Sprout Social, Inc

Thank you for standing by. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprout Social first quarter 2024 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, please press star one again. Thank you. I would now like to turn the call over to Jason Recco, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome to Sprout Social's first quarter 2024 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 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. All statements other than statements of historical fact are forward-looking. These include, among others, statements concerning our expected future financial performance and business plans and objectives, and can be identified by words such as expect, anticipate, intend, plan, believe, seek, opportunity, or will. These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of the risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2023, filed on February 23, 2024, as well as any future 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. Definitions of these non-GAAP financial measures, along with reconciliation to the most directly comparable GAAP financial measures, are included in our first quarter 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 thank you to everyone for joining us. We always appreciate your time. I'm excited to get us started today by expanding on our news to promote Ryan Barreto to CEO before handing things over to him. Ryan and I have had an incredible partnership over the past eight years, but it only took me a few of those years to recognize that he should and would become our CEO. Several years ago, we both agreed and committed that it didn't matter which role either of us were in, as long as we put Sprout in the best position to win and that we were in it together. That's why we're so excited about the natural progression of this transition. Throughout our time together, Ryan has often had the biggest impact in the areas typically aligned with the CEO role. And I've often made my biggest impact when I can think deeply about our biggest opportunities, get forensic with our data, and push our product strategy forward. Over time and as we've grown, the role of the CEO has changed and naturally became more aligned with areas where Ryan is exceptional. The same skills and perspective that allowed me to architect our success over the past 14 years aren't the same things required of the role today. And conversely, I've had far less time for the areas where I can bring exponential value to the business. Together, we're an incredible team. Adjusting the positions we play to match where we're heading gives us the opportunity to add significantly more value and move faster in capturing the opportunity ahead of us. In a moment, I will turn it over to Ryan to talk about how we intend to make that happen. But first, I wanna say thank you and congratulations to Ryan. As a founder, board member, team member, and shareholder, I am as excited as I've ever been about the opportunity in front of us with you leading this incredible team.

Thank you, Justin. I'm deeply grateful for this opportunity. It's been an amazing honor to work alongside Justin for the last eight years building this team and business together. Getting the opportunity to step into the CEO role with his continued partnership and support creates an amazing foundation for me and for Sprout. I want to thank the Sprout Board of Directors for your ongoing trust, my team for putting me in this position, our shareholders for your commitment, and our customers for your advocacy and for helping us get better every day. I want to be really clear upfront on my goals and aspirations for this team. We are here to win. This will be a winner-take-most market, and I believe Sprout is best positioned to be that winner in a growing market. We have the number one product in software, an award-winning culture, and the team most well-known for driving customer success. I'm going to be deeply focused on raising the bar on all of these competitive advantages. We intend to drive excellence in everything we do and to deliver outsized value for our employees, customers, and shareholders along the way. Our team can expect me to lead from the front as we work to deliver here. Let's start with Q1 results. We had a strong quarter on many dimensions, but ultimately didn't meet our revenue goals. After a record back half of 2023, where the majority of our focus was deeply weighted on closing deals versus creating new pipelines, we walked into 2024 with a different business. We're now enterprise heavy, and the linearity of our business has changed materially, which affects our revenue recognition and planning. Our months, quarters, and years are now more heavily weighted to traditional enterprise buying cycles. We underestimated the magnitude of this shift and the quickly changing dynamics in our customer mix. On top of this, we made several important strategic decisions heading into Q1, such as building new vertical sales teams, accelerating promotions in our mid-market and enterprise teams, adjusting our account coverage model, and prioritizing tagger enablement for all of our customer-facing teams. We thought we could manage these changes without disruption, but they collectively set us back. I believe each of these moves support our long-term strategy and better positions us for the future, but in the short term, there were execution headwinds that were self-induced. Although Q1 net new revenue added was less than Q1 of last year and not where we expected it to be, there was a lot of important learning, progress, and momentum coming out of this process. I own this and fully expect us to be much better going forward. Our go-to-market org is now better positioned for scalable growth. Our total pipeline increased 37% year-over-year, premium module attach rates continue to rapidly increase, and our gross retention is over-performing plan. Each positioning sprout for another strong annual performance. Tagger ARR meaningfully accelerated in growth and is seamlessly folding into our platform strategies. And we expect that our Q1 added new ARR will be our low watermark with strong sequential growth over the year. Shifting to the go forward. Entering 2023, we took an important strategic step of deprioritizing the very low end and unproductive parts of our business. Coming into 2024, with that business largely cycled out, we have new clarity on where to optimize and redraw our teams and go to market efforts to accelerate our path to 1 billion in revenue. While we believe this is a powerful unlock for both our growth and efficiency, the benefits will not materialize overnight. We believe that redrawing our go-to-market model around the most successful cohorts is a massive unlock to our future potential. We know that our best customer cohorts are our most efficient customers to acquire, they are the most efficient expansion opportunities, and they are the least likely to cancel, each by orders of magnitude. We will invest aggressively against these cohorts with improved economic efficiency. At the same time, we plan to de-invest in the parts of the market where these attributes don't exist, even if this results in walking away from immediate revenue. We're already beginning to realize the benefits to gross retention from our 2023 model changes, being nicely ahead of Q1 plan here. And we believe that by prioritizing the market cohorts where we can predict future economic potential and get surgical with where we will allocate our time, we can scale a durable, efficient upmarket land and expand motion. We believe the results will be higher future NDR and improved efficiency across the entire organization. As we all know, with compounding SAS models, our Q1 performance does flow through the year from a revenue perspective. With the downward pressure from Q1 revenue flowing through, the changing linearity of the business, and the need to create space as we execute on our go-to-market changes, I needed to tighten up our forecast to ensure we deliver on our commitments. The underlying reality of our business today is orders of magnitude different from the business you knew at the time of our IPO. Once a completely inbound, highly transactional model, we're now enterprise heavy and are constructed that way from product through customer success. Because of this, we should be measured on different metrics that properly align to this current state. As I transition into the CEO role, I want to ensure that we move forward with this in mind. We've told you that ARR growth should have a similar trajectory to revenue growth while metrics like RPO and CRPO are more appropriate indicators of performance trends for our business. As such, we'll no longer be disclosing ARR on a go-forward basis, an approach that is consistent with enterprise SaaS companies in our peer set, including our direct competitors. We've been consistently sharing for four years that we don't measure our success in total logos or total customer count, and our sales team are not measured or compensated on these metrics. We're now at a point where a single large enterprise customer is worth more than hundreds of smaller customers. With enterprise being the priority, total logo count is not a key performance indicator of our current business. As such, we'll no longer be disclosing total customer count. Further, with the goal of transparency, we had previously disclosed logo numbers and contributions from our partner channel. However, we recognize that this has actually served as more of a distraction than a helpful data point, so we won't be continuing that practice. The idea that all of our growth comes from temporal partner contributions is unfounded, so I want to ensure that everyone has the same understanding and more clarity into the actual data. Salesforce partner revenue, including both social studio and non-social studio business, accounted for slightly less than 15% of our new business in 2023 and less in 2022. This amounts to a roughly 3% contribution to our total 2023 revenue growth. which I believe is significantly less than many may have previously assumed. We value our partnership with Salesforce and other key partners, and we see a strong opportunity for future growth that powers through a 3% potential headwind in 2025, especially given all the opportunities we are creating within our ecosystem. We have a tremendous opportunity in front of us, and I'm excited about the innovation and change that we are driving the business to deliver on our goals. We're aligning ourselves with the best and fastest growing cohorts of our market, which you can see in our 44% large customer growth, 41% ACV growth, and ongoing rapid growth in RPO and CRPO. We expect we're going to see both accelerating new business, accelerating expansion momentum, and improving efficiency over a multi-year period of time as we build on our product leadership, world-class culture, and history of over-delivering for our customers every day. I'm excited to bring Justin and our founders' original vision to life as Sprout defines how businesses can operationalize social. And with that, I'll turn it over to Joe.

