Sprout Social, Inc

Q2 2022 Earnings Conference Call

8/2/2022

spk12: Hello, and thank you for standing by. My name is Joanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprout Social Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, Press star one again. Thank you. Jason Rackel, Head of Investor Relations and Corporate Development. Please go ahead.
spk06: Thank you, Operator. Welcome to Sprout Social's second quarter 2022 earnings call. We'll be discussing the results announced in our press release issued after the market closed today, and I've also released an updated investor presentation, which can be found on our website. With me are Sprout Social's CEO, Justin Howard, CFO, Joe DelPretto, and President Ryan Barreto. Today's call will contain forward-looking statements which are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among others, statements concerning financial, business, and customer 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, products, investments, initiatives, or strategies, and our guidance for the third 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, 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 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, 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 today, 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 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.sproutsocial.com. And with that, let me turn the call over to Justin.
spk07: Justin? Thank you, Jason, and good afternoon, everyone. Thank you for joining us. I am pleased to be in the fortunate position today to again raise our annual growth and margin goals coming out of a strong quarter. We surpassed a quarter billion dollars of ARR during Q2 at a faster year over year growth rate than when we surpassed $100 million of ARR. This is the output of strong execution across our teams, particularly against the backdrop of a dynamic world around us. Our business model and culture are perfectly aligned to help our customers navigate a changing world Our fundamental growth drivers are strengthening as business use cases of social continue to increase in criticality, and our world-class team is leveling up every quarter. We believe we've positioned Sprout to thrive now and for many years into the future. I'm proud of our execution during Q2. I'm pleased to see the two-year stacked growth rate of ARR accelerate for the sixth consecutive quarter and to also deliver positive free cash flow for the sixth consecutive quarter. The consistency of this performance and durability of our growth this quarter was driven by outsized contributions from our mid-market and enterprise segments. The number of customers contributing more than $10,000 in ARR grew 47% year over year, and our number of customers contributing more than $50,000 in ARR grew 88% year over year. And even those numbers stop short of the full picture. The ACVs of new business lands grew more than 30% year over year, And we delivered our largest ever new customer land for social customer care. We also delivered more than 25 new logos from our Salesforce partnership, which has begun to build momentum into what we expect will be a strong second half of the year. Given the heightened level of uncertainty throughout the financial markets, I want to now give a more granular view into the linearity of our quarter and what we're expecting for the balance of the year. Net new ARR in the months of April and May was relatively consistent with our healthy trajectory exiting Q1 across new business retention and growth. Our month of June, however, was one of our strongest ever. Retention and expansion trend lines stayed consistent with April and May, and we delivered a record new business month, including incredibly strong large deal momentum in the enterprise. As we look ahead, we currently see steady trends within customer retention and expansion as we remain mission critical to our customer's workflow. As our investments in mid-market enterprise sales capacity lean into strong new business demand, and many of our partner and product initiatives begin to impact ARR, we believe we are well positioned to deliver consistently healthy ARR growth into 2023. Because we have always been thoughtful and deliberate about our hiring and pace of investment, we are also currently in the fortunate position not to backpedal on our growth plans, And given the momentum of our strong pipeline, we plan to continue hiring while also keeping a close eye on market conditions and the efficiency of those investments. We believe this positions us to perform well relative to our near-term margin expansion commitments and to further distance ourselves from our competitors and to find further category leadership. Shifting quickly to second half priorities. Entering the year, we outlined an ambitious R&D plan that we believe puts Sprout in a position to lead our markets. The scope of this investment has both high profile and subtle impacts on our customer value proposition. In late May, we joined the TikTok Marketing Partner Program and introduced a new first of its kind TikTok integration, giving customers the ability to build TikTok into their workflow across publishing, engagement, and analytics in Sprout. Today, we announced that support for Instagram Reels went live across our entire customer base, And recently, social listening support for comment moderation on LinkedIn also went live, two highly requested features from our customers. Last month, our integration with the Salesforce Marketing Intelligence Cloud went live, and we expect that our enhanced integration with Salesforce Service Cloud will go live later this summer. Our strategic platform investments in social commerce, messaging, publishing, and reporting are making great progress, and our roadmap and social customer care has been further prioritized. We are working on further integrations with new partners and have multiple opportunities to go deeper in commerce, messaging, and listening. Our work here aligns well both to our product roadmap and to the competitive modes that are strengthening around Sprout as we grow. We believe the combination of our customer scale, our fully unified social media management platform, and the breadth and depth of our network and partner integrations are significant and compounding competitive advantages, especially now. As you'll hear Ryan discuss in greater detail, we believe the market is increasingly shifting in our direction. This comment isn't limited to customers and partners. During Q2, we were fortunate to be recognized as one of the best workplaces in Chicago by Great Place to Work, and we were certified as a great place to work for the fourth consecutive year. The ongoing consistency of our execution and steady demand trend gives us confidence to continue to thoughtfully build our company with amazing people and leaders. I'm incredibly grateful to our people, and we are collectively excited to deliver value to all of our stakeholders in 2022 and beyond. With that, I'll turn the call over to Ryan.
