Sprout Social Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 15 speakers on the call.

Operator

Welcome to the Sprout Social Third Quarter 2023 Earnings Call. I would now like to welcome Jason Reickel, Vice President of Investor Relations and Corporate Development to begin the call. Jason, over to you.

Speaker 1

Thank you, operator. Welcome to Sprout Social's Q3 2023 earnings call. We'll be discussing the results announced in our Press release issued after market close today and have also released an updated investor presentation, which can be found on our website. With me are Sprout Social's CEO, Justin Howard CFO, Joe Del Prieto and President, Ryan Baretto. Today's call will contain forward looking statements, Which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Speaker 1

All statements other than statements of Historical facts are forward looking statements. These include, among others, statements concerning our future financial performance and business plans and objectives And can be identified by words such as expect, anticipate, intend, plan, believe, seek, path, opportunity or will. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of the risks and other important factors that could affect Actual results, please refer to our quarterly report on Form 10 Q for the quarter ended September 30, 2023 to be filed with the SEC As well as our previous 10 Q and most recently filed 10 ks.

Speaker 1

During the call, we'll discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Definitions of these non GAAP financial measures along with reconciliations to the most directly comparable GAAP financial measures are included in our Q3 earnings release, which has been furnished to the SEC and is available on our website at investors. Sproutsocial.com. And with that, let me turn the call over to Justin. Justin?

Speaker 2

Thank you, Jason, and good afternoon, everyone. Thank you as always for joining us. At our Investor Day in Chicago last month, we spent time outlining our path the $1,000,000,000 revenue milestone and on the opportunity to establish ourselves as the category winner in a rapidly maturing market. Our goal is to build an enduring software company centered on amazing products, amazing people and over delivering for our customers every day. We're pleased to share fantastic Q3 results today, which reflects strong execution against these goals.

Speaker 2

The combination of our ongoing breakout upmarket, rising utility for our software, strengthening multiproduct strategy And our entrance in influencer marketing have spotted the starting line of our next great growth chapter. During Q3, we saw continued record new business ACVs And total ACV growth at a record 40% year over year. This was driven by 49% year over year growth in our 50 ks plus ARR customers, An acceleration in our premium module attach rates and a further acceleration in our enterprise business. We delivered ARR over performance across segments, Geographies, Products, Partnerships and Tagger and RPO growth of 67% crystallizes this momentum. We spent a considerable amount of time at Investor Day discussing our product leadership through every stage of market maturity and what is today a market that is more quickly maturing than any time in our history.

Speaker 2

This was perhaps most evident at the high end of the enterprise and in our strategic accounts team, which delivered more than 100% year over year growth in net new ARR, Powering total ACV growth of more than 40%. This combination of product leadership and market maturity will stand out in some of the brands that Ryan will share with you. You're going to hear stories that you haven't historically heard from customers that this group hasn't historically associated with Sprout. Another key component of our current and future execution is our platform strategy. Only 6% of our customer base has adopted 2 or more premium products, And we see massive potential to unify what should be standard social capabilities for all global businesses.

Speaker 2

Total premium module attach rates were even stronger than our Q2, increasing to more than 27%. We were also excited to surpass $100,000,000 in premium module ARR this quarter. This performance was of course complemented during Q3 with our acquisition of influencer marketing leader, Tagger. Our acquisition thesis Grounded in our right to win this nascent category by leveraging our incumbent position in social with our ability to create a social suite designed to deliver customer workflow, Reporting and analytics that is not to this point existed.

Speaker 3

One of the

Speaker 2

more recent validations of our thesis was Snapchat's October launch of their Creator Marketplace API. Tagger was one of only a handful of companies selected to participate and this further highlights the rising strategic role we play with the networks positioning Sprout and Tagger deliver integrated and differentiated functionality that our industry has not previously seen. Business integration has also progressed smoothly and early customer reception to Tiger has far exceeded our expectations. Our teams and our products have felt like cousins from the start, and we now have a differentiated value proposition to deliver for an expanding set of new customers and customer excitement inside our installed base has been headlined by very large enterprise bands And small businesses alike. With 3x to 4x current Sprout ECVs and a meaningful opportunity to further differentiate We believe Tagger has potential to be a greater than $100,000,000 ARR business by 2028.

Speaker 2

Our broader product evolution made meaningful progress during Q3 as well, most specifically in AI and social customer care. Our foundational AI releases during Q3 included listen and content filtering, message sentiment analysis, enhanced listening queries, team suggestions and many more. We expect generative AI and new enrichments to the platform will create even more customer value during Q4 and into next year. We saw high velocity of social customer care enhancements during the quarter as we redefined workflow, case creation and reporting With differentiated rules engine, elegant user experience, enterprise security and governance and a platform that allows our customers to engage everywhere that their customers are. Our enterprise customer care momentum with new customers this quarter was exceptional, and we're just getting started.

Speaker 2

Sprott has been fortunate to build a leading company centered on building world class team and over delivering for our customers. Recently, we were named to the 2023 Fortune Best Workplaces and Technology list and recognized by G2's 2023 fall reports As a leader across 138 categories, we are also honored to be rated the number 3 software company in the entire software industry. We've proven our success at every stage of the evolution of our market with customers of all sizes and in all market conditions. We believe social is maturing as the primary communication channel between brands and our customers. Though our market is still early, both in In terms of age and the maturity of adoption across the fast growing list of use cases, we're all in on social.