Joe? Thanks, Ryan. I'll now run through our financial results and guidance. Revenue for the fourth quarter was $96.8 million, representing 29% year-over-year growth. Subscription revenue was $95.8 million, up 28% year-over-year. Services revenue was 1.0 million, up 120% year over year. Despite underestimating the impact of the strategic changes Ryan outlined earlier, we continue to deliver top quartile growth in SAS. The number of customers contributing more than $10,000 in ARR grew 24% from a year ago. The number of customers contributing more than $50,000 in ARR grew 44% from a year ago. ARR growth approximated subscription revenue growth in Q1 which underperformed our plan for the reasons Ryan outlined. We have materially fewer net customer losses compared with the back half of 2023, consistent with the early benefits from our model change. You should think about Q1 ARR being even smaller as a percentage of the full year compared with prior periods, and you should continue to think about the rate of growth of total customer base improving throughout 2024. Q1 ACV was $12,892, up 41% year over year. As we left our first full quarter of new business pricing, new business ACV again grew double digits year over year, and we expect strong ACV growth to continue over the medium term, driven by rapidly shifting enterprise mix, strengthening premium module attach rates, influencer marketing, and customer care. In Q1, non-GAAP gross profit was 76.0 million, representing a non-GAAP gross margin of 78.5% of 30 basis points from a year ago. Non-GAAP sales and marketing expenses for Q1 were 37.2 million, or 38% of revenue, down from 40% a year ago. We continue to hire visually in our enterprise sales and growth organizations. As our customer base has shifted away from SMB and into enterprise, we have changed our accounting for deferred commission amortization from three years to five years. This is consistent with our peers in enterprise software. This accounting change resulted in a $4.4 million reduction in Q1 sales and marketing expenses. We expect an operating income and benefit in all future periods. This accounting change has no impact on cash flow and will mean that a non-GAAP operating margins and non-GAAP free cash flow margins are likely to be increasingly correlated moving forward. Non-GAAP research and development expenses for Q1 were $18.3 million, or 19% of revenue, roughly flat from a year ago. We continue to invest in our future and are increasingly targeted investments in AI and social customer care and are delivering strong returns. Non-GAAP general administrative expenses for Q1 were 14.5 million, or 15% of revenue, down from 17% a year ago. We expect to deliver consistent G&A leverage as a percent of revenue moving forward. Non-GAAP operating income for Q1 was 6.0 million for a 6.2% non-GAAP operating margin. Non-GAAP net income for Q1 was $5.7 million for non-GAAP net income of $0.10 per share, based on $56.3 million weighted average of common stock outstanding, compared to non-GAAP net income of $3.4 million and $0.06 per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q1 with $95.2 million in cash, cash equivalents, and market securities, This is down from $98.1 million at the end of Q4. Deferred revenue at the end of the quarter was $147.1 million. Looking at both our billed and unbilled contracts, RPO totaled $290.0 million, up from $275.0 million exiting Q4, and up 54% year over year. We expect to recognize 73% or $210.6 million of total RPO as revenue over the next 12 months. implying a CRPO growth rate of 48% year-over-year. We continue to believe that all our leading indicators are converging towards CRPO over time. Operating cash flow in Q1 was a record 11.2 million, up from 8.3 million a year ago. Non-GAAP-free cash flow was a record 11.3 million, up from 7.9 million a year ago. Shifting to formal guidance. For the second quarter of fiscal 2024, we expect revenue in the range of 98.5 to 98.6 million. or growth rate of more than 24%. We expect non-GAAP operating income in the range of 4.6 million to 5.0 million. There is a non-GAAP operating margin of 4.9% at the midpoint and includes an estimated benefit of our deferred commission accounting change. We expect a non-GAAP net income per share between 7 cents and 8 cents. This assumes 56.6 million weighted average basic shares of common stock outstanding. For the full year 2024, we are reducing total revenue to the range of $405.0 million to $406.0 million. This assumes a greater than 20% organic sprout revenue growth and accelerated tag or subscription revenue growth and incorporates each of the changes Ryan outlined. For the full year 2024, we are raising non-GAAP operating income to the range of $28 million to $29 million. This implies annual non-GAAP operating margin improvement of roughly 560 basis points. Excluding the accounting change, We are reiterating our prior non-GAAP operating income guidance, which now implies zero-year non-GAAP operating margin improvement of 240 basis points. We expect non-GAAP net income per share between 45 cents and 46 cents, assuming 57.0 million weighted average basic shares of common stock outstanding. We believe we've transformed our business model to position us to deliver increasingly durable and increasingly efficient growth. With that, Jess and Ryan and I are happy to take any of your questions. Operator?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask a question and are listening by loud speaking on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. Your first question comes from the line of Raimo Lempstra with Barclays. Your line is open.

