Sprout Social Inc (SPT) 2023 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Sprout Social's Second Quarter 2023 Earnings Call.

I would now like to turn the call over to Jason Rechel, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, operator. Welcome to Sprout Social's Second Quarter 2023 Earnings Call. We'll be discussing the results announced in our press release issued after the market closed today and have also released an updated investor presentation, which can be found on our website. With me are Sprout Social's CEO, Justyn Howard; CFO, Joe Del Preto; and President, Ryan Barretto.

Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among others, statements concerning financial, business, and customer trends, our expected future business, financial performance and financial condition, our expectations concerning the benefits of our acquisition of Tagger, performance against our multiyear financial framework, our market size and opportunity, our plans, objectives and expected results from our future operations, growth, products, investment initiatives, pricing partnerships or strategies and our guidance for the third quarter of 2023 and the full year 2023 and can be identified by words such as expect, anticipate, intend, plan, believe, seek, or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements.

Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially. For 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, 2022, filed with the Securities and Exchange Commission on February 22, 2023, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2023, filed with the SEC on May 3, 2023, and our quarterly report on Form 10-Q for the quarter ended June 30, 2023, to be filed with the SEC as well as any future quarterly and current reports that we file with the SEC.

During the call, we'll discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. In particular, references to profitability and margins refer to non-GAAP operating margin, non-GAAP operating income, non-GAAP net income and non-GAAP earnings per share. Definitions of these non-GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures are included in our earnings press release, which has been furnished to the SEC and is available on our website at investors.sproutsocial.com.

And with that, let me turn the call over to Justyn. Justyn?

Thank you, Jason, and good afternoon, everyone. Thank you, as always, for joining us. Late last year, we initiated several strategic changes that we believe are now beginning to materially improve our long-term growth and efficiency and we'll cover more of our progress throughout our discussion this afternoon.

Today, I'm also excited to share our entrance into the influencer marketing category, which broadens our reach, expands our market, creates more value for our customers and further differentiates Sprout as we uniquely define our industry.

Our product advancements, strategic alignment, and broadening set of capabilities have further established a highly differentiated value proposition for customers and have positioned Sprout at the beginning of an exciting new chapter in our journey as Sprout paces towards our new $1 billion subscription revenue target.

In Q2, record new business ACVs drove ACV growth to a record 29% year-over-year as our success upmarket continues to progress ahead of plan. We're pleased to see 48% year-over-year growth in customers paying us $50,000 or more in ARR and 130% year-over-year growth in customers paying us 250,000 or more in ARR.

Leading indicators like RPO and cRPO, each continue to materially outpace our ARR growth rate. RPO growth of 62% underscores the momentum we are seeing upmarket, and Q2 RPO represented more than 63% of our total ARR, up more than 2,000 basis points over the past 2 years.

The significantly improving quality of our business was further evident in record non-GAAP operating margins during Q2 and more than 140% growth in cumulative year-to-date free cash flow. While we're seeing everything we want to see from our strategic shift late last year, structural improvements in our business and accelerated momentum upmarket, the unpredictability at the very loan of our business has remained difficult to forecast in Q2.

Though we view this as a positive trade-off and have deliberately deprioritized and removed resources from this part of our business, we're ultimately committed to high confidence projections. For that reason, we have elected to remove non-core ARR from our plan for the remainder of this year and are modeling to have it cycled out fully heading into 2024.

We believe this change provides investors with the greatest visibility into our performance and position Sprout to execute with the level of consistency that you have come to expect from us. Meanwhile, the upside of our strategic shift is becoming even more pronounced. We are beginning to see a structurally positive impact on net dollar retention of our core customers and our enterprise business further accelerated during Q2, yielding the highest new LTV for enterprise compared to all prior quarters.

Enterprise grew nearly 50% year-over-year and represents a record 43% of total ARR. Enterprise new business was up more than 50% year-over-year and total net new ARR from this segment also grew greater than 50% year-over-year.

Multiple factors are contributing to our success and this quarter premium module attach rates were very strong. Total premium module attach rates increased by 160 basis points from Q1 2023, nearly double the uptick we saw on average in 2022.

During Q2, we further accelerated our roadmap in social customer care and AI. Our product team has already delivered 16 material care-related releases in 2023, including reply suggestions by AI assist. We've also made structural and organizational changes to rapidly expand our investments in AI and accelerate the work already underway to make AI pervasive across our platform and deliver significant new value to our customers.