Speaker 2

Our holistic differentiated approach and consistent focus increasingly stand out. We're early in our multi product strategy, early in our international growth And early in our upmarket evolution, we believe we have the right team and the right approach to fully capitalize our expanding opportunity. And with that, I'll turn the call over to Ryan to tell you more about our progress.

Speaker 4

Thanks, Justin. I'm incredibly proud of the way our teams are delivering for our customers. Social is unlocking new paths to revenue, customer satisfaction and loyalty, brand awareness and business growth. And knowing that we have the technology, community and customer validation to lead social into the next phase of growth is beyond exciting. At Investor Day, I shared several important building blocks that will allow us to execute against our $1,000,000,000 revenue milestone, and I want to update you on that progress today.

Speaker 4

Thinking about platform leadership and culture, it's worth stating again. We were recently recognized as the 3rd highest ranked company on G2. And of every software company on G2, we are number 3. We're honored to be recognized as the top customer rated platform in our category for every market segment From SMB through the enterprise and in virtually every customer satisfaction dimension measured by G2. We are also specifically named as the number one product in social media management, social media analytics, social customer service, best results for the enterprise And 68 other categories.

Speaker 4

We have a relentless commitment to be the best place to be an employee and the best place to be a customer. This type of market recognition only comes after exceptional customer success. Our teams continue to over deliver And during Q3, we had the opportunity to work with many iconic and leading global brands. These customers included American Honda Motor Company, Herman International, a Samsung Company, Camping World, Hormel Foods, Danaher, Activision Blizzard, Welch Foods, NYU Langone Health System, Belden and MercadoLibre. For those keeping track, I just mentioned the 4th biggest tech company in the world, the 20th most valuable brand in the world, 4 Fortune 500 Companies, the biggest commerce company in Brazil, And these are just a handful of the iconic brands we have the approval to share publicly.

Speaker 4

It's also inspiring to see the scope of how our customers are now leveraging social. For those that know the Barreto household, Papa John's is the pizza ordered for pizza night. Josh Martin, Papa John's Director of Social Media and Brand Engagement Said it well. We strive to be the most engaged pizza brand in the industry and Sprout is the right solution to help us achieve that goal. We focus on high value community engagement to improve our overall customer experience.

Speaker 4

Rich social listening data allows us to go deeper into customer sentiment, While making UGC more accessible, Sprout's unified platform allows us to deliver value across content marketing, Influencer Identification, Brand Management and Social Customer Care. Long time Sprout customer NBCUniversal, who expanded our relationship this quarter, Echo's similar sentiment. Justin Karp, the VP of Social Media at NBC Cable Entertainment and Sports shared, Sprott Social has made many parts of our social business more efficient. From content creation, project management to analytics, Spritz tools have made us a smarter and stronger operation. The product continues to improve and we are pleased that our feedback on several of Spritz tools Expanding our partner ecosystem will also play a pivotal role in our future success.

Speaker 4

We have a massive opportunity to complement Salesforce Service Cloud and help brands respond faster than ever to their customers on social. After a record Q2 onboarding, we helped another 154 sales force customers implement Sprouture in Q3 And the scope of deployments increased resulting in record new sales force ARR. We expect another record ARR Contribution in Q4 as complex deployments begin their migration to Sprout. A loyal community is another building block to 1,000,000,000. We're fortunate to invite many customers to speak in our community.

Speaker 4

And just last week, we had the opportunity to host McDonald's Customer Care Program Strategy Manager, Ellie Moody, to hear her perspective on enhancing the customer experience with social care. I'd encourage you to listen and learn about the inherent challenges when sending customers from social to the 1-eight hundred number or other channels. As I shared in my presentation at Dreamforce, this is the future state of omni channel customer care, Meeting customers where they are. This is the key to improving customer satisfaction and building customer trust. This intersection of partner success and community highlights exactly why Social Studio is only the beginning of our ecosystem opportunity.

Speaker 4

We have spent the last 18 months integrating Sprout natively into the common data layer of Salesforce. Our main goal has been to provide the most Powerful and seamless collaboration across Salesforce and to ensure that Sprout is the best and only choice for Salesforce customers seeking to solve for social. We believe this unique combination of partner and community success has felt well positioned for growth in 2024 and well beyond. Speaking of 2024, according to socialmedia.org's recent 2024 Pulse survey, more than 75% of enterprise social media leaders Expect to maintain and grow their budget through next year and more than 90% expect a stable or growing social media team through 2024. Some top areas of planned investment include influencer marketing, employee advocacy, social listening, content creation, reporting and analytics.

Speaker 4

Social is an increasingly important and necessary part of any business as it expands across many different departments and Sprout is well positioned to help I am proud of the way our teams are executing. Our exceptional team and exceptional product are foundational for how Sprout creates outsized value for our customers And they are the pillars for how we will build a category defining software franchise. And with that, I'll turn it over to Joe to run through the financials. Joe?

Speaker 5

Thanks, Ryan. I'll now walk you through our Q3 results in detail before moving on to guidance for the Q4 and full year 2023. Revenue for the Q3 was $85,500,000 representing 31% year over year growth. Subscription revenue was 84,800,000 Up 31% year over year. Services revenue was $700,000 down 5% year over year.

Speaker 5

Total ARR exiting Q3 was $359,500,000 up 33% year over year and nicely ahead of our plan. Very strong AR growth was led primarily by meaningful acceleration in our enterprise business, stronger premium module attach rates, Our unexpected early TAGM momentum and roughly $3,000,000 less churn than we had previously anticipated from our non core business. The number of customers contributing more than $10,000 in ARR grew 33% from a year ago. The number of customers contributing more than $50,000 in ARR grew 49% from a year ago. Q3 ACV growth was a record 40% year over year.

