must convert to sustain the current trajectory.
Free cash flow of $65.8 million was down from $80.7 million. The drop came from higher capex ($4.6 million vs. $3.1 million) and a $30.7 million working capital outflow from accrued expenses. The company spent $125 million on share repurchases, reducing diluted share count by roughly 5% year-over-year. That buyback pace is aggressive for a company generating $65.8 million in quarterly FCF, consuming nearly all cash from operations plus the marketable securities drawdown.
For FY2027, guidance implies total revenue of $866.5 million to $868.5 million, about 6% growth at the midpoint. Non-GAAP EPS is expected at $0.48 to $0.49. The Q2 outlook of $214 million to $215 million in total revenue suggests a sequential dip from Q1's $219.5 million. This is typical for the seasonal pattern, but it falls below what the Q1 beat might have telegraphed. Management is signaling caution, not acceleration.
The tension here is between the top-line beat and deteriorating unit economics. Sprinklr is spending more to acquire and serve customers, and the buyback is consuming cash that could fund organic investment. With $442.8 million in cash and marketable securities, the balance sheet is not strained. Still, the trajectory of operating leverage will determine whether the stock's current 3.5x revenue multiple is justified. Next quarter's cRPO growth and margin trajectory will be the key metrics to watch.