spk18: Thanks, Justin. This moment provides us with a big opportunity to distance ourselves from our competitors and our peers. I'm incredibly proud of our performance from our teams, and I'm even more excited for what's ahead as we execute and create more momentum from our roadmap, partnerships, and go-to-market strategy. We aren't distracted by the business externalities around us. We're focused on delivering more value to our customers than is expected of us and in being a joy to do business with. We believe this position sprout to move ahead as a category-defining company. Justin highlighted the great work of our product teams, which has our marketing team excited to generate even greater top-of-funnel pipeline in the periods ahead. The TikTok partnership launched last quarter with clear validation of our market leadership. the speed at which our product teams work, and the reach that our marketing teams can deliver. The reception of the Sprout community, our new network for practitioners, which launched during Q1, has been incredible to witness, with thousands of engaged customers now actively sharing ideas and best practices. We plan to expand the Sprout community later this year to all practitioners and brands, Sprout customer or not, which will be even more impactful to those looking to up-level and refine their skills in this dynamic role. Speaking of practitioners, we talk with you frequently about the organic growth of our category and the fact that social is increasingly a key sport. According to the LinkedIn 2022 Marketing Jobs Report, the role of social media marketing specialist is the single most in demand occupation within North American marketing teams. This is a direct result of the rising complexity and expanding use cases of social and speaks to how mission critical it is for brands to meet their customers where they are. In a world where ad budgets and advertising ROI are increasingly being scrutinized, organic social has become more important and more impactful than ever before. Canva, which is on a mission to empower everyone in the world to design anything and publish anywhere, highlights the power of this reality as they expanded with Sprout this quarter. Said Canva, our community is at the heart of everything we do. Given our rapidly growing global community, The use of social listening has been key to engaging and fostering authentic conversations with them across social channels. We've been able to proactively engage with them to collect valuable feedback and strengthen brand love. Sprout's all-in-one platform has helped us scale our community engagement and build strong, lasting connections. Shifting to quarterly performance, what stood out to me the most was a greater than 30% ACV growth in new business lands. Our marketing investments have been targeting more sophisticated buyers and personas in the enterprise. Our sales hiring has focused on mid-market and enterprise and into the explosive expansion of social use cases. We know that the larger our customers land, the faster and the larger they grow with us. But especially against the backdrop of the current global climate, larger initial deal sizes will speak to how fundamentally mission critical it is for brands to get social right. Our product-led motion is perfectly suited to seed and grow with customers big and small as they become increasingly sophisticated users of our platform. As Justin referenced earlier, more than 25 new logos this quarter came from our Salesforce partnership. As we go deeper with Salesforce Social Studio customers, we've learned several key things. First, these customers are considerably larger than our average customer. Second, pipeline momentum is clearly building for a very strong second half of the year and very strong 2023. And third, we believe our deeper technical integration with Service Cloud will unlock even more opportunity as we create value for our customers and reinforce the value of their existing investments in the Salesforce tech stack. I'm incredibly excited to present at Dreamforce later this quarter where Sprout and Salesforce will build on our partnership together and further articulate our vision for social media management. One of the first customers we migrated over was Gordon Food Service, the largest privately owned and family managed food service distributor in North America. Sprout's strong team and close partnership with Salesforce made it easy for us to migrate from social studio this quarter to Kristen Johnson, digital campaign supervisor at Gordon Food Service. It's incredibly important that we have a centralized social media management platform that is easy to use for different teams across our organizations. Sprout's usability and analytics dashboards foster confidence that we have the right partner to execute our social strategy from publishing to listening. We hope the technology and team behind Sprout will help us elevate our Good Finds by Gordon program, created to find meaningful food solutions that not only taste good, but do good too, and other sustainability initiatives as we lead to choose food that can change our world. The broader group of brands that grew with Sprout this quarter is a cross-section of leading franchises across all segments of the economy. This speaks to both the magnitude of our opportunity and the importance of organic social and includes BT Group, Hertz, Afterpay, Decker's Footwear, Sunoco, Virgin Red, HP, Duolingo, Douglas Elliman, Athena Health, H.J. Heinz, Block, Porter Airlines, the University of Virginia, and close to this group's heart, Robert Baird. I'm proud of what our teams have delivered through the first half of 2022, but I'm even more inspired by what I know we can accomplish in the quarters ahead. Our partnerships are building momentum, our teams are up-leveling, and new product enhancements are delivering incremental value to our customers. We surpassed a quarter billion dollars of ARR during Q2 at a faster growth rate than when we surpassed 100 million of ARR. Our powerful and unified platform, disruptive inbound trial model, and world-class teams give me confidence we'll continue to scale above our next growth milestones even faster. And with that, I'll turn it over to Joe to run through the financials. Joe?
