Sprout Social, Inc

Please stand by. We're about to begin. Good day, everyone, and welcome to Sprout Social's fourth quarter 2021 earnings conference call. Just a quick reminder, today's call is being recorded. After today's prepared remarks, we will have a question and answer session. To ask a question, please press star 1 at this time, at that time. And now at this time, I'll turn things over to Mr. Jason Reckle, head of investor relations. Mr. Reckle, please go ahead. Thank you, Operator. Welcome to Sprout Social's fourth quarter 2020-21 earnings call. We'll be discussing the results announced in our press release issued after market closed 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 Preto, and President, Ryan Barretta. 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. Board-looking statements include, among others, statements concerning financial and business trends, our expected future business and financial performance and financial condition, performance against our multi-year financial framework, our market size and opportunity, our plans and objectives for future operations, growth, initiatives, or strategies, our guidance for the first quarter of 2022 and the full year 2022, and can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will. These statements reflect our views as of today only, shouldn't be relied upon as representing our views at any subsequent date, and we don't undertake any duty to update these statements. Board-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially. For discussion of the risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K for the fiscal year ended December 31st, 2021, to be filed with the Securities and Exchange Commission, as well as any future quarterly and current reports that we file with the SEC. During the call, we'll discuss non-GAAP financial measures which aren't prepared in accordance with generally accepted accounting principles. Definitions of these non-GAAP financial measures, along with reconciliation to the most directly comparable GAAP financial measures, are included in our earnings press release, which has been furnished to the SEC and is available on our website at investors.sproutssocial.com. And with that, let me turn the call over to Justin. Thank you, Jason, and good afternoon, everyone. Thank you for joining us. We're very pleased to report a fantastic conclusion to a remarkable year for our company. Our teams continue to execute at a high level, and our opportunity in 2022 is clear. As always, we appreciate your ongoing support and partnership as we forge towards leadership in the $100 billion market opportunity ahead. I plan to outline a few topics that stood out from the quarter and map to our investment priorities for 2022 before turning the call over to Ryan with additional detail and Joe for financials. We're pleased to have delivered greater than 40% revenue in ARR growth in 2021 with efficiency handily outperforming the Rule of 40 benchmark. Our opportunity is fundamentally driven by the secular emergence of social media management, our unique go-to-market strategy, and the differentiation of our technology platform. We're seeing great progress across all segments of our market with our focused investments in the mid-market enterprise leading to our strongest quarter as a public company. We shattered many of our own records and growth milestones during Q4, including a new high watermark for net dollar retention and a record met new ARR. We again added a record number of customers contributing more than 10,000 in ARR, up 56% year over year. again added a record number of customers contributing more than $50,000 in ARR, up 91% year-over-year. And we're very pleased to inform you of our first customer above the $1 million ACB threshold. Building on the recent free cash flow inflection in our business, the straight line from ARR growth to Billings growth to RPO growth outlines an acceleration in the growth and commitment customers are making to social. These fantastic growth numbers and many of the financials that you'll hear from Joe underscore a clear trend. Customers are investing in Sprout more meaningfully and for longer because social has emerged as mission-critical, successful outcomes in the next evolution of business. For this reason, our customers, large and small, are expanding both their investments and use cases for social across their organizations as social becomes a preferred communication channel for global consumers. The 2021 Gartner Digital Marketing Survey found social marketing to be the number one most effective channel of the purchase funnel for brand awareness and for conversion to sales. These findings, along with many similar studies, reinforce a generational change that requires replatforming of the enterprise tech stack. When we started as a company, social didn't even really have a seat at the table. Now social media leaders have executive roles, business strategy and social media strategy can't be compartmentalized, and the entire customer journey exists on social. This means our role in the market has expanded dramatically, and our opportunity with customers of all sizes continues to grow as social becomes even more mission critical. It's why we believe our opportunity is growing, as customers harness the power and utility of social across an ever-expanding set of use cases. We're making investments across the business to capitalize on this opportunity, but to fundamentally extend the foundation of our platform and to double down on our product strategy, we're planning to make our largest ever incremental R&D investment in 2022. This will represent a step function change from 2021, and we believe it