The emergence of generative AI, enhancements to large language models and new training techniques favor the most skilled product teams and we believe will allow us to outpace anything being done in our space today. Our early momentum in this area, including language detection, AI assist, enhanced sentiment and content detection and filtering lay the foundation for an extensive roadmap of exciting product capabilities to come.

All of this progress brings me to our most important update today, our announced acquisition of Tagger. Influencer and creator marketing has quickly increased in customer demand given how critical this category has become to a brand's awareness and brand strategy. In fact, we currently see influencer marketing in more than half of our enterprise RFPs.

While the demand signal is very strong, brands have up to this point struggled to fully harness its potential because influencer marketing has been siloed with little connection to their core social marketing strategy and no ability to manage discovery approvals, workflow, and reporting. We believe Sprout's brand and scale position us to pull ahead in this market.

For anyone unfamiliar, influencer and creator marketing is today the third leg of the stool for social strategy, and one of the most important and fastest growing. As traditional media and paid advertising continue to be disrupted, influencers, creators, and short form content are beginning to take priority for brands, along with demonstrably higher ROI.

Industry analysts have estimated that nearly 50% of CMOs are growing their spending on influencer marketing in 2023, representing the third fastest area of budget growth. We believe the combination of Tagger and Sprout will allow us to create a market leader in both social media management and influencer marketing.

We developed a thesis on this space in 2022 and Tagger very quickly became our target for 3 primary reasons. First, the team is world-class, a smart, innovative, and customer-obsessed group. Second, we found the technology, infrastructure, and products were built with the same emphasis on quality, elegance, approachability, and scale that Sprout focuses on. And third, Tagger's product has been recognized as industry leading by both G2 and the Global Influencer Marketing Awards and has been chosen by iconic brands across the mid-market and enterprise.

Similar to why we brought social listening into Sprout several years ago, we have identified silos that exist today in influencer marketing and an opportunity for Sprout to step in and provide a unified platform for executing a comprehensive social strategy.

Together, we'll deliver the next generation of social insights to fuel business strategy, execute end-to-end campaign management, foster authentic customer engagements and deeply understand and measure the full ROI of holistic social investments. We believe our capabilities will further differentiate Sprout in our core market and will make Tagger the category winner in influencer marketing.

The combination of our ongoing breakout of market, strengthening partnerships, expanding use cases for our software and an accelerated entrance into the influencer marketing category have Sprout at the starting line of our next great growth chapter. We're excited to outline our path above 1 billion in subscription revenue.

Our strategic changes have positioned us to deliver an even faster pace of margin expansion and free cash flow growth than previously anticipated. And we're excited to share more of our vision and financial future at Investor Day next month. I've never been more energized by our team's momentum and alignment to deliver incredible results and value to our customers, partners, and stakeholders.

With that, I'll turn the call over to Ryan.

Thanks, Justyn. The focus and momentum in our core business, combined with the exciting new addition of Tagger have me incredibly excited about the second half of this year in 2024. I'd like to begin with some perspective on several of my most topical conversations with customers and investors this quarter before digging into the opportunity we have to change the game with influencer marketing.

Research this quarter from the Harris Poll in partnership with Sprout found that social's importance within an organization is only growing. 80% of business leaders anticipate their company's social media budget will increase over the next 3 years. And 44% of leaders expect their social media budget will increase by more than 50%, even in spite of macroeconomic pressures on their total company's budget.

Underlying these trends, business leaders nearly universally agree that social has become the primary channel for customer care, customer retention and customer feedback. Social is where your customers are, and it has become imperative for brands to meet them there.

We can see this imperative in our partnership with Salesforce, which has accelerated momentum as we further capture the social studio opportunity and align ourselves as a standard social platform for all Salesforce customers. Our product alignment went even deeper this quarter with a native integration into the Salesforce marketing cloud, allowing marketers to personalize their customer's journey based on social data.

We onboarded a record 176 logos in Q2, and we continue to expect contributions to grow meaningfully and linearly over the course of 2023, building to a very strong Q4 as the largest and most complex deployments begin to make their migration over to Sprout.

In total, we grew with an amazing list of customers this quarter, including PACCAR, Cintas, Klaviyo, Irving Oil, Heartland Financial, Jollibee Foods, Cedars-Sinai Medical, Arnott's, Bobcat, Salix Pharmaceuticals and the Federal Deposit Insurance Corporation or FDIC. We also saw and heard some incredible things from our customers this quarter.

