Sprout Social, Inc

Hello, everyone. Thank you for joining us and welcome to the Sprout Social second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Lexi Johnson, Investor Relations Manager. Lexi, please go ahead.

Thank you and welcome to Sprout Social's second quarter 2026 earnings call. We will be discussing the results announced in our press release issued after market closed today and have also released an updated investor presentation which can be found on our website. With me are Sprout Social's CEO, Ryan Barretto, and Vice President of FP&A, Aaron Grotman. 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, including our Q3 and 2026 outlook in business plans and objectives, and can be identified by words such as expect, anticipate, intend, plan, believe, seek, opportunity, target, 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 year ended December 31st, 2025, as well as our quarterly report on Form 10-Q for the quarter ended June 30th, 2026 to be filed with the SEC. 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 reconciliations to the most directly comparable GAAP financial measures, are included in our second quarter earnings release, which has been furnished to the SEC and is available on our website at investors.sprapsocial.com. As a reminder, we will be referring to the metric Approximated Subscription Revenue Contribution for customers contributing $30,000 and above in ARR. Thank you, Lexi, and welcome to our second quarter earnings call for fiscal 2026. Sprout delivered another strong quarter with revenue of $123.8 million.

representing 10.8% year-over-year growth, and we closed out the quarter with a non-GAAP operating margin at 12.9%, up 370 basis points year-over-year. I'm pleased that both CRPO and RPO accelerated this quarter. Current remaining performance obligations grew 12.4% year-over-year to 202.7 million, and total remaining performance obligations grew 15.5%. We continue to see customers making longer-term commitments to Sprout, with multi-year contracts representing almost half of our contract mix, up from about one-third two years ago. This reflects the growing confidence in Sprout as a strategic platform and supports our broader go-to-market motion with larger, more sophisticated customers. Sprout also delivered strong non-gap free cash flow in the second quarter at $8.3 million, an improvement of approximately 60% year-over-year. On a trailing 12-month basis, the company has generated approximately $54 million in non-GAAP-free cash flow. We believe this improvement underscores our ability to drive leverage in our model. Q2 was an important quarter for AI at Sprout. We expanded the capabilities of Trellis, our proprietary agentic offering, announcing these updates at our Breaking Ground event in May. Alongside listening, Trellis can now deliver insights on demand. Users can query their social data in plain language and receive analyst-quality answers in seconds without configuring complex reports or dashboards. We introduced Trellis Studio, a no-code interface for building and customizing skills that proactively surfaces what matters most so teams can move from insight to action faster. Every Sprout customer receives a base allotment of Trellis usage at no additional cost. For customers with higher usage needs, we introduced Trellis Plus, a paid tier that increases their limits and just went live in July. We've seen healthy growth and adoption trends with monthly active Trellis users. In Q2, those customers retained at a higher rate than customers without active Trellis users. And that held true across all segments. Customer feedback has also been very encouraging. One of the nation's top-ranked health systems asked Trellis for a summary of their listening dashboard and described the output as perfect, vastly better than what I would have done. Reporting an analysis that once took hours now takes seconds. Within Newswhip, we extended intelligence capabilities, adding predictive scoring across community platforms like Reddit to help identify emerging narratives earlier. We also launched an AI dashboard builder that generates a real-time monitoring dashboard from a plain language prompt. As it relates to integrations, we also expanded network coverage, adding Snapchat scheduling and publishing, direct creator payments with automated tax documentation through PayPal and Lamano, and consolidated management of TikTok ad comments within engagement. On the partnership side, we launched an expanded integration with Canva to bring design workflows into the Spread platform, and were represented at the Cannes Lions Festival last month alongside partners like Canva and Snapchat. Across R&D, AI has become the center of gravity for our product investments this year. In addition to strengthening our core platform and delivering on the integrations our most sophisticated customers depend on. Co-founder Aaron Rankin's recent return as CTO reflects the priority we're placing here. He'll partner closely with our CPO, Srinivas Somayajula, to lead this next chapter of AI investment and enterprise capabilities that we're building into our products. As we announced on July 15th, we made the very difficult but important decision to reduce the size of our team by approximately 20%. We're incredibly grateful for the contributions of our departing colleagues who helped shape Sprout into the company it is today. Our industry and software more broadly is changing quickly and the way companies need to operate and invest has changed with it. As we step back to examine our own operating model, we saw too many layers and an org structure that was slowing down decision-making and saw an opportunity to really streamline our work in areas of focus. Thank you so much for joining us today. as we look around our market it's clear that major brands are trying to solve the same problem right now how do they manage an explosion of social activity across more platforms than ever at the speed customers expect with finite resources Social is where products get discovered and purchase decisions get made. Customer service has moved there. News breaks there first. Brands are built and destroyed on social media and hours. The most trusted voices talking about a brand are creators and communities, not people on your payroll