Sprout Social, Inc

Ladies and gentlemen, thank you for standing by and welcome to the Sprout Social second quarter 2023 earnings call. I would now like to turn the call over to Jason Reckle, Vice President, Investor Relations and Corporate Development.

Please go ahead. Thank you, Operator.

Welcome to Sprout Social's second quarter 2023 earnings call. We'll be discussing the results announced in our press release issued after the 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 Del Preto, 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, our expectations concerning the benefits of our acquisition of TAGR, performance against our multi-year financial framework, our market size and opportunity, our plans, objectives, and expected results from our future operations, growth, products, investments, initiatives, pricing, partnerships, or strategies, and our guidance for the third quarter of 2023 and the full year 2023, 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 31, 2022, filed with the Securities and Exchange Commission on February 22, 2023, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 3, 2023, and our quarterly report on Form 10-Q for the quarter ended June 30, 2023, to be filed with the SEC 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 margin, 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 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. Justin?

Thank you, Jason, and good afternoon, everyone. Thank you, as always, for joining us. Late last year, we initiated several strategic changes that we believe are now beginning to materially improve our long-term growth and efficiency, and we'll cover more of our progress throughout our discussion this afternoon. Today, I am also excited to share our entrance into the influencer marketing category, which broadens our reach, expands our market, creates more value for our customers, and further differentiates Sprout as we uniquely define our industry. Our product advancements, strategic alignment, and broadening set of capabilities have further established a highly differentiated value proposition for customers and have positioned Sprout at the beginning of an exciting new chapter in our journey as Sprout paces towards our new $1 billion subscription revenue target. In Q2, record new business ACVs drove ACV growth to a record 29% year-over-year as our success up market continues to progress ahead of plan. We're pleased to see 48% year-over-year growth in customers paying us $50,000 or more in ARR and 130% year-over-year growth in customers paying us $250,000 or more in ARR. Leading indicators like RPO and CRPO each continue to materially outpace our ARR growth rate. RPO growth of 62% underscores the momentum we are seeing upmarket, and Q2 RPO represented more than 63% of our total ARR, up more than 2,000 basis points over the past two years. The significantly improving quality of our business was further evident in record non-GAAP operating margins during Q2 and more than 140% growth in cumulative year-to-date free cash flow. While we're seeing everything we want to see from our strategic shift late last year, structural improvements in our business and accelerated momentum upmarket, the unpredictability at the very low end of our business has remained difficult to forecast in Q2. Though we view this as a positive trade-off and have deliberately deprioritized and removed resources from this part of our business, we're ultimately committed to high confidence projections. For that reason, we have elected to remove non-core ARR from our plan for the remainder of this year and are modeling to have it cycled out fully heading into 2024. We believe this change provides investors with the greatest visibility into our performance and position Sprout to execute with the level of consistency that you have come to expect from us. Meanwhile, the upside of our strategic shift is becoming even more pronounced. We are beginning to see structurally positive impact on net dollar retention of our core customers and our enterprise business further accelerated during Q2, yielding the highest new LTV for enterprise compared to all prior quarters. Enterprise grew nearly 50% year over year and represents a record 43% of total ARR. Enterprise new business was up more than 50% year over year, and total net new ARR from this segment also grew greater than 50% year over year. Multiple factors are contributing to our success, and this quarter, premium module attach rates were very strong. Total premium module attach rates increased by 160 basis points from Q1 2023, nearly double the uptick we saw on average in 2022. During Q2, we further accelerated our roadmap in social customer care and AI. Our product team has already delivered 16 material care-related releases in 2023, including reply suggestions by AI Assist. We've also made structural and organizational changes to rapidly expand our investments in AI and accelerate the work already underway to make AI pervasive across our platform and deliver significant new value to our customers. The emergence of generative AI, enhancements to large language models, and new training techniques favor the most skilled product teams, and we believe will allow us to outpace anything being done in our space today. Our early momentum in this area, including language detection, AI assist, enhanced sentiment, and content detection and filtering, lay the foundation for an extensive roadmap of exciting product capabilities to come. All of this progress brings me to our most important update today. our announced acquisition of Tagger. Influencer and creator marketing has quickly increased in customer demand given how critical this category has become to a brand's awareness and brand strategy. In fact, we currently see influencer marketing in more than half of our enterprise RFPs. While the demand signal is very strong, brands have up to this point struggled to fully harness its potential because influencer marketing has been siloed with little connection to their core social marketing strategy and no ability to manage discovery, approvals, workflow, and reporting. We believe Sprout's brand and scale position us to pull ahead in this market. For anyone unfamiliar, influencer and creator marketing is today the third leg of the stool for social strategy and one of the most important and fastest growing. As traditional media and paid advertising continue to be disrupted, influencers, creators, and short-form content are beginning to take priority for brands. along with demonstrably higher ROI. Industry analysts have estimated that nearly 50% of CMOs are growing their spending on influencer marketing in 2023, representing the third fastest area of budget growth. We believe the combination of Tagger and Sprout will allow us to create a market leader in both social media management and influencer marketing. We developed a thesis on this space in 2022, and Tagger very quickly became our target for three primary reasons. First, the team is world-class, a smart, innovative, and customer-obsessed group. Second, we found the technology, infrastructure, and products were built with the same emphasis on quality, elegance, approachability, and scale that Sprout focuses on. And third, Tagger's product has been recognized as industry-leading by both G2 and the Global Influencer Marketing Awards, and has been chosen by iconic brands across the mid-market and enterprise. Similar to why we brought social listening into Sprout several years ago, we have identified silos that exist today in influencer marketing and an opportunity for Sprout to step in and provide a unified platform for executing a comprehensive social strategy. Together, we'll deliver the next generation of social insights to fuel business strategy, execute end-to-end campaign management, foster authentic customer engagements, and deeply understand and measure the full ROI of holistic social investments. We believe our capabilities will further differentiate Sprout in our core market and will make Tagger the category winner in influencer marketing. The combination of our ongoing breakout upmarket, strengthening partnerships, expanding use cases for our software, and an accelerated entrance into the influencer marketing category have Sprout at the starting line of our next great growth chapter. We're excited to outline our path above $1 billion in subscription revenue. Our strategic changes have positioned us to deliver an even faster pace of margin expansion and free cash flow growth than previously anticipated, and we're excited to share more of our vision and financial future at Investor Day next month. I've never been more energized by our team's momentum and alignment to deliver incredible results and value to our customers, partners, and stakeholders. With that, I'll turn the call over to Ryan.