The FDIC used Sprout listening data as part of congressional testimony on the banking sector in the wake of the SVB collapse. And one of our new enterprise customers shared with us, I'm thrilled by the new AI assist functionality. As far as AI content generators go, this may be the best one I've seen so far.

In a recent not-for-profit webinar, I was invited to present at, the host introduced us by saying, as a CMO and marketing leader, I spent over 2 decades buying enterprise software and investing in technology that would help me understand how to grow, and social media engagement was always a top priority.

In 2023, time and social media continues to scale, and business leaders are tasked with not only driving engagement, but elevating their constituent experience and support to meet the bar that has been raised by the commercial sector. I've evaluated every tool in the market and Sprout has been my preferred platform for over 10 years.

We know from our customer interest to market diligence that the influencer marketing category is converging with social media management. In a recent briefing, an industry analyst shared, if you aren't working with influencers today, you can't really say you have a real social strategy.

With this as a backdrop, it's been incredibly exciting to get to know the Tagger team and software over the past several months, knowing that we could solve multiple customer pain points together. We knew immediately that Tagger would make for an incredible fit with Sprout. The software is powerful and elegant and the team is hungry to design a category. We believe our depth and scale will allow Tagger's products to innovate and grow at an accelerated pace, and our go-to-market motion is perfectly suited to accelerate Tagger's growth and drive even more customer success.

Joe will later share that we've made no cross-selling assumptions and our commitments to you. But influencer is a customer requirement showing up in more than half of our enterprise conversations. Tagger's ACVs are meaningfully above Sprout's and we believe will now have the most comprehensive and competitively differentiated set of solutions in each of our markets.

We believe the cross-sell opportunity for Tagger's product is massive and orders of magnitude larger than Tagger today. We also believe our new business win rates and ACVs are set to move higher in our core business as we combine forces. It's this combination of factors that has our teams inspired to go big together.

Our alignment around the most sophisticated tiers of our market has our teams motivated for the future with Tagger poised as a new strategic catalyst that we expect will deliver significant value for our customers. We've executed a similar playbook before when our acquisition of Simply Measured accelerated our value proposition and our momentum in social listening and advanced analytics, which are now foundational to our success.

We've long shared that we aspire to be the best place to be an employee and the best place to be a customer. After receiving multiple product awards from G2 and others last quarter, I was incredibly excited that this quarter, Sprout was recognized by Great Place to Work as the best place to work in Chicago and as the best place to work for millennials. Our commitment to our core values and our people continue to make Sprout an exciting career destination on our journey past our $1 billion revenue target.

And with that, I'll turn it over to Joe to run through the financials. Joe?

Thanks, Ryan. I'll now walk you through our second quarter results in detail before moving on to guidance for the third quarter and full year 2023.

Revenue for the second quarter was $79.3 million, representing 29% year-over-year growth. Subscription revenue was $78.7 million, up 30% year-over-year. Services revenue was $0.6 million, down more than 10% year-over-year. Core ARR from existing customers spending greater than $2,000 in ARR with 33% now represents 96% of our total ARR. Total ARR exiting Q2 with $326.1 million, up 27% year-over-year.

The number of customers contributing more than $10,000 in ARR grew 27% from a year ago. The number of customers contributing more than $50,000 in ARR grew 48% from a year ago. And the number of customers contributing more than $250,000 in ARR grew more than 130% from a year ago. Q2 ACV growth was 29% year-over-year, again, accelerated from Q1 2023.

Record new business deal sizes, the exit from a number of low-value logos, and ongoing execution on our pricing changes each compounded healthy, underlying seat expansion and premium module attach rates. We continue to expect that ACV growth will further accelerate through Q3, but now expect faster than previously expected ACV growth over the medium term.

In Q2, non-GAAP gross profit was $61.9 million, representing non-GAAP gross margin of 78.1%. This is up 150 basis points compared to a non-GAAP gross margin of 76.6% a year ago. Non-GAAP sales and marketing expenses for Q2 were $32.1 million or 40% of revenue, consistent with 40% a year ago. We were fortunate to hire well throughout the quarter.

Non-GAAP research and development expenses for Q2 were $14.6 million or 18% of revenue, down from 20% a year ago. We continue to make transformative R&D investments, particularly around platform AI and automation and social customer care.