Speaker 5

Record new business deal sizes, very strong enterprise momentum, Earlier turns from influencer marketing expansion and the exit from a number of low value logos each compounded ongoing healthy seat expansion And much stronger premium module attach rate. We expect ACVs in the near term to grow similar to Q3 levels Expect faster than previously anticipated ACV growth over the medium term. In Q3, Non GAAP gross profit was $66,800,000 representing non GAAP gross margins of 78.1%. This is up 50 basis points compared to a non GAAP gross margin of 77.6 percent a year ago. Non GAAP sales and marketing expenses for Q3 were $35,900,000 or 42% of revenue, up from 40% a year ago.

Speaker 5

We continue to hire aggressively at our enterprise sales and success organization and this quarter took on the Tagger team as well. Non GAAP research and development expenses for Q3 were $15,000,000 or 18% of revenue, down from 20% a year ago. We continue to invest in our future and our increasingly targeted investments in AI and social customer care are delivering strong results. Non GAAP general and administrative expenses for Q3 were $16,400,000 or 19% of revenue, consistent with 19% a year ago. We expect to deliver a consistent G and A leverage as a percent of revenue moving forward.

Speaker 5

Non GAAP operating loss for Q3 With negative $600,000 or negative 0.7 percent non GAAP operating margin, an improvement of 150 basis points year over year In spite of near term dilution associated with Tagger, non GAAP net loss for Q3 was $600,000 For non GAAP net loss of $0.01 per share based on 55,800,000 weighted average shares of common stock outstanding compared to a non GAAP net loss of $1,000,000.02 per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q3 with $121,400,000 in cash, cash equivalents and marketable securities. This is down from $192,400,000 at the end of Q2 And reflects our acquisition of Taggart in August. Deferred revenue at the end of the quarter was 123,400,000 Looking at both our billed and unbilled contracts, RPO totaled $228,700,000 up from 206,400,000 Exiting Q2, we have 67% year over year. We expect to recognize approximately 73% or 167,000,000 of total RPO's revenue over the next 12 months, implying a CRPO growth rate of 51% year over year.

Speaker 5

Operating cash flow in Q3 was negative $5,500,000 compared to positive $1,000,000 a year ago. Free cash flow was negative $3,400,000 down from a year ago. We absorbed Tagger and integration expenses this quarter. We expect to shift back to positive operating and free cash flow beginning in Q4. Shifting to formal guidance.

Speaker 5

For the Q4 of fiscal 2023, we expect revenue in the range of $90,500,000 to $90,600,000 or growth rate of 30%. We put non GAAP operating income in the range of $600,000 to $700,000 This represents a non GAAP operating margin of 0.7% at the midpoint. We treat the non GAAP net income per share of between $0.01 and $0.01 This assumes 56 600,000 weighted average basic shares of common stock outstanding. For the full year 2023, expect total revenue in the range of $330,600,000 to $330,700,000 This is expected overall reported growth rate more than 30%. We are raising our implied ARR growth rate exiting 2023 to approximately 30% from our prior view of 28% to 29%.

Speaker 5

This continues to assume that our non core low end ARR declines to 0 exiting the year. For the full year 2023, We now expect non GAAP operating income in the range of $3,600,000 to $3,700,000 This implies annual non GAAP operating margin improvement of 2 70 basis points With our prior margin expansion forecast of 200 basis points. We now expect non GAAP net income per share of between $0.12 $0.13 Compared to our prior guidance of $0.07 and assuming 55,900,000 weighted average basic shares of common stock outstanding. We believe we're building a category defining company and we like strong execution during Q3 as it's on the path to achieving our full potential We carry strong business momentum at the end of the year. With that, Justin, Ryan and I are happy to take any of your questions.

Speaker 5

Operator?

Operator

We ask that you limit yourself to one question and one follow-up question, please. We'll pause for just a moment to compile any questions. Our first question comes from the line of Raimo Lenschow with Barclays. Please go ahead.

Speaker 5

Hey, this is Frank on for Raimo. Congrats on a strong quarter. I want to ask one around Tagger. How has the integration process been going there? And has Tagger begun to weigh as a factor in those Enterprise wins are ready.

Speaker 4

Hey, thanks for the question. This is Ryan. The integration has been going well so far. We've been really excited by what we've seen certainly from the product and as well from the team. We've got the team now working really well The go to market organization embedded into our marketing, our sales and customer success motions and then certainly on the product side, Our R and D organizations have been working really closely together, not only on the integration, but as we think about 2024 and some of the opportunities in front of us.

Speaker 4

As it relates to the second part of the question in terms of the value in the enterprise deals, we're really early within this so far. We've been generating some really nice pipeline and But certainly from what we've seen in a short period of time, the value prop of having social media management alongside of influencer marketing Has been very compelling for customers. And so we are seeing this as a great opportunity to do what we had thought during diligence, which is to differentiate ourselves from other social media management providers And also to bring a product that's still pretty nascent to the 30,000 customers that we get to work with every day. So we see it being a really strong opportunity for us as we move forward here and we certainly saw some good results already in Q3.

Speaker 5

Thanks, Ryan. Any way to think about the ARR contribution from Tiger specifically? Yes. So the way we've kind of talked about that historically Frank is we talked about this coming out of the acquisition after Q2 is we modeled out we told you about $3,000,000 of revenue over Last 5 months and from there you can kind of infer the ARR from those numbers. We outperformed that in Q3 a little bit and we're a little bit ahead of that schedule.