Thanks, Justin. The focus and momentum in our core business, combined with the exciting new addition of Tagger, have me incredibly excited about the second half of this year in 2024. I'd like to begin with some perspective on several of my most topical conversations with customers and investors this quarter before digging into the opportunity we have to change the game with influencer marketing. Research this quarter from the Harris School in partnership with Sprout found that social's importance within an organization is only growing. 80% of business leaders anticipate their company's social media budget will increase over the next three years, and 44% of leaders expect their social media budget will increase by more than 50%, even in spite of macroeconomic pressures on their total company's budget. Underlying these trends, business leaders nearly universally agree that social has become the primary channel for customer care, customer retention, and customer feedback. Social is where your customers are, and it has become imperative for brands to meet them there. We can see this imperative in our partnership with Salesforce, which has accelerated momentum as we further capture the Social Studio opportunity and align ourselves as a standard social platform for all Salesforce customers. Our product alignment went even deeper this quarter with a native integration into the Salesforce Marketing Cloud, allowing marketers to personalize their customer's journey based on social data. We onboarded a record 176 logos in Q2, and we continue to expect contributions to grow meaningfully and linearly over the course of 2023, building to a very strong Q4 as the largest and most complex deployments begin to make their migration over to spread. In total, we grew with an amazing list of customers this quarter, including Packard, Sintas, Klaviyo, Irving Oil, Heartland Financial, Jollibee Foods, Cedars-Sinai Medical, Arnaut's, Bobcat, Calix Pharmaceuticals, and the Federal Deposit Insurance Corporation, or FDIC. We also saw and heard some incredible things from our customers this quarter. The FDIC used Sprout listening data as part of congressional testimony on the banking sector in the wake of the SBB collapse. And one of our new enterprise customers shared with us, I'm thrilled by the new AI assist functionality. As far as AI content generators go, this may be the best one I've seen so far. In a recent not-for-profit webinar I was invited to present at, the host introduced us by saying, as a CMO and marketing leader, I spent over two decades buying enterprise software and investing in technology that would help me understand how to grow, and social media engagement was always a top priority. In 2023, time on social media continues to scale, and business leaders are tasked with not only driving engagement, but elevating their constituent experience and support to meet the bar that has been raised by the commercial sector. I've evaluated every tool in the market and Sprout has been my preferred platform for over 10 years. We know from our customer interest to market diligence that the influencer marketing category is converging with social media management. In a recent briefing, an industry analyst shared, if you aren't working with influencers today, you can't really say you have a real social strategy. With this as a backdrop, it's been incredibly exciting to get to know the Tiger team and software over the past several months, knowing that we could solve multiple customer pain points together. We knew immediately that Tiger would make for an incredible fit with Sprout. The software is powerful and elegant, and the team is hungry to define a category. We believe our depth and scale will allow Tiger's products to innovate and grow at an accelerated pace and our go-to-market motion is perfectly suited to accelerate Tagger's growth and drive even more customer success. Joe will later share that we've made no cross-selling assumptions in our commitments to you, but influencer is a customer requirement showing up in more than half of our enterprise conversations. Tagger's ACVs are meaningfully above Sprouts, and we believe we'll now have the most comprehensive and competitively differentiated set of solutions in each of our markets. We believe the cross opportunity for Tiger's product is massive and orders of magnitude larger than Tiger today. We also believe our new business win rates and ACVs are set to move higher in our core business as we combine forces. It's this combination of factors that has our teams inspired to go big together. Our alignment around the most sophisticated tiers of our market has our teams motivated for the future. with Taggart poised as a new strategic catalyst that we expect will deliver significant value for our customers. We've executed a similar playbook before when our acquisition of Simply Measured accelerated our value proposition and our momentum in social listening and advanced analytics, which are now foundational to our success. We've long shared that we aspire to be the best place to be an employee and the best place to be a customer. After receiving multiple product awards from G2 and others last quarter, I was incredibly excited that this quarter, Sprout was recognized by Great Place to Work as the best place to work in Chicago and as the best place to work for millennials. Our commitment to our core values and our people continue to make Sprout an exciting career destination on our journey past our $1 billion revenue target. 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 second quarter results in detail before moving on to guidance for the third quarter and full year 2023. Revenue for the second quarter was $79.3 million, representing 29% year-over-year growth. Subscription revenue was $78.7 million, up 30% year-over-year. Services revenue was $0.6 million, down more than 10% year-over-year. Core ARR from existing customers spending greater than $2,000 in ARR grew 33%, and now represents 96% of our total ARR. Total ARR exiting Q2 was 326.1 million, up 27% year-over-year. The number of customers contributing more than $10,000 in ARR grew 27% from a year ago. The number of customers contributing more than $50,000 in ARR grew 48% from a year ago. And the number of customers contributing more than $250,000 in ARR grew more than 130% from a year ago. Q2 ACP growth was 29% year-over-year again accelerated from Q1 2023. Record new business deal sizes, the exit from a number of low-value logos, and ongoing execution on our pricing changes each compounded healthy underlying seed expansion and premium module attach rates. We continue to expect that ACV growth will further accelerate through Q3, but now expect faster than previously expected ACV growth over the medium term. In Q2, non-GAAP gross profit was $61.9 million. representing non-GAAP gross margin of 78.1%. This is up 150 basis points compared to a non-GAAP gross margin of 76.6% a year ago. Non-GAAP sales and marketing expenses for Q2 were 32.1 million, or 40% of revenue, consistent with 40% a year ago. We were fortunate to hire well throughout the quarter. Non-GAAP research and development expenses for Q2 were 14.6 million, or 18% of revenue, down from 20% a year ago. We continue to make transformative R&D investments, particularly around platform, AI, and automation, and social customer care. Non-GAAP general and administrative expenses for Q2 were 13.3 million, or 17% of revenue, down from 20% a year ago. We expect to deliver consistent G&A leverage as a percentage of revenue moving forward. Non-GAAP operating income for Q2 was 1.9 million for a positive and quarterly record 2.4% non-GAAP operating margin, an improvement of more than 500 basis points year over year. Non-GAAP net income for Q2 was 3.8 million for a net income of 7 cents per share based on 55.5 million weighted average shares of common stock outstanding, compared to a non-GAAP net loss of 1.9 million and 4 cents per share a year ago. Turning to the balance sheet and cash flow statement, we had a Q2 with $192.4 million in cash and cash equivalents and marketable securities. This is up from $187.2 million at the end of Q1. Deferred revenue at the end of the quarter was $116.7 million. Looking at both our billed and unbilled contracts, RPO totaled approximately $206.4 million, up from $187.8 million exiting Q1, up 62% year over year. We expect to recognize approximately 74% or 153 million of total RPL revenue over the next 12 months and applying a CRPL growth rate of 47% year-over-year. Operating cash flow in Q2 was positive 6.3 million compared to 1.3 million a year ago. Pre-cash flow was positive 6.0 million, up meaningful from a year ago. Ongoing focus on unit economics and the quality of our customer base is beginning to deliver structural improvements to our cash flow generation.