Hey, thank you. Ryan, first question for me is like, if you think about the go-to market changes, if you think about software historically, That usually takes like two to three quarters for go-to-market changes to kind of settle down the organization. Can you speak a little bit like how you see, like maybe more specifically compared to your preparation mark, what you did there? And is that two to three quarter kind of math still valid? And then I had one follow-up.

Yeah, thanks, Remo. Yeah, I mean, we're kind of, I would say most of the way through some of those things today, we made a lot of those shifts heading into Q1. If I think about the things that we did, really important strategically for where we're going as a market organization. If you think about the investments into things like vertical sales, in the account coverage that we implemented, in the enablement that we were doing as a team. So all those things were playing through in Q1. When we think about the guidance, they've all been factored through both the compounding of the subscription revenue through the year, as well as the impact of the changes that we're making through Q2 and getting the rest of our team ramped. So they've all been factored in here, and I think a good portion of it has been felt in Q1, and we feel really good as we're going into Q2 with where our team's at.

Yeah, and then since maybe it's for all of you, since you took away ARR, now we need to think, okay, how do I judge you, and how do I judge the progress of the business and Joe, you said like ARR is probably worth the trough in Q1. Is there any kind of hand-holding you want to give us here or you just kind of need to wait for the outcomes?

Yeah, I'll start on that one. I think just going back to the rationale here, the linearity of our business and the composition of our customer base has been changing in really material ways. As we've been going through this transformation of market and becoming more back-end loaded, we view revenue and RPO as the best indicators for our business, and that's consistent with our peers. We also believe that for all of you, this is going to be the most accurate and a less complicated and less noisy way to measure our business. So I'd highlight the revenue and the RPO as sort of the lagging leading indicators that are going to give you a good indication of where the business is going. And we realize that this is a change and we've added some work to all of you tonight. And so our team will make sure that we are providing the right level of support as you dial in your models. Okay, thank you. Thanks, Cheryl.

And your next question comes from the line of Arjun Bhatia with William Blair. Your line is open.

Thank you. Maybe to start just on the guidance, and obviously we took a pretty big cut to the full year number here, but maybe for Joe, if I think about it historically, at least over the last couple of years, I think there hasn't really been that much room or cushion in the guidance for variability in the business. And now it seems like there's some more changes that are coming from an operational and strategic perspective. And so can you just walk us through maybe what you're baking into the guidance and how much cushion you've left yourself as you work through some of these changes over the course of 2024 here?

Yeah, so Arjun, and some of this Ryan covered, but I'll kind of reiterate the things that are baked in there. First of all, all the kind of go-to-market changes that Ryan indicated are kind of baked in the guidance and how that kind of, you know, we're still making those changes that flow into Q2, but we feel really good about the momentum. The fact that, you know, the flow through on revenue, the soft Q1 revenue that we had and how that flows through. And then the other thing we've kind of factored in here is, you know, our business is definitely becoming more Q3, Q4 weighted. And so when we look at the full year, you know, we're putting way more weight in the back half of the year, and thus we wanted to take revenue down to a level that we felt like a high level of confidence to execute through these changes and give us an opportunity to have a successful, you know, back half of 2024.

Okay, got it. And then, Ryan, for you, you mentioned something in your prepared remarks, and I may have missed the details, You mentioned that there's some immediate revenue that you might walk away from if it wasn't the right strategic fit for you long term. Can you just help flush that out for us? What is it that you're deprioritizing? Is that different from the transition that we've been talking about over the last year or so and maybe how much more complexity does that add into your go-to-market motion as you try to reallocate resources to the ideal customer profile for you?

