Sprout Social, Inc. (SPT) Q1 2021 Earnings Call Transcript

Thank you for joining us for the Sprout Social First Quarter Earnings Conference Call. I will now turn the call over to our speaker, Mr. Jason Rechel. Please proceed.

Thank you, operator, and welcome to Sprout Social’s first quarter 2021 earnings call. We’ll be discussing the results announced in our press release issued after the market closed today. And we’ve 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 statements concerning financial and business trends, our expected future business and financial performance and financial condition, our guidance for the second quarter of 2021 and the full year 2021 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, 2020 which was filed with the Securities and Exchange Commission on February 24, 2021 as well as any future quarterly and current report that we’ll file with the SEC. During the call, we will discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. Definitions of these non-GAAP financial measures, along with reconciliation to the most directly comparable GAAP financial measures are 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.

Thank you, Jason, and good afternoon, everyone. Thank you for joining us. We are off to a fast start in 2021, thanks to our focus on delivering world-class experiences to our customers and the ongoing execution and resiliency of our team. More businesses than ever invested in Sprout during the first quarter, as social takes center stage in the digital strategy for what comes next. I want to touch on a few first quarter highlights before turning the call over to Ryan and Joe to cover the details. Our growth rate is shifting into an even higher gear which reinforces confidence in our strategy, our opportunity, and the investments we’re making in our future. During Q1 we added a record number of net new customers, added a record number of customers contributing more than 10K in ARR, and delivered further acceleration in ARR growth. We also achieved positive free cash flow and inflected above the Rule of 40 benchmark, each for the first time and much sooner than forecasted. These points underscore the value we’re delivering to our customers and the compelling unit economics of our business. We’re focused on building a durable company for the long term, but our current growth and momentum has never been stronger. We’re well equipped to capitalize on the convergence of multiple tailwinds in our market, and we’re continuing to prioritize our investments in these areas. In the early stages of 2021, the expansion of use cases for our platform has continued to accelerate. Stakeholders across nearly all functions of business are using Sprout to harness the power of social, unlock business intelligence, and broadly operationalize social across their organizations. These expanded use cases have three distinct implications in our market and our company. More businesses need to adopt the social media management platform because they’re challenged to broaden and become more acute. There are more opportunities for seed expansion into new departments within our existing customer base. And the opportunities and values for our data-driven social listening and premium analytics capabilities are compounded by these first two factors. We expect this flywheel to remain in motion for many years to come and potentially be further strengthened by the looming convergence of social and e-commerce. Further, the proliferation of social across an organization plays for natural competitive strength. Our platform was built for the end-user, and the ease of use, rapid time to value, collaboration, security, permissioning, and workflow management capabilities that are embedded in Sprout have advantages that become even more powerful as more departments and users come online. We’re working hard to build on top of these core advantages, introduce new functionality that can drive even more use cases, and to develop new capabilities for what comes next. Our single code base and strategic scale allow us to execute against this strategy faster and more efficiently than anyone else in our market. To reiterate something I said last quarter, the multitude of global events over the past 12 months have made it clear that social media will be a cornerstone to the next evolution of business. We’re seeing an inbound volume and quality of customers coming into our opportunity funnel. The growing importance of social was crystallized in a recent study by the Harris Poll that was commissioned by Sprout. I encourage you to dig into the data for yourselves, but I want to call out a few of the most compelling data points that stood out to us. First, 91% of executives anticipate that their company’s social media marketing budget will increase over the next three years, and more than half expect it to grow by more than 50%. Second, 84% of business executives expect their company’s use of social media for external communication to increase over the next three years, and 90% agree that social media will soon become the primary communication channel for companies to connect with existing and potential customers. And third, 85% of business executives agree that social data will be a primary source of business intelligence for their company going forward. These plans on the business side also align with consumer needs. The data from the Harris Poll also shows that 80% of consumers expect brands and companies that have a social media presence to interact with customers in meaningful ways. 78% of consumers will buy from a brand after a positive experience on social media. These trends are even more pronounced in younger generations that will soon represent the majority of both the workforce and consumer spend, creating a second-order tailwind for the industry for many years to come. Social has become a mission-critical communication channel that organizations of all sizes must lean into to thrive. The Sprout platform is perfectly aligned with the social system of record, action, and intelligence. It empowers our customers to not only capitalize on social as an engagement channel but also to deliver sophisticated intelligence that inform nearly every aspect of their digital strategy. Our emphasis on world-class user experience uniquely positions us for both Greenfield adoption, as well as expansion as more of these stakeholders become involved in social across more of the companies we serve. Another significant shift in our industry is the rapid emergence of social as a true commerce platform. We shared with you last quarter that this is an area of focus for us, and we’ve been hard at work. We’re excited to introduce our first partner and technology integrations with you over the course of this current quarter and will further expand our investment in this area as product discovery, purchases, and support all begin to emerge in compelling new ways on social media. Our scalable platform and extensive ecosystem of network integration partners positions our company to play a valuable role as this market develops. Before I wrap up, I want to talk about the team that makes this all possible. Over the past quarter, our team has continued to raise the bar in the way we build, market, and sell our products. They brought increased focus and vision for our strategy during an uncertain time for our world. We’re committed to fortifying our culture and supporting not just our team, but our customers, partners, and our communities. We’re humbled when that commitment is recognized with awards such as Fortune’s 2021 Best Places to Work in Tech, and we’re constantly investing in new ways to make a positive impact. As our people potentially return to offices later this year, we will continue to prioritize well-being and reshape the way we work and communicate. Culture is central to our work at Sprout and I’m thankful for the opportunity to lead such a talented, dedicated, and diverse team. With that, I will turn it over to Ryan.

Thank you, Justyn. You said we’re off to a fast start, and you are right, the momentum is building and we’re set for an even bigger 2021 than we had planned. Our teams are delivering across the board, and we’re seeing incredible brands continuing to invest in the Sprout platform. In this new era of work, changes to the way that companies find, evaluate, and buy software have never been more pronounced, which is only strengthening our technology and go-to-market differentiators. Social has become the central fabric of society, forcing businesses to rapidly adopt and adapt, and Sprout is optimized to help brands lean into social as a centerpiece of digital transformation that will ultimately shape their new future. The recent results from the Harris Poll validated this. Consumers are choosing social as their preferred communication channel, and brands simply don’t have a choice, they must embrace social for customer marketing, engagement, and intelligence. Now, I typically highlight one specific team that exceeded my expectations, but I won’t be able to do that because during Q1, every team delivered in a meaningful way. Our product and partnership organization is on fire. They’re continuing to find ways to innovate for our customers, make our platform stickier, and add tremendous value. Our marketing team delivered on our top-of-funnel goals with insightful content, strong inbound trial volumes, and improvement in overall quality and conversion rate, with even more room to grow. Each of our new business segments were very strong this quarter led by our mid-market teams. Our customer success teams also executed remarkably well in a critical renewal period. Our investments in customer onboarding and success are paying off as we move into a phase of growth with higher overall customer retention and customer growth. A record number of new customer additions is not accomplished without outsized contributions by each of these teams. The success that I’m seeing with some of the world’s largest and most beloved brands makes me even more excited about our opportunity within the enterprise space. Not only did we have a record overall customer additions, but we also set new records in greater than 10K net additions as well, underscoring our momentum in the market and our success in selling our premium modules. To that point, a sample of the brands that we grew with this quarter is a fantastic list that includes McKesson, Danaher, Oliver Wyman, Heidrick & Struggles, Brother International, Cole Haan, Tumi, Hanes Brands, Sur La Table, Grammarly, and the Academy Museum of Motion Pictures. Before I highlight customer stories, I want to expand on Justyn’s message about the growth of social use cases. Investor Relations is a perfect example. As you’re all acutely aware, social has recently burst into the mainstream as a central platform for investors to discuss and disseminate investment ideas. This quarter we hosted a panel with several Investor Relations leaders, Mike Coffey, the VP and Head of Global Partnerships and Alliances at Q4 said, more retail investors are investing in the market than ever before and they’re choosing to discuss their ideas and tactics very publicly on Reddit, Twitter, and other platforms. Investor relations officers have taken note, whether it’s to gauge social sentiment, engage with shareholders, like Coinbase did through its IPO process, monitor for potential volatility and risks, or improve strategic messaging, it is becoming increasingly clear that social is a channel that can no longer be ignored. This is amazing insight into a growing use case. Now, shifting to a couple of new Sprout customer stories. Fred Sanelli, Senior Vice President Marketing, Brands and Sales Development at Performance Food Group said, 'We turned to Sprout after rethinking what social would and could mean to our business. We realized that we need transparent real-time visibility across our operations, and social listening helps us stay ahead of the curve, not just for our brand of products, but also our performance within the industry. We’re able to actively surface these social trends to our executive team, creating actionable insights for our company. We chose Sprout because of its powerful, intuitive, and industry-leading platform.' And a leading CPG company was looking to better understand social conversations that were happening around specific brand campaigns, both to understand the competitive positioning and to gain visibility into how their content was performing on social. They determined that our social listening and premium analytics products would empower their team to capture critical insights that would enhance their strategy and deliver a compelling ROI. Wrapping up, I continue to be proud and grateful for the performance of our people at Sprout, who have raised the bar for 2021 while also laying the foundation for success well into the future. We’re excited about the multitude of opportunities ahead of us. And as always, we appreciate your support. With that, I’ll turn it over to Joe to run through the financials. Joe?

Thanks, Ryan. I’ll walk you through our first quarter results in detail before moving on to guidance for the second quarter and the full year 2021. Total revenue for the first quarter was $40.8 million, representing 34% year-over-year growth. Excluding the impact on legacy Simply Measured, organic revenue was up 35% year-over-year. We expect the impact from legacy Simply Measured to be immaterial to revenue and ARR going forward. Total ARR ending Q1 was $172 million, up 38% year-over-year. Organic ARR was $171 million, up 39% year-over-year. We’re pleased to see record quarterly customer additions, healthy retention, and very healthy expansion. We added a record 1,404 net new customers in Q1 to finish the quarter with 28,122 customers, up 17% year-over-year. This is a reflection of very strong performance in each of our segments. We continue to be focused on high-quality revenue yield from our new customer cohorts. The number of customers contributing more than $10,000 in ARR was 3,514, up 46% from a year ago and up from 3,149 in Q4 of 2020. Our ACV was approximately $6,000 and was up 18% year-over-year. Rising use cases as customers operationalize social, rising attach rates of our premium module, and our momentum upmarket remain three sustainable growth levels for our $10,000 customer cohort for durable medium-term ACV growth. In discussing the main portions of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share count are on a non-GAAP basis. In Q1, gross profit was $31.0 million, representing a gross margin of 76%. It is up 190 basis points compared to gross margin of 74.1% a year ago in comparison with 74.6% last quarter. We’ve seen a positive impact on gross margins as we eliminate duplicate infrastructure hosting costs from legacy Simply Measured and from the natural efficiencies of scale in our business. Sales and marketing expenses for Q1 were $16.4 million or 40% of revenue, down from 44% a year ago. We are pleased with the quality of people that are choosing to join Sprout. We are continuing to accelerate our pace of hiring across both our sales and marketing team. Even as our total sales and marketing expense growth accelerates for the third quarter in a row, indicating a healthy trend line of investment, we are able to drive leverage indicative of efficient growth. Research and development expenses for Q1 are $7.6 million or 19% of revenue, down from 20% a year ago. We continue to have aggressive R&D growth goals in 2021 as we are expanding our set of opportunities. The timing of many key R&D hires will be weighted in Q2 and Q3 of 2021. General and administrative expenses for Q1 were $9.5 million or 23% of revenue, down from 32% a year ago. G&A expenses are lower on a year-over-year basis and had a significant impact on our overall marketing expansion, due in part to the timing of annual corporate training. The employee offsite, which occurred during Q1 of 2020, did not occur this quarter. Continued spend a portion of these annual expenses may occur later this year or will be reinvested elsewhere in the business. Now this time impacts the magnitude of quarter-to-quarter margin gains. We do expect general and administrative expenses to continue to decrease as a percentage of revenue as we scale. Non-GAAP operating loss for Q1 was $2.3 million for a negative 6% operating margin. This compares with a negative 24% operating margin a year ago. We significantly outperformed our expectations due to higher revenue, better-than-anticipated gross margins, and timing of many key hires which have an April start date. Non-GAAP net loss for Q1 was $2.5 million for a net loss of $0.05 per share based on 53.4 million weighted average shares of common stock outstanding, compared to a net loss of $7.0 million and $0.14 a year ago. Turning to the balance sheet and cash flow statement, we ended Q1 with $167.8 million in cash, cash equivalents, and marketable securities, up from $163.9 million at the end of Q4 2020. Deferred revenue at the end of the quarter was $51.0 million. Looking both at our billed and unbilled contracts, our remaining performance obligations (RPO) totaled approximately $74.9 million, up from $64.4 million as in Q4 2020 and up approximately 58% year-over-year. We expect to recognize approximately 85% or $63.7 million of total RPO as revenue over the next 12 months. Operating cash flow in Q1 is positive $3.6 million versus a negative $4.5 million a year ago. Free cash flow was positive $3.4 million in Q1 for an 8% free cash flow margin compared to a negative $4.8 million and a negative 16% free cash flow margin a year ago. Our ongoing momentum into the mid-market to enterprise is proving efficiencies in our billing process and mix shift towards annual and multi-year contracts are each having a positive impact on free cash flow as we grow. We are pleased to report positive free cash flow for the first time, much sooner than our prior forecast. A combination of accelerating free cash flow margins and accelerating revenue growth puts us above the Rule of 40 benchmark this quarter. We believe this milestone is an important validation of the unique economics in our business and the compelling efficiencies in our model. I do want to stress that while we may optimize for future growth, we do not expect to be sustainably free cash flow positive in all subsequent quarters. We generally expect free cash flow margins to be several hundred basis points better than operating margins throughout the remainder of 2021. Shifting to formal guidance. For the second quarter of fiscal 2021, we expect total revenue in the range of $43.0 million to $43.1 million or a growth rate of 37%. We expect non-GAAP operating loss in the range of $5.4 million to $5.0 million. This represents an anticipated operating margin of negative 12.1%, an improvement of more than 600 basis points year-over-year. We are making aggressive growth investments across our company. We are doing this while delivering improvement in our margins, highlighting efficiencies in our business as we scale. We expect a non-GAAP net loss per share of between $0.10 and $0.09, assuming approximately 53.6 million of weighted average basic shares of common stock outstanding. For the full year fiscal 2021, we now expect total revenue in the range of $176 million to $177 million. This is at an expected overall reported growth rate of 32% to 33% compared with our prior annual expected growth rate of 30%. For 2021, we now expect non-GAAP operating loss in the range of $18.5 million to $18.0 million. This implies a non-GAAP operating margin of negative 10.3%, with an improvement of more than 500 basis points year-over-year. We are pleased with faster growth with greater efficiency. We now expect a non-GAAP net loss per share of between $0.35 and $0.34, assuming approximately 53.8 million weighted average basic shares of common stock outstanding. Called 10-year expense models, we currently expect a portion of our employees may return to our offices during the second half of this year. The timing and number of employees that return in 2021 is, at this point, unknown but we have accounted for a full return in our annual expenses. Although we did not incur expenses for our annual corporate training events and travel in Q1 of 2021, at this stage, we expect to incur these expenses again in Q1 of 2022 and most likely to fall in Q1 of 2023. In summary, we believe we are uniquely positioned to capitalize on the opportunity for global multi-year growth. It also moves to the center of digital strategy. Our compelling financial leverage and breakthrough free cash flow performance gives us confidence to make optimized investments that we believe will enable us to achieve our full potential in quarters and years ahead. With that, Justyn, Ryan, and I are happy to take any of your questions. Operator?

Your first question comes from the line of Raimo Lenschow from Barclays. Your line is open.

Hey, this is Frank out for Raimo. Congrats on another very strong quarter here. I was wondering if we could touch on your customer conversations at a high level, just given the strength in net adds. So, what are you seeing as we start to move past the dynamic? Has there been any momentum in any particular verticals, or is the strength really a bit more broad-based in nature?

Frank, this is Ryan. Thanks for the question. We’ve seen a lot of positive trends here. This is a lot of the stuff that we saw coming off of Q3 and Q4 into the year. Our marketing teams continued to deliver a really strong top of funnel, and we’re seeing a lot of progress. I would say that it’s across a variety of verticals. One of the advantages that we have here is you’re hard-pressed to think of a business or brand that isn’t thinking about social right now. And so we’ve got a long tail of really successful customers in a variety of industries, but given the number of customers that we have today, most verticals and industries have hundreds of different examples that are using Sprout. So it’s been pretty much across the board that we’ve seen success. Some of the ones that probably we’ve mentioned in the past that I think has been surprising but really interesting for us are things like higher education in terms of trying to connect with the community, retail, travel and hospitality, restaurants. Many of these organizations that had more challenging times last year are continuing to need to find ways to build their brand and their connection with customers. So it’s been a nice long tail for us and we’re seeing success across a variety of verticals.

Okay. Perfect. That’s great color. And then just with ACV growth looking strong again, I want to ask about the momentum in the listening and premium analytics products. I think those doubled last quarter in aggregate. I was wondering if there’s any more color you could provide there for this quarter?

Yes. We continue to see very similar success to last quarter for both the premium modules. One of the things that’s really stood out is just the importance and value of data, both the data that you have within your own four walls, your own organization, we think about our premium analytics and the data that exists across all of social, outside of your four walls when we think about our listening product. And so we’ve seen tremendous success in both of those premium products. One of the things that we’ve highlighted in the past, I think it’s important to know, is it’s not just in the mid-market and enterprise; we’re seeing the same success with these modules in our SMB segment, in our mid-market segment, and in our agency segment as well.

Great. Thank you.

Thank you. And your next question comes from the line of Rob Oliver from Baird. Your line is open, sir.

Great. Thank you very much for taking my question. Ryan, I have one for you as well. I was looking at the expansion deals you mentioned this quarter, which involve some large companies that typically would have purchased software in a traditional, monolithic way. I'm curious about how your conversations have evolved with these customers, particularly at a managerial level, as you expand in terms of seats, departments, and new use cases. Have you noticed any changes, and are buyers experiencing any "Eureka" moments regarding the advantages of your model compared to competitors? I also have a quick follow-up for Joe.

Yes, thanks, Rob. We are definitely experiencing a significant realization among many companies and customers. We appreciate the concept of seed and grow. We are making inroads into various departments, divisions, brands, and even geographic areas. The discussions we have are quite similar to those on the new business side. We still attract customers who, for instance, may have initially engaged with us for a marketing use case, focusing on campaigns and content, without necessarily utilizing our listening or premium analytics. We are also applying that trial model for our existing customers. This allows them to interact with the product and experience the technology, and since they have used our product for some time, they can quickly adapt to the premium offerings and gain immediate value. Additionally, having already completed procurement and legal processes makes it easier for us to expand those add-ons. There are numerous impressive examples and use cases, and I am truly excited about the progress we’ve observed from our customer growth and success teams that support our clients.

Okay. Great. That’s really helpful. Thank you. And then, Joe, just for you, I know, but thinking about some of your investment areas, mid-market, obviously, enterprise reps, you’re still hiring. I know you in the past, you’ve talked a little bit about international with APAC and Latin America. Maybe could you just drill down and give us a little bit of color on where we are in some of those investment cycles and where you feel like you’re getting a really good return right now? Thanks, guys.

Thank you, Rob. I want to highlight that we are investing in both the sales and marketing areas and research and development. We see numerous opportunities to enhance our product and expand its use cases. On the sales and marketing front, we are focusing on geographic expansion, particularly in APAC, LATAM, and EMEA, and you will notice increased activity in these regions. We appointed a General Manager for APAC this quarter and plan to boost our investments there. Additionally, we are also making significant investments in the mid-market enterprise segment, where we are observing substantial returns. The top-of-funnel activity is strong, and we are achieving success in acquiring large enterprise clients. While these areas will be our main focus, we will continue to prioritize small and medium-sized businesses, driven by our marketing efforts. Ryan mentioned earlier that we experienced good success in all segments during Q1, particularly on the inbound side. These are the primary areas we are concentrating on.

Great. Thanks again.

Thank you. Our next question comes from the line of Matt VanVliet from BTIG. Your line is open.

Yeah, thanks for taking my question, guys, and nice job on the quarter. I guess, thinking about some of the answers so far, just a couple of questions, maybe from a different angle a little bit. The growth in the 10K ARR customer was pretty significant again. Are you seeing some new customers when you win new logos come in at a larger scale? Are they buying more modules at a time? Maybe just help us think about kind of what that new land looks like as maybe you have customers coming that didn’t see the light before but now are forced to be a little more reliant on social than the current environment?

Yes. Thanks, Matt. Yes, we are seeing that, and we’ve seen really good progress. Again, across the board, I would highlight certainly that mid-market and enterprise continue to prove great execution. But we’re seeing growth in deals, even in the SMB and the agency space as well. I think it’s a combination of things. One, certainly, for the customers that are a little further in the journey, more sophisticated, it’s the analytics and the listening and the need to have more data to formulate their strategy, but we’re also seeing for many organizations just in the expansion of seats and use cases. And for us, what used to be years ago, maybe just one person in marketing on social, today, you’re seeing teams of marketers that are in the solution that are not just there from a social perspective; they’re thinking about content and brand and PR and comms, and that’s expanding out into things like customer care and customer support and sales. And so it’s kind of a combination of things between use cases and users, and then our premium modules.