Shifting to our financial expectations of the TAGR acquisition.

We acquired TAGR Media for a cash consideration of $140 million. We financed the acquisition with cash in our balance sheet and liquidity from our newly established revolving credit facility. We believe this to be an efficient use of our balance sheet and an attractive cost of capital. We expect that TAGR will be accretive to our ARR and ACV growth rates and accretive to our gross margins. In addition, we anticipate that TAGR will be moderately dilutive to our non-GAAP operating margins in 2023 and upside to our margins in 2024 and beyond as we aim to efficiently accelerate growth inside our distribution model. We have incorporated approximately $3 million of revenue into our guidance for the remainder of 2023, which assumes no customer cross-sell, and we anticipate meaningful growth in 2024. Shifting to formal guidance. Our core business continues to perform very well. As a reminder, we have removed our low-end customer core from our forecast. For the third quarter of fiscal 2023, we expect revenue in the range of $84.1 million to $84.2 million, or a growth rate of 29%. We expect services revenue to decline year over year. We expect non-GAAP operating loss in the range of $2.8 million to $2.7 million. This accounts for the timing of our one-time global employee event in Q3 this year, the timing of sales hiring in Q2, and then temporal impact of the absorption of TAGR expenses. There is a non-GAAP operating margin of negative 3.2% at the midpoint. We expect a non-GAAP net loss per share of roughly 5 cents. This assumes approximately 56.5 million weighted average basic shares of common stock outstanding. For 2023, we expect total revenue in the range of 328.6 million to 328.7 million. This is an expected overall reported growth rate of 30%. we expect services revenue will be lower than 2022 levels. For the full year fiscal 2023, we have decisively modeled our lowest customer tier ARR to decline to zero exiting 2023, which we believe reduced forecast risk of this business that has been strategically deprioritized. With this change, we believe investors can more clearly assess our outperformance on market and expect that total ARR exiting 2023 will be growing at the same pace as reported revenues. This implies that Q2 will resent the lowest pace of ARR growth this year. For 2023, we now expect non-GAAP operating income in the range of $1.4 million to $1.5 million. This implies annual non-GAAP operating margin improvement of 200 basis points compared with our prior margin expansion forecast of 225 basis points to 235 basis points. On an organic basis, we expect to outperform our prior plan, and we expect that TAGR will become a net benefit to operating margin expansion in 2024. We now expect non-get net income per share of approximately $0.07 compared to our prior range of $0.07 to $0.08, and assuming approximately 56.0 million weighted average basic shares of common stock outstanding. To conclude, I'd like to preview our investor day next month. We believe that removing low-end ARR from our forecast allows investors to most appropriately focus where we are focused and prosper out to continue to execute on our goals. We've introduced our new medium-term financial plan and expect to exceed $1 billion in subscription revenue in 2028. We can exceed this target sooner if our mid-market enterprise segments further accelerate, if Salesforce builds further upside, if we're a successful and cross-selling tagger to our customer base, or if we are able to execute additional future strategic M&A. We expect to deliver 20% non-GAAP operating margins at $1 billion in scale. We expect free cash flow margins of 20% to 22% in 2028, and deliver a meaningful amount of free cash flow over this horizon. We look forward to sharing further data, details, and assumptions with you next month in Chicago. We're the starting point of the next great growth chapter in Sprout's journey. We're grateful for your support as we continue to scale the category-defining social media management company. With that, Jess and Ryan and I are happy to take any of your questions.

