Sprout Social, Inc

Thank you for standing by. My name is Christina and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprout Social Q4 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. And 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. And if you would like to withdraw your question at any time, you can press star one again. I would now like to turn the floor over to Alex Kurtz, EPIR and Corporate Development. Alex, the floor is now yours.

Thank you, operator, and welcome to Sprout Social's fourth quarter 2024 earnings call. We will be discussing the results announced in our press release issued after market closed today and have also released our updated investor presentation, which can be found on our website. With me are Sprout Social's CEO, Ryan Barreto, and CFO, Joe DelPretto. Today's call will contain certain forward-looking statements which were 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, including our Q1 and 2025 outlook, and business plans and objectives, and can be identified by words such as expect, anticipate, intend, plan, believe, speak, 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 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, 2024, to be filed with the SEC, as well as our most recently filed 10-K and 10-Qs. During the call, we will 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 the reconciliations, the most directly comparable GAAP financial measures are included in our fourth quarter earnings release, which will be furnished to the SEC and is available on our website at investors.sproutsocials.com. With that, let me turn the call over to Ryan. Ryan?

Thank you, Alex, and welcome to our fourth quarter earnings call for fiscal 2024. We reported fourth quarter results with revenue of $107.1 million, representing year-over-year growth of 14%. Our current remaining performance obligations, which reached $249.4 million, represented 26% year-over-year growth. I want to thank the SCRO team for their focused execution to close out 2024. Their hard work in the quarter has allowed us to build a stronger foundation for future growth in 2025 and beyond. We saw steady improvements in gross retention, continued ACV growth, and momentum in our enterprise segment. The Q4 demand environment remained consistent with Q3, marked by budget scrutiny, cautious investments, and prolonged sales cycles. Given these trends, we're taking a measured approach to FY 2025, expecting demand to track with FY 2024. In Q4, our go-to-market teams delivered strong results in our 50K ARR customer net ads, and in our CRPO growth, both clear indicators of our success in securing annual and multi-year enterprise agreements. We also saw steady pipeline trends with healthy year-over-year growth across both inbound and outbound channels, particularly in our enterprise business. Further underscoring this momentum, revenue from the 50K segment grew over 35% in FY 2024, and continues to represent a larger share of our overall revenue base. These results highlight the ongoing success of our upmarket strategy. We believe the competitive landscape is increasingly favorable for Sprout, creating a unique opportunity to solidify our market position with enterprise level care, AI functionality, and influencer marketing capabilities. This momentum was evident in Q4 as we closed the largest new business ACV win in Sprout's history with a Fortune 500 financial services company. We also won a strategic opportunity with Under Armour, and I'm excited to share a quote from this amazing brand. We chose Sprout for its innovative features, intuitive interface, and the ability to seamlessly manage publishing, listening, and social engagement all in one platform. With the goal of reaching Gen Z audiences and tapping into deeper insights about this key demographic, Sprout has empowered us to respond quickly and effectively. The integration with Salesforce Service Cloud has also streamlined our customer service process, allowing us to manage inquiries directly from one place. Early successes like the Notre Dame Championship and the NBA All-Star Weekend have shown the true value of Sprout in driving our social media strategy forward. Partnering with these industry leaders, along with other significant enterprise wins this quarter, underscores the value we bring to some of the world's most sophisticated brands. With that as the backdrop, I want to outline why we believe Spread is uniquely positioned to not just win, but help shape the future of social media management, a market that has become indispensable for brands seeking authentic customer connections and deep business impact. I'll then touch on a few updates on our four key growth drivers before handing the call over to Joe. In today's rapidly evolving digital landscape, brands can no longer afford to tackle the complexities of social media without a powerful, integrated platform. The question isn't whether they need one. The question is when they will hit the tipping point and which platform will drive their success. With a relentless focus on customer impact, the growing partner ecosystem, real-time data insights, and strategic AI integration, we believe we are the mission-critical solution for enterprises looking to lead in social. Our customers see us as a trusted partner, helping them engage their audiences, drive action, and deliver measurable results. Our customers manage dozens to hundreds of social accounts, integrating insights from CRM, help