Non-GAAP general and administrative expenses for Q2 were $13.3 million or 17% of revenue, down from 20% a year ago. We expect to deliver consistent G&A leverage as a percentage of revenue moving forward. Non-GAAP operating income for Q2 was $1.9 million for a positive and quarterly record 2.4% non-GAAP operating margin, improvement of more than 500 basis points year-over-year.

Non-GAAP net income for Q2 was $3.8 million for net income of $0.07 per share based on $55.5 million weighted average shares of common stock outstanding compared to a non-GAAP net loss of $1.9 million and $0.04 per share a year ago.

Turning to the balance sheet and cash flow statement, we enter Q2 with $192.4 million in cash and cash equivalents and marketable securities. This is up from $187.2 million at the end of Q1. Deferred revenue at the end of the quarter was $116.7 million. Looking at both our billed and un-billed contracts, RPO totaled approximately $206.4 million, up from $187.8 million exiting Q1, and up 62% year-over-year. We expect to recognize approximately 74% or $153 million of total RPO as revenue over the next 12 months and implying a cRPO growth rate of 47% year-over-year.

Operating cash flow in Q2 was positive $6.3 million compared to $1.3 million a year ago. Free cash flow was positive $6.0 million, up meaningful from a year ago. Ongoing focus on unit economics and the quality of our customer base is beginning to deliver structural improvements to our cash flow generation.

Shifting to our financial expectations of the Tagger acquisition. We acquired Tagger Media for a cash consideration of $140 million. We financed the acquisition with cash in our balance sheet and liquidity from our newly established revolving credit facility. We believe this to be an efficient use of our balance sheet and an attractive cost of capital. We expect that Tagger will be accretive to our ARR and ACV growth rates and accretive to our gross margin.

In addition, we anticipate that Tagger will be moderately dilutive to our non-GAAP operating margins in 2023 and upside to our margins in 2024 and beyond, as we aim to efficiently accelerate growth inside our distribution model. We have incorporated approximately $3 million of revenue into our guidance for the remainder of 2023, which assumes no customer cross-sell, and we anticipate meaningful growth in 2024.

Shifting to formal guidance. Our core business continues to perform very well. As a reminder, we have removed our low-end customer cohort from our forecast. For the third quarter of fiscal 2023, we expect revenue in the range of $84.1 million to $84.2 million, or a growth rate of 29%. We expect services revenue to decline year-over-year.

We expect non-GAAP operating loss in the range of $2.8 million to $2.7 million. This accounts for the timing of our one-time global employee event in Q3 this year, the timing of sales hiring in Q2, and then temporal impact of the absorption of Tagger expenses. The refers to the non-GAAP operating margin of negative 3.2% at the midpoint.

We expect a non-GAAP net loss per share of roughly $0.05. This assumes approximately 56.5 million weighted average basic shares of common stock outstanding. For 2023, we expect total revenue in the range of $328.6 million to $328.7 million. This is an expected overall reported growth rate of 30%. We expect services revenue will be lower than 2022 levels.

For the full year fiscal 2023, we have decisively modeled our lowest customer tier ARR to decline to 0 exiting 2023, which we believe reduce forecast risks of this business that has been strategically de-prioritized. With this change, we believe investors can more clearly assess our outperformance upmarket and expect that total ARR exiting 2023 will be growing at the same pace as reported revenue. This implies that Q2 will represent the lowest pace of ARR growth this year.

For 2023, we now expect non-GAAP operating income in the range of $1.4 million to $1.5 million. This implies annual non-GAAP operating margin improvement of 200 basis points compared with our prior margin expansion forecast of 225 basis points to 235 basis points.

On an organic basis, we expect to outperform our prior plan and we expect that Tagger will become a net benefit to operating margin expansion in 2024. We now expect non-GAAP net income per share of approximately $0.07 compared to our prior range of $0.07 to $0.08, and assuming approximately 56.0 million weighted average basic shares of common stock outstanding.

To conclude, I'd like to preview our Investor Day next month. We believe that removing low in ARR from our forecast allows investors to most appropriately focus where we are focused, and for Sprout to continue to execute on our goals.

We've introduced our new medium-term financial plan expect to exceed $1 billion in subscription revenue in 2028. We can see this target sooner if our mid-market enterprise segments further accelerate, if Salesforce builds further upside, if we're successful in cross-selling Tagger to our customer base, or if we are able to execute additional future strategic M&A.

