Actuals vs. estimates

Revenue — possible unit mismatch: actual is 9.97e-07x the estimate

Verdict

• Non-GAAP diluted EPS of $0.11 beat the $0.104 estimate by $0.006.
• The call put a name on the shortfall: services gross margin was -22% against a 74% subscription gross margin, which management attributed to partner cost overruns and execution challenges in one region on top of several large implementations completing.
• Guidance moved in two directions at once -- full-year subscription revenue was raised to $782.5m to $784.5m, while full-year professional services revenue was cut to $84m and Q3 services guided down 34% year over year to $19m at a -15% gross margin.
• Full-year free cash flow was set at approximately $135m, a 16% margin, on lower services billings and higher cash outflows for new hosting environments.
• The one thing that matters: the services problem is a cash problem, not a margin footnote -- $79m of free cash flow is already banked from the first half, so the approximately $135m full-year guide leaves roughly $56m for the second half, with only about $10m of it in Q3.

Guidance & KPIs

Management commentary

• CEO Rory Read has taken over the services organization himself, saying "I will lead our services organization on an interim basis." -- with three stated priorities: partner utilization and implementation economics, AI in service delivery, and higher managed-service attach rates.
• Management framed the services shortfall as the cost of transitioning off the largest implementation in company history rather than weak demand, pointing to a five-year strategic agreement signed in the quarter valued at well over $20 million.
• The CFO said services billings came in softer than anticipated for the quarter, and tied the updated cash outlook to lower services billings plus higher outflows for new hosting environments.
• On AI, management cited more than 200 customer engagements and ARR for AI-native SKUs up 40% year over year, alongside higher data and hosting costs.
• Management declined to call the turn, framing fiscal 2027 as the setup rather than the result: how the company executes in Q3 and Q4 sets the trajectory for next year.

Quality of earnings

• The profit gap sits in one line, and it is getting wider before it gets better. Services gross margin of -22% against subscription gross margin of 74% pulled total non-GAAP gross margin to 66%; Q3 services gross margin is guided to -15%, so the drag persists through the guided period rather than reversing inside it.
• Contracted demand is lengthening, not accelerating. Total RPO of $1.03bn is up 11% while current RPO of $614m is up only 3% -- the gap comes from large renewals with terms extended up to five years, which buys visibility but not near-term revenue.
• Expansion is concentrated at the top. Subscription net dollar expansion was 102% while the $1m-plus cohort was 112%, so outside the largest accounts the installed base is running at roughly replacement rate.

Gotchas & watch items

• Second-half free cash flow is guided to roughly $56m after $79m in the first half, with about $10m of that in Q3 -- cash generation is guided to fall sequentially even as subscription revenue is guided up.
• Professional services revenue is guided to $19m in Q3, down 34% year over year, and to $84m for the full year, so the line management calls a transition issue is still shrinking through the fourth quarter.
• Management flagged billings came in softer than anticipated, attributed to services, against total RPO growth of 11% -- the leading indicator investors watch and the one management points to are pointing different ways.
• Full-year non-GAAP operating income of $139m to $141m implies a step up in the fourth quarter against $31.3m delivered in Q2 and $33.5m to $34.5m guided for Q3.