spk15: Thanks, Ryan. I'll now walk you through our second quarter results in detail before moving on to guidance for the third quarter and full year 2022. We're pleased to again deliver very strong growth, positive free cash flow, and to raise our expectations for the year, underscoring the mission criticality of organic social media management. Revenue for the second quarter was $61.4 million, representing 37% year-over-year growth. ARR exiting Q2 was $256.1 million, up 35% year-over-year. We're very pleased that the two-year stack growth rate of ARR accelerated for now six consecutive quarters. which we believe underscores the durability of our growth momentum. Our enterprise-made business and pipeline further accelerated during the quarter, and our inbound volume remained strong, contributing to our expectation to deliver consistently strong ARR growth. We believe this positions us to continue to deliver durable and efficient growth ahead of our medium-term goals. We added 820 net new customers in Q2 to finish the quarter with 33,620 customers up 14% year-over-year. Our net additions were below recent trends during Q2, primarily because we experienced larger-than-normal deal sizes in mid-market enterprise new business, which resulted in more than 30% year-over-year growth in new business ACV. We've talked about managing the business to ARR, and this outsized new business ACV growth meant that we required fewer logos to achieve our goals that had previously been the case. While this trend could continue, We also believe we have strong visibility into new business momentum and healthy new customer additions for the foreseeable future as our sales capacity continues to increase. The number of customers contributing more than $10,000 in ARR reached 5,800, up 47% from a year ago. The number of customers contributing more than $50,000 in ARR reached 755, up 88% from a year ago. Q2 ACV growth of 19% year-over-year, was driven primarily by larger initial deal sizes. We believe there are several factors that will contribute to sustained medium-term ACV growth. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share current are on a non-GAAP basis to exclude stock-based compensation expense and reconcile to our GAAP results in the earnings press release that was just issued before this call. In Q2, gross profit was $47.1 million, representing a gross margin of 76.6%. This is up 100 basis points compared to gross margin of 75.6% a year ago, and is again our highest gross margin in five years as we scale into our financial model. Sales and marketing expenses for Q2 were $24.4 million, or 40% of revenue, up from 38% a year ago. We're fortunate to hire well throughout the quarter and continue to make meaningful investments in mid-market enterprise sales capacity to match the current demand signal that we see. Research and development expenses for Q2 were $12.3 million, or 20% of revenue, up from 18% a year ago. Our headcount and absolute expenses again grew substantially this quarter as we continue the trajectory of transforming R&D investments. We believe we're in the process of extending our market leadership and positioning Sprout as a category-defining software company. General and administrative expenses for Q2 were $12.2 million, or 20% of revenue, up slightly from 90% a year ago. We continue to 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 on an annual basis. Non-GAAP operating loss for Q2 was $1.9 million for a negative 3.0 operating margin. We are pleased with the ongoing efficiency improvements as we scale and we exceeded our expectations this quarter due to revenue outperformance. Non-GAAP net loss for Q2 was 1.9 million for net loss of 4 cents per share based on 54.5 million weighted average shares of common stock outstanding compared to net income of 0.0 million and 0 cents per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q2 with 181.7 million in cash cash equivalents, and market securities, up from $180.8 million at the end of Q1. Deferred revenue at the end of the quarter was $80.2 million, a strong sequential increase. We continue to progress nicely to our high watermark anticipated in Q4. Again, both our billed and unbilled contracts, our remaining performance obligations, or RPO, total approximately $127.6 million, up from $115.9 million as in Q1, and up 57% in the over year. We expect to recognize approximately 82% or $104.2 million of the RPO as revenue over the next 12 months. Operating cash flow in Q2 was positive $1.3 million compared to $4.4 million a year ago. Pre-cash flow was positive $0.7 million for a positive 1% pre-cash flow margin ahead of our expectations.
spk08: Shifting to formal guidance.
spk15: For the third quarter of fiscal 2022, we expect revenue in the range of 64.9 to 65.0 million or growth rate of greater than 32%. We expect non-GAAP operating loss in the range of 2.4 million to 2.0 million. This represents an anticipated operating margin of negative 3.4%. We expect a non-GAAP net loss per share between 4 cents and 3 cents, assuming approximately 54.5 million weighted average basic shares of common stock outstanding. For the full year of fiscal 2022, we now expect total revenue in the range of $253.9 million to $250.0 million. This is an expected overall reported growth rate of more than 35%, up roughly 100 basis points from our prior expected growth rate and tracking well against our medium-term goals. For 2022, we now expect non-GAAP operating loss in the range of $5.9 million to $5.7 million. This implies annual non-GAAP operating margin expansion of roughly 110 basis points to 120 basis points, up from a prior margin expansion range of 90 basis points to 110 basis points. We're pleased to forecast faster revenue growth with improved efficiency, even as we continue to make growth investments for our future. We expect a non-GAAP net loss per share between 11 cents and 10 cents, assuming approximately 54.5 million weighted average basic shares of common stock outstanding. In summary, our Q2 financial performance highlights the consistency of our execution and the rising strategic emphasis our customers are placing on social. Our balance sheet and pre-cash flow strength provide us with future optionality and our pipeline upmarket is robust. Even against the backdrop of a dynamic world around us, we believe we're poised to deliver consistent and efficient growth, which positions Sprout to pull away and forge leadership in the $100 billion market opportunity ahead. With that, Justin, Ryan, and I are happy to take any of your questions.
spk08: Operator?
spk12: At this time, I would like to remind everyone to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the lineup. Michael Turitz with KeyBank. Sir, your line is open.
spk14: Hey, guys. Congrats on good results in a tough environment. If I could just speak in my fundamental, and then one numbers question. On the fundamental side, maybe you could just talk about, we've seen some weakness, I would say, in digital marketing demand, including, say, in paid ads, which I know you're not in. But, you know, maybe in that more, there more broadly. How do you think that social media management, why does it seem to be holding up better? And then I would just add, maybe just if you could Give us a little bit more on those new logos from Salesforce. 25, great. What has the trend been there previously?
spk10: Yeah, sure.