will solidify our product and market leadership at a time when the industry is ours to execute against. We believe the barriers to entry in social are risen substantially, the competitive set is diminishing, and our advantages are compounding all at the right time. From a product perspective, we're expanding our capabilities to democratize social for new stakeholders and building deeper functionality for the most sophisticated users. The core investments in our platform are more critical than ever. We'll make the product even easier to adopt and use while also making meaningful advancements in social listening, premium analytics, social advocacy, and social customer care. We'll also be making strategic platform investments in social commerce, messaging, publishing, and reporting. The expansion of these capabilities is designed to create even more value for customers by providing users with the tools they need to excel in their specific workflow spread horizontally across an organization, and empower the teams with the collaboration required to truly harness the power of social. Building on our product leadership, we're also planning to capitalize on multiple strategic leadership opportunities. The recent addition of WooCommerce to our social commerce ecosystem, the recent addition of Yelp to our reviews capabilities, and advancements in unified messaging with WhatsApp are a few examples. We're also deepening the functionality and data sources within our most sophisticated products like listening and analytics that we believe will make Sprout the single source of truth for social data. We expect to hear new partner announcements over the course of the next quarter or two as well. The technical foundation that we've laid to this point and the additive plan investments to our roadmap in 2022 have never been more compelling. We believe we have a true and unique opportunity to define our category both as an overall platform and in each key product area to become the horizontal social system of record, intelligence, and action for businesses of all sizes in all industries. Beyond product and technology, we're also redefining the way we work. We're in the midst of the largest workplace shift of our generation, and we intend to make Sprout a career destination across disciplines and an incredible place to be a customer at the same time productivity and execution is one of the things i'm most proud of as a leader of our company rain or shine this team just delivers we challenge ourselves with an ever higher bar we do the work and we constantly seek to get better the resulting honors from workplace awards like glassdoor's best places to work in 2022 battery ventures 25 highest rated public cloud companies to work for where we ranked number three and a best workplace for parents by Great Place to Work empowers us to remain thoughtful, deliberate, and intentional with the strategy. We're a different kind of company, and we're excited to create value for our employees, our customers, our communities, and you, our stakeholders in 2022 and beyond. With that, I'll turn the call over to Ryan.

Thanks, Justin. Our collective teams really stepped up during Q4 and delivered a performance I'm incredibly proud of. With strong momentum in the business, the most exciting R&D roadmap we've ever had, and continued acceleration in our go-to-market hiring, we remain confident in our continued success in 2022. We spent the better part of last year speaking with you about our marketing focus in the mid-market and enterprise, our international sales and marketing investments, the expanding use cases of our platform, and the rising importance of the product-led sales motion. As these trends carry into this year, we expect to see both the value of an expanded platform with enhanced premium capabilities and the continuation of a social commerce inflection point. Most importantly, we plan to build on the compounding scale with now more than 31,000 customers, as well as our product leadership with industry-leading ratings from G2, TrustRadius, and others. Because we're product-led, we know that the incredibly exciting innovation that our R&D teams are working on will create tremendous value for customers and further enhance our competitive advantages. Our marketing team has doubled down on the content, strategies, and campaigns that needed to target the most sophisticated buyers. We're building on our foundation of success here with better account-based marketing, the recent beta launch of a dedicated Sprout community for practitioners, and are growing our strategic accounts team to bolster outbound sales. Internationally, we continue to migrate high-performing content to local languages and to localize our messaging. Our EMEA team continues to overdeliver. The recent addition of our APAC GM will help scale that business in 2022, and our recently hired LAC team leader will help us execute on our international playbook in that region. As Justin highlighted, the use cases for Sprout have continued to evolve, from social publishing and marketing to social customer care, customer success, business intelligence, advocacy, product intelligence, sales, comms, investor relations, and more. Social is a pillar for how business is done in all these functional areas, and social commerce sits at the intersection of each. Commerce pulls the entire customer journey into social, demanding a platform like Sprout to make social marketing more measurable, social customer care more effective, and to deliver more accurate customer sales, product, and community feedback. Businesses are also being forced to meet the customer at the initial point of product discovery. So it's no coincidence