Speaker 5

So you can expect a little bit more upside from an AR standpoint based on what we've seen so far in Q3 going into Q4. Awesome. Congrats again. Thank you.

Operator

Our next question comes from the line of Rachel Ijos with William Blair. Please go ahead.

Speaker 6

Yes, thanks. Congrats on the quarter and appreciate you taking the question. I was curious if you could give any additional color on the acceleration of premium attach rates. Was that primarily driven by like Tagger cross sell or was it more the other premium modules?

Speaker 4

Yes. Thanks, Rachel. It was the other premium modules that we'd highlight. These are things that we've Talked about in the past, we've seen really good acceleration there. As we get really focused in on this ideal customer profile, which are these sophisticated customers, more and more Things like premium analytics, social listening, advocacy are really important for the things that they're trying to solve at the enterprise level.

Speaker 4

So we've continued to see really great success across all of those products. And we certainly believe to the question before that, The Tagger is going to be a really nice addition on top of that. So this is really driven by the premium modules that we've always had and spoken about in previous calls.

Speaker 6

Awesome. Thank you. And then just like one follow-up to that if I could. Any thoughts on where you think premium attach rates could go in the near to medium term?

Speaker 2

Thanks for the question. This is Justin. I think that you've heard us talk a lot Where it is today in terms of percentage of customers with multiple of the premium products, we see a lot of utility Cross a number of the premium offerings now including influencer marketing to a pretty wide part of our customer base. I think it's early for us to be directional on where we think that could ultimately be, but we certainly think that there's a ton of headroom. We've seen that acceleration in the attach rates today.

Speaker 2

We talked about at Investor Day, the amount of companies that are becoming going to be kind of graduating through the maturity curve of where they are with social. And as that continues to improve that utility, and that readiness for these more sophisticated future sets is only going to grow from there.

Speaker 6

Awesome. Thanks so much and congrats again.

Speaker 2

Thank you very much.

Operator

Our next question comes from the line of DJ Hynes with Canaccord Genuity. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking

Speaker 7

the question and really impressive roster of large customers here in the quarter. So kudos. Ryan, maybe one for you to start. I'm curious what kind of trends you're seeing in sales cycles as you move really up into that Kind of large enterprise bucket. And I'd be curious, like how often are those deals involving multiple department decision makers at land?

Speaker 4

Yes. Thanks, T. J. So one of the benefits and we've spoken about this a little bit in the past, but worth mentioning again, one of the benefits that we have here is that we have this trial model And so even in enterprise deals that might come from RFPs, we generally have a faster sales cycle than you might see with other Enterprise software players both in our space and outside of it because customers are in the product by the time they make a decision and oftentimes They've implemented a lot of the work. They've got users in.

Speaker 4

They're starting to publish through their social profiles or run reports directly In Sprout before they ever signed a contract for us. So we've seen really good cycles. There's still 35 to 41 days on average. Certainly in the large enterprises, There'll be longer than that, but we have this advantage that they're in the product leveraging it. And we've seen that being a really big differentiator for us as we move forward.

Speaker 7

And then Justin, maybe a follow-up from you. I'm curious how you think about more traditional contact center oriented software firms and their ability to compete in social customer

Speaker 2

Yes, it's an interesting question and one I spent a lot of time thinking about. I think Social has proven to be something that requires a lot of focus, a lot of energy, a lot of R and D expertise, A lot of historical buildup of that expertise. And social as part of the CareStack, if you will, is really unique in that it's not the only thing happening in that channel. There's marketing, There's community, there's product feedback, there's certainly questions, there's support issues, etcetera that really require All of the stakeholders within an organization across business functions to be able to work together. And for that reason, Historically and we believe going forward there's a pretty big moat around the care aspects of social.

Speaker 2

And we're seeing as more of these large enterprises that we've talked about in many other organizations Are starting to make investments, more significant investments in social as a care channel. They're recognizing that as well, choosing Sprout for the reasons that I mentioned, Where it's been a bit harder and disconnected in some of the other approaches Taking kind of legacy systems into account.

Speaker 4

DJ, I also realized I didn't finish the second part of your question, which is Departments and it ties to what Justin was talking about, but the answer is yes. We are getting into more departments than a few years ago. So when we go into Justin's point, certainly we'll be in care, but we're talking to marketing departments, we're talking to oftentimes sales departments It could be across the enterprise depending on the potential use cases for social. And for us, that's a really important part of the new business cycle, Because we're either landing them larger in these multi departments with different use cases or receiving and growing knowing that we've opened up the opportunity To grow that, to expand that account later over time. And so a lot of the logos that you heard from us today were selling to multi departments from the get go from a new business perspective.

Speaker 4

And then some of the logos that we talked about today were actually current customers. You've heard us talk about them before where we've gone in and sold to different departments Later on that had different use cases. So definitely see that as an important part of our go to market strategy.

Speaker 7

That's great. Thank you guys for all the color.

Speaker 5

Thanks, TJ.

Operator

Our next question comes from the line of Adam Hotchkiss with Goldman Sachs. Please go ahead.

Speaker 8

Great. Thanks for taking my questions. I guess to start on the enterprise side and then the 50 ks plus deals category. I know you've talked about hiring aggressively here. Could you just talk a little bit more about the key drivers What they've been in some of these much larger enterprise deals, how you're thinking about contributions from things like Salesforce, some of your other partners in being more aggressive on the outbound direct side and anything you've learned as you've grown your team there?

Speaker 8

Any color would be helpful.