spk07: Thank you for the question. I'll start with the first half of that question, then Ryan can jump in. In terms of the kind of the dynamic around paid and marketing spend, I think you know, as we've shared before, we don't participate in the advertising space. And so we've got a bit of isolation from the things happening in that part of the market. But in terms of how it flows through to how social media management has remained pretty resilient there, I think it largely comes down to the fact that it's separate functions, right? You know, on the one hand, you've got direct advertising with a very specific purpose and budget usually team around it. And on the other, you have very organic side of relationships between brands and their customers, whether that is simple evangelism on the customer side, if it's customer support, pre-sales, post-sales, or just general support or commentary back and forth between the brand and the customers. And so That side of it, I think, which is largely what this company was built around and where we focus with our customers, is going to remain consistent. It's going to remain important. It is as important as any other form of communication, and I think increasingly so. On the flip side of that, I think there are some organizations where the organic side of social is very much a hedge against anything that may be less productive on the advertising side. So where those channels might be a little more challenging that we've seen a few different times over the last handful of years. That organic channel to the extent that brands are earning and cultivating that community is one that's always going to be available to them with generally very positive returns and results. So for those two reasons, the side of social that we've focused on and that we primarily play for our customers, I think continues to be really strong, continues to be growing in importance. And I think that we're at the stage now where the parts of social that are not specific to advertising are very clearly something that is becoming part of workflows across the organization, not just in marketing. but through to customer service, sales support, et cetera. And I expect we'll see that continue for those reasons.
spk18: And I'll just tie on one last point on that one for you, Michael, and then I'll jump into the Salesforce piece. Agreed with everything Justin just shared. You know, more and more we're hearing from our customers, especially in this type of environment where, you know, they might be scrutinizing some of their paid spend or other more expensive areas of spend. The campaigns that they're running from a marketing perspective on social are very efficient. Their customers are there. They get real-time feedback. The data and the analytics that we provide help them be smarter in the campaigns that they're running. So that ends up being one of those value points for our customers. And again, the inbound model for us, those customers are coming in with these needs that they're looking to solve and identifying Sprout as the right solution to do it. So I think Those are all the reasons why we're seeing the resilience within our market. From a Salesforce perspective, continue to be really excited about the opportunity in front of us. We are still just getting started, as you can see with the logos we've closed. The trends that we've seen in those deals so far, one, we are getting great participation and interaction from the Salesforce team and intros into many of these customers. As we mentioned before, these customers are larger than our average deal size. They're falling in the 10K and 50K bucket. And then on top of that, which has been really exciting for the customers, is they're seeing a lot of innovation. They're seeing a lot of features, lots of parts of our product that they had on their wish list that weren't there in Social Studio that are in Sprout. And so even if I just think about what we've delivered in the last quarter, things like TikTok and Reels, great examples of innovation that have happened within our platform that they didn't have before and wouldn't have now. So we continue to see a lot of opportunity there and are excited about the relationship that we're developing.
spk08: Great. Thanks, guys. Thank you.
spk12: Your next question comes from the line of Ramo Lynch-Chow with Barclays. Sir, your line is open.
spk02: Hey, this is Frank Dunn from RIMO. Thanks for taking my question. Maybe more at a high level, how have you seen the resiliency of the product suite in prior recessions, and how has the business since evolved to be better suited for any potential downturn?
spk08: This is Justin.
spk07: I'll take that, and anyone else on the team can add some thoughts. If I heard the question correctly in terms of how the product itself and maybe indirectly the business have fared during previous challenging times. And I think that the resounding answer there is that we've seen both across the last couple of years and certainly across our history as a company that because we are serving a very fundamental and growing need for our customers because our platform does an incredible job of tying all of the necessary utility into one place. And given that it is a mission critical mode of communication for brands at this stage, I think we've really navigated just about anything that's thrown at us very well, current environment included. The product's role in that, I think, is... primarily around making sure that we are offering a well-rounded set of solutions that are really horizontal in their function. They're not specific to one very discrete objective within an organization and therefore have a lot of resiliency regardless of what an organization is going through. You know, for example, when COVID took its first kind of really tough pass throughout the world. One of the things that we saw was that businesses that were otherwise struggling were using social as pretty much the only or at least the primary way to stay connected with their audience and with their customers. In other scenarios where things are a little more steady state, They're able to shift their efforts into activities that are focused on growing the business, engaging with their customers in different and new ways, developing larger communities. We're starting to see businesses investing more in some of the more forward-looking functions of social, such as care, sales, et cetera. And so I think because we're providing just this really fundamental set of business needs through social channels, It's been something that rain or shine has a ton of value for our customers. It's something that remains very important and certainly very high on the list of things that are must-haves for a business at this point. And so we've fared very well through a handful of different conditions. And we expect that this year is not done throwing curveballs at us. but that we're very well positioned, just as we saw in Q2, to really continue to add a ton of value for our customers in those environments.
spk18: Maybe just add one point to that, too. Part of the way that the product is being architected is ensured that we don't have concentration in any specific point. The diversity that we've seen across verticals and industries and segments and the utility of that product has also been really important during difficult times because we've got such a wide remit of the types of companies and the types of use cases we can support.
spk08: Great. Thank you.
spk12: Your next question comes from the line of Elizabeth Porter with Morgan Stanley. Your line is open.
spk11: Great, thank you so much and congrats on the strong quarter. A benefit we hear about this Sprout platform is just a relatively fast time to implementation and the strong ROI. So just in the context of a potentially more scrutiny on IT spend, how are new customers in particular thinking about just the willingness to move over to Sprout at this point? Curious if that's coming up in conversations more as a benefit Just given the comments that we're hearing overall in the environment about longer deal cycles and that scrutiny on IT spend. Thank you.