Yeah, thanks for the question. I mean, step one of a lot of the change that we were making last year was getting the composition of our customer base to a place where we felt like it perfectly matched our ideal customer profile. And really transforming both the inbound and outbound motions, so our new customers as well as our current customer base. And going through that, the next part of it and the biggest opportunity is really identifying where our most sophisticated customers live and where we had the greatest opportunity to be able to maximize our investment. And so as we've looked at the data and looked at our customer base and the cohorts of customers, we've identified some really exciting opportunities for us to really put our team's majority of which in the upmarket and mid-market enterprise. Again, some amazing opportunities when we think about our outbound motions and where we invest our time prospecting, as well as where we think about our marketing efforts and all of the inbound actions that we take to drive really healthy inbound. And so it was really a commentary that we've identified pockets of just the overall opportunity that we don't want to go as hard at because we know that it has different metrics like CAC and higher churn rates compared to the opportunity with some of these cohorts that just convert faster, they land bigger, they stay longer. So it was really a comment on focusing on our team on some of these areas that we've just got more surgical with with the data that we've got in our business.

Okay, got it.

Thank you.

And your next question comes from the line of DJ Hines with Canaccord Genuity.

Hey guys, thanks for taking the question. Ryan, if I interpret your comments right about Q1 softness, it sounds like it was a function of kind of shots on goal, right? A little bit less pipeline generation, the second half of 23. I'd be curious to kind of extrapolate from that and ask about like sales cycles. What are you seeing? I mean, Sprout has always had really quick, close rates and short sales cycles. Is that changing now with the push to enterprise? I mean, you talk more about Q3, Q4 waiting. Maybe that's more tied to budget cycles, but I'd love to hear just specifically on sales cycles, what you're seeing.

Yeah, thanks for the question, DJ. Yeah, you're right. I mean, we are definitely seeing lengthening of our sales cycles as the composition of the customer base and the prospect base is changing. These are larger opportunities. They're larger lands and they have larger opportunities for expansion. And so it is changing. We've We still feel like we're in a great position because we leverage our product in an effort to get customers to more quickly see the value and realize that Sprout is a great fit. But we also see ourselves in more RFPs today than we ever did before, which is a really positive thing for the business. If you look at some of the logos that we've been talking about over the last few quarters and even this quarter, the likes of P&G and Universal Pictures and American Honda, great examples of large companies. that land much bigger for us and have much bigger expansion opportunities later. So I would say that the lengthening of the cycle is a dynamic in our business, which ties to a lot of the commentary around the backloaded nature of where our business is transforming.

Yeah. Okay. And then maybe as a follow-up, just with all that's happening from a regulatory standpoint surrounding TikTok, can you remind us Like, A, how material that is to the business from a revenue standpoint today. And then, B, I'd love to pick up any industry chatter that you're hearing, how folks are thinking about this. Like, what would happen if TikTok were to go away in the U.S.? And any comments there would be helpful.

Yeah, I think the biggest thing to highlight here is we don't really monetize specifically on any of the networks. So if you think about just our customer strategy, the way that they think about is they think about social holistically, and they've got all these different channels that they need to execute against. And so much of this is actually dictated by where their community and their customer base is, and that's where they lean in. TikTok's obviously been a great partner for us. We're really excited about the products we've built alongside of them. But at the same time, when we look at our customers, they typically have multiple networks that they're leveraging. And so any changes that happen here from a brand perspective will just mean that they end up leaning heavier in some other social network where the traffic goes, where their customers go, and where they will spend time. And so for us, that's a huge part of the importance of the work that we do is making sure that we have excellent partnerships and that our products add a ton of value across all of the social networks.

And this is Justin. I'll add on the to the ecosystem commentary. I think at this stage, you know, there's not a lot. I don't think brands are contemplating in a big way that there's an inevitable disruption here with TikTok. That's just the sentiment that we kind of feel from customers. It's been talked about for a while. They'll kind of see what happens, but not shifting around their time or energy at this point. And then broadly, you know, I think that that platform is powerful in a lot of ways, and we value the partnership there. What's sticky about that for consumers and brands is the very short form and unproduced video content. And should something happen and TikTok become unavailable, then that effort is just going to shift to something else with that same sort of characteristic and footprint. Reels is one example. There's others. So it's filling a spot in the market based on the type of content. The network itself is the carrier of that, but this is part of a social strategy and that type of content as part of the social strategy and the engagement that it provides is something that's going to be part of the ecosystem, part of the landscape regardless of where it lives. Okay, that makes sense. Thank you guys.

Your next question comes from the line of Parker Lane with Stifel.

Hey, guys. Thanks for taking the question. Brian, maybe just to double down on one earlier, you referenced that the sales changes happened really before the start of the year. A lot of it took place in Q1, but it's still lingering here in 2Q. When we look at your tight guidance range, how confident are you that peak disruption and go-to-market is behind us and that there's not going to be any level of additional sales execution risk here in 2Q?

Yeah, thanks for the question, Parker. And just to clarify, decisions were made in Q1 and the implementation of those changes, sorry, the decisions on all this happened in Q4 and the execution of it happened in Q1. And going to guide, we feel good about the way that we've built out the guide for Q2 and the rest of the year. The majority of the actions that needed to take place and the changes with the sales teams and some of the enablement that we were doing happened within the quarter. So we feel good about all that and that's being contemplated within the guide.