Speaker 4

Yes. Thanks, Adam. Clearly, we've seen a lot of success with our enterprise team. We've mentioned them a little bit in prepared remarks. But we just look at the growth rates in the 50 ks as you mentioned, but also just enterprise in general going at over 50%.

Speaker 4

We've been very excited about the Market opportunity that we have in front of us. What's really exciting about this is our products are perfectly positioned for these enterprises. And as we're going into these enterprises, similar to the question that D. J. Had before, because we're going into multi departments, we're getting access to Many different users and those users have very different use cases.

Speaker 4

So the ability to have an elegant and approachable software like Sprout Makes a difference. The idea of being able to get these folks up and running in the platform before they sign a contract makes a difference. And so when we think about the profile of the enterprise reps that we have on our team, clearly they have some great skills around understanding social and best practices for the enterprise. Our deals move faster than most enterprise organizations, so expect those reps To have a certain level of speed to them and in the way that they execute and to manage more accounts and transactions and deals than they might have at another legacy enterprise So the speed and velocity of our business as well as the depth and understanding business strategy is really important for our enterprise team And we're seeing really good success, as demonstrated in the logos that our team has been able to win.

Speaker 8

Great. That's really helpful. And then just on Social Studio, appreciate the update on new logos there this call. Just curious if there's any update on the way you're thinking about conversions over the next 12 months and the impact of growth as we think about modeling? Thank you.

Speaker 4

I'll start on the business side and see if any of the others have anything else they want to add. From a Salesforce partnership We continue to see great success there. We mentioned it before, but the social studio piece was obviously the sunset Coming next year is certainly the immediate opportunity where we're seeing good execution. But we go into the full opportunity, which is all Salesforce customers. And our goal really is to build a partnership and product integrations that ensure that any Salesforce Customer that's investing in social sees Sprout as the very best choice for their business and that's what we're seeing in the marketplace.

Speaker 4

I'd specifically call out the work that we've been doing with the Service Cloud. And obviously, our integration today lives within the Service Cloud console itself. And that native integration is adding tremendous value for customers. We're getting customers up and running very quickly there. And they're really going from 270 degree view of their customer to the full 360 because they now have the social engagement data from Sprout tapped in.

Speaker 4

So we continue to see success and opportunity there. We'll focus in on both Social Studio, but outside of that the entire ecosystem of customers that may be On Salesforce.

Speaker 8

Great. Really helpful. Thanks, Ryan.

Speaker 6

No problem.

Operator

Our next question comes from the line of Parker Lane with Stifel. Please go ahead. Your line is open. Please go ahead. Our next question comes from Robert Michael Morelli with Needham and Company.

Operator

Please go ahead.

Speaker 3

Hey, yes. This is Ram Relli on for Scott Bergman. Thanks for taking the question. Understanding you focused on hiring recently into the next quarter, how are you looking at your 24 S and M investments and overall go to market strategy, are you thinking the year will entail more investment or should we expect more leverage in the model? Thanks.

Speaker 5

Yes, I can take that one and then Arbib wants to give color of the key investment areas. I think overall, we're not going to get too into 2024 as far as guidance and what those numbers might exactly. But what I can tell you is Based on the momentum we're seeing in the business right now, especially upmarket, you're going to continue to see us invest in the enterprise, in the mid market And integrations and a bunch of other stuff that RB can touch on. And so what you will expect to see is a little bit of leverage overall Off sales and marketing, not a lot, just given what we're seeing in the business and the opportunity. And we'll give you more color as we get Q4 guidance or I'm sorry, 2024 guidance next year.

Speaker 4

Yes. And I think I just underline Joe's points there. I It's going to be a consistent strategy. We certainly see these opportunities across the mid market and enterprise, but all of our market segments have been performing nicely. And so a consistent approach to how we're going to invest going into next year and we feel really good about the motion that we have today.

Speaker 4

So no major changes to call out.

Speaker 3

Got it. That's helpful. And then regarding AI, any insight you can provide on customer feedback and demand trends with your AI assist functionality? Thanks.

Speaker 2

Yes, this is Justin. So AI, I would say, continues to be Certainly a topic of interest across our customers. I think, I would characterize that mostly as, starting to get their heads around, How it may improve the tools, their day to day workflow and processes. We've gotten quite a few new releases That are powered by AI into our customers' hands over the last couple of quarters, a lot more coming. The way that we're thinking about this is, we have a lot of foundational things That, as I mentioned, we've gotten into our customers' hands.

Speaker 2

We've built a lot of really powerful back end that's going to start to power Some really, really cool capabilities for our customers that isn't just going to help them do the things that they were already doing day to day, but unlock some Entirely new opportunities and capabilities for our customers. I'm certain we'll have more to share around some of those specific releases As we get into 2024, I would say that The impact that our customers that have adopted some of these early features have been able to make It's certainly improving their social efforts and their social strategy. I think the areas where we're going to start to see Really big customer value unlocked are some of the things that are in the works now, some of the things that are coming down the road, but Tons of excitement, tons of interest by the customers, a lot of really positive feedback with the customers that we've shared sort of more depth on our AI vision, Reflecting back to a bit of the strategy that we talked about at Investor Day, that's something that's been resonating really, really well with our customers Across segments, but in particular in the enterprise, and we'll see a lot of more interest build heading into next year.

Speaker 5

And I might just add on to that, that

Speaker 4

the way that the product team has approached this, I think is really impressive. Clearly, similar to everything that we've done in Sprout, we want this to be approachable and elegant and fit within the workflow. That's part of the feedback we get from customers as well. Implementing these AI features just fits within their workflow. They don't have to change to get the benefits from it.