Operator?

The floor is now open for your questions to ask a question this time, please press star one on your telephone keypad at any point you'd like to withdraw from the queue, please press star one again. you'll be provided the opportunity to ask one question and one further follow up question will now take a moment to compile our roster.

Our first question comes from the line of Remo Lenchow from Barclays. Please go ahead.

Hey, thank you. Could we just go one more time through the changes we're seeing today? So basically, you're removing the low-end ARR from the ARR calculation, which kind of makes a lot of sense for that kind of precious ARR. How does that impact revenue, or what's driving the change in the revenue guidance? And that's my first question. I have one follow-up.

Yeah, Ramo, this is Joe. I can probably help you, you know, model that out a little simpler. I think the way we're thinking about it is if you look at the comments I made around, if you assume that ARR exiting Q4 is in line with our revenue growth, exiting in Q4, and you can apply from our guidance, that's probably in the 28 to 29% range. So if you use that as the ARR kind of growth rate year over year, you can kind of back into the ARR we plan to add in to the back half the year. And then from there, you can kind of get the revenue that flows through your model.

Yeah. And then just remember last quarter, we talked about like the low end kind of maybe exiting you quicker than expected. And you kind of talked about some stabilization trends in April. How does this quarter play out and where are we on that journey?

Yeah. Yeah. Great question. This is Justin. So, yeah, I mean, the low end of the business has been obviously a bit challenging for us over the last couple of quarters. When we spoke last, we saw some signs, some really positive signs of stabilization early in the quarter, in the second quarter, and then kind of reverted back to what we had seen in the back half of first quarter shortly after that. And so while we're optimistic that there's future stabilization there, we wanted to make sure that we're just eliminating that risk from the model, as it's remained fairly unpredictable, both on the contraction as well as the new business side, with not only the pricing changes, but also just the organizational alignment and prioritization that we've put further upmarket. that segment of business has just remained a bit more challenging.

Okay, perfect. Thank you.

Our next question comes from the line of Arjun Bhatia from William Blair. Please go ahead.

Perfect. Thank you, guys. One, maybe for Joe, I think you called out that medium-term you expect ACV growth to be faster than expected, can you maybe just walk us through some of the drivers there? What are you seeing that's going to get that ACV growth to be higher and accelerate through the rest of this year?

Yeah, good question there. You know, for us, I think it's some of the momentum we're seeing up in the, definitely in the enterprise space, some of the data points we gave out, you know, the enterprise business growing 50% year over year, new business growing over 50%. The deals that are coming in are just much larger these days than they were last quarter or the quarter before that. And so I think as we continue to move up into this mid-market and enterprise business, we continue to see larger and larger ACBs. If you look at the stat on the 50K cohort growing over 48%, the 250K cohort that grew over 130% margin, we're just seeing larger deals. across the organizations that we're doing business with. So it gives us a lot of confidence that that momentum up market will continue throughout the year.

Yeah, and I'd probably just also add in from a premium attach rate perspective, we've seen a lot of progress there up 160 basis points. Now, 24% of our total customers have one of those products, but we see a lot of headroom there with the products we had previously. And when we think about the fact that only 6% of them have both of those products, and then we add in something like Tagger, there's additional growth to come in the future for us there. So we feel really good about the quality of those customers coming in and the ability to attach some of these other products from an ACV perspective.

Okay, got it. And then on Salesforce, it seems like there's a pretty good quarter in Q2 in getting migrations. What are you seeing in the pipeline, Ryan? And how do you think the cadence of that partnership kind of progresses through this year and even into 2024?

Yeah, we feel great about the partnership. We delivered 176 logos in Q2, up 75% sequentially. A lot of value being viewed by these customers as it relates to the integrations that we had built across Tableau and Slack and more recently in Q4 Service Cloud. And then we added the Marketing Cloud integration in this quarter as well, which we had a great opportunity to speak to customers live about at the Salesforce Connections event. We'd shared this previously, but we continue to see a lot of amazing opportunity with these customers, both social studio customers that need to transition off, that are very large in size, as well as just Salesforce customers in general that are looking for a fully integrated solution into the Salesforce tech stack. And so we feel really great. The pipeline is continuing to grow. We anticipate we'll continue to see strong results in the second half of this year. There's been some amazing stories we've seen from customers coming in where this combination of Moving from social studio, trialing our product, seeing all of the value ads that we have in Sprout that they could immediately get benefit from. And then for customers that are Salesforce customers that were on another social media management platform, realizing the importance of having that full 360 degree view of the customer and having that social data pervasive across the Salesforce CRM record. Now, we are uniquely positioned to deliver this for customers. So feeling really good about the visibility and a lot of traction. And, you know, we'll be heavily active at Dreamforce coming up in September.