I think it's also helpful context here just to talk about the type of changes that we're talking about. This, you know, where a big change in go-to-market strategy might take a couple of quarters to take hold. This is a layer lower than that in that we're talking about some pretty tactical decisions around account coverage, spending time with the team on tagger enablement, things like this. So rather than a large kind of strategic change or going after a different part of the market or something like that, these are some tactical things that from a time, energy, and calories spent into one perspective created some headwind for us. But I just want to make sure it's clear that we're not talking about some radical change that's going to take a while to play out. Most of it, you know, things like the enablement, et cetera, are done. That's a binary thing. and that the momentum stutter is fairly finite.

Got it. Appreciate that feedback. And then, Ryan, one more. You talked a lot about aligning your go-to-market around your best customer cohorts. From our perspective, should we interpret that to mean 10K, 50K cohorts, or is there a level of depth beyond that so that customers under 10K that are providing the right signals are still going to be emphasized here?

Yeah, sorry, this is Justin, but this is a project that I've spent a lot of time on, so I'll jump in here. I think that when we talk about taking that next step beyond moving past the very low end of the customer base, and now we've got a customer base on the hold that is much healthier, that's going to have better unit economics, et cetera, there's a next layer there, which is Now, rather than assuming that, okay, the rest of that customer base kind of behaves similarly, performs similarly, et cetera, being able to get a much clearer look at different patterns across different industry types, B2B versus B2C, different approaches to social, different social footprints, things like that, allows us to recognize that there's variance in any given segment. So let's say enterprise. companies that have a very, very different growth profile, even with similarly sized, other similarly sized companies, where rather than painting with a broad brush, we're able to categorize these further and look at opportunities where there are, you know, if we look at even under 10K, There's a dramatic difference in potential in, let's call it the, you know, the 10K to 15K bucket. Within that group of customers, very, very different behavior and potential. And now we've dialed that in and figured out where should we be spending our calories, where should we be spending our time. Thinking about how we talk to those different groups differently and how we show up in market with those different groups differently is a really powerful unlock. And that's kind of some of the background on those points. It makes sense.

Thanks, guys.

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

Great. Thanks for taking the question. I guess to start, how should we think about the performance of your direct and partner channels in the quarter? Is it fair to say that sales productivity was just below where you thought it'd be despite the record RFPs you mentioned, or is there just more of a ramp that your direct sales force has to get through before you can reaccelerate ATV you know, just anything around sales productivity or morale would be useful.

Yeah, you know, I think some of it's actually what you said at the latter part of your comment. It's just some of this is a natural ramp for folks as we had some new hires and then changing roles happening within Q1 and we expect to see that ramp coming into full play here as we go into Q2 and going forward. From a partnership and distribution channel perspective, we saw relative good strength there as well and feel really good about the back half of the year and the partnerships that we have created. So I think these are all just natural things that are playing out in our business model today as more and more of our team is more focused upmarket.

Okay, that's really helpful. And then I just be curious how you now think about the billion dollar revenue target. I know that your prior long term guidance implied something like a 25 or 26% CAGR. And based on that guidance, we're going to be the guidance that you gave, we're going to be a little bit below that exiting this year. Are you continuing to stick with that outlook today? And how should we think about your confidence and reaccelerating growth once we get past the end of this year?

Yeah, we still very much have this insight and in focus. The Q1 impact, when you think about in isolation, is relatively small. It's a relatively small number relative to the billion-dollar target. And our intention here is really to set up Sprout to accelerate to and through that number. And so we think about that $1 billion target certainly as the next milestone, but not the finish line for us. And so much of the work that Justin actually just even touched on from a go-to-market perspective will impact our timelines and just how fast we can get there. So, you know, I'd say no changes right now. And as we have more data to share on this in future quarters, we'll definitely come back to you and share that.

Okay. Thanks, Ryan.

Your next question comes from the line of Rob Oliver with Baird.

Yeah, great. Hi, thanks. Good afternoon, guys. Ryan, I think you said in your prepared remarks you made reference to the quickly changing dynamics in the customer base. I'm paraphrasing if I didn't get it exactly correctly. I assume that reference is in part the move to enterprise, but I wanted to know if there's anything else being referenced there as well, because clearly the move up market for you guys is one that's been telegraphed from when you got out of the lower end of customers beginning last year and then through the end of the year. Just curious what you meant by those dynamics, and if there's something in addition to just, hey, our customers are getting bigger, that you wanted to call out.

Yeah, thanks, Rob. It's really that. If you think about it, the business is really transformed. It's very different from the business we knew at IPO that was highly transactional and inbound with a lot of small SMB-type business. And when we think about today, the opportunity that we have in front of us, the way that our customer dynamics have changed, the way that our capacity and staffing models have changed, and the customers that we're in front of, it's a lot more of these larger, sophisticated customers that come with larger opportunities to land and larger opportunities to grow and longer sales cycles. So it was really more a comment on that and the changing dynamics of the business that we've been going through.

Great. Okay. Thanks. Helpful. And then just one other, and I can't remember if it was you or Joe, that referenced the Salesforce contribution in 23. And I think you were seeking there, I think, to indicate that, hey, we're not dependent on Salesforce. However... I think you guys said it was down year over year from 22, which was surprising to me because coming into the end of life of Social Studio Plus with the momentum around the Salesforce customer service, native integration. So I'd be curious, and I know you've been, and I've seen you at some of the World Tour events for Salesforce, so I'd be curious to hear, is this... a de-emphasis of the Salesforce partnership. I know you've already been talking about it more in the context of a longer-term opportunity, but I just want to help us, if you can, frame those comments relative to Salesforce. Thanks.