Speaker 4

And to Justin's point, the roadmap that's coming is really exciting. Some of the stuff that we've done on Care is a great example of how we're changing the game for our customers. You think about the volume of customer feedback, A customer care feedback that you get on social, those social teams typically are already small and there's a lot of volume And our product is enabling them to prioritize where they should be spending time because we've given them the ability to see sentiment in their customer care inbox. We've allowed them to respond in a way that's going to be better for the customer faster for the customer through our AI Assist functionality. So All these things are starting to take shape right now and the initial feedback to Justin's point has been great and we see a lot more in the future here.

Speaker 3

Got it. Appreciate the color. Congrats on the quarter.

Speaker 5

Thank you.

Operator

Our next question comes from the line of Rob Oliver with Baird. Please go ahead.

Speaker 9

Great. Good evening, guys. Thanks for taking my question. I wanted to follow-up on the question earlier that touched on Tagger. I guess, 2 parts to the question.

Speaker 9

One is, what sort of an impact are you seeing Tagger having on these large customer wins, say, over $50,000 and over $200,000 And then The second part of the question is what obviously, there's a strategic element to the acquisition here and I'd just be curious to hear any color around The extent that this improves your competitive position with the upper end of mid market and enterprise in some of these larger deals given the sort of depth Brett, that this adds to your product and portfolio. Appreciate it.

Speaker 4

Yes. Thanks, Rob. So I think on the first piece just in terms of large deal execution and opportunity, I'd say we're still early. We see a lot of potential and opportunity and we shared a little bit before that Taggart Safaris outperformed in a short period of time that they've been part of the company. So we're very excited about what we've seen both in terms of being ahead For the quarter as well as the pipeline that we're developing and certainly we see this in the mid market and enterprise.

Speaker 4

That was a huge part of our thesis When acquiring Tagger was that they had great progress and success already in the enterprise place where we saw them playing really nicely with Sprout. So we continue to see that we're seeing in the pipeline that's being developed and I think we'll have more specific stories to share there on the success From a competitive positioning perspective, absolutely. We do believe that this is going to have really positive impacts And our ability to win against other competitors within the space to really differentiate and to increase our ACVs In the deals that we're in. And when we looked around at the market and looked at the opportunity, we didn't see anybody else who had anything like Tiger. And when we think about the combination of TIGR and the core Sprout product, it adds tremendous value for customers.

Speaker 4

If you just think about it today, on the core Sprout That organic that they were thinking about those customers today, and the publishing and engagement And listening and analytics really important. Another influencer marketing piece is another investment that they're thinking about. You can have all that in one place now through 1 company. So that is certainly going to be a major differentiator for us and the teams are doing a great job Getting enabled and taking it to market today and we expect to have more stories for you in future quarters on the progress.

Speaker 9

Great. Looking forward to it. Thanks, Ryan. Thanks, team. Appreciate it.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Michael Turits with KeyBanc. Please go ahead.

Speaker 10

Hi, this is Michael Budowick Thanks for taking my question here. Just wanted to follow-up on the TIGR contribution question. Could you point to the level of ARR contribution you'd expect for Q4 and full year 'twenty three Or just not at this time.

Speaker 5

Yes, Michael, not at this time. I think the data point, like I said earlier, the one that we're getting out is the revenue that we We talked about the $3,000,000 over the last 5 months and we're ahead of that pace. And from there, you can kind of probably back into the ARR number, but similar to We're not giving out specific guidance on the Tagger ARR.

Speaker 10

Okay. And then on the Salesforce opportunity, Are you landing material number of Salesforce customers not in Social Studio today or is that something you'd expect to pick up maybe starting in 2025 here?

Speaker 4

We are starting to and we expect to see more and more of those. That's the long tail of the opportunity that we have in front of us. I think what's also been really exciting is Some of these deals that we've already closed from a social studio perspective, in some cases, we're only using one part of the platform and it might have been More on the marketing side. And then as we introduced our integration to Service Cloud, all of a sudden you have this opportunity that goes beyond marketing into social customer care They're starting to use the Service Cloud integration. And some of the logos that we talked about this quarter is great examples of those things happening today.

Speaker 4

So, It's growing and we expect to see more of it going into next year and beyond.

Speaker 10

Great. Thank you. Appreciate it.

Operator

Our next question comes from the line of Fiona Hynes with Morgan Stanley. Please go ahead.

Speaker 11

Hi, good afternoon. This is Fiona on for Elizabeth Porter. Thank you for taking the question. I wanted to ask on macro and understanding that you guys just put up a good quarter. I'm curious Your perspectives on how trends may have shifted in Q3 relative to Q2 and whether or not like understanding the execution was definitely a part of the performance.

Speaker 11

Just curious for any perspectives that you can share there. Thank you.

Speaker 2

Yes. Thank you for the question, Fiona. I think that execution as well as getting a little further along with the some of the strategic changes that we made last year, The momentum that we continue to see in the enterprise, etcetera, is the bulk of the story for Q3. We've got A lot of tremendous work happening inside the organization and the team is across the board doing a phenomenal job. We haven't seen some of the same macro impacts that we're aware that others have seen.

Speaker 2

We're cautious of it. We're keeping an eye on it. We feel like we're factoring it adequately. But Something that we talked about at Investor Day, I think continues to be a key trend, not only in this environment, but some of the others that we faced over the last couple of years, Which is that social is still an emerging space. It's still a space that many companies are very early in their adoption of and their maturity Through social teams continue to be generally understaffed.