We expect to deliver 20% non-GAAP operating margins at $1 billion in scale. We expect free cash flow margins of 20% to 22% in 2028, and deliver a meaningful amount of free cash flow over this horizon. We look forward to sharing further data, details and assumptions with you next month in Chicago. With the starting point of the next great growth chapter in Sprout's journey, we're grateful for your support as we continue to scale the category defining social media management company.

With that, Justyn, Ryan, and I are happy to take any of your questions. Operator?

(Operator Instructions) Our first question comes from the line of Raimo Lenschow from Barclays.

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

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

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

Yes, great question. This is Justyn. So yes, I mean the low-end of the business has been obviously a bit challenging for us over the last couple of quarters. When we spoke last, we saw some signs, some really positive signs of stabilization early in the quarter, in the second quarter and then kind of reverted back to what we had seen in the back half of first quarter shortly after that.

And so while -- we're optimistic that there's future stabilization there. We wanted to make sure that we're just eliminating that risk from the model, as it's remained fairly unpredictable, both on the contraction as well as the new business side, with not only the pricing changes, but also just the organizational alignment and prioritization that we've put further up market, that segment of the business has just remained a bit more challenging.

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

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

Yes. Good question there. For us, I think it's some of the momentum we're seeing up in the -- definitely in the enterprise space, some of the data points we gave out, the enterprise business growing 50% year-over-year, new business growing over 50%. The deals that are coming in are just much larger these days than they were last quarter or the quarter before that.

And so I think as we continue to move up into this mid-market and enterprise business, we continue to see larger and larger ACVs. If you look at the stat on the 50K cohort growing over 48%, the 250K cohort that grew over 130% Arjun, we're just seeing larger deals across the organizations that we're doing business with. So it gives us a lot of confidence that, that momentum up market will continue throughout the year.

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

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

Yes. We feel great about the partnership. We delivered 176 logos in Q2, up 75% sequentially. A lot of value being viewed by these customers as it relates to the integrations that we had built across Tableau and Slack and more recently in Q4 Service Cloud. And then we added the marketing cloud integration in this quarter as well, which we had a great opportunity to speak to customers live about at the Salesforce Connections event.

We shared this previously, but we continue to see a lot of amazing opportunity with these customers, both social studio customers that need to transition off that are very large in size, as well as just Salesforce customers in general that are looking for a fully integrated solution into the Salesforce tech stack. And so we feel really great.

The pipeline is continuing to grow. We anticipate we'll continue to see strong results in the second half of this year. There's been some amazing stories we've seen from customers coming in where this combination of moving from social studio, trialing our product, seeing all of the value adds that we have in Sprout that they could immediately get benefit from.

And then for customers that are Salesforce customers that were on another social media management platform, realizing the importance of having that full 360 degree view of the customer and having that social data pervasive across the Salesforce CRM record. Now we are uniquely positioned to deliver this for customers. So feeling really good about the visibility and a lot of traction and we'll be heavily active at Dreamforce coming up in September.

Our next question comes from the line of Parker Lane from Stifel.

Joe, I wanted to go back to the non-core customer cohort here. And I know it's not in the numbers and there's a lack of certainty around modeling that. But what should we think about as a realistic time frame for these 7,400 customers to either move off the platform or reach some point of stabilization? I mean, we're about 9 months into the price changes, a lot of these customers are month-to-month. Just give us a sense of what a realistic timeline is to approach a stabilization in that cohort, just in that absolute customer logo terms?

Yes. Parker, so what we've mentioned on the call and the way we're kind of giving our guidance, we're actually assuming that, that goes to 0 by the end of the year. So we want to just kind of take that risk off the table. So from that standpoint, that's how you can kind of think about that as it relates through the end of this year. So we've got that zeroing out by the end of this year from a guidance standpoint.

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

This is Ryan. So, it skews very much into sophisticated customers in the enterprise. One of the reasons why it stood out so much to us is they've got customers like Estee Lauder, Bose, Omnicom and a stable of really great customers that they work with. Their technology, which we love, is just incredibly scalable. It's elegant. It looks and feels a lot like Sprout. And so our R&D team who certainly bias to the internal side of building, this is one of the first companies we've ever seen that they've just been incredibly impressed with.