Perfect. Thank you very much. Our next question comes from the line of Parker Lane from Seafull.

Please go ahead.

Hi, guys. Thanks for taking the question here. Joe, I wanted to go back to the non-core customer cohort here. And I know it's not in the numbers and there's a lack of certainty around modeling that. But what should we think about as a realistic timeframe for these 7,400 customers to either move off the platform or reach some point of stabilization? I mean, we're about nine months into the price changes. A lot of these customers are month to month. Just give us a sense of what a realistic timeline is to approach a stabilization in that cohort, just in absolute customer logo terms.

Yeah, Parker, so what we've mentioned on the call and the way we're kind of giving our guidance, we're actually assuming that that goes to zero by the end of the year. So, you know, we want to just kind of take that risk off the table. So from that standpoint, that's how you can kind of think about that as it relates through the end of this year. So we've got that zeroing out by the end of this year from a guidance standpoint.

Understood. And then maybe on Tagger, can you give us a sense of that business model and, you know, who exactly they're targeting, what size of organizations they're looking at? Does that tend to skew more enterprise given the higher ACVs there or is it, you know, relatively balanced mix of organizations they're targeting?

Yeah, thanks, Parker. This is Ryan. So it skews very much into sophisticated customers in the enterprise. One of the reasons why it stood out so much to us is, you know, they've got customers like Estee Lauder, Bose, Omnicom, and a stable of really great customers that they work with. um their technology which we love is just incredibly scalable it's elegant it it looks and feels a lot like sprout and so our r d team who certainly bias to uh to the internal side of building uh this is one of the first companies we've ever seen that they've just been incredibly impressed with and we liked it because We obviously have a certain go-to-market motion within the enterprise and the way that they've built their software and implemented customers and the way that customers get utility quickly lines up really well to us. So they're definitely focused in on the enterprise part of the market. And so that, again, speaks to just some of the ACV opportunities we see in the future, as well as the impact we think that they can eventually have on our competitive win rates.

Got it.

I appreciate the responses here, guys. Thanks again.

Our next question comes from the line of Adam Hotchkiss from Goldman Sachs.

Please go ahead.

Great. Thanks for taking my questions. I guess to start, it would be great to just dig a little deeper on what you're seeing in the mid to high end of the market. You know, it looks like on one hand, the 50K plus ACV cohort was your strongest 2Q that you've seen to date. But I think it was a little bit softer once you got below 50K, even when you back out the very low end of the market. So I guess To ask the question in two parts, one, how would you characterize the success you're seeing in the 50K plus? Is that more wins in the enterprise against some of your larger competitors? Is that upsells? How should we think about that? And then two, is there anything to call out from that sub-50K cohort that we should be aware of? Thank you.

Yeah, thanks for the question. We're incredibly excited about the progress that we continue to see in that 50K. You know, it's up 48% in terms of representative ARR. Logos was up nearly 3X sequentially. And then the 10K side of things, what I'd highlight there is from an ARR perspective, it's pretty similar in terms of value from Q1s. But if we look at the AR contribution in the 50K bucket, it was much greater than Q1 with an accelerating growth rate. So I'd just highlight that the deals were much bigger and we were seeing a lot of deals within that bucket that more than made up for the reduction in logo count in the sub 50K.

Okay, great. That's really helpful. And then, you know, second, just to double-click on Tagger, I appreciate all the color that you've given there, but could you give us more of a sense for why now on buying that business and how you thought about that from an M&A environment and balance sheet perspective? Was this just a function of you're hearing accelerating demand for this in your customer base and wanted to be sure to build out a presence there early, or how did you think about the sort of why now?

Yeah, this is Justin.

I can speak to the kind of the why now and how we're thinking strategically about this. So you've heard me start talking about this space, you know, probably as early as beginning of last year, late the prior year. This is a part of the market and part of the category that we know has grown increasingly important to our customers. We referenced in the remarks, you know, we're seeing this in a substantial amount of the enterprise and even the mid-market deals that we're working on. And that's been on an upward trend for some time now. When we think about the timing on this, we were mostly focused on finding the right partner here, finding the right team, the right product, didn't have specific designs around the when. But it certainly lines up nicely, I think, that it's happening when it is because we've got a real opportunity not only to meet a much larger set of customer demands and kind of follow the demand trends that we're seeing around this space, it's also reached the level of maturity where CMOs are starting to take it seriously, you know, as you heard around kind of the increased investments there, but also gives us an immediate opportunity to create a category winner here. increase the competitive win rates in our own business, in the core products, and really stand out from a competitive differentiation standpoint to have a foothold in this part of the market that we expect is going to grow pretty substantially over the next many years.