Speaker 2

We see marketers from recent surveys expressing that they expect to maintain to increase 90% of them expect to maintain or increase headcount into 2024 despite the current conditions. And so social is kind of Over the last 3 years proven to be fairly all weather in that regard. We want to be mindful. Certainly, we want to make any adjustments that we need to make in as conditions continue to change, but The execution of the team is going to continue to be the main driver of our ability to outperform.

Speaker 11

Thank you. And then one follow-up to that on AI and the monetization strategy there. Appreciating that it's early, I'm curious for your thoughts on how you expect those to layer into the model over time. Do you think about some of these AI features that you're rolling out as Drivers on more of the customer acquisition side, more on like the higher monetization per customer side or potentially both? Thank you.

Speaker 2

Yes. I think potentially both is the likely answer. I think we've talked about this before. I think that there are certain things capabilities that we've introduced Today and we'll continue to introduce that really fit nicely into the core jobs to be done. Within Sprout, it makes the user experience better, it makes the product It makes the customers more impactful.

Speaker 2

And I think for those that'll help us with conversion rates, it'll help us with competitive advantage, it'll help us with retention. But there are opportunities including some of the things that we're working on now, where we expect to deliver pretty outsized value To our customers, particularly when we start thinking about customer specific modeling, when we start to think about some of the really powerful New capabilities that AI is going to unlock. And I think that it's going to make sense. It's too early to put a line in the sand or make predictions here, but I think that it's going to make sense that there Some monetization involved, in some of the more powerful AI capabilities. They could also be wrapped up into some other Monetization opportunities, right.

Speaker 2

AI is going to certainly improve listening. It's going to improve customer care capabilities, etcetera. So we're kind of watching and starting to form some opinions around how that layers in from a monetization perspective across the board, Particularly as we get more of these exciting things in our customers' hands.

Speaker 6

Thank you.

Operator

Our next question comes from the line of Matthew Van Luyt with BTIG. Please go ahead.

Speaker 12

Yes, good afternoon guys. Thanks for taking the question. I guess first on the fact that we're almost a year into The new pricing strategy, curious on a couple of fronts, what you've seen from a realization standpoint with your existing customer base Through the renewals and potential upsellcross sell, how much pricing you've actually realized at this point? And then on the new customer front, any estimates on sort of where you're landing there Relative to maybe deals of similar scope and size in the past and how much uplift you're actually realizing there as well, please?

Speaker 4

Sure. Thanks, Matt. I'll start this is Ryan. I'll start with the second one just in terms of new customers. And I think probably the best indication of the opportunity there is just the ACV growth, right?

Speaker 4

We've had a record ACV growth of 40%. The customers that we're in front of today with the strategy shift and our focus and on sophisticated customers as well as The fit that they have with our premium modules can be seen in the growth of our larger size deals and the attach rates. And so we continue to see great opportunities. We think that there's a lot more opportunities like that as we continue to sell into these sophisticated customers and we continue To grow our attach rates and certainly now as we add in Tagger as another great solution for these customers. And then on top of that, when we go back to the attach rates, we think about our current customer base, we're still sub-seven percent of our customers have more than the 2 products.

Speaker 4

And so we have a lot of opportunity to go Back to the current customer base. Some of that will be making sure that we're educating them on the products that we have and the problems that they solve and some of it is just the maturity that's happening within the marketplace Where they're going to be ready for these products. So, continue to see lots of great ACV opportunities today and the ACV growth number I think is probably the best indicator of that.

Speaker 5

Yes. And then, Matt, to follow-up on your question around the impact of the price increases. And we've talked about this over the last couple of quarters. I think it's a combination of a couple of things. One is we Coming out of the first couple of quarters, we talked about the increased churn you saw in the loan in the market and part of that was related to moving around the resources, but Part of that was the price sensitive customers.

Speaker 5

We gave those price increases. And then when you think about when you get an upmarket in the mid market enterprise deals, We went to those customers who have really successful renewal rates, but a lot of the times it wasn't about the price increase as it was about Entering other conversations around maybe adding listening or maybe adding premium analytics or adding another department in place of a price increase. And so net net when you factor All those things in, what we've kind of seen year to date and what we expect for this full year, you're probably looking at about a low single digit increase or impact from the price increase. And we probably expect the same thing going forward, if you think about the Evergreen clause we now have in our contract. So we feel like, that will be very similar impact in 2024.

Speaker 12

Okay. Very helpful. And then when you look at, not only outlook for 2024, but even beyond that, especially as The Salesforce partnership ramps up some new opportunities that maybe weren't done on your plate before. What's the plan for headcount, Maybe very specifically in the go to market team and sort of what you're expanding there. But even if you zoom out from there on the other support roles and maybe more broadly, How are you thinking about headcount heading into 2024?

Speaker 5

I can talk more at a high level, Matt, I may be not going into too much specifics as we're not trying to talk too much about 2024 right now and if RB wants to chime in on where he might see Some of that on the go to market side. I think what you can expect to see is a very similar level of investment from an employee standpoint as you're going to see in 2023, Maybe not as many, but very close. We feel like we've got a lot of momentum in the business. We want to keep investing, especially on the R and D and the go to market side. And so I don't think you'll see a significant change in the level of investment in the business as it relates to the number of employees that we're adding Next year versus this year.