Yeah, this is Justin. I want to start with just a quick clarification. That wording might have been a little tricky, but it was up significantly year-over-year from 22 to 23. We were saying that it was a smaller contribution in 22. But want to make sure that that's heard. I'll let Ryan comment on the forward momentum, which is still something that we are very excited about. A lot of opportunity in front of us. So want to make sure that we don't take away the wrong things from those comments.

Yeah, I would just add, we still feel great about that partnership. You're right. We were at New York World Tour. We will be at Connections where CMO Scott will be speaking. Next month, and so we feel really great about the relationship and the opportunity, especially around a lot of the other product lines beyond Social Studio. The commentary was really to make sure that we are properly framing the size and the impact of the business on our overall growth levers and the impact on Sprout. And so that was what the commentary was about.

Okay, great. Thank you. Thank you.

Your next question comes from the line of Rob Morelli with Equity Research.

Hey, this is Rob Morelli. I'm from Scottburg. Thanks for sending the question. We'd love to get some color regarding the early results for your customer care solution. Have you seen any incremental upsell activity with this new release, or is it still too early to tell? Thanks.

Yeah, thanks for the question.

We're really excited about what we're seeing in care. I think there's been a lot of great feedback from customers today. If you think about some of the stuff that we've been building out just in terms of our prioritization of cases and routing of cases and the analytics that come along with agent productivity. We feel really good about the opportunity that we're developing in the marketplace. Our customer feedback has been really strong because we know they are seeing more and more volume showing up in social, and it is critical for them to be in front of these customers every single day. We know that the expectations for consumers on social is much higher than any other channel. And so showing up fast and intelligently is what they expect when they're leveraging a platform like Sprout. So we are seeing lots of good opportunity. There's still lots of roadmap that the team's been working on. And I think you'll expect to see, as we go through the year, more and more features and functionality added in there and more and more success stories from us on that note.

Got it. Thanks for the color. And then regarding the go-to-market shift, you touched on continuing to enable customer-facing teams with Tagger, while also noting Tagger ARR meaningfully accelerated. Has this, I guess, outperformance shifted your outlook for Tagger for the remainder of the year? And I guess, what's the overall opportunity over the remainder of the year? Thanks.

yeah all that's contemplated in in the guide and highlight we feel really good just about the way that the the team and the product is is performing um there there's clearly a ton of value that we're being able to deliver to customers now a big part of the thesis that we shared with all of you before is that this is an area that our customers really cared about and they were either doing this very manually trying to figure out how to build a strategy around this or we're leveraging groups like agencies to execute. And so what we've seen from our customers today is that they really appreciate the ability to be able to do their influencer discovery in our platform, to be able to find the right folks that they should be leveraging for their strategy, to be able to run campaigns through Sprout and then properly report on the ROI from all of that, all in one place with one team. We've seen a lot of great progress so far, both from a new business perspective as well as going back to our current customer install base and attaching it. All of this is being contemplated within the guide, but we certainly see good progress and we'll continue to update you on the things that are progressing here. Got it. Thanks.

Your next question comes from the line of Jackson Eder with KeyBank Capital Markets.

Great. Good evening, guys. Thanks for taking our questions. The first one is, Joe, I think you mentioned that there were still some go-to-market changes that are being, I guess, still being made or still being kind of flowed through here in the second quarter. Just curious which ones have already gone into effect and which ones are still out there.

Yeah, my comment was more about not necessarily the changes were still going on, but the impact of those has been contemplated in our Q2 guide in the back half of the year, Jackson. That's what I was referring to.

Okay, so all of the, just for clarity, all the changes that you plan to make have already been made.

I'll defer to Ryan to reiterate what he was talking about earlier.

Yeah, I think the commentary is really more along the lines of The changes have been made in Q1 and just the flow through Q2 as folks ramp into the roles. And then also just the focus areas that we were talking about in terms of where we're directing the go-to-market teams. But there's, and this ties back to something that Justin said earlier, there's no pivotal shifts that we are making in Q2 that should impact any of the data that we shared.

Gotcha. Okay. And then I'm just curious about the timeline. When in the first quarter did these changes go into effect? And then how soon after those, you know, that time did you start to see the issues in, you know, in deal closures and pipeline and things like that?

Yeah, and I want to call out, there was a few things that we highlighted here that all contributed to just the Q1 performance. We've highlighted some of the things that we believe were self-induced From an execution perspective in terms of introducing some new teams and changing some of the account coverage and taking the team off the floor for enablement. Those were all things that impacted the amount of customer facing time that we had in Q1. There are other things that we highlighted as well, just in terms of where our focus was in Q4 with execution versus building pipeline for Q1. And just some of this is also just the natural shift in our business that we've highlighted around longer sales cycles and larger deals that are gonna fall in the back half. So just highlight those, all of those things contributed to the end result. And then clearly the piece that we haven't spent any time on, but we're aware of and we've generally not leaned into, but we know that it exists is just the macro environment that we're operating in is challenging. And if I think about all of these things, And you've seen it from us over the last few years, this team has been able to navigate all of those headwinds and execute really well. And if we were operating in a different macro environment, I think these things probably wouldn't even have shown up in Q1. So just wanted to make sure that we're properly framing all of those things. And I'd clarify that the self-induced changes or strategy shifts that we had made going into Q1 were really about sales focus and time in front of customers.

Okay. All right. Thank you.

Your next question comes from the line of Elizabeth Porter with Morgan Stanley.