Yeah, and I'll maybe just add in from a team and customer perspective, you know, the folks on our team have been paying a lot of attention to the space. Justin's been talking about this space for a while. We've been developing a point of view around this space for a while. And the Tagger team and product just really stood out. And when we started to bring some of the rest of our team in the go-to-market org as well as R&D together, to take a look at tagger um the the excitement was off the charts in terms of the fit for us and the opportunity and to justin's point you know in our enterprise over half of the the uh opportunities we have are talking about influencers we saw just a great fit there we saw the opportunity to differentiate and remember i think about real time my team's sending me texts right now even in the you know the hour plus since this news has dropped we've had over 40 inbounds from from brands and companies that you know well that are incredibly excited about spending some time with with us on this product either because they need it and and uh and or they've been asking us for it and asking us to get in this space so all those things have really lined up to this massive opportunity that we're excited about okay really helpful thanks Justin thanks Ryan

Our next question comes from the line of Matt Van Billet from BTIG.

Please go ahead.

Yeah, good afternoon. Thanks for taking the question. Ryan, I guess when you look at that last comment about a number of customers, especially larger ones, looking at the influencer market and probably waiting to see kind of how things emerge from a technology perspective, Where are you projecting this to be in terms of contribution or any kind of premium lift in pricing or anything like that? So whether it's contribution in that dollar retention or anything like that, what's sort of baked into the plan this year? And maybe more importantly, as you look towards next year, how much of a lift can you get at existing customers from a product like this?

Yeah, I'll start off and then Joe, maybe you can just chime in with the modeling and the forecasting. You know, I think I would just tell you from a qualitative perspective right now, we see a lot of opportunity as we move forward. And most of my comments would be 2024 focused on just the combining of our efforts here from a win rate perspective, both in our core business, as well as the deals that would have just been TAGR on its own. We see opportunities from an ACV perspective, The same success we've seen in attach rates from listening and analytics, we expect that our go-to-market motion will drive progress and success on that side as well. But I'll maybe let Joe get into a little bit more of the modeling forecasting.

Yeah, so Matt, I think, you know, right now what we talked about is, you know, we've got $3 million worth of revenue in the guidance for this year, and we're not assuming right now any kind of cross-sell in that number in the Sprout. And so I think that'll be all upside depending on, you know, how the rest of the year goes. And then as far as the other data point that I think is important to note here to one of your questions, which is the ACBs of these deals are significantly higher than our average ACBs. And so when we think about going into next year, Justin Vazquez- In the upside that we have in our business, I think this contributes to our move up into the mid market enterprise, you know the ACB growth that we're seeing, so I think this all kind of fits into the model from that aspect.

Justin Vazquez- yeah and this is justin i'll just quickly add to the to the question you asked about ndr I think you know, obviously a little bit early to be thinking about modeling that, but we know. that anytime we've got additional functions, additional users, or additional product touchpoints with our customers, particularly in this part of the market, that's absolutely a contributor that we expect will have some benefit on both sides of the business for both product sets as we are able to start to execute on that cross-sell and combined selling motion.

All right. And then, Joe, I wanted to follow up just to make sure we're kind of calculating this all out correctly. But if you're adding $3 million from Tagger in the rest of the year guide, then it looks like you took kind of the guidance range down, called $7.5 million at the midpoint. If we try to calculate out what the lowest end cohort is at 4% of ARR, it looks like the rest of the business you're actually lowering the second half contribution a little bit. So can you just tie these together in terms of how much revenue you're taking out of the guide for that low-end customer group going to zero, and then what the remaining delta is in terms of the forward guide?

Yeah, so I think the way to think about it is, and I brought this a little earlier up, Matt, we're taking out that sub-2K bucket down, that low-value bucket down to zero by the end of the year. Um, and so w and we're not lowering any other part of, of the guidance or the model. And then the other data point that I think is important there is that, you know, I think to think about the revenue and maybe what you originally had would be. Back to that comment I made earlier about our exit ARR. If you think about exiting, um, year end ARR with a 28, 20% year over year growth rate, you can kind of get what we think we're going to add to the business. And then, you know, back into the revenue. overall revenue contribution factoring in the $3 million from Tagger.

Okay, great. Thank you. Our next question comes from the line of DJ Hines from Canaccord Genuity.

Please go ahead.

Hey, guys. Ryan, I'll start with you. It may be early, but I'd love to get your thoughts on expansion dynamics with the early customers that have moved over from Social Studio. I know they're generally larger in scope at land but it would be great to get any observations on how these larger lands might impact nrr going forward and what you're seeing with those social studio customers you know as they get acquainted to the sprout product yeah thanks tj i mean i think we are pretty early on on that journey but generally i would say that those lands are coming in larger than they were

with Social Studio. So we are getting a premium on most of those accounts as they move over. I think the things that I get excited about more from a qualitative perspective is typically when they're coming in, in the enterprise, they might be in one part of the business, right? It might be one business unit or might be one use case. and then we've got this opportunity to land and expand across the organization i think because those customers are such a great fit for us in terms of ideal customer profile they tend to skew very much into the mid-market and enterprise we still see a lot of headroom for them even beyond the initial land and and then i think the other piece that i'd share is if i think about just the social studio product and what it offered You usually see customers in one of two places. One, they're doing the marketing publishing side of it, or they might be doing the customer care. We know that we've got a lot of benefit to expand beyond that into the analytics side and into the advocacy side, and in many cases into the social listening side and now influencer. So I think that there's quite a bit of headroom there, but we're still pretty early in that journey.

Yeah, yeah, makes sense. And then, Justin, maybe a follow-up for you. It'd be great to hear a bit more about what you're doing with Repustate and AI on the social listening side of the business. I mean, how meaningful are the advancements you can drive here compared to kind of what that listening product was prior?