And we liked it because we obviously have a certain go-to-market motion within the enterprise and the way that they've built their software and implemented customers and the way that customers get utility quickly lines up really well to us. So they're definitely focused in on the enterprise part of the market. And so that, again, speaks to just some of the ACV opportunities we see in the future as well as the impact we think that they can eventually have on our competitive win rates.

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

I guess to start, it would be great to just dig a little deeper on what you're seeing in the mid to high-end of the market. It looks like on one hand, the 50,000 plus ACV cohort was your strongest 2Q that you've seen to date. But I think it was a little bit softer once you got below 50,000, even when you back out the very low-end of the market. So I guess to ask the question in 2 parts, one, how would you characterize the success you're seeing in the 50,000 plus? Is that more wins in the enterprise against some of your larger competitors, is that upsells, how should we think about that? And then 2, is there anything to call out from that sub 50,000 cohort that we should be aware of?

We're incredibly excited about the progress that we continue to see in that 50,000. It's up 48% in terms of representative ARR. Logos was up nearly 3x sequentially. And then the 10-K side of things, what I'd highlight there is from an ARR perspective, is pretty similar in terms of value from Q1, but if we looked at the ARR contribution, the 50,000 bucket was much greater than Q1 with an accelerating growth rate. So I'd just highlight that the deals were much bigger and we were seeing a lot of deals within that bucket than that more than made up for the reduction and logo count in the sub 50,000.

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

Yes. This is Justyn. I can speak to the kind of the why now and how we're thinking strategically about this. So you've heard me start talking about this space, probably as early as beginning of last year, late to prior year. This is a part of the market and part of the category that we know has grown increasingly important to our customers. We referenced in the remarks, we're seeing this in a substantial amount of the enterprise and even the mid-market deals that we're working on. And that's been on an upward trend for some time now.

When we think about the timing on this, we were mostly focused on finding the right partner here, finding the right team, the right product, didn't have specific designs around the when, but it certainly winds up nicely. I think that it's happening when it is because we've got a real opportunity, not only to meet a much larger set of customer demands and kind of follow the demand trends that we're seeing around this space.

It's also reached the level of maturity where CMOs are starting to take it seriously, as you heard around kind of the increased investments there, but also gives us an immediate opportunity to create a category winner here, increase the competitive win rates in our own business, in the core products, and really stand out from a competitive differentiation standpoint to have a foothold in this part of the market that we expect is going to grow pretty substantially over the next many years.

Yes, And I'll maybe just add in from a team and customer perspective, the folks on our team have been paying a lot of attention to the space. Justyn's been talking about this space for a while. We've been developing a point of view around the space for a while and that the Tagger team and product just really stood out. And when we started to bring some of the rest of our team in the go-to-market org as well as R&D together to take a look at Tagger, the excitement was off the charts in terms of the fit for us and the opportunity.

And to Justyn's point, in our enterprise, over half of the opportunities we have are talking about influencers. We saw just a great fit there. We saw the opportunity to differentiate. And if I think about real time, my team's sending me texts right now, even in the hour plus since this news has dropped, we've had over 40 inbounds from brands and companies that you know well that are incredibly excited about spending some time with us on this product, either because they need it and or they've been asking us for it and asking us to get in this space. So all those things have really lined up to this massive opportunity that we're excited about.

Our next question comes from the line of Matt VanVliet from BTIG.

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

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

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

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

All right. And then Joe, I wanted to follow up just to make sure we're calculating this all out correctly. But if you're adding $3 million from Tagger in the rest of the year guide, then it looks like you took kind of the guidance range down, called $7.5 million at the midpoint. If we try to calculate out what the lowest end cohort is at 4% of ARR, it looks like the rest of the business, you're actually lowering the second half contribution a little bit. So can you just tie these together in terms of how much revenue you're taking out of the guide for that low-end customer group going to 0 and then what the remaining delta is in terms of the forward guide?

Yes, so I think the way to think about it is, and I brought this a little earlier up, Matt, we're taking out that kind of that sub, 2,000 bucket down that low value bucket down to 0 by the end of the year. And so -- and we're not lowering any other part of the guidance or the model.

And then the other data point that's important there is that, I think to think about the revenue and maybe what you originally had would be back to that comment I made earlier about our exit ARR. If you think about exiting year-end ARR with a 28%, 29% year-over-year growth rate, you can kind of get what we think we're going to add to the business and then back into the revenue, overall revenue contribution, factoring in the $3 million from Tagger.