or under your control. Most companies can't keep up with what that requires. We believe we have built the infrastructure to help brands do exactly that in a way that is differentiated and drives clear ROI. Every day, Sprout ingests more than 2 billion real-time social interactions from hundreds of APIs across more than a dozen networks. That access took 16 years of legal agreements, security certifications, and a track record of delivering customer value. We believe this has built a level of trust and credibility that creates a strong competitive moat defined by high barriers to entry that are difficult to replicate. As we've been discussing with you for the past few quarters, our strategy is increasingly focused on larger, more sophisticated customers where our platform breadth, product roadmap, and go-to-market investments are most aligned with their needs. Thank you. This 30k plus customer segment has stronger unit economics and a better retention and expansion profile, and they tend to adopt more of our strategic products than our smaller customers do. In fact, this cohort carries an average ACV multiples higher than our total average ACV with higher attach rates of products like Influencer Marketing and NewsWeb. As we look to the remainder of 2026, we continue to expect to see this segment represent an increasing percentage of our subscription revenue. Our logo count for customers contributing 30,000 or more in ARR continues to compound as we added 51 net new customers in the segment during the second quarter and 388 over the trailing 12 months. Looking at the largest of our net ads, we had over 10 customers in Q2 that contributed 150K or more in ARR, demonstrating our market progress. As we dig into some of our customer wins from the quarter, the trends become more clear as to why we see so much opportunity with our larger customer cohort. I will start with a seven-figure new business deal with a multinational manufacturer and distributor that is establishing our enterprise suite as the foundational backbone of their global social strategy. By adopting a comprehensive portfolio of Sprout solutions, including premium analytics, social listening, employee advocacy, influencer marketing, news whip, and premier success, they consolidated their highly distributed social operations into a single ecosystem. Thank you for joining us. In addition, Sprout streamlines their creator discovery, influencer campaign logistics, and ROI measurement, while Newswhip empowers them to proactively detect crises and monitor breaking news signals to help protect their brand equity. Following a $1.65 million new business deal last quarter, this Fortune 50 financial services company expanded their footprint in Q2 by an additional $893K, adding our Service Cloud integration and Guardian product. The deep Salesforce integration optimizes their marketing and care workflows, enabling them to deliver a sophisticated omni-channel social customer care, but automatically routing social inquiries directly into their existing environment. Our automated routing is designed to reduce customer response times and eliminate the risk of missed client messages, all while scaling support operations to accommodate 100 Service Cloud users with high volume agent productivity. This customer further ensures brand safety and financial services regulatory compliance by utilizing Guardian, which monitors channels for compliance risks, regulatory concerns, and real-time brand mentions. Service Cloud is designed to enrich client profiles with high fidelity social data, connecting social interactions directly to Salesforce to provide a holistic, unified view of client sentiment and engagement. We believe the story highlights Sprout's unique capability to streamline enterprise customer care while upholding the highest standards of security and compliance for one of the world's largest financial institutions. This quarter, we also secured a 250K new customer win with a leading North American audio and media publisher, underscoring Sprout's ability to drive intuitive enterprise platform consolidation for massive content ecosystems. By adopting a comprehensive suite including Listening, Premium Analytics, Guardian, Newswhip, Influencer Marketing, and Premier Success, this customer is consolidating more than three point solutions into a single enterprise platform. This transition unifies their editorial, social, and events team, streamlining multi-department workflows, improving collaboration, and reducing overall technology complexity. By establishing high-performance enterprise reporting and executive-aligned ROI modeling, Sprout enables them to standardize and scale social operations across 850-plus brand channels, supporting high-volume editorial publishing with rigorous enterprise governance. Sprout is driving business value by unlocking deep social intelligence and predictive media insights to assist this customer's editorial team through the real-time analysis of emerging conversations, trends and fan sentiment. In addition to enriching content strategy, this deployment creates new monetization opportunities by equipping sales and marketing teams with deeper audience, creator, and content insights. These data assets allowed the publisher to build more valuable advertising sponsorships and branded partnership offerings while providing unified creator and artist management and reporting. This story highlights Spread's capacity to handle marketing, creator management, and real-time trend monitoring on a single scalable infrastructure. Next, I'd like to turn to our strategy for customers below $30,000 in approximated subscription revenue. This cohort represented 39% of approximated subscription revenue in the trailing 12 months ended June 30, 2026, compared to 59% in the trailing 12 months ended June 30, 2022. This 20-point shift reflects our multi-year move towards larger, more strategic customers, while also highlighting the opportunity we have to serve this part of the market with a more efficient product and go-to-market motion. As you may recall, last quarter we outlined two pillars of our strategy for this segment, evolving our self-service motion through automation and AI, and reworking the lower end of the market around a simpler, purpose-built product. In April, our