desk, marketing, and collaboration platforms. rather than juggling multiple tools and networks they're able to rely on sprout as their central hub to help orchestrate and optimize their entire social strategy this unified approach is a key differentiator in a market crowded with fragmented tools and it continues to drive our momentum in the enterprise space our partner ecosystem also continues to evolve with deepening integrations like salesforce and expanding relationships with both established and emerging social networks. This strategic expansion further strengthens our ability to provide a single unified platform. This year, we are focused on expanding our footprint of technical and go-to-market integrations with other platforms, but also deepening our international partner reach as well. Our massive data vault isn't just big. We believe it differentiates Sprout from other solutions available in the marketplace. Processing more than 1 billion messages per day for almost 30,000 customers, we believe we're uniquely positioned with a deep and proprietary understanding of the content and workflows that drive optimal performance for our customers across all social networks. This data set fuels our development of cutting edge solutions and actionable intelligence for our customers. Expect to hear more from us this year about our expanding data strategy. AI is woven throughout the Sprout platform. From automating the everyday to generating content and surfacing predictable insights, Sprout's AI is designed to unlock customer efficiency. Our customers are able to elevate their strategic vision and creative execution all without leaving the platform. Ultimately, Sprout's products win because they anticipate and address our customers' evolving needs. We're not just helping customers solve today's challenges, we're helping them build the foundation for future success. Last quarter, I outlined four key growth drivers for SPRO. Number one, win the enterprise. Number two, drive customer health and adoption. Number three, expand our partnership and ecosystem. And number four, drive improved account penetration. So today, I want to take a few minutes to provide some quick updates on each of these key focus areas. To win the enterprise, we intend to expand the pipeline, close more 50K deals, and accelerate adoption with a product roadmap built for enterprise needs. Let's start with key product releases in the quarter. For AI, we have seen strong growth in usage of our AI-assessed features over the last year and a 300% year-over-year increase in AI-generated content, highlighting the accelerating adoption of our AI capabilities. We also just released Analyze Chart by AI Assist. AI Assist can now help our customers quickly understand the key insights from the social charts with an automated summary of critical metrics. This marks our 11th enhancement to our AI assess capabilities that also includes features like summarizing conversations, enhancing posts, generating posts, and recommending listening queries. For listening, we're expanding social intelligence with deeper real-time insights from high-impact platforms. Our full launch of Sprout's direct connection to Reddit gives brands access to richer conversations, including comments, engagements, and potential impressions. unlocking a valuable source of unfiltered consumer sentiment. This builds on our expanded partnership with Reddit announced in February 2024, and we see significant opportunities for growth and innovation in 2025. For Care, our latest innovations are built for brands managing high-volume engagement at scale. Enhanced automation and governance tools enable agents to move faster with precision, while advanced sentiment analysis across social networks surfaces real-time customer insights. By improving speed, oversight, and intelligence, we're helping brands deliver exceptional service at scale. We're strengthening enterprise scalability, security, and compliance to help organizations manage complexity with confidence. Large distributed teams need consistency and control. Our new content management tools help enterprises create and distribute approved messaging at scale, aiming to establish brand alignment while reducing risk. Managing access across complex organizations is also critical, which is why our new admin controls simplify role-based permissions, reducing administrative burden while strengthening security. And as data protection remains a top priority, our beta release of sensitive data masking allows brands to automatically redact personal identifiable information and other sensitive information, assisting with regulatory compliance and protecting customer trust. As AI is tackling more tasks like basic social content creation, authentic human-generated content is more important now than ever. We're seeing a generational shift in how people find and buy products, and as a result, we believe effective influencer marketing has become mission critical. In December, we sunset the tagger brand, paving the way for the official launch of Sprout Social Influencer Marketing. In April, we'll launch an overhauled product, making it easier than ever for brands to connect with the right influencers to reach their customers. We've designed AI enhancements that leverage natural language search to help find, recommend, and vet creators that are brand safe and aligned to customer objectives. In 2025, we're excited to build on this momentum with major product updates planned under the Sprout Social Influencer Marketing brand, further demonstrating our commitment to this important market. I also want to spend a few minutes discussing some additional strategic enterprise wins in the quarter that are also outlined in our earnings presentation. We closed the largest new business win in Sprouts history with a Fortune 500 financial services company in a highly competitive deal. They needed a platform to unify social operations across their entire organization, breaking down silos, streamlining workflows, and transforming complex data into real-time actionable insights. Sprout won because of our intuitive experience, advanced reporting, and strategic partnership approach. With premium analytics and listening, this customer can now drive data-informed decisions and execute seamlessly across their large distributed teams, reinforcing Sprout as a platform of choice for enterprises managing social at scale. Our second story highlights a major expansion with a Fortune 500 pharmaceutical company that started with just five users in their global corporate marketing team. Due to this team's early success with Sprout, adoption quickly grew and marketing leaders took notice. The company had long struggled with low adoption of their previous social media management platform, with over 100 users still posting natively, creating inefficiencies and security risks. When they implemented a new policy requiring all social posts to be managed through a centralized platform, they needed a solution that could scale fast and drive adoption. Sprout's intuitive experience, secure access controls, and streamlined workflows made it the clear choice for this customer. Now fully deployed across their organization, Sprout is not only aiding with compliance and efficiency, but also helping to provide deeper insights into their brand's performance, reinforcing our role as the platform enterprises rely on to scale social effectively. Our third story highlights a major transformation for a Fortune 500 retailer that faced challenges with standardization, inefficient workflows, data inaccuracies, and inadequate support from their previous tool. Managing social, email, phone, and reviews across multiple systems created unnecessary complexity and slowed their teams down. By switching to Sprout and leveraging our service cloud integration, they consolidated their customer interaction into a single platform, eliminating silos and improving operational efficiency. This led to faster resolution times, fewer errors, and reduced manual reporting, driving both agent productivity and customer satisfaction. With a more connected and scalable approach, they now have the insights and agility needed to deliver more seamless customer experiences at scale. Our second growth driver is a sharper focus on customer health, onboarding, and adoption to maximize long-term value. In 2025, we are deepening our investment in customer behavioral insights in our 16,000-plus user community and with targeted professional services, all designed to drive success and expansion across the platform. To accelerate adoption and in an effort to maximize ROI, we're also launching new customer education journeys that empower users to unlock Sprout's full potential from day one. Moving on to our third driver, we'll continue to invest in our partnerships with strong global partners that bring Sprout into strategic accounts and expand our reach into some of the largest digital marketing budgets. We're excited to roll out our new integration with Salesforce's AgentForce Assistant for Service Cloud, reinforcing both our AI leadership and deep partnership with Salesforce. Sprout is the first and only social media solution integrated with AgentForce, enabling businesses to seamlessly connect social data with Service Cloud for complete customer view and faster case resolution. This latest expansion not only strengthens our AI advanced capabilities, also underscores our commitment to driving smarter, more efficient customer engagement at scale. We're excited to announce that Sprout social influencer marketing now integrates with the Meta Partnership Ads API, making it easier for brands to boost influencer content directly from campaign workflows. This allows businesses to amplify creator-driven content through their own ad accounts, leveraging authentic endorsements to reach new audiences more effectively. By streamlining promotion and improving efficiency, this integration helps brands drive stronger engagement and better outcomes. Our fourth driver is deepening customer engagement through use case expansion and premium modules, with our field teams seeking to drive greater value across both new and existing customers. In 2025, we're executing a more structured platform selling approach that guides customers through a clear expansion journey, supported by targeted sales incentives to highlight the full value of Sprout. We're also strengthening pipeline generation with a disciplined, playbook-driven approach to account identification and mapping. Lastly, we're refining our international sales coverage to focus on key growth markets across Europe, Asia, LATAM, and emerging markets. We believe these efforts will position us to accelerate expansion, increase customer lifetime value, and maximize the impact of our go-to-market strategy. This team, from individual contributors to executive leadership, is aligned, focused, and committed to executing on our