that a report from Accenture last month estimated that sales made through social commerce will triple by 2025 to more than $1.2 trillion. The investment in our product is designed to meet user demands head-on. The expansion of our platform will enable us to create value for specific subsets of enterprise users within each use case. But because we built a platform with tightly integrated capabilities, we can address any or all of these demands with a unified solution. It's what makes our go-to-market motion so powerful. and it's why we remain the industry's highest-rated technology platform across major categories in each market segment, from SMB up through the enterprise, according to thousands of customer reviews from G2 and others. We're taking the friction out of customer adoption and accelerating our product-led sales motion to deliver an even more efficient go-to-market model, and we're doing it at scale. While our current execution remains incredibly strong, our enterprise and mid-market teams dropped the mic during Q4. Our investments in sales capacity, onboarding, and success have been well aligned to the inbound customer demand signals we've seen. The combination of increasing use cases, expanding seat counts, rising premium module attach rates, and steady expansion at market are each massive opportunities for us to execute against in our ACV growth strategy. In this quarter, the large customer growth trends jumped off the page. Social has become a team sport, and we believe we're the software best equipped to help these cross-functional teams win. A sample of the amazing brands that grew with us this quarter includes Square, Omnicom Media Group, Johnson & Johnson Medical Devices, Illumina, Marsh McLennan, Archer Daniels Midland, The Container Store, Rackspace, Red Hat, Agrium, the United Nations, and the YMCA. Now shifting to a couple of Sprout customer stories. We have the opportunity to expand our relationship this quarter with Atlassian. Kristen Roth, social media manager of Atlassian, shared, we needed to consolidate point solutions and centralize our social media strategy in a unified platform. The smart inbox has been game-changing to our social customer care team to improve engagement across all social handles. As the number of Atlassian brands and footprint across markets has continued to grow, we've increasingly leaned on social listening for brand and competitive health. And consolidating these efforts with Spread's platform will improve collaboration across teams and streamline and up-level our reporting capabilities to ensure we're fully optimizing our social strategy. Another incredible customer highlight from this past quarter was Dong, the leader in revenue intelligence. Udi Ledergore, the Chief Marketing Officer at Gong, shared, we're a power user of Spread's publishing and reporting capabilities to track campaign performance and engagement across different types of social content. Spread's premium analytics offering helps us deeply understand our content trends and optimize custom reporting to uncover actionable insights for our business. Using Sprout, we experienced meaningful growth in engagement and followers over the course of 2021, unlocking even greater opportunities to advance the business impact of our social strategy in 2022. To bring it all together, we had another great quarter to cap off a fantastic year. I'm so energized by this special team and the opportunity to deliver value for our customers during a transformational time. New technology advancements in our platform, new stakeholders in social, and new strategic partnerships position our company for even more success in 2022. And with that, I'll turn it over to Joe to run through the financials. Joe?

Thanks, Ryan. I'll now walk you through our fourth quarter results in detail before moving on to guidance for the first quarter and full year 2022. We're very pleased to deliver greater than 40% revenue in ARR growth in 2021 with a 50-sheet approaching the Rule of 50 benchmark. Revenue for the fourth quarter was $53.3 million, representing 43% year-over-year growth. ARR exiting Q4 was $224.2 million, a 42% year-over-year. We're pleased to see very healthy new business as well as strong retention and expansion across our customer base. We added 1,057 net new customers in Q4 to finish the quarter with 31,762 customers, up 90% year over year. As always, we remain focused on high-quality revenue yield from our new customer cohorts, not the absolute volume of net addition. Our go-to-market efforts increasingly leaned into mid-market and enterprise customers this quarter. Our inbound demand remains very strong. We believe this gives us the ability to optimize for revenue yield while also delivering very healthy quarterly customer net addition, consistent with recent trends for the foreseeable future. The number of customers contributing more than $10,000 in ARR reached 4,917. Up with our expansion efforts, new use cases and a very strong year-end uptick in our premium module sales our ACB growth was again very strong at 90% year-over-year, surpassing $7,000 for the first time and extending the rapid growth we discussed coming out of Q3. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to expenses, operating results, and share count are on a non-GAAP basis to exclude stock-based compensation expense Now, reconcile to our gap results in the earnings pressure rate that was just issued before this call. In Q4, gross profit was $40.3 million, representing a gross margin of 75.7%. This is up 110 basis points compared to gross margin of 74.6% a year ago. Sales and marketing expenses for Q4 were $21.0 million, worth 39% of revenue, down from 42% a year ago. We're continuing to accelerate our pace of hiring across both our sales and marketing teams with an emphasis on content marketing and SEO on the market. We were fortunate to hire aggressively during Q4, which positions our go-to-market teams well entering the year. But even as total expense growth excited for the sixth quarter in a row, we were again able to further improve year-over-year efficiency. Research and development expenses for Q4 were 10.9 million, or 20% of revenue, consistent with 20% a year ago. Our R&D headcount and absolute expenses again grew substantially this quarter as we accelerated hiring to an expanding set of product opportunities. We were planning our largest ever incremental investment in R&D in 2022, and as Justin said, we expect this will extend our market leadership and further differentiate ourselves in the market. General and administrative expenses for Q4 were $11.0 million, or 21% of the revenue, down from 22% a year ago. We expect our G&A expenses to increase in 2022 as we enter a more normalized spending environment, but to decrease as a percentage of revenue. Non-GAAP operating loss for Q4 was $2.6 million, or a negative 4.8% operating margin. This is an improvement of 400 basis points compared with a negative 8.8% operating margin a year ago. We are pleased with the improving efficiency as we scale and we surpass our expectations due to revenue outperformance. Non-get net loss for Q4 is 2.7 million for net loss of 5 cents per share based on 54.1 million weighted average shares of common stock outstanding. with a net loss of $3.4 million and $0.06 per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q4 with $176.9 million in cash, cash equivalents, and marketable securities, up from $175.0 million at the end of Q3 2021. The total revenue at the end of the quarter was $69.4 million, a record sequential increase in the fastest year-over-year billings growth rate in our history. which could lead to greater Q4 seasonality in years ahead for this metric. Looking at those, our billed and unbilled contracts are remaining performance obligations, or RPO, of approximately $107.8 million, up from $87.2 million as of Q3 2021, and up 67% year-over-year. We expect to recognize approximately 82%, or $88.2 million, of total RPO as revenue over the next 12 months. Operating cash flow in Q4 was positive $2.5 million compared to negative $0.2 million a year ago. Free cash flow was positive $2.2 million in Q4 for a positive 4% free cash flow margin compared to a negative $2.0 million and a negative 5% free cash flow margin a year ago. For the full year 2021, free cash flow was $13.9 million or 7% free cash flow margin compared to negative 12% free cash flow margin in 2020. In addition to improving efficiency, the ongoing shift to annual and multi-year contracts is having a positive impact on our free cash flow as we grow. In 2021, our overall dollar-based net retention rate was 112%, an improvement of 200 basis points compared with 110% in each of the past two years. Our dollar-based net retention rate excluding SMB customers was 118% in 2021 compared with 117% in 2020. Shifting a mix of annual contracts and investments we've made in onboarding and customer success are structurally improving our expansion rates. We believe there's a strong multi-year runway to further expand dollar-based net retention from current levels. Shifting the formal guidance. For the first quarter, quarter of fiscal 2022, we expect revenue in the range of 56.1 to 56.2 million or a growth rate of 38% at the midpoint. We expect non-GAAP operating loss in the range of 2.2 million to 1.8 million. This represents an anticipated operating margin of negative 3.6% and improvement of more than 200 basis points year over year. We expect a non-GAAP net loss per share between 5 cents and 4 cents summing approximately 54.2 million weighted average basic shares of common stock outstanding. For the full year fiscal 2022, we expect total revenue in the range of $249 million to $250 million. This is an expected overall reported growth rate of 33%, which we believe positions us favorably against our medium-term growth goal. For 2022, we expect non-GAAP operating loss in the range of $7.4 million to $6.0 million. This implies annual non-GAAP operating margin expansion of between 40 basis points and 100 basis points, paving with our medium-term goals and highlighting the efficiency of our financial model. We're pleased to forecast margin expansion after more than 1,200 basis points of margin expansion in 2021 as we accelerate the pace of investment across many business units. We expect that we'll be aggressive with hiring during the first half of 2022. In our product-led business model, we believe this positions us well to create even stronger value for our customers. We expect a non-gap net loss per share between 14 cents and 13 cents, summing approximately 54.5 million weighted average basic shares of common stock outstanding. For your gap modeling purposes, we expect stock-based compensation to trend in the mid to high teens as a percentage of revenue consistent with fast industry benchmarking. In summary, our Q4 financial performance was indicative of a rising strategic emphasis our customers are placing on social. Our balance sheet and pre-cash flow strength provide us with future optionality, inbound demand remains strong, and our sales execution has been crisp. These strengths empower us to make meaningful investments in technology and go to market, which we believe will position Sprout to pull away and forge leadership in the $100 billion market opportunity ahead. With that, Justin, Ryan, and I are happy to take your questions. Operator?