Essentials product moved from limited release to general availability, following positive signals from our initial testing. While it's still early, initial cohorts are seeing positive demand trends. Looking ahead, we're also refining our top of funnel motion for Essentials, sharpening how we reach and acquire target customers. Additionally, we believe the product simplicity and price point will be well-suited for expansion into non-US markets. The Essentials product is one component of our broader self-serve strategy for the sub-30K customer cohort, a fully digital, no-sales touch experience. In this segment, we're extending the self-serve model across the full customer lifecycle from acquisition through onboarding, support, and expansion with the goal of improving unit economics across the entire lower segment, not just at the point of initial purchase. I'll now run through our quarterly financial results and then discuss our outlook for Q3 and fiscal 2026. Our second quarter results were highlighted by a quarterly non-GAAP operating margin of 12.9%, up 370 basis points year-over-year, and ongoing expansion of our 30K and above customer segment. Thank you for joining us. Since the fourth quarter of 2022, we have added over 1,900 customers contributing 30,000 or more in ARR and over 1,100 customers contributing 50,000 or more in ARR. Growing these more socially sophisticated customers remains a central part of our longer-term strategy. Turning to cash flow, we generated $8.3 million in non-GAAP free cash flow during the quarter, an increase of approximately 60% from the prior year. As we've communicated previously, we expect our non-GAAP free cash flow margin to closely track our non-GAAP operating margin on an annual basis, and we remain committed to growing non-GAAP operating leverage on a fiscal year basis. Q2 ACV increased 14.8% year over year, reflecting the continued mix shift toward large, more sophisticated customers and broader adoption of our higher value products across the platform. Expanding ACV remains a core part of our strategy, and we see continued opportunity to grow customer value through products like influencer marketing, customer care, premium analytics, and NewsWhip. RPO totaled 400.8 million, representing growth of 15.5% year-over-year. We expect to recognize 70.5% or 282.7 million of total RPO as revenue over the next 12 months, representing CRPO growth of 12.4% year-over-year. Note that during Q2, CRRPO benefited due to longer contract durations as well as a higher mix from renewals. We ended the quarter with $119.9 million in cash and cash equivalents, up from $101.5 million a year ago. As a reminder, last quarter we initiated a $50 million share repurchase authorization. Although our restructuring and blackout periods restricted our ability to buy back stock during Q2, we plan to be in the market opportunistically this quarter. Thank you so much for joining us. Before I discuss guidance, I want to review the recent restructuring and its impact on our financials. We believe the reorganization we announced on July 15th will enable us to deliver faster product innovation for customers in the future while also enabling us to invest in our business. As part of this headcount reduction, we expect to incur pre-tax restructuring charges of approximately $18 to $20 million. Substantially, all of these changes will impact Q3. As a result of our restructuring, we expect to reduce our overall non-GAAP cost structure by at least $50 million on an annualized go-forward run rate. Due to the timing of employee departures and other initiatives related to the reorganization, we expect the annualized run rate will not be fully realized until 2027. With this reduction in cost structure combined with the continued investments we plan to make, we are increasing our guidance for both non-GAAP operating income and non-GAAP EPS. We will continue our disciplined approach to our spend while maintaining flexibility to invest behind Trellis and AI-driven product expansion. Moving on to guidance. For the third quarter of fiscal 2026, we expect revenue in the range of $123.3 to $124.1 million. Non-GAAP operating income in the range of $17.5 to $18.3 million. Non-GAAP net income per share of between 29 and 30 cents. This assumes approximately 60.7 million weighted average basic shares of common stock outstanding. For fiscal year 2026, we expect revenue in the range of 493 to 495.6 million. Non-GAAP operating income in the range of 68.3 to 70.3 million. This is an increase of 20% over the midpoint of our prior outlook. For modeling purposes, we expect to exit Q426 with a non-GAAP operating margin close to 17%. A non-GAAP net income per share between $1.11 to $1.15, assuming approximately 60.6 million weighted average basic shares of common stock outstanding. This represents non-GAAP net income per share growth of approximately 22% over our prior outlook. Finally, we are reaffirming our target of reaching 30% under our Rule of 40 framework by the fourth quarter of fiscal 2027. We expect continued growth in our 30K and above customer segment with continued headwind from customers below 30K. Our focus is improving the quality and durability of growth while continuing to expand non-GAAP profitability. And as a reminder, we are lapping the acquisition of Newswhip beginning in Q3 26, which will carry an associated headwind on both revenue and RPO growth moving forward. In addition, we are not anticipating an improvement in the demand environment. We expect the backdrop to remain consistent with what we have experienced the last few quarters. Note that our guidance excludes the impact of any potential share repurchases for purposes of our earnings per share outlook, given the timing and amount of repurchases is inherently uncertain and subject to a number of restrictions and other requirements. In conclusion, I'm pleased with the progress we made in Q2. Looking ahead, we believe that our current structure puts us in a fundamentally stronger operational and financial position with the ability to deliver higher operating margins and stronger cash flow leverage while at the same time enhancing our ability to invest in what will drive the business forward. And with that, Aaron and I are happy to open up the call for questions. Operator?