Speaker 4

I just underline the consistency. Our go to market strategy is working and we're going to add In some of these places where we just see outsized return opportunities, it's happening across all parts of our business, but Midmark and Enterprise certainly are the ones that have been growing the fastest. And then there's going to be continued opportunities to make sure that we're Driving through these premium modules through our customers and that's probably some combination of just thinking about solution engineers and our customer success managers. But again, I'd highlight that these things are all going to be very consistent with what we've done before. And so no surprises for all of you in the way that we grow our business.

Speaker 12

Very helpful. Thank you.

Operator

Our next question comes from the line of Clark Jefferies with Piper Sandler. Please go ahead.

Speaker 13

Hello. Thank you for taking the question. Just one from me. Joe, you had mentioned a few $1,000,000 Better in terms of expectation of churn in that low end cohort. Just wanted to ask At this point, I know that the full year is derisked by that number still going to euro, but any update on the rhyme or reason for why Customers churn or don't in that segment, any change in the last 90 days in terms of the net new funnel there if there still is one active.

Speaker 13

Just any color on kind of that segment because that does seem like some amount of swing factor in the end result when we get to Q4.

Speaker 5

Yes, Clark, thanks for the question there. So first of all, on the net new, there's no new customers coming in into that part of the funnel. So if you looked at the new pricing and the way we set our lowest There's no customers that are going to come into that part of the business. And I think that was one of the main reasons we decided to make the pricing changes we did A year ago, as we identified the part of the market and the customers that weren't just as efficient and as strong as the rest of our business. And so that's why we Kind of made the pricing change.

Speaker 5

As far as why some of those customers haven't turned out as fast, I mean, I think it can be a combination of things, right? Some of these customers, They might have went out in the market and realized for the value that they were getting, even though they didn't have as many resources on the accounts, it was still the best product to market, right? And so, okay, Maybe it's a little bit more expensive than I thought and maybe I'm not getting the amount of support that I had before, but versus what else is in the market, it's probably still a pretty good value for them. And so That's probably one of the main drivers that they're still sticking around. And I don't know if RB has any other color on what he's seen from the success team on these customers.

Speaker 4

Yes. I'd say no change in behavior or actions that we've been taking with those groups. I think some of this is also just timing, right? We've seen this to be A very tumultuous group, which is why we forecasted it the way we have and why we've moved away from that part of the business. And so some of this is just The timing of it, but I think the way that we set up the model and built the forecast, we've done it in a way that can provide predictability For our investors, so we feel good about the strategy and the outlook for everybody.

Speaker 1

Perfect. Thank you very much.

Operator

Our final question comes from the line of Nicholas Zangler with Stephens Inc. Please go ahead.

Speaker 14

Hey, guys. Thanks for getting me on. I'll note Papa John's is the pizza delivery choice in my household as well. Obviously, some great results here. And I just wanted to parse this out, but given the guide, I think what you're suggesting The new ARR that was generated in 3Q, that incremental ARR, it's actually expected to outpace The level of new wins that you may be expecting in 4Q, I think typically 4Q is the strongest quarter for Some of these incremental ARR wins.

Speaker 14

So do I have this right? And if so, any reason to suggest that you see superior strength in 3Q on the new ARR win front versus 4Q.

Speaker 5

Yes. So I think, Nicholas, Great to have you on the team and really excited to talk with you today and going forward. I think if you were to Back out the net new ARR that we added in Q3 from the Tagger acquisition and we've kind of given you some of the numbers to calculate that. Then and then you compare that to Q4. Q4 will be bigger than close will be coming larger than Q3, I think it's just the Tagger piece that you're seeing in Q3 that is probably throwing off your math.

Speaker 14

Got it. Helpful. And then I do want to hit on the sales force partnership just because it's so important here. But Another 154 accounts shifting over. That's right.

Speaker 14

I think you're at 780 now of what I would assume is around 4,000 Social Studio accounts, so still suggest there's a ton of room left, maybe 3,200 incremental targets. From what I understand, These contracts that exist on that side, as they expire, they're nonrenewable, even though the product doesn't go dark until November of next year. These holdouts that are left over there, they're running out of time. So given that, should we actually start to see an acceleration, A pretty significant acceleration in the pace of these clients migrating over to Sprout Social over the next 12 months. Just any reason to suggest otherwise, given that assumption for maybe acceleration going forward?

Speaker 4

Yes. Thanks for your question, Nick. In terms of the opportunity, I think you're right in the way that you're framing it here. We've got about a year left. From what we've seen, they're not renewable.

Speaker 4

We don't control those contracts though, but we have seen the same thing that you mentioned. We are still seeing new accounts and new deals that we had not seen before coming up. So there's still customers that are on it. In terms of the opportunity, we feel great about what's in front of us here today. And we feel like, As we mentioned in the prepared remarks as well, we'll continue to see really good ARR opportunities from those as well as we move forward.

Speaker 4

But I don't think I'd take the next step of forecasting out any of those numbers, but we feel great about the opportunity in front of us and our position to win those accounts.

Speaker 1

Much appreciated. Thanks, guys.

Speaker 5

Thank you.

Operator

I would now like to turn the call over to Justin Howard for closing remarks.

Speaker 2

Thank you very much. Thank you all for all the time. I'll keep this really short because I know everyone's got a very busy night. But we appreciate the time. We appreciate the questions.

Speaker 2

We're looking forward to follow-up conversations, spending more time with all of you over the coming weeks. And just want to close with recognition for our team doing a remarkable job and looking forward to sharing lots more with you next quarter. Thank you all very much.

Operator

I'd like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call and you may now disconnect.

Powered by Quartr
Earnings Conference Call
Sprout Social Q3 2023
00:00 / 00:00