spk18: Thanks, Elizabeth. Yeah, it is actually proven to be a really nice strength for us. Again, for our business today, over 90% of our revenue actually touches the product before they ever sign a contract. sign any commercial terms before they become a customer. And we continue to press on the modern way to evaluate and buys to actually trial the product first, to get your hands on the keyboard. And so for us, the conversations we're having with our customers is that we want to mitigate risk for you. We want to ensure that the Sprout solution is going to work perfectly for what you need. And you can actually get into the platform You can do the sophisticated parts that you need, whether it be analytics or listening or publishing or engaging with your customers and prove that it works. And the benefit of that for us, one, you start to prove that the use case is set. You get a chance to experience the technology. You also get a chance to interact with our incredible team, which is a huge value prop for us. But for us, it also means that you do part of the implementation during that trial. And so that is a huge part of the conversations that we have. Again, our sales cycle times around 35 days for a trial, 41 days for a lead, they've stayed pretty consistent through that. And the conversations we're having, again, because of the trial, have stayed pretty consistent from what we've historically seen. So we see it as a huge strength that we're leaning into.
spk07: Yeah. One other thing that I'll point to on that question is just the – The reality of the conversations on the customer side has been for some time pretty close to non-negotiable, meaning this isn't something when budgets start to get more scrutiny and start to get looked at or they're looking for areas to make cuts. This isn't typically one that's on the list for a company that's for a brand that's invested in social. you know, turning the lights out on this channel or introducing disruption into how effectively they're managing their communities on social is pretty detrimental, particularly if the business is facing a challenging time. And so, you know, there are certainly going to be exceptions to this, but given where we come from, the budget that we're coming from, the critical nature of the platform and the function that we serve within the organization,
spk11: um and the price points uh that we're selling to within the organizations i i think we're we're pretty well down the list of things that are on the chopping block great and then just as a follow-up i wanted to touch on the customer ads so from a total customer perspective the net new ads fell below a thousand for the first time in about seven quarters but clearly we're really seeing that strengthen the large customer cohorts So first just anything to call out with respect to demand trends from those large customers versus, you know, the smaller SMB customer segments, just trying to get the sense if there was any softness in that segment, just given some of the more macro sensitivity. Thanks.
spk07: Yeah. Yeah. Yeah. Um, yeah. So as you mentioned, you know, we're continuing to see the shift that really started kind of the middle of last year where our emphasis and, um, investment priorities have really become more focused on the mid-market enterprise. And we're seeing some mix shift in the customer base, not only in the new lands, but also in the top of the funnel and the people that we're targeting and swapping out some of the highest volume, lower end of the market opportunities with some of the bigger ones, which you're seeing in the, the momentum that we've gotten them in market, the enterprise that you're seeing in the 10 K and the 50 K deals. And so, you know, we'll, we'll, we'll, but continue to reinforce the idea that the quality of the revenue yield from our net ads is our primary focus. I do think that at the edges, when we think about the opportunities and logos at the lowest price points in the lowest parts of the market, we're definitely seeing some change in composition there toward the mid-market enterprise. Some of that intentional by nature of the areas that we're focusing in our investments. Some of that perhaps a result of some of the things happening in the world right now, but a healthy shift for us nonetheless, and one that we're going to continue to focus on the quality output of that revenue, and we're feeling really good about that.
spk08: Great. Thank you so much. You got it.
spk12: Your next question comes from the line of Arjun Bhatia with William Blair. Your line is open.
spk04: Thank you. Thanks for taking the questions, guys. I want to start off with just maybe the growth composition. It seems that you're seeing strength both across the expansion front and obviously the new customer lands are coming in at pretty strong values. I'm curious how much of your growth currently is coming from these net new customers that are landing versus existing customers that continue to expand with Sprout, and then maybe in relation to that on the new customer front, where are those customers coming from, particularly those larger customers? Are they switching from competitors, or is that still largely a greenfield opportunity?
spk10: Thanks, Arjun. This is Ryan.
spk18: From a growth perspective, It's a pretty healthy balance for us. It's still weighted by new business over expansion, and those trends have continued. You can see it in the new business ACV numbers up 30%, but we feel really good about those lands. You can also see it in the 10K and 50K growth that we've had, but the new business side from a mid-market enterprise perspective has been really strong and continued down that path, and we're continuing to grow from an expansion standpoint. more outsized of new business than expansion today. And then in terms of where they're coming from on the enterprise side, from a large customer perspective, it's a bit of a mix. So, you know, we said this before, but we still believe that we're really early in this market today. Even in large enterprises, you'd be surprised how many organizations that you'll come up across that have not invested within social media management. They might be using native tools or they might have had a small investment somewhere, but it's very siloed and it's not a strategy across the organization. So it's been a pretty healthy balance of displacing some of the competitors as well as going in and being able to uncover a really big need where they weren't investing and now they get a chance to invest with Sprout.
spk04: Got it. That's very helpful. And then one more, if I can, just in terms of pricing power, I'm curious how you're viewing that lever over the next several quarters and years. Obviously, it seems like you're adding capabilities to the platform. You're adding enterprise requirements, integrations with TikToks. Is there a lever on price that's available and Is that something that you would consider as your product and platform develops?