Yeah, pretty substantial, in my opinion. I think that the things that we've released to date, the things that we've got in play, et cetera, are interesting and are going to add a ton of value But once we get to kind of the next generation and the next bits of our roadmap where we're really able to start tying in things like, you know, understanding the trends that are coming in through listening, applying that back to the content that's resonating best with your audience, tying that there again to influencers that may be helpful in driving the messages that you want to drive, et cetera, and be able to seamlessly and very easily tie all of the aspects of the social strategy together, which are largely driven by listening with AI and give our customers an easy button to do those things, to draw those insights and to frankly develop their action plan for the outcomes that they want to drive as one example. That's where it starts to get really interesting to me. And that's where I've got a lot of confidence in the team that we have and our product team's ability to take something that may look, you know, fairly simple or pedestrian on the surface and turn it into something that creates a ton of value for our customers and that's differentiated in the market. That's the part here that I'm most excited about. We're already seeing improvements across the entire platform, including listening. And I think, you know, one of the earliest ones that give me a lot of excitement I think are going to drive a lot of value for our customers is, you know, social listening is a pretty interesting endeavor in that you're consuming and trying to draw meaning from massive, massive amounts of data, often nuanced meaning and often multiple meanings. There's not a single thread. There's not a single kind of analysis. or a single bit that's going to be useful to the organization. There's many. And as we start to deploy the large language models and the things that we're building around listening to unlock all of that for our customers, and then again, turn it back around onto their strategy, that's going to be a game changer in my opinion.

Yeah, I might just add on that last point that Justin made, which I think is really, really powerful, is that I think that Sprout is just so uniquely positioned to help here because of the way that we've built this product, how approachable and elegant it has been for folks that have never leveraged listening. So you think about all those things that Justin mentioned, and all of a sudden we can take folks who are new to listening and really super power supercharge their ability to get at that data and make it actionable and so i think that that one piece with the work that we're going to do there just allows us to have a much bigger market to go after because of the way that we've we've built this product yeah yeah helpful caller thank you guys our next question comes from the line of scott berg from needham and company please go ahead

Hi, everyone. Thanks for taking my questions here. Joe, I wanted to just ask a couple things on the Tager guidance here together. I guess, first of all, is there any purchase accounting impact on their revenues? Don't know what standards you've adopted this year in the transition year around that. And then secondly, what's the linearity of that $3 million look like?

Yeah, so on your first question, Scott, there's not going to be any purchase accounting adjustments or impact to the revenue number or the way that the guidance we gave. So we feel like that's a pretty pure number and nothing to worry about that on that front. And I know what you're talking about, but not the concerns you might see from other companies that have other services bundled in with the subscription side. And then, as far as the linearity, we definitely see that there'll be a little bit more of that in Q4, obviously, just given the deals are definitely more enterprise, you know, similar to our business, and so a little bit more weighted in Q4.

Got it. Helpful. And then from a follow-up question, I guess just, you know, more strategically with this product is, I know part of the rationale was on the differentiation side of the house. I guess as you think about other vendors out there that are selling the traditional social media product that you all have had for a long time, it looks like you're probably the only vendor that really will have this functionality. But I guess in that question, how 50% of your RFPs have this in it? Is do you see this typically being selected in the sales cycle or is the sales cycle maybe different than what you'd usually see for your social media solutions? Thank you.

Yeah, thanks for the question, Scott. Yeah, so I would say you're right just on the stat in terms of half of the deals in the enterprise, we're seeing this being a requirement. From a competitive perspective, as we did diligence on the market, really looked at it, There really wasn't much relevance from what we could see in our direct competitive set. It seemed to be a lot of folks that just were competing directly against Tagger. And Tagger just stood out for us in terms of just their technology and the solution and their approach to the market and all the things I mentioned before in terms of fit. And so we see this as a really great competitive advantage in our core business. as we move forward as well. And some of that's been referenced just in the last hour with all the inbound leads that we're seeing from these accounts. And then from a sales cycle perspective, the other piece that was just exciting for us is as we spent time with the go-to-market team, their sales cycles aren't quite as rapid as ours with our trial model, but they're fast for enterprise. And we believe that from what we've seen and how we're running the rest of our cycles, um that they they can attach nicely in the work that we're doing without elongating um our core business so that was also part of the thesis for us on this is as we're doing that cross sell that we can we can really tie these things together as we're going to market yeah and i'll maybe quickly add on the inbound demand and what we were seeing in the asks uh from our prospects and customers both in rfps and just generally

It was a very important part of their strategy and an important part of their ask. It wasn't something that anyone, to your point, that anyone in the space was able to meet. And so it was a demand that was largely left unmet unless it was sourced separately. And now we've got an alternative for those customers that we're really excited about.

Excellent. Thank you for the questions. Our next question comes from the line of Michael Turitz from KeyBank.

Please go ahead.

Hi, this is Michael Vidovic. I'm from Michael Turitz. Thanks for taking my question. So just on the pricing changes you made last year, just wanted to get sort of an update on if you were able to kind of achieve that 10% uplift on existing logos that you talked about last year, if that was just playing as you expected it to play out.