Hi. Thanks for taking my question. You have Ryan Bresner on for Elizabeth here. I'm just kind of curious if we could touch on Tagger here. How has progress been with the platform? How ramped is the sales team with this? And just how much work does there still have to do here?

Yeah, we've seen a lot of great progress. We've been really excited about the things that the team has been has been shipping from a from a sales team perspective and maturity to sales team. We did a lot of enablement in Q1 across our entire team. customer facing org to make sure that we are up to speed with all of the elements of influencer and our Tiger platform. So we're seeing really good progress from there. And that's why we called it out as well, just in the prepared remarks. Our customers really see value in this. We believe it is the best solution that is on the market. We've got this really exciting opportunity to educate customers on the value of Influencer and how this can nicely fit into their social strategy. And then we're bringing along this incredible technology that allows them to execute. And then when you think about the value of the return on investment, you put it against the rest of the things that we do in Core Sprout. It provides customers with really great opportunities to increase their share of voice and their brand, and their own lead generation and revenue. So lots of good progress. The team is ramping really well, and we expect to continue coming back to you, sharing the progress we're making with the team and with customers.

Got it. Very helpful. Thank you.

Your next question comes from the line of Matt Van Lee with BTIG.

Yeah, good afternoon. Thanks for taking the question. You guys talked about quite a bit of changing dynamics in the business, going after a different customer set over the last couple years, the product expanding quite a bit. What gives you confidence that the go-to-market team, especially the sales reps you have in place, are trained, have the right skills, are the right folks to lead this different market motion and go after a different set of customers? especially as you're making changes and it doesn't seem to be sticking right away.

Yeah, thanks for the question.

I mean, I think the first thing that I highlight is we've seen a lot of success in this customer base of market. If we look at the 50K being up 44%, the ACV being up 41%, and the metrics in RPO being up 54% and CRPO being up 48%, there's a lot of good signal in the execution that we've seen. Then you add in a bunch of the logos that we've talked about over 2023, And here in Q1, we're seeing good execution from this team. A lot of this when we think about Q1 is also again just the shape of the way that our years are going to go in this new model as we shift the business. We've also over time just continued to add really great talent to the team. When I look at the folks that we have on the squad today, they're really, really excellent. We've taken the great people that have been at Sprout that have continued to hone their skill set and prove that they can execute, and we've complemented them with great folks from across the SaaS industry that have joined our team. So I think it's a combination of seeing it in the data today and then feeling like we've been raising the bar on the talent we're bringing in, and we're confident that you're going to see the fruit bared in future quarters here as we get into the back half.

All right, great.

Thank you.

Thanks, Rebecca. Apologies. Your next question comes from the line of Clark Jeffries with Piper Sandler.

Hello. Thank you for taking the question. You know, Ryan, I think we've touched on a lot, but what comes to mind is sort of endogenous, exogenous. And I think the biggest framework that we've always appreciated with the guidance is, you know, it seems like the guidance is really set by the ARR that you exit at the prior quarter at. And so when we think about that time spent away from customers aspect, you know, was there anything surprising in terms of retention characteristics? or was there just that lack of time in front of customers that may have contributed to something that you'd characterize as, you know, worse retention metrics? And then I have sort of one follow-up for Joe.

Yeah, thanks for the question. I wouldn't characterize retention metrics within my commentary. In fact, our gross retention performed nicely above plan within the quarter. I think a lot of that is is you know the moving up market and the dynamic of these larger customers that that are going to have a greater lifetime value and and be growing faster with us i think a lot of that is also the strategic shifts that we had made last year and changing the dynamic of our customer base and and the folks that we were um proactively targeting and going after um and and you know if i think about it for us it was really this combination of not not enough customer facing time from an execution perspective within the quarter. Feel good about the work that the team did to create future opportunity. Our pipeline was up 37% within the quarter, but we just didn't get the number of deals we want to get done in the quarter. And I've, you know, for me that's this combination of we we didn't cultivate enough of it in q4 and then we didn't have enough time executing on deals in q1 and then the shifting in that business model into the back half had some natural pressures behind it as well yeah thank you for the cover and then joe you know just before we put arr to bed i was hoping you could maybe frame

maybe the exit growth rate of the business in any way you would choose. Just as we think about, you know, maybe a seasonality of the business that puts less time for ARR booked to be recognized as revenue. Just any way to frame maybe, you know, growth in that new ARR. Do you expect that to be higher in the second half year over year versus, you know, the Q1 commentary that being down year over year? Thank you.

Yeah, Clark, I think, you know, one of the things that you said, it definitely makes sense, which is, you know, and Ryan talked about this, you know, our years are becoming more, you know, Q3, Q4, you know, loaded. And then within the quarters, like even, you know, even the third month in the quarter now are becoming really heavily weighted. And so if you think about, you know, where our ARR is going to be, I think, you know, it's definitely going to be higher, for example, than what our implied, you know, revenue growth rate is. And so I think from that perspective, you're definitely going to see way more ARR come from the back half of the year. Clark, I think that's a fair assumption as we move up into the enterprise business.

Thank you very much.

Your next question comes from the line of Surinder Finn with Jefferies.

Thank you. When I think about all of the changes that were made on the quarter, how should we actually think about the impact on the opportunity pipeline here? Has it effectively been reset at this point? Do we need a couple of quarters to rebuild it? Also, given more focus on enterprise, which even has a longer sales cycle. Is there perhaps a larger than anticipated air pocket here that we should be thinking about?

Yeah, thanks for the question.