spk07: Yeah, so I'll start with that one. I think the answer is most certainly yes. I think you've seen it from us historically where, for example, the entry-level pricing for our platform has steadily increased over time. The landing deal sizes have steadily increased over time. And there is, I think, certainly for at least a good chunk of the customer base that we're focused on today and the top of the funnel that we're focused on today where there is some of that power. To your point, we're, over the course of a couple of years, in a lot of cases, doubling the value of the platform that we're giving to customers through product enhancements, additional networks, and things like that. And so we're constantly iterating testing, developing ideas around that. I will say that I think the last, you know, probably six quarters specifically have occurred to us to be maybe not the most opportune time to be super disruptive on the pricing side. We have made some changes, and as you've seen from the ACP growth, obviously made a ton of improvements there. We think that there's more meat on the bone to that point long term. Now, we always expect to be getting a fair value for our platform and deliver more value than we're getting back. But to your point, that continues to grow over time. The investments and what brands are expecting to spend in this channel and for a platform like Sprout, I think, is steadily ticking up. So we're going to continually iterate and be responsive to that.
spk10: Got it. Thank you very much and congrats, guys. Thank you.
spk12: Your next question comes from the line of Matt Van Bliet with BTIG. Your line is open.
spk01: Hey, good afternoon, guys. Thanks for taking the question. Maybe just wanted to dig in a little deeper on the larger ACV trends for new lands and maybe Ryan is best for you. But are you seeing more of that from just the overall size of the customer being significantly larger and you're still landing with kind of a similar footprint relative to the size of the organization, or are you actually getting maybe more seats earlier on, or the number of modules from analytics or listening or attach rates there are actually the bigger reasons for driving those deal sizes larger? Thanks.
spk18: Yeah, thanks, Matt. So it's definitely getting in front of more enterprise organizations. I'd call it still more of an 80-20 rule in terms of the majority of the revenue coming from our core products. So think about users versus the add-ons. The add-ons obviously add a lot of value, both in terms of the problems that they solve for customers, but also the ACV opportunity. But the lion's share of the revenue is coming from the core users and licenses. And so we're in more deals than we've ever been in the past. We've been investing a lot within this mid-market and enterprise space, been doing more from the top of funnel perspective to attract those prospects and customers. We've been investing in sales capacity to ensure that we have a great team in front of them to take care of those customers and investing on the back end to make sure that we're supporting them well. So it's getting in front of more of those deals. And we are seeing certainly in those deals, as you're in front of bigger customers, even more opportunity from a licensed perspective, a user seat perspective. And some of these organizations just have really massive marketing departments or customer care departments. So that tends to be what's driving most of the opportunity. And even in the large accounts that we're landing today, we're still seeing a lot of headroom, a lot of opportunity to grow, be it more users, departments, divisions, and obviously the add-on products as well.
spk01: All right, great there. And then looking at the TikTok product or even the Instagram Reels product you announced today, are you finding the reception from customers to be strong? Obviously, there's tons of users on those platforms, but are they sort of understanding how they can use those platforms in an actual sort of business sense or to monetize those? Or is there an education process from your side of helping them understand and how you can pull analytics to drive more traffic and response there?
spk10: Yeah, yeah, that's a great question.
spk07: This is Justin. I think that it tends to be more of, so it's a little bit different. First, I'll say that the reception has been fantastic. You know, these are two of the things that our customers have been asking for above all else. These are things that, as the technology has become available and the networks themselves have, done what they needed to do to make these products available for our customers. Obviously, we're very excited to get them in their hands and our customers are very excited to have them. I think the answer to the other part of your question is a little more nuanced network to network, right? So Reels and TikTok being of similar media type, I'll call it, I don't know if it's much education as it is just an evolution within the brands of being prepared to better utilize them. It's a different format. It requires different sets of skills to put together short and engaging videos, for example. There's some different habits and behaviors on the consumer side. So I think that the awareness and the interest is there. I think that as we've seen with other new media types that have come along, the readiness of brands is going to be a little bit behind the curve, but there's still plenty who are doing a bang-up job, who are ready to go and doing really cool things here. And then with TikTok generally, I think, obviously a juggernaut and a network that is doing incredibly well and has a lot of really cool new angles on the consumer experience that we haven't seen before. I think that we're still relatively early in brand adoption. Again, when I say early, there's hundreds of thousands that are active and engaged there. But when we think about the maturity of some of the other networks and some of the other media types, those are certainly further along. And we'll just continue to see that tick up as time goes on.
spk18: Yeah, the other thing that's interesting about this is, to Justin's point, our customers are super excited about this video. Short form content matters a ton, and those that are doing it, this is a massive win for them. For those that are still learning about how to participate in developing the skill set internally, we see this as a huge opportunity from a success perspective to drive more awareness and education on how they can leverage these tools, leveraging the Spread platform. And I can see this internally. Our team has been spending a lot of time just building content and best practices to help those that haven't come on board with it to ensure that they are adopting and they're getting value from it. And then even from our customer community perspective, you can see that a lot of the conversations happening within the communities touch on topics like these. So I think there's a lot of opportunity for the current customers and then more value that we can add along the way.
spk10: All right, thank you. Very helpful. Great job on the quarter.
spk08: Thank you.
spk12: Your next question comes from the line of Parker Lane with Stifel. Your line is open.
spk13: Hi, guys. Thanks for taking the questions. Curious if you could provide some more context on the performance of the agency channel during the quarter. Is the health of that channel on par with what you saw during the first quarter? Are there starting to see any signs of weakness inside of some of those agencies that are leveraging Sprout for their end users?
spk08: Yeah, thanks, Parker.