Yeah, Michael, this is Joe. Right now we're feeling really good about the price lifts for the existing customers that have rolled out throughout the year. I think it ranges anywhere from like we talked about, low middle single digits to low middle double digits. I think in a lot of the larger deals on the enterprise side, and we talked about this in the last quarter too, is a lot of time it's not so much about the price increase in these deals, but it's bringing them to the table to maybe add more users, buy more products. And so what we're seeing overall is not necessarily an impact directly related to the price uplift, but basically seeing our ability to expand in these larger accounts is bringing really interesting conversations to the table. And so we feel like overall that the pricing changes we've made, especially upmarket, have been really beneficial to Sprout.

Right.

And if I just squeeze a quick one in here, just baked into your guidance, I guess, what are your expectations in terms of like the demand environment Is it just the same as you currently saw in 2Q, you know, a slight improvement, or what are you expecting there?

Thanks.

So, on the demand side, if we think of the top of the funnel and what we're seeing, we talked a little bit about this in our prepared remarks. We saw a little bit of pressure in the lower end of the business, you know, the low-value customers. I think with the strategic changes we made on the pricing side, we, you know, we definitely anticipated a little bit lower new business on that front. But I think overall, from a demand standpoint, especially up in the mid-market enterprise, it's never been stronger, right? We talked about the 50% uplift, 50% year-over-year increase in the enterprise business. We'll talk about the ACV growth. So I think we're really happy with what the demand we're seeing in the part of the business we're focused on.

Our next question comes from the line of Clark Jeffries,

from Piper Sandler. Please go ahead.

Hello. Thank you for taking the question. First, just on the $1 billion plus revenue for calendar 28, I wanted to ask, how significant is TAGR in that number? Or maybe another way of saying it is, is that a completely organic number with the assets that you have today? Maybe a slight kind of detail of that.

no entry into any other material product categories even if that was organic development uh and then i can follow up yeah so i think you know in in our we talked about this a little bit in the prepared remarks there's there's definitely the tagger organic you know uh business standalone business in that projection i think it's a little early for not for us to kind of predict how much of of the tagger cross selling of the sprout will go to that number we think that's more upside We'll talk a little bit more at investor day, but for now it's, it's basically assumes kind of the organic side of the tagger business with upside with the sprout cross out.

All right, perfect. And then Joe, you know you know, reaching a 20% free cashflow margin by 28 you know, I think that averages out to be maybe at the high end of what, you know EBIT expansion you're targeting. So just, You know, how linear will free cash flow improvement be? Would you expect this to be more back-end weighted in terms of the improvement up to 20%? Any kind of color on the path there would be helpful.

Yeah, we definitely think it's going to be more linear up through 2028. And a lot of that just has to do with the way that our business has shifted up into the mid-market enterprise. We've talked about this, but the unit economics, that business are much stronger. The size of those deals and the length of those contracts are longer. And so there's a lot of upside on the free cash flow side. So we feel like that's a pretty linear progression through 2028 versus running the business as is and then seeing this big uptick towards the back half. So, I would expect that to be pretty even.

All right. Thank you very much. Our final question comes from the line of Elizabeth Porter from Morgan Stanley.

Please go ahead.

Great. Thanks so much. Hello, Jeff. Again, I'm Tagger. Was there any sort of overlap with the customer base we should think about currently? I understand you aren't assuming any cross-sell in 2023 guidance, but how should we think about just the balance of benefits from the acquisition skewed to either landing more customers with this asset now in your portfolio versus the cross-sell opportunity?

Yeah, thanks. You know, with 30,000 plus customers, there's certainly been some overlap, but I would categorize it as one where we think we have a lot of upside for both. So upside for both landing net new customers for both organizations, as well as being able to cross-sell from Sprout Core to Tagger and vice versa, going to Tagger customers and being able to sell Core Sprout. So we see quite a bit of opportunity on both sides of that. And as you might imagine with the overlap, that there was some opportunity for us to just go back to our customer base and get feedback from some of our customers that are leveraging the product, which made us even more confident about the fit with Tagger and Sprout.

Got it. And then hoping to get some color, just higher level NRR trends that you guys may be seeing more recently across the software space. We are seeing more optimization of spend. Yet you're also kind of benefiting from the mix to hire deeper wallet customers. So any commentary on just how some of those positive or negative factors may be impacting your current NRR and change in trajectory?

Yeah, so I think, Elizabeth, I think a couple of comments there. One, I think when you think about the move up to the mid-market enterprise, and Ryan talked about that, the attach rates, you know, 160 basis point improvement and the growth we're seeing there, we're really confident that the NRR we're seeing in that part of the market is really strong and actually improving. And obviously, that's offset probably by what we've talked about over the last couple of quarters is, you know, the turn on the low end of the market obviously will impact our overall NRR. But we're overall happy about the progress we're making up market, knowing that we made this strategic change that was going to kind of put pressure on the low end of the market that's impact NRR as well.

Thank you.

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

All right. Yeah, thank you. And thank you everyone for your time today. You know, we appreciate the opportunity to be talking about and providing some more visibility into this important transition for us. We're certainly very excited about all of the positive momentum that we're seeing in the parts of the business that we're focused on and being able to see the benefits of a lot of the strategic changes that we're making. So we're excited to be able to continue to add clarity there. And look forward to doing more of that. Just as a reminder, September 27th, Investor Day, we'll look forward to talking more about the future, what we have planned, and giving you some more visibility into how we're going to get to that billion-dollar revenue mark and a lot of the other exciting things that are happening in the business. So we'll look forward to seeing you all there. Thanks, everyone, for your time today.

Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation.