Sprout Social, Inc. (SPT) Q1 2020 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Sprout Social First Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Rechel, Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you, Operator, and welcome to Sprout Social's first quarter 2020 earnings conference call. Like all of our employees and many of you, we're working from home this afternoon. We will be discussing the results announced in our press release issued after market close today. With me are Sprout Social's CEO, Justyn Howard; CFO, Joe Del Preto; and Senior Vice President of Global Sales, Ryan Barretto. Please note that we will be providing more transparency into our business than normal today in an effort to help our investors and analysts better understand how our business is performing through this period of economic volatility. You should not expect us to continue with this level of granularity in the future, and such disclosures should be considered as one-time in nature. 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 statements concerning financial and business trends, our expected future business and financial performance and financial condition, our guidance for the second quarter of 2020 and the full-year 2020 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, including potential disruption from COVID-19, please refer to our annual report on Form 10-K filed with the Securities and Exchange Commission, our quarterly report 10-Q to be filed with the SEC and our other periodic filings with the SEC. During the call, we will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings press release, which has been furnished to the SEC and is also 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 for joining us today. The world has certainly changed since last time we were together, and we hope that you and your families are healthy and finding ways to make the best of this difficult situation. At Sprout, our first priority is the well-being of our people, our families, our communities, and our customers. To that end, we began implementing precautions in February and moved fully to work from home across the company in early March. We're fortunate to have no reported cases of COVID within the Sprout organization, and we'll continue to employ policies that not only keep our team safe, but also reflect our commitment to the well-being of those around us. I'm grateful that we have a team, customer base, and business model that have allowed us to respond quickly to this crisis and adapt with minimal disruption as things have quickly evolved. We'll share a lot of detail today around the impact and trends we're seeing within our business and how the rest of the year may unfold for Sprout, but in short, our diverse customer base, agile team, strong culture, and high-volume business model have allowed us to deliver a strong first quarter with healthy guidance into Q2 and an abundance of data to make thoughtful decisions as the crisis continues to evolve. We're also seeing some really interesting trends emerge around the acceleration of digital adoption by brands with an increased reliance on social as a primary communication channel and many behavioral changes that we expect are likely to become permanent post-COVID. As we'll discuss, there were certainly challenges in March and April and some that will remain to some degree for the foreseeable future. Many of our key operating metrics saw compression for a two to three-week period beginning in mid-March. Though many have recovered and are trending that way in the more recent weeks. We attribute this to a few things. First, Sprout has a very diverse customer base across segments and verticals with balanced exposure by market segment and industries. This has helped minimize the impact of the crisis on our business. Next, we were able to transition to work-from-home quickly, getting back to virtually full operational capacity within about a week. The majority of our new business implementation and account management has always been done virtually, so the adjustments to our customer-facing activities were minimal. We also benefit from a high-volume inbound funnel and rapid sales cycles that give us granular visibility into key metrics at a daily level. This has helped us quickly adapt and apply resources where they are most impactful. Lastly, the increased importance of social, both as a communication channel and an alternative to advertising have led to strong engagement across industries, even some you would expect to be retreating. In fact, we closed our largest ever new business contract at the end of February, and one of our largest expansion deals in April in the travel industry. While we have a lot to be encouraged by, and we continue to invest in the growth of our business, we also believe it is important to address both the gravity of the global situation and the uncertainty that will remain for some time. We are operating from a conservative position, and we'll lean back into an aggressive posture as we see indicators that it's wise to do so. Fortunately, as I mentioned, we operate with high visibility of our key metrics, so we feel well equipped to adjust our posture quickly as needed. If we continue to execute on our strategy, we believe we'll be positioned to capture disproportionate market share and accelerate out of this turn. This visibility has also allowed us to be responsive to our customers and their evolving needs during this crisis. Understanding which of our customers have been most impacted has allowed us to devote resources to their well-being and success to develop joint efforts with our network partners for COVID relief, facilitate peer discussions among our customers and develop resources to help them navigate this situation. Internally, this visibility has allowed us to quickly ship resources to react to customers and verticals where we've seen demand increase. Particularly in the enterprise segment, where we see increased engagement and our competitive advantages have become increasingly compelling as customers grow averse to long sales cycles, expensive and lengthy implementations and services heavy platforms. While this is an incredibly difficult time globally, we feel fortunate to have a team that has adapted well, the ability to adjust quickly and the flexibility to keep our teams healthy and be there for our customers. Now I'll spend a few minutes going over our first quarter performance as well as provide some color on how we're thinking about Q2 and the rest of the year. We had an excellent first quarter with strong momentum across the entire business. Our total revenue for the first quarter was up 31% year-over-year to $30.5 million, and organic revenue grew 41% year-over-year. We exited Q1 with an ARR of $124.6 million, up 30% year-over-year, and organic ARR of $123.1 million was up 39% year-over-year. As a quick reminder, organic revenue and organic ARR exclude revenue from the 2017 acquisition of Simply Measured, and organic revenue now accounts for 99% of our total. We saw acceleration in our performance relative to Q4 across virtually every metric. The investments we're making, strong demand and increased efficiencies led to remarkable performance across the board despite heavy headwinds in March. We also introduced dozens of new product capabilities for our customers in Q1, and we're recognized by G2 and TrustRadius in their Annual Software Awards, winning in nine separate categories, including the top product, best software company and highest customer satisfaction. This is especially rewarding for us because this recognition is based on thousands of customer reviews. Looking forward to Q2, we expect another relatively strong quarter, as Joe will share in more detail shortly. As we think about guidance for Q2 and the rest of the year, we wanted to provide some additional transparency in how we're modeling projections to help you with your own assumptions. As I mentioned, we saw distinct compression in many of our key metrics beginning in mid-March. New business demand and churn all fell below our typical range, with churn specifically dropping below one standard deviation from our norms, measured against the 90-day period pre-COVID. Fortunately, we've seen those metrics return within the expected ranges with some exceeding prior ranges on the demand side beginning the week of April 6. Some volatility remains, but we have good visibility and remain optimistic that we took the brunt of the impact during that three-week period. We would expect those declines to flow through our typical sales cycle of 35 to 45 days with the bulk of new business impact seen in April and May. More specifically, we saw demand in the form of trials and demo requests, which are our primary sources of pipeline, fall below our normal ranges from March 16 to March 26. Beginning the week of April 6, demand recovered and has been above pre-COVID ranges each week since. While it's harder to quantify the quality of demand during this period, at this time, we feel good about the recovery and customer interest. Contraction, which is a combination of gross churn and downgrades, fell below our norms from March 23 to April 6. Beginning the week of April 6, those levels came back within our normal ranges for the remainder of April. Expansion saw a slightly longer rate of compression, but has remained within our 90-day pre-COVID norm ranges in the month of April with a steady recovery trend, and finally, new business has remained within our pre-COVID ranges throughout this period with the exception of the week of April 6, where it fell below those levels briefly. While we're seeing positive indicators in the data, we feel it's appropriate to remain prudent with our guidance as there are still many unknowns related to COVID, including the speed of economic recovery, stimulus delivery, prolonged business disruption or future waves of the virus. The low end of our guidance assumes that we see no improvement to our business relative to what we saw in March and April for the remainder of the year. The midpoint and the high end of our range reflect marginal improvements to the business, consistent with the trends we've seen during April, the variation based on how quickly those trends stabilize. Before I pass the call off to Ryan, I want to wrap up by saying that I'm extremely proud of our team, our ability to adapt and the execution we've seen over the past few months. Our platform has been as critical as ever for our customers during this time, and we expect this expanded reliance on social channels to continue post-COVID. We've seen our efficiency remain steady through this transition and continue to deliver value and new capabilities to our customers at our usual rapid pace. We believe our focus on world-class products and our deep commitment to our people and our customers keep us well positioned to capture market share in this large, expanding and increasingly important category. And with that, I'd now like to turn the call over to our Senior Vice President of Global Sales, Ryan Barretto, who will walk you through some of our customer success stories from this quarter.

Thanks, Justyn, and thanks again to everyone for joining us. I've been really proud to see how our team has responded in this environment. We've led with empathy, and in the process, put many of the Sprout values on display. I'd like to take a few minutes to discuss some of our key customer wins this quarter and share some of the exciting ways our customers are leveraging the platform. Our value proposition is resonating, and we're really excited by what we see ahead. It's clear that we're living in challenging times, and social has become an even more important part of the way we communicate. We're seeing this in our data. In the last four weeks, our traffic was up 24%, and our trials were up 14% in comparison to our Q1 pre-COVID baseline. Every business has been impacted in some way and is now getting a crash course in digital-first communication. Our customers are doing amazing things with the platform, and we've been fortunate to be an essential partner for them. It's been remarkable to see how our marketing, sales and customer success organizations from leaders to individual contributors have responded to this crisis. As Justyn mentioned, the transition of work from home was more seamless than we could have predicted. We're seeing impressive things from our teams. This has included building a crisis communication playbook for social media managers, creating a COVID-19 social listening report, which we gave to every listening customer at no extra charge, seeing our daily sales activity metrics at historic levels, both in terms of speed and volume, and we are hosting our largest ever digital event on May 13 with over 5,000 practitioners registered and brands like Trek, Twitter, CB2 and Slab joining us to co-present. In this market, customers are looking for partners that can respond fast with solutions that can add immediate value. The 30-day free trial continues to be our secret weapon even in the enterprise. The legacy software playbook that required on-site custom demos, long evaluations, and even longer and expensive deployments has become antiquated. We're in the age of the user, and companies expect to be able to not just see, but to use the technology before they invest. And that's where we mean it. Our free trial model has been highly disruptive, enabling customers to implement Sprout before they even see one of our competitors' demos. The Ohio State University, HubSpot, Earl Enterprises, Harrods, Blue Nile, Alterra Mountain, Kendra Scott, Boston Scientific and Edelman were just a few of the incredible brands that invested in Sprout this past quarter. Ohio State ran a very competitive RFP with the goal of selecting one provider for all of their schools, departments and hundreds of social media accounts. With the deployment of this size, they were laser-focused on finding a partner that could deliver the usability, security and functionality required by all of their stakeholders, and most importantly, had a track record of implementing quickly and successfully. They found all of that in Sprout, and I'm pleased to say that they already started rolling out to their schools. Another great story came from one of the largest and oldest retailers in North America. During a time like this, connecting with their customers on digital was paramount. They are struggling with the usability and reporting of their previous enterprise software vendor and were looking for an all-in-one solution with better user adoption and reliable support. Thanks to our trial model, Sprout got this retailer up and running during their evaluation, giving them the confidence they needed to sunset the legacy vendor. We are also seeing customers use social and creative and resourceful ways to continue driving their businesses forward. One of my favorite stories was learning more about how Trek bikes are leveraging Sprout. With shelter in place, many parents have found themselves looking for new ways to keep kids busy and offer their devices. I know this very well. In response to this demand, Trek is using Sprout to market their free home delivery service and to engage and measure their campaign efforts. Every business needs to be faster to create and respond to demand, and Trek is a perfect example of a brand that is doing this well. Another great story is from Mount Sinai Health System in New York, an amazing organization and one that is truly on the front lines. Mount Sinai has been leveraging the Sprout platform to tap into social and web conversations, analyze past content performance and plan future content across the major networks. Their content has included touching stories about their staff and sharing appreciation for the NYC businesses supporting them. In turn, this content has been re-shared by celebrities like Jonah Hill and Ellen. It's an incredible example of the amplifying power of social media. In summary, it's been a rewarding time to be leading at Sprout. Our people have risen to the challenge and are operating at new levels. And most importantly, we're taking fantastic care of our customers. Our virtual stand-ups, scavenger hunts and Sprout's own version of MTV Cribs have served to bring our people closer than ever. This culture extends to our customers who feel the overwhelming daily support and know that we have put them first. I look forward to being able to share more of these stories with all of you in the future. And with that, I'll turn it over to Joe to run through the financials.

Thanks, Ryan. I'll now walk you through our first quarter results in detail. We're moving on to guidance for the second quarter and full-year 2020. We are pleased with this quarter's strong results. As Justyn noted, total revenue for the first quarter was $30.5 million, representing 31% year-over-year growth. Excluding the impact from legacy Simply Measured products, our organic revenue was up 41% year-over-year. This growth was driven by increased demand from both new and existing customers and strong sales execution. We've maintained a strong financial profile with high margins and 99% recurring subscription revenue. Total ARR in Q1 was $124.6 million, up 30% year-over-year. Organic ARR was $123.1 million, up 39% year-over-year. We had 390 net new customers in Q1 to finish the quarter with 24,083 customers. The number of customers contributing more than $10,000 in ARR reached 2,404, up 58% from a year ago and up from 2,185 in Q4 2019. We continue to add value to existing customers and land increasingly large initial deal sizes with newer customers as we focus on high-quality customer lead generation. In discussing the remainder of the income statement, please note that unless otherwise noted, all references to our expenses, operating results and share count on a non-GAAP basis are reconciled to our GAAP results in the earnings press release that was just issued before the call. In Q1, gross profit was $22.6 million, representing a gross margin of 74% compared to 75% a year ago and 72.5% last quarter. Turning now to operating expenses, as Justyn touched on, we have granular daily visibility into our key metrics, which will inform our investment decisions both through this crisis and over the long term. With very short sales cycles, we feel well equipped to adjust our posture quickly and as needed. Sales and marketing expenses for Q1 were $13.4 million or 44% of revenue, down from 45% a year ago. We made significant investments in sales and marketing throughout 2019 focused on expanding our market reach. We expect to continue to make smart investments, and we'll focus on optimizing our sales and marketing spend. We finished our Q1 hiring on track with our expectations, and we'll continue to look for opportunities to invest through the lens of the current visibility we have into our business environment. Our teams are adapting to remote onboarding, and we feel fortunate that we are in the financial and business position to take advantage of hiring amazing people through this period of time. Research and development expenses for Q1 were $6.8 million or 22% of revenue, down from 27% a year ago. We're able to drive leverage in this area due to our approach to building software and our single code base while continuing to expand our offering and adding new capabilities for our customers. General and administrative expenses for Q1 were $9.8 million or 32% of revenue, up from 26% a year ago. This growth was primarily a function of public company expenses, which we did not have in Q1 2019, and expansion of our annual corporate training. We expect general and administrative expenses to decrease as a percentage of revenue as we continue to scale our operations over time. Non-GAAP operating loss for Q1 was $7.4 million or a negative 24% operating margin. This compares with a negative 23% operating margin a year ago. We did, however, outperform our expectations due to high incremental leverage from revenue outperformance. Non-GAAP net loss for Q1 was $6.96 million or a net loss of $0.14 per share compared to a net loss of $5.2 million a year ago. Turning to the balance sheet and cash flow statement, we ended Q1 with $137.4 million in cash and cash equivalents, up from $135.3 million from the end of 2019. During Q1, we executed the greenshoe following our December IPO, resulting in net cash flow proceeds of $10.0 million. Deferred revenue at the end of the quarter was $34.1 million. Looking at with our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $47.5 million, up from $42.1 million exiting 2019. We expect to recognize approximately 88% or $41.8 million of total RPO as revenue over the next 12 months. Operating cash flow in Q1 was negative $4.5 million compared to negative $3.9 million a year ago. Free cash flow was a negative $4.8 million in Q1 or negative 16% free cash flow margin compared to negative $4.0 million and a negative 17% free cash flow margin a year ago. Moving on to guidance, for the second quarter of fiscal 2020, we expect total revenue in the range of $31.1 million to $31.2 million or a growth rate of roughly 26%. We expect our organic growth rate to be mid- to high single-digit percentage points faster than our total reported growth rate. We expect non-GAAP operating loss in the range of $8 million to $7 million. As Justyn discussed, we are continuing to invest in our products and our people in support of our long-term growth. In certain segments, we see opportunity to increasingly leverage our competitive advantage, but to be clear, we are tracking our business on a daily basis to ensure we are optimizing our pace of overall investment. Historically, our free cash flow margins have been a couple hundred basis points better than our operating margin, or we are building relationships for the long term, and we're working with customers that have been adversely impacted by this crisis on flexible billing and payment terms. As a result, we would expect Q2 free cash flow margin to be roughly similar to our operating margin; to the extent that crisis persists, this dynamic could persist into Q3. We expect non-GAAP net loss per share between $0.15 and $0.14, assuming approximately 50.5 million shares. For the full year of fiscal 2020, we expect total revenue in the range of $125.5 million to $130.5 million. This compares with our pre-COVID guidance range of $131.7 million to $133.7 million. At the midpoint, this is an expected overall reported growth rate of 25%. We continue to anticipate that our organic revenue growth rate will be higher than our reported revenue growth rate by mid- to high single digit, implying a 2020 organic growth rate of greater than 30%. We believe this forecast captures many unknowns, including the prevailing environment, which is adversely impacting many of our customers, potential for future disruption from the virus and certain path of broader economic recovery. As Justyn referenced, we have seen many business indicators stabilize through the course of April. The low end of our 2020 guidance range assumes that we see no improvement to our business relative to what we saw in March and April for the remainder of the year. The midpoint and high end of our range reflect margin improvements to our business, consistent with the trends we've seen during April, the variation based on how quickly those trends materialize. For 2020, we expect non-GAAP operating loss in the range of $28.3 million to $25.3 million compared with our pre-COVID range of $29.3 million to $25.3 million. We expect a non-GAAP net loss per share of between $0.55 and $0.50 compared with a prior range of $0.57 and $0.50, assuming approximately 50.6 million shares. In summary, and as Justyn and Ryan have discussed, the durability of our mission-critical platform is resonating as global customers accelerate their transition to digital-first businesses. The opportunity to help customers manage the increasingly relevant social channel continues to present compelling opportunities for sustainable growth. Our strong balance sheet and prudently managed cash flow give us a high degree of confidence to continue to make balanced and high ROI investments that will enable us to capitalize on our potential in the years ahead. With that, Justyn, Ryan and I are happy to take any of your questions.

Thank you, sir. I show our first question comes from Stan Zlotsky from Morgan Stanley. Please go ahead.

Perfect. Thank you so much, guys, and I'm glad to hear that everybody on the call is doing well and the company is also doing well as far as health and safety. First question from my end, what gives you confidence to provide guidance, and why provide guidance for full-year revenue considering that so many other companies have pulled guidance, what are you seeing out there that's really giving you that confidence? And then I have a quick follow-up.

Yes. This is Justyn. Thanks, Stan. I'll address that, and certainly, if my team has anything to add, but when we thought about what the remainder of the year looks like for us and what Q2 looks like for us, a lot of that confidence came from, as we mentioned in the remarks, our ability to look at very detailed and granular data for the business. So, given the thousands of trials that we're adding to the top of the funnel in any given month, tens of thousands of renewals and transactions that we're doing, gave us a lot of insight into how those metrics were trending, which periods of time they were impacted for and the degree of recovery. I think while certainly there's a lot of unknown still that remain for the rest of the year, the assumptions that we're making and where we felt good about putting the baseline of the guidance was around the kind of extrapolating out the worst of what we've seen in March and April, which is counter to the trends that we've seen more recently, which are much healthier, and that gave us the confidence that we needed at least to put a stake in the ground at the low end of the guidance while we gather more data on how quickly or how much those trends that we've seen improve in the last several weeks, what the level of stability is around those, and so, part of this is the high volume kind of lower ACV nature of our business where we've just got a lot of predictability. We've got 99% recurring revenue, subscription revenue, and low services. We've been virtual for a long time, and we've got that level of detail on our data on top of a 35 to 45-day average sales cycle has allowed us to see how a lot of this impact plays out in the time that we've kind of been in the situation. So, we felt like we've got strong visibility into at least the band that we provided. Where it falls within that, is we're going to look to data to clarify that for ourselves, but the guidance that we gave is something that we're really confident in because of the reasons that I mentioned.

That makes a lot of sense, and I commend you for providing guidance to help set investor expectations given your confidence in the data. Regarding your improvements in April, what are you observing about new business activity during that month? What factors are motivating customers to choose Sprout Social software now, instead of postponing their decision for six months? That’s all from me. Thank you.

Thanks, Stan. This is Ryan. Happy to jump in and answer that. I think it's really twofold in terms of what we're seeing in terms of our customer base. One, we've got this advantage where, as Justyn mentioned before, highly data-driven. We're seeing good traffic in inbound trials in. And the themes with those customers are either, a, they've needed to really start to prioritize social more than they were before, and they need a platform today because digital and, specifically, social has become the most important channel to market, to communicate, to support their customers. So, it's one of those things where they just need to get there and do it today, and they weren't doing it effectively before or they were on a platform that wasn't working really well, and for those customers, these challenges could certainly be amplified at this time, right? You've got more traffic coming in through social channels. You've got more of a need to engage. And if the platform that you have right now isn't easy to use, you're not getting the data that you need from the analytics portion of that platform, that would cause you to raise your hand and seek help. The secondary point for us there is that with our free trial model, we're able to get all these customers, including the enterprise customers, into the trial and actually using the platform. So they're proving for themselves that it's going to work exactly the way they need it to on a go-forward, and so, that's certainly been a big helping hand for us in engaging customers and getting them through the buying process.

Perfect. That's very helpful. Thank you, guys.

Thank you. Our next question comes from Chris Merwin from Goldman Sachs. Please go ahead.

This is Kevin on for Chris. Thanks for taking my question. Maybe can you talk about adoption trends for some of your add-on products like listening, premium analytics and reputation and maybe what you're seeing across mid-market and the enterprise and if you've seen kind of a recovery in adoption trends in recent weeks.

Yes, thank you, Kevin. This is Ryan, and I’m glad to contribute to this discussion. Both the listening and analytics products are performing exceptionally well. Listening’s annual recurring revenue grew significantly in the first quarter, and currently, premium analytics is outperforming listening in terms of annual recurring revenue after a comparable time in the market. The value proposition is clearly resonating, and we are very pleased with the return on investment that both products are delivering to our customers. Part of this success stems from the fact that social media engagement is evolving; the way people interact and the types of messages that resonate with them are changing. Access to social data through our listening and analytics tools is providing brands with essential insights to refine their content, promotions, competitive positioning, and even product development. They receive valuable information from both our analytics and listening products that they can act upon. This has been well received in the market. Additionally, it’s important to note that both of these products need to be integrated with the rest of our core platform, which they receive through Sprout. By combining listening and analytics with publishing and engagement features, we have created a significant differentiator for ourselves. Overall, we are seeing strong progress in the first quarter and continued value from these products.

Great, thank you.

Thank you. Our next question comes from Tom Roderick from Stifel. Please go ahead.

Hi, Justyn. Hi, Joe. Hi, Ryan. It's great to hear from you all, and I'm glad to know everyone is doing well. I would love to hear more about the significant travel deal that was signed in April. Could you share some insights on the urgency from the customers to finalize the deal, especially in relation to their industry? What factors pushed them to make this decision, and how are they planning to engage with the social channel in an environment where traditional customer interactions might be limited?

Yes, Tom, this is Ryan. I'm glad to jump in. That's a great example, and Justyn mentioned it earlier as well. We've observed this in travel, restaurants, and hospitality. Many organizations that you might think are not spending or investing in this area actually are, as they need to engage with their communities and customer bases now more than ever. If they want to emerge from this stronger in the market, they need to focus on digital channels, especially social media. The organization Justyn referred to is a prime example of one that needs to maintain close connections with its customers. From a customer care standpoint, they’re experiencing a surge in inquiries regarding credits, rebookings, and general business updates to help customers understand what future travel will look like. Moreover, from a marketing perspective, it's crucial for these brands to stay connected with their customers, even when they may not have many or any travelers currently. Keeping their brand prominent in consumers' minds is essential. We've certainly seen this dynamic in the travel market and in some other sectors with similar situations.

Outstanding, that's really helpful. Justyn, this question might be for you, but anyone can respond. I appreciate that you seemed to be ahead of the curve in transitioning your employees to a work-from-home environment, and your expertise with the low-touch model has historically been strong. Now that we are beginning to see signs of recovery, the timing of this is uncertain. As you consider bringing employees back to the office, could you share your thoughts on how and when you envision this happening? Is there any urgency, given that your low-touch sales model appears to be functioning well with employees working virtually?

Yes, I'm glad to address that. There's much discussion about what returning to normal looks like. We were among the early adopters of remote work compared to many organizations, and I expect we’ll be slow to return to the office. We want to provide our offices for those who find it difficult to work from home, whether due to their living situation or childcare needs. Each person's situation is unique, and we want to accommodate them when it's safe and practical. However, I want to emphasize that we're seeing strong productivity across the organization, even higher in some cases than ever before, which gives us the flexibility to approach this return thoughtfully. We don't feel pressured to choose between the safety of our team and families and our productivity, as we've maintained high levels of output. We're proud of that achievement. Therefore, we'll take our time and prioritize the well-being of our team and their families as we consider the next steps.

Outstanding, thank you, congratulations on getting everything done from far, and looking forward to see again in person, sometime soon. Take care.

Thank you.

Thank you. Our next question comes from Arjun Bhatia from William Blair. Please go ahead.

Hey, everyone, thanks for taking my question. I hope you are all doing well. My first question is probably for Ryan. We previously discussed the flexibility in your go-to-market strategy and how you adapt based on incoming data. Before the pandemic, I noticed that Sprout Social was pivoting to focus more on expansions and larger customers. I would like to know how that trend is evolving now—whether it's accelerating or if you're shifting your focus to high-volume transactions. Could you explain those dynamics during the coronavirus era?

Yes, Arjun, happy to jump in and cover both of those things. Both the expansion and the enterprise segment continue to be areas of strength for us and areas of focus. From an expansion standpoint, and Justyn discussed this a little bit in the script, we've seen healthy growth from our customer base. It's been aligned with what we would expect from our customers and didn't face the same level of compression that you might see in other areas within NDRR. So, that motion for us continues to be a strong one; certainly, tied to the success of products like listening and analytics that are adding a ton of value to customers today. So, on the expansion side, feeling very strongly there, on top of that, on the enterprise side, seeing some opportunities for acceleration and the opportunity to grow our market share, the challenges highlighted in the past with the long deployments, the expensive deployments, challenging adoption due to user interface and difficulties within implementations is becoming a pretty big challenge for a lot of enterprise companies, and certainly, at this time, when social is more important than ever, they need to be able to deliver within that channel. And so, in leading with those trials that we are, and we're getting these enterprise customers in the platform, they're able to start publishing through Sprout. They're engaging with their customers. They're using our analytics and proving to themselves that the platform works. And so we've seen really nice progress from that enterprise team as we ended Q1 and going into Q2 with these accounts where they need access to Sprout, and we have the ability to get them up and running really quickly, which removes a lot of the burden of making a change, especially when you've implemented a good portion of Sprout within the trial.

This is Justyn. I'll add something quickly there. Yes. Sorry, if you don't mind, I'll just add a couple of things. I think one of the other benefits of not only the team, but the agility that we have in our model is that we've been able to realign resources internally to kind of match what we're seeing in the market, and that's true both from a customer success perspective where we're able to align resources around those that may be struggling more than others and make sure that they have the help that they need, but also on the new business side and the growth side where we're able to realign the team and the folks on our team around the areas where we're seeing the most demand. And I think to that extent, being able to pick up on the signals that we've seen from the enterprise and even the mid-market and align resources around what we think is a heightened opportunity in that space may act or has acted certainly in a catalyst for how we're thinking about resources internally, but may also act as an accelerator to the point that you mentioned. I think we're still seeing success across all markets. They're all incredibly important to us, but when a shift like this happens, our ability to react to that, use the data to say, 'Hey, this is where we need to be reporting our people and our time, whether it's to support them or because that's where the demand is,' I think it's been really, really valuable for us.

Perfect. And a quick follow-up, if I can, on listening specifically, Ryan, it sounded like you mentioned that the current demand environment is still strong. But if I think about the pipeline, I know these deals have generally taken longer than the core product, and it's a bit more of an involved sale. Are you seeing customers when they talk about maybe deploying this now or in the future expressing a desire to pause deployment, or are those deals progressing as you would usually expect despite the macro uncertainty in the environment?

Yes. Arjun, good question, in the mid-market and enterprise space, we're still seeing good acceleration on those listening deals. Majority are acquiring those products with the rest of the core platform. They see it as part and parcel of the entire solution that they need, and we're certainly leading with that as the main value prop in that unified platform. In the SMB market in the agency market where they may not be as familiar with listening, and that may not be the reason that they showed up in our pipeline, those deals are certainly harder to close within the environment today. They're looking to keep for the bare essentials. I see those as good seed-and-grow opportunities, but those have had more challenge compared to the mid-market enterprise.

Great, thanks for taking my question, and congrats on a good quarter.

Thanks, Arjun.

Thank you. Our next question comes from David Hynes from Canaccord. Please go ahead.

Thank you for taking my question. I have one for Ryan. It might be a bit early to ask, but I'm going to give it a try anyway because I’d like to know your thoughts. We are 30 days past the April 6 recovery rig, which seems to put you at the lower end of a typical sales cycle. I'm interested in what you're observing regarding conversion rates on demos and trials. There seems to be a belief that it has probably never been easier to get a prospect on the phone or signed up for a demo or trial. I'm curious if there are any data points that give you confidence that the conversion rates from all the activity you've seen could actually resemble normal levels.

Yes. Thanks, David; happy to jump in there. I think we still have a few more weeks to go to get the full picture of when the trough look like from COVID, but what I will tell you is we are seeing really good success in the engagement from our teams today. It's certainly taking more activity than it did before to get customers to the same point, but they're in the trial. We're seeing good progress in the way that they're using the platform. We're seeing good progress in the amount of demos that we've been having across the board in every segment and seeing good deals closing along the way as well. We're paying very close attention on a daily basis to things like the conversion rate and what we call the revenue per subscriber, so just the number of subscriptions that are getting done within the market just so that we know how these are comparing to our baselines, but good progress there just in terms of the amount of engagement we have with customers and just even the number of deals that we're getting done at this point and deals with those premium add-ons.

Yes. Okay. That's helpful color. I know it was a hard one to answer since we're still relatively early into this, and then maybe one for Justyn or Joe, I assume the answer to this is no based on what you've said, but anything you're seeing that changes your thinking in terms of timeline to profitability for the business?

Yes. From my perspective, there are some counterbalancing factors occurring in the business, as evident from both our performance and our projections. I believe the net effect is that we are not reassessing our timeline for profitability at this point.

Yes, okay. Very good, that's helpful, guys. Thanks very much.

Thank you. Our next question comes from Alex Kurtz from KeyBanc Capital Markets. Please go ahead.

Yes, it's great to know that everyone at Sprout is safe and healthy. I have a clarification for Joe, and a broader demand-related question for the team regarding the trend of G&A expenses. You mentioned that G&A has a linear trend, and I would appreciate it if you could elaborate on that. Additionally, you posted a blog a week or two ago discussing demand trends by vertical. Using that as a reference, could you share where you're facing challenges and where you're seeing positive developments, especially comparing SMB to larger accounts? Those are my two main questions.

Sure. I'll address the G&A question first, Alex. The increase in G&A for the quarter happened for a couple of reasons. One reason was that this was our first quarter with public company expenses, which we didn't have in Q1 of 2019, and there was also an increase in our annual training costs this quarter. Looking ahead, I anticipate that G&A expenses will decrease back to the low to mid-20% range of revenue.

Got it, and maybe a quick clarifying question on the second half of that. You mentioned kind of the blog post and what we're seeing. It sounds like you're looking for commentary around what we're seeing both from a vertical as well as kind of a segment basis, just where we're seeing folks that are doing well versus not as well, et cetera. Is that kind of just of the question?

Yes, happy to answer that, Alex. In terms of where we've seen a lot of success on the vertical side and continued demand, in places like government, higher education, gaming, tax, have all been really strong. We've seen really good inbound demand from all those organizations, good acceleration on deals. In terms of compression or pressure, certainly have seen that in a good portion of the SMB market, and then in parts of the agency market, mostly in the small side of agency, those are probably in the areas where the impacts mostly being felt. In terms of opportunity and growth, we traditionally had good strength from the mid-market and enterprise, and that's continued to be the case. All are growing, but the mid-market enterprise continue to kind of lead the pace for us.

Okay, thank you.

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call over to Mr. Justyn Howard, CEO and Co-Founder, for closing remarks.

Great, thanks. Okay. So thank you all for spending some time with us. We look forward to spending more time with you in the coming months. We'll be spending some time with investors virtually. We'll be attending the Stifel Cross Sector Insight as well as the William Blair Growth Virtual Conferences in early June and have other opportunities, and we look forward to that time with all of you. In closing, I just want to, again, thank our employees, our customers and our partners for their hard work and support and for helping close the terrific quarter. More importantly, we're grateful for the hard work and agility on everyone's part to adapt quickly to the situation that we're all facing together and making sure that our team and customers are well supported. And on behalf of the entire team, we also want to thank the frontline and health care workers who are helping keep everything running. So thanks again. We'll look forward to talking to you soon. I appreciate your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.