spk18: So the agency business for us, I would say in Q2, it was a little bit more challenging. Specifically, I'd call it out on the new business portion of that and those that work mostly within that SMB side. As you might imagine, those customers right now are very focused in on retaining existing clients versus expanding and trying to win new clients. Despite that, we're still seeing growth within this segment. That agency segment for us has been one filled with evangelists for our business. We've created a business that not only supports them from a software perspective and a services perspective, but we're there to help them build best practices to build their business. And we've seen great execution for the people and the teams within agency at Spread that are supporting those organizations. So I'd say some headwinds on the new business side. But we feel really confident about this being a point in time for those organizations and us being a great support for their business and vice versa in the future.
spk13: Got it. Understood. And then on the Salesforce partnership, I think you alluded to 25 customer wins there during the quarter. Can you give us a sense of what share of those are customers whose contracts would be coming to expiration the next 90 to 180 days versus those that are looking at the functionality of Sprout relative to Social Studio and saying, you know, we need this today regardless of when our contract expires?
spk18: Yeah, directly I'd say that it's more of those customers that have upcoming renewals where they were needing to make a decision. They were getting into the market to figure out what's next. And the majority of these accounts that were in, they were either partnered sales calls with the Salesforce team, intros from the Salesforce team, or back channel referrals with the Salesforce team. They tend to be ones that had upcoming renewals and there was a catalyst to make a decision. We are doing a lot to continue to partner with Salesforce and Prospect into those accounts as they come up for renewal over the next couple of years here. And then this new integration that we're building that we're working on to launch later this quarter, and we'll talk a little bit about more Dreamforce, is something that we're really excited about because I think that a lot of those customers that were on Social Studio that were deeply integrated with the Service Cloud are going to get tremendous value from what we're building.
spk09: Very helpful. All right.
spk08: Thank you.
spk12: Your next question comes from the line of Clark Jeffries with Piper Sandler. Your line is open.
spk16: Hello, thank you for taking the question. Ryan, you mentioned the benefit that some of these migration customers were seeing from the innovation. Did any of these migration customers change the fundamental scope of social media management in their organization as part of that migration process?
spk18: I mean, there's certainly been some that have expanded the scope. of the utilization. So you'll see some that might have started in marketing and been using mostly marketing use case where we've won care or vice versa. They're doing care and we've won some marketing. My comment was mostly directed at the idea that there was a lot of features and functionality that were in Sprout and or were coming quickly on the roadmap that didn't quite exist yet in Social Studio and was on the wishlist for customers. And that was a driver when we were having the initial conversations with Salesforce and Social Studio around the fit that we would have for their customers. So, I mean, things like Reddit listening, if we think about Instagram DMs last year, the TikTok, which we obviously released, Reels, another example, There's a bunch of functionality like that that, as you might imagine, is pretty critical for the practitioners that are counting on these solutions, counting on Sprout every day that they didn't have before. So, yeah, a little bit of expansion certainly on use case and more opportunity there for us. But a lot of these features that didn't exist that existed in Sprout have been a big part of their conversation, the driver.
spk07: Yeah, I will add anecdotally that I think A lot of folks that we're talking to at this stage in the partnership just focused on let's get the solution in place. They're excited about some of the things that we're bringing to the table, but let's get that resolved. We see their wheels spinning around what the additional opportunities may look like, additional departments that can now be brought in and things like that. But I think the first order of business for most of them is to get the solution in place and up and running. And as you know, we're relatively early in those sales processes and conversations.
spk16: Helpful. And then a follow-up, and then something it seems we've kind of talked around for the call is the presence of short-form video. I wanted to ask specifically on the difference between organic changes and users that prioritize different forms of content versus proactive changes by the social networks to, uh, change the algorithm and the prioritization of that content. So generally just, have you seen any distinct algorithm changes at those large networks that are prioritizing these short form video products that makes it sort of a change in the continuity of social for your customers? And, and maybe generally speaking, has that been disruptive or additive to the value of Sprout?
spk10: Yeah.
spk07: So I, We haven't seen that flow through to behavior changes around the things that our customers are spending all their time in Sprout doing. Engaging, publishing content, measuring analytics, listening, etc. But there is a distinct difference, right? And if you look at the recent changes to The Facebook feed, for example, where those were prioritized, they were very much prioritizing the short form videos. And that does change the consumer experience, I think quite a bit. But at least from what we've seen in the press, that may be changing back or has changed back to some degree. So I think most of the end user experience as that's shifting and the networks are prioritizing that short-term video in their own algorithms. But we're also seeing there's an opportunity to opt in or out of what the algorithm is suggesting versus what their normal engagement patterns would be. So I don't know how disruptive it really is. I think it'll take a few more quarters to figure that out. But, too, I think the spirit of the question and how it's changing things for our end customers.
spk08: Are you back, Justin? I'm back. I dropped.
spk07: I saw one of the networks was listening to my answer and maybe didn't like it. But in terms of changes to behavior to what our customers are doing, the value of the platform, et cetera, we've seen a lot of these algorithm changes over the years, and it really hasn't flowed down to the brands and what they're doing. I think it probably is increasing the emphasis on them getting internal plans together to be able to tackle short-form video in ways that they haven't in the past. But there, again, that's something that we help them out with through our platform and through the tools that we make available to them.
spk10: Appreciate it. Sorry, I don't know how much of that answer cut out, but hopefully I hit the key points for you. Oh, absolutely. Thank you. Cool. Yep.
spk12: Your next question comes from the line of DJ Hines with Kennicard Genuity. Your line is open.