First off, all of those things have been contemplated and factored into the guide. I also want to highlight, you know, my commentary was walking into Q1, we didn't have enough pipeline built to close in Q1 that we needed to cover. And if I think about that combination, and so much of that was tied to the backend being so much more loaded than years past. And you can see it in the numbers that we delivered in Q3 and Q4. And so a lot of that time was focused in on execution, meaning that we walked in in Q1 with not as much as we would want to be ready to close in Q1. And then you add in some of the changes that we implemented there with meaning that we just didn't have enough time, customer facing time to go execute. I feel really good about the pipeline that we've created. We're up 37% within Q1. We also have a bunch of pipeline that we walked into the year with that wasn't ready to close in Q1 that is very much alive and active for this year. We've also been in more longer type sales cycles, RFPs, for example, from larger companies that are going to be back-end loaded. So we feel really good about the opportunity in front of us. You take all that and you add in that our reps are continuing to ramp and the maturity of the team continues to get better. And we feel really good about the opportunity that we have in front of us.

Got it. Kind of just shifting back to the decision to no longer report ARR, is there perhaps a structural change in the business? Maybe that you're feeling that there's more churn in the business that makes it less predictable over a 12-month period, perhaps you're going down the path of more transactional types of revenues. I'm a little puzzled by the decision there because By definition, right, it's the revenue over the next 12 months that's on the books, right?

Yeah, this is Justin. I'll jump in. What I think the spirit of the question is here, we actually see it the other way. I think that, you know, if you look at how pronounced the move over the last couple years has been toward the backup periods, whether it be a quarter, a month, or the full year, it has created a lot of noise in the ARR numbers and the ARR comparison. We have a business that is shifting toward the end of the year. The way and this is different than where our company was when we came out where it was highly predictable. It was smooth across months. It was smooth across quarters. It was smooth across the year. And so as we go through this transition, As a publicly traded company sharing metrics like this, we're going through this in real time using a metric that is challenging at scale in an enterprise-heavy business. And it's not, we think, the best indicator for the health of the business. It is going to be, it is going to have big, uh differences between the first half of the year and the second half of the year um and it's uh we don't think the best way nor the most productive way uh for us to be measuring the business or for us to be thinking about our internal decisions that we're making executing on our long-term strategy um to uh build the best value for this company

The only other thing I'll add there is, and we commented on this in our prepared remarks, is that retention outperformed plan for Q1, and we anticipate that we're going to continue to have strength there. And also, just highlight the RPO and CRPO, I think, are really great indicators of the health of the business and where the business is going.

Thank you. Yeah, thanks for your question.

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Yeah, hi. Thanks for taking my question. Ryan, thank you so much. Lots of transparency on what's going on with the business. And you talked a little bit about the macro. Can I just touch upon that? Do you feel that the macro had changed at all, had deteriorated at all since you last reported Q1? Because it's been pretty tough for a while now. And Just wondering if you feel like it was the same or had deteriorated somewhat in the first quarter.

And sorry, just to clarify, compared to what time frame?

The last time you updated us. So your last time you updated us in February.

Yeah. Yeah. I mean, I think the first thing that I'll highlight, and I want to say it again, you know, for those that have been following the story and alongside of us, I don't think we've really ever leaned into the macro. We certainly acknowledge that this is a more challenging environment to execute within, but we've always just really been focused in on controlling the things that we can control and making sure that we are highly accountable to our own execution. um but like all of you we listen to uh our the calls from our peers and we network within the industry and we see the things that we see with within our own business as well and so i would highlight that you know the things that that we have seen um you know uh within the business is you're seeing more scrutiny on budgets um you're seeing more decision makers involved in making decisions In some cases, it's probably elongating some of the sales cycles. Those are all things that are happening. And for us, the way we think about it is, how do we make sure that we absolutely show up at our best for our customers? How do we make sure that we are really clear on the value that we can deliver for them? How do we make sure that we're differentiating against the competition in every conversation and making sure that our customers see just how Sprout can help them with their share of voice, with their pipeline, with their NPS, with their customers. So I would say, you know, I think for most folks, it exists in the environment today. We're really just focused in on controlling what we can control and delivering on our goals.

Thank you. And then my follow-up question for Joe, Thank you very much for the color on the seasonality that we should expect for CRPO and RPO. But what can you share for us in terms of your growth expectations for CRPO this year? Thanks.

Yeah, so we still see Q1 as kind of like the low watermark in the way that you should look at those metrics and you could expect those to be steady and continue to increase. throughout the year with Q4 being the high watermark part of the year, just giving away the curve of our business. So low watermark in Q1 and then high watermark in Q4.

Thank you for taking my questions today. Thank you.

That concludes our Q&A session. I will now turn the conference back over to Justin Howard for closing remarks.

All right, thank you. I know everyone's got a busy schedule tonight. I'll keep this quick, but really appreciate the opportunity to talk to you about what's going on in the business, some of the things that we're excited about. I think that, you know, kind of contrary to the backdrop of Q1, the excitement that Ryan and I have, we've been jamming in a way that feels the energy and opportunity in front of us feels, you know, something akin to, you know, four or five years ago. The plans that we have, the strategy changes that we've got in motion, the foundation that we've built on top of, you know, making the adjustments that we need to make and expectations with all of you to be able to out deliver is something that has us incredibly energized. You'll see that play out from us across the year. Appreciate the chance to chat a bit more with some of you folks later on and over the next several weeks. So appreciate your time and look forward to catching up with you all soon.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Ladies and gentlemen, that concludes today's call.