Sprout Social, Inc

Hello, my name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sprout Social first quarter 2023 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Jason Reckle, Vice President of Investor Relations and Corporate Development. You may begin.

Thank you, Operator. Welcome to Sprout Social's first quarter 2023 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 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 provisions 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 financial performance and financial condition, performance against our multi-year financial framework, our market size and opportunity, our plans, objectives, and expected results from future operations, growth, products, investments, initiatives, pricing, partnerships, or strategies, and our guidance for the second quarter of 2023 and the full year 2023, and to 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, 2022, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31st, 2023, each 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 are not prepared in accordance with generally accepted accounting principles. In particular, references to profitability and margins refer to non-GAAP operating income, non-GAAP net income, and non-GAAP earnings per share. Definitions of these non-GAAP financial measures along with reconciliation to the most directly comparable gap 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. With that, let me turn the call over to Justin. Justin?

Thank you, Jason, and good afternoon, everyone. Thank you, as always, for joining us and for your time today. Late last year, we began making pricing changes that we believe will materially improve the long-term growth and margin trajectory of our business by better aligning around an incredibly strong core business while deprioritizing the long tail of low-value business that had begun to anchor our growth. Today, we're going to provide additional detail around our progress here and how those efforts have set us up to raise our forecast for accelerating ARR growth and margin expansion throughout 2023. During Q1, we saw new business deal sizes more than double year-over-year, in addition to 46% year-over-year growth in customers paying us $50,000 or more in ARR, and 59% year-over-year growth in customers paying us $250,000 or more in ARR. Leading indicators like RPO and CRPO each meaningfully accelerated during Q1, which helped drive further acceleration in ACV growth, alongside record margins and record-free cash flow. We also made meaningful improvement to the quality and health of our customer base with our non-core customers that spend below $2,000 in ARR, now representing less than 5% of our total ARR, down from 12% of ARR and 50% of logos in 2021. The healthiest 95% of our business delivered greater than 35% year-over-year ARR growth, nearly 600 basis points faster than total ARR growth. as we continue to shift our resources away from the very low end of our market. These changes are also accelerating new business and expansion momentum within our highest ACV customers with better baseline pricing and focused energy across the team. By drawing a line in the sand around the entry point to Sprout and properly aligning our focus, we've begun to accelerate the growth in the healthiest parts of our business and expect improvements across key metrics as we replace lower quality revenue with fundamentally healthier unit economics. In Q1, we shifted customer success and growth teams away from our smallest ACV customers and at the same time changed prices, which we believe accelerated roughly 6 million in churn of low quality revenue. As I mentioned, our less than 2K customer cohort as a proxy for non-core customers is now less than 5% of total ARR. Until this quarter, these customers have been allocated a meaningful investment in sales and customer success resources, specifically accounting for more than 20% of our total customer success headcount in spite of NDR just barely over 100%, significantly lower than the rest of our customer base. This was an investment with negative ROI, and we believe removing this anchor and shifting resources will position our company for fundamental growth and margin acceleration. We've also made great progress on our top of funnel demand since making our pricing changes last November. We anticipated and initially experienced the decline in our top of funnel trial volume while we de-emphasized high volume, low value leads. However, through the marketing team's exceptional work on content, messaging, and SEO, we've seen our overall trial volume move to pre-price change volume levels beginning in March with further acceleration in April. At far higher price points, we believe this underscores the size of our market and a far greater near-term revenue opportunity. We believe the shift away from our inefficient low-end business, consistent growth in the healthiest tiers of our business, and renewed top-of-funnel demand through March and April positively impacted net new ARR performance in April, with enterprise being a positive outlier. We expect that a healthy April performance will continue through Q2 and result in strong net new ARR growth in Q2 and an ongoing acceleration as we progress through the year. In spite of accelerating $6 million in churn during Q1 from our lowest ACB customers, we're pleased to increase our 2023 ARR growth forecast as we further build on these initiatives. We're looking into Q2 with a healthier customer base, consistent new business and expansion execution, improving competitive dynamics, and healthy top-of-funnel demand. Our investments in enterprise also continue to deliver great results. with Enterprise Q1 net new ARR growth of greater than 50% year over year. During Q1, our acquisition of Repustate accelerated several facets of our roadmap and social listening, and we are now quickly extending more sophisticated AI and machine learning across our platform to care, publishing, messaging, and employee engagement. Late in Q1, we further built on these advancements with a combination of OpenAI's GPT model. We're going deeper into social customer care, routing, and workflow functionality and allowing impactful and intuitive AI to greatly build upon existing customer workflows. We're being thoughtful and intentional with our approach to AI to bring the most valuable aspects of these technologies to our customers to tailor unique solutions to social. Premium module attach rates were again strong this quarter, improving by 100 basis points sequentially to nearly 23% of our total customer base. We see ongoing success and opportunity with customers selecting our full suite of products as we continue to see meaningful expansion opportunities to drive each of these metrics higher over time as customers unlock social data to drive business decisions. We believe our roadmap in AI, social customer care, listening, and analytics will unlock even greater value with our premium capabilities in the quarters ahead. We are also very excited today to announce an extension of our longstanding strategic partnership with Twitter. Global consumers continue to validate Twitter as one of the most valuable channels for businesses to find the voice of culture, to foster authentic relationships with customers, and to provide real-time engagement. Through the strength of our partnership, our customers will continue to have the tools they need to execute a holistic social strategy at scale. All said, our multi-year investments in the most productive parts of our market are coming into focus in 2023. We've meaningfully shed growth and efficiency anchors to fully benefit from our pricing evolution and momentum upmarket. which we believe will make Sprout the clear category winner. We are continuing to hire incredibly talented people across our company that will uniquely position Sprout to flex all of our competitive advantages to maximize our potential in the years ahead. With that, I will turn the call over to Ryan.