spk05: All right, Justin. We'll see if your mic can work for one more, and I'll keep it to one just for the sake of time. um risky all right road map prioritization on social care i'm just curious like what are you hearing from customers what are you seeing in the market that kind of reinforces the bet you're making there and maybe that's a good segue to talk about the record win uh in social care you touched on in the quarter yeah yeah sure so um
spk07: You know, I think that the signals that we're seeing, I mean, the most obvious one is just the wins that we're seeing around those use case opportunities and the large, particularly in the mid-market enterprise opportunities that we're seeing that are oriented around care. Typically a high number of users typically land on the higher side of the deal sizes, et cetera. So that's certainly a pulling function and supports why we're prioritizing those things. The other thing I think is just operational maturity within the organizations of how they're thinking about care through social channels, where I think for a long time, it was really just kind of this hybrid of community management. And we're going to respond to our community and answer questions there. It's being operationalized in a way that looks a lot more like more typical approaches to customer service, right? So you've got things like SLAs, you've got things like more complex routing and successful handoffs between agents and things like that. And so there's just a ton of opportunity for us there. I think we do a phenomenal job with this today, you know, as I think is demonstrated in the success that we've seen there. But it's also just a really fascinating part of the roadmap that has a ton of potential for us, where particularly as we're talking with some of our largest customers and the things that they would like to do to further advance their care through social, And we can help them support that. There's just a ton of roadmap there that's really exciting on that front.
spk08: Yeah, that makes sense. Congrats on the results, guys. Thanks. Yeah, thank you.
spk12: Your next question comes from the line of Michael Rackers with Needham. Your line is open.
spk17: Hey, everyone. It's actually Scott Burge here. I guess the question is really more in the macro, sorry, in regards to your assumptions in the guidance in the back half. Just wanted to gain some clarity in terms of maybe what you're all seeing there. Are the estimates in the back half of the guidance, are they, I don't know, maybe a little bit more cautious than what you've seen historically? I'd love to just maybe hear a little more color there. That'd be great. Thank you.
spk15: Yeah, Scott, I think, you know, we felt pretty good come out of this quarter, our ability in the macro environment to raise our guidance by more than what we beat. And so we feel like there's a lot of momentum in the business. And as you know, we're pretty responsible in the way we give guidance. We like to give it in a way that we have a high confidence level of hitting. And so I think from that perspective, we feel that we're pretty well positioned to execute on our plan in the back half of the year. And everything that we've given out from a guidance standpoint, has taken into consideration kind of the known risks that we have and some of the unknown risks out there. And so I think we've backed all that into our guidance for the back half of the year.
spk09: Great. Super helpful. That's all I have. Thanks for taking my question.
spk12: Your next question comes from the line of Brett Knobloch with Cancer Fitzgerald. Your line is open.
spk03: Hi, guys. Thanks for taking my question. Just two for me. First, with e-com being weaker, large AS do the macro, can you provide what you're seeing in terms of growth of social commerce and how that's doing and what you're investing on there to kind of further drive that growth? Yeah.
spk07: Yeah. So, you know, it's interesting in that – It may be surprising to hear that we're actually increasing our investment around some of the commerce things that we're building. And a lot of it has to do with, as we've discussed before, this is a multi-year arc for us. We're very early in the social commerce side of things. There are a lot of fundamental things that we've built, a lot of really cool things that we want to be building for our customers as we look out over the long-term role that social commerce is going to be playing. And so while there may be some volatility, broadly speaking, around online commerce. We're fortunate with the air cover of we're early in this. It hasn't been a material part of our performance or the projections that we're making. We've got the time to be able to make sure that we get this right without having to overreact to anything that's happening from quarter to quarter. So we're still on our fundamental roadmap. That hasn't changed, and we're putting more effort and investment there. Nothing super disproportionate or anything else, but it is a team that we are ramping up and continuing to push that roadmap forward because regardless of, I think, quarter-to-quarter performance there, regardless of any COVID lag that some of the companies that are focused there may see,
spk03: um this is going to be a big part of the industry for a long long time and and we've got the opportunity to get it right um so it's still an area we're super excited about perfect thank you that's helpful and then maybe just on maybe the demand environment i know we've heard from a couple companies so far talk about you know deal cycles lengthening um and also maybe amia being particularly weak you know have you seen any of those impact your business i know for me is maybe 17, 18% of your business?
spk18: Yeah, thanks, Brett. No, I mean, from a just sales cycle perspective, again, because of the trial model and because 90% plus of our revenue touches the product before they buy, we've got a distinct advantage there in that they're coming to us inbound model for reasons. They're in the product. They're starting the implementation. They're investing resources to go through so that it hasn't felt different than what we've had before. And then from an EMEA perspective, you're right in terms of just the value of that business. The teams performed really well. The growth for them was among the highest that we had this quarter. So we're still feeling really strong about the opportunity there. We also feel like there's a lot of upside, and we're still early within that market. So those two areas for us have not been concerns based on performance.
spk08: Perfect. Thanks. Really appreciate that. No problem. Yes, we can take one more question. And the question comes from Jim Masaga with FactSet. Your line is open. We must have the same internet provider. I think.
spk12: to his question. There are no further questions at this time. I would now like to turn the call back over to the presenters.
spk07: All right. Yeah, thank you. I'm not sure if we're over time or not, but I'll get us out of here quickly. Thank you, as always, for the support. Thanks for the great questions. We'll look forward to catching up with everyone over the next couple days, weeks, and quarters here, and we'll let you get on with your day.
spk10: Thank you so much.
spk12: This concludes today's conference call. You may now disconnect.
Disclaimer

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