vision. Social's role in business continues to evolve, driven by shifting consumer behavior, deeper brand investment, and increasing need for AI-driven automation. These dynamics are expanding our opportunity, and Sprout is well-positioned to help organizations navigate this shift. I'm excited about what's ahead and look forward to sharing our progress along the way. And with that, I'll turn it over to Joe to run through the financials. Joe? Thanks, Ryan. I'll now run through our financial results and guidance. Our fourth quarter results were highlighted by quarterly non-GAAP operating margin reaching over 10% for the first time in operating history. Solid sequential growth in CRPO dollars and the quality of the larger enterprise wins, a few that were outlined earlier by Ryan. We also added the year with the highest mix of annual and multi-year contract duration in the company's history as our sales teams continue to increase our enterprise focus. But also note that Tagger, recently renamed to Influencer Marketing, had one of the strongest growth rates since the acquisition. We continue to see this product as broadening our market opportunity and allowing our field teams increased cross-selling motions. We generated 6.6 million in non-GAAP-free cash flow during the quarter and $29.7 million during fiscal 2024, up $19.4 million from our non-GAAP-free cash flow in fiscal 2023, up almost 2.9 times on a year-over-year basis. We remain committed to growing operating leverage on a fiscal year basis, and we'll evaluate our ability to drive greater profitability as the year progresses, but we remain focused on funding key growth initiatives. On to a summary of the quarter. Revenue for the fourth quarter was 107.1 million, representing 14% year-over-year growth. Subscription revenue was 105.9 million, up 15% year-over-year. The number of customers contributing more than $10,000 in ARR grew 7% from a year ago. The number of customers contributing more than $50,000 in ARR grew 23% from a year ago. Q4 ACV was 14,651, up 19% year-over-year, against a strong year-over-year comparison. As Ryan discussed earlier, our strategy to drive ACV growth remains focused on shifting to a higher enterprise mix and strengthening premium module tax rates, such as influencer marketing and customer care. RPO totaled $351.5 million, up on $311.5 million exiting Q3 and up 28% year-over-year. We expect to recognize 71% or $249.4 million of total RPO as revenue over the next 12 months, implying a CRPO growth rate of 26% year-over-year. Non-GAAP operating income totaled $11.4 million, which is well ahead of the high end of our outlook. This was up from $1.7 million a year ago and equates to a non-GAAP operating margin of 10.7%. A quarterly record for operating margins. We're pleased that our progress here demonstrates our focus on continued growth in our margin profile. As we know in our last call, during Q4, we implemented a restructuring to improve the efficiency and effectiveness of our R&D organization. As a result, we acquired a restructuring expense of approximately $3 million that was excluded from our 4Q non-GAAP results. In 2024, our overall dollar-based net retention rate, or NDR, was 104% compared to 107% in 2023. Our dollar-based net retention rate excluding SMB customers was 108% in 2024 compared to 111% in 2023. Before moving on to guidance, a few additional comments. Based on the data we gathered in fiscal 2024 that reflects their current macro environment and traditional enterprise sales cycles, expect us to take a more measured view on how we look at the business. As Ryan mentioned earlier, we do not expect the demand environment to change in fiscal 2025 from what we experienced in fiscal 2024. Please also note that during Q1, we implemented a restructuring with our primary focus on customer success. We expect to record a severance expense of approximately $2.6 million that will be excluded from our 1Q non-GAAP results. For the last quarter, we intend to reallocate resources back into our customer-facing organizations. Now on to guidance. For the first quarter of fiscal 2025, we expect revenue in the range of $107.2 million to $108.0 million. We expect non-GAAP operating income in the range of $8.5 million to $9.5 million. We expect non-GAAP net income per share of between 14 cents and 16 cents. This assumes approximately 58.5 million weighted average basic shares of common stock outstanding. For the full year 2025, we expect revenue in the range of $448.1 million to $453.1 million. For the full year 2025, we expect non-GAAP operating income in the range of $38.2 million to $43.2 million. We expect non-GAAP net income per share between $0.65 and $0.74, assuming approximately 59.3 million weighted average basic shares of common stock outstanding. Small note about non-Gatnet income per share distribution across the four quarters in fiscal 2025. We expect our second quarter non-Gatnet income per share to have a slight decrease from Q1 due to seasonality in our Q1 to Q2 operating expense trends and then to grow from Q2 through Q4. Looking ahead, we believe the company has the sales capacity to deliver on our outlook for the fiscal year We intend to expand free cash flow and operating leverage on an annual basis as we've demonstrated over the last two years. We look forward to continuing to innovate and create more opportunities for our customers to grow with us. With that, Ryan, Alex, and I are happy to take any of your questions.