Our next question comes from the line of DJ Hynes from Canaccord Genuity.

Ryan, I'll start with you. It may be early, but I'd love to get your thoughts on expansion dynamics with the early customers that have moved over from social studio. I know they're generally larger in scope at land, but it would be great to get any observations on how these larger lands might impact NRR going forward and what you're seeing with those social studio customers, as they get acquainted to the Sprout product?

I mean, I think we are pretty early on that journey, but generally I would say that those lands are coming in larger than they were with social studios. So we are getting a premium on most of those accounts as they move over. I think the things that I get excited about more from a qualitative perspective is typically when they're coming in, in the enterprise, they might be in one part of the business, right? It might be one business unit or might be one use case.

And then we've got this opportunity to land and expand across the organization. I think because those customers are such a great fit for us in terms of ideal customer profile, they tend to skew very much into the mid-market and enterprise. We still see a lot of headroom for them even beyond the initial land.

And then I think the other piece that I'd share is if I think about just the social studio product and what it offered, you usually see customers in one or 2 places, one they're doing the marketing publishing side of it, or they might be doing the customer care. We know that we've got a lot of benefit to expand beyond that into the analytics side and into the advocacy side, and in many cases into the social listening side and now influencer. So I think that there's quite a bit of headroom there, but we're still pretty early in that journey.

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

Yes. Pretty substantial in my opinion. I think that the things that we've released today, the things that we've got in play, et cetera, are interesting and are going to add a ton of value. But once we get to kind of the next generation and the next bits of our roadmap, where we're really able to start tying in things like understanding the trends that are coming in through listening, applying that back to the content that's resonating best with your audience, tying that there again to influencers that may be helpful in driving the messages that you want to drive, et cetera, and be able to seamlessly and very easily tie all of the aspects of the social strategy together, which are largely driven by listening with AI and give our customers an easy button to do those things to draw those insights and to frankly develop their action plan for the outcomes that they want to drive as one example.

That's where it starts to get really interesting to me. And that's where I've got a lot of confidence in the team that we have and our product team's ability to take something that may look fairly simple or pedestrian on the surface and turn it into something that creates a ton of value for our customers and that's differentiated in the market. That's the part here that I'm most excited about.

We're already seeing improvements across the entire platform, including listening. And I think one of the earliest ones that give me a lot of excitement, I think are going to drive a lot of value for our customers is, social listening is a pretty interesting endeavor in that you're consuming and trying to draw meaning from massive, massive amounts of data. Often nuanced meaning and often multiple meanings, there's not a single thread, there's not a single kind of analysis or a single bit that's going to be useful to the organization. There's many. And as we start to deploy the large language models and the things that we're building around listening to unlock all of that for our customers, and then again, turn it back around onto their strategy, that's going to be a game changer in my opinion.

Yes. I might just add on that last point that Justyn made, which I think is really, really powerful, is that I think that Sprout is just so uniquely positioned to help here because of the way that we've built this product, how approachable and elegant it has been for folks that have never leveraged listening.

So you think about all those things that Justyn mentioned and all of a sudden, we can take folks who are new to listening and really supercharge their ability to get at that data and make it actionable. And so I think that, that one piece with the work that we're going to do there just allows us to have a much bigger market to go after because of the way that we've built this product.

Our next question comes from a line of Scott Berg from Needham and Company.

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

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

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

Yes. So I would say you're right just on the stat in terms of half of the deals in the enterprise, we're seeing this being a requirement. From a competitive perspective, as we did diligence on the market and really looked at it, there really wasn't much relevance from what we could see in our direct competitive set. It seemed to be a lot of folks that just were competing directly against Tagger and Tagger just stood out for us in terms of just their technology and the solution and their approach to the market and all the things I mentioned before in terms of fit.

And so we see this as a really great competitive advantage in our core business as we move forward as well. And some of that's been referenced just in the last hour with all the inbound leads that we're seeing from these accounts. And then from a sales cycle perspective, the other piece that was just exciting for us is as we spent time with the go-to-market team, their sales cycles aren't quite as rapid as ours with our trial model, but they're fast for enterprise.

And we believe that from what we've seen and how we're running the rest of our cycles that they can attach nicely in the work that we're doing without elongating our core business. So that was also part of the thesis for us on this is as we're doing that cross-sell that we can we can really tie these things together as we're going to market.

Yes. And I'll maybe quickly add on the inbound demand and what we were seeing in the asks from our prospects and customers, both in RFPs and just generally. It was a very important part of their strategy and an important part of their ask. It wasn't something that anyone, to your point, that anyone in the space was able to meet. And so it was a demand that was largely left unmet unless it was sourced separately. And now we've got an alternative for those customers that we're really excited about.

Our next question comes from a line of Michael Turits from KeyBanc.

This is Michael Vidovic, on for Michael Turits. So, just on the pricing changes you made last year, just wanted to get sort of an update on if you were able to kind of achieve that 10% uplift on existing logos that you talked about last year, and if that was just playing as you expected it to play out?

Yes. Michael, this is Joe. Right now we're feeling really good about the price lifts for the existing customers that have rolled out it throughout the year. I think it ranges anywhere from like we talked about, low middle single-digits to low middle double-digits. I think in a lot of the larger deals on the enterprise side, and we talked about this in the last quarter too, is a lot of time, it's not so much about the price increase in these deals, but it's bringing them to the table to maybe add more users, buy more products.

And so what we're seeing overall is not necessarily an impact directly related to the price uplift, but basically seeing our ability to expand in these larger accounts, it's bringing really interesting conversations to the table. And so we feel like overall that the pricing changes we've made, especially upmarket have been really beneficial to Sprout.

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

So on the demand side, if we think of the top of the funnel and what we're seeing, we talked a little bit about this in our prepared remarks. We saw a little bit of pressure in the lower end of the business, the low value customers. I think with the strategic changes we made on the pricing side, we definitely anticipated a little bit lower new business on that front.

But I think overall, from a demand standpoint, especially up in the mid market enterprise, It's never been stronger, right? We talked about the 50% uplift, 50% year-over-year increase in the enterprise business. We're talking about the ACV growth. So I think we're really happy with what the demand we're seeing in the part of the business we're focused on.

Our next question comes from the line of Clarke Jeffries from Piper Sandler.

First, just on the 1 billion plus revenue for calendar '28, I wanted to ask, how significant is Tagger in that number, or maybe another way of saying it is, is that a completely organic number with assets that you have today, maybe a slight kind of detail of that, no entry into any other material product categories, even if that was organic development? And then I have a follow-up.

Yes. So I think in our -- we talked about this a little bit in the prepared remarks, there's definitely the tagger organic business, standalone business in that projection. I think it's a little early for not for us to kind of predict how much of the Tagger cross-sell under the Sprout will go to that number. We think that's more upside. We'll talk a little bit more at Investor Day, but for now it's basically assumes kind of the organic side of the Tagger business with upside with the Sprout cross-sell.

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

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

Our final question comes from the line of Elizabeth Porter from Morgan Stanley.

I want to ask again on Tagger, was there any sort of overlap with the customer base we should think about currently? I understand you aren't assuming any cross-sell in 2023 guidance. But how should we think about just the balance of benefits from the acquisition skewed to either landing more customers with this asset now in your portfolio versus the cross-sell opportunity?

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

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

Yes. So I think Elizabeth, I think a couple of comments are one, I think when you think about the move up into the mid-market enterprise, and Ryan talked about that, the attach rates, 160 basis point improvement and the growth we're seeing there, we're really confident that the NRR we're seeing in that part of the market is really strong and actually improving.

And obviously that's offset probably by what we've talked about in the last couple of quarters is the turn on the low end of the market obviously will impact our overall NRR. But we're overall happy about the progress we're making up market, knowing that we made this strategic change that was going to kind of put pressure on the low-end of the market that impact NRR as well.

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

All right. Yes, thank you. And thank you, everyone, for your time today. We appreciate the opportunity to be talking about and providing some more visibility into this important transition for us. We're certainly very excited about all of the positive momentum that we're seeing in the parts of the business that we're focused on and being able to see the benefits of a lot of the strategic changes that we're making. So we're excited to be able to continue to add clarity there and look forward to doing more of that.

Just as a reminder, September 27th, Investor Day, we'll look forward to talking more about the future, what we have planned, and giving some more visibility into how we're going to get to that billion dollar revenue mark, and a lot of the other exciting things that are happening in the business. So, we'll look forward to seeing you all there. Thanks, everyone, for your time today.

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