Got it. Got it. And then, Joe, on the gross margin side, it’s a pretty good improvement. You mentioned you’re finally weaning off the Simply Measured. But is that something that you expect to continue to scale forward? Are there any meaningful kind of step function investments that you’re going to make over the next couple of quarters that maybe pulls that back in the short term? Just thinking about kind of the overall operating structure there?

Yes, Matt. So for the rest of this year, we feel pretty good about where we’re at, where we ended Q1, and we’ll be able to maintain that for the rest of this year. We don’t see any pull back on that front. And then I think when we get into 2022, you’ll start to see a little bit more increase or a little bit more leverage on the gross margin as we move into 2022.

Wonderful. Thank you.

Thank you. Our next question comes from the line of Chris Merwin from Goldman Sachs. Your line is open.

Great. Thanks very much for taking my question. As you move more upmarket, what are your customers asking you for that isn’t part of the suite today? So obviously, you’ve shown very strong traction upmarket already, and clearly, the products you have are resonating. But as you continue to grow in this customer segment, can you just talk a bit more about what the feedback you’re getting and how that perhaps is influencing the product roadmap? Thanks.

Yes. Thanks, Chris. This is Ryan. There’s probably a few things that we’ve seen, and I think many of the things that you’ve just seen from us over the last little while are a very big part of this narrative. When I think about premium analytics and listening, two great examples of products that have a ton of utility and value for upmarket customers. We’re continuing to develop within those product lines today and add value. Integrations is another area where we’ve had some of our customers for integrations. We’ve actually, this past quarter, delivered some integrations from a help desk perspective across Microsoft and Salesforce and HubSpot and ZenDesk. The thing that I’d highlight here as we’ve tackled all of these opportunities is how do you build these sophisticated features in a way that’s going to bring value to your customer right away and utility right away and adoption right away. And so those are the things that we’re thinking about and the product team is thinking about as they deliver, and I’m really excited about some of the evolution that we’ve seen on listening and analytics and on the integration side, and you’ll continue to see more evolution from us there over the next quarters and years.

Okay. Great. And then as a quick follow-up, with this shift to a more upscale market, do you anticipate an increase in annual billing? Could this indicate an expanding difference between cash flow margins and EBIT margins in a positive manner? Is there anything you can share regarding the trend of cash flow margins in relation to EBIT?

Yes. Chris, this is Joe. Great question. I believe that we’re definitely witnessing an increase in engagement, especially in the enterprise and mid-market segments over the last couple of quarters. As we take on larger deals, our product is becoming more integral; customers are starting to commit to longer-term contracts. They understand that deploying the product across their marketing, support, and sales teams means they prefer to sign for a longer duration than they did before. While this shift is notable, it's still a bit early to assess fully since we currently have about a 50:50 mix of month-to-month and annual contracts. I expect this will evolve over the long term. In the short term, the transition might not be very consistent and could be somewhat unpredictable, but we are certainly heading in that direction.

Okay. Great. Thank you.

Thank you. Next one we have Clarke Jeffries from Piper Sandler. Your line is open.

Well, thank you for taking my question. This has been slightly addressed by some questions, but I’ll ask it directly. Impressive to see another quarter of record customer adds. My question is really around the sustainability of that pace of customer acquisition. I know, Ryan, you touched on the improvement of the top of funnel, but should we think about this as sort of a revelation for the organization that could really drive that cadence going forward?

Yes. This is Justyn. I’ll start addressing that, and Ryan or Joe can add their thoughts. In the earlier quarters, when we experienced customer additions like this, we advised caution, suggesting we wait for a few more data points before declaring a trend. It seems like we're at that point now. The insights from our sales funnel and our performance over the last three quarters indicate that we can continue to add customers. I want to emphasize that our focus will be more on the revenue generated from these customers rather than just the total number. It appears we are in a strong position, indicating that what we've encountered isn't just a temporary occurrence, but rather a situation where our team and our sales model are well-prepared for the future. Our primary concern is revenue going forward. Additionally, considering factors like the ACV growth we’ve observed and potential adjustments to our conversion funnel, we may intentionally influence those figures to ensure that the results are as strong as possible.

Got it. And it just seems like overall, the go-to-market is more effective than the place you were at last year. I guess just in relation to that question, what is the limiter for additional investment right now? And why not get more aggressive at this stage and invest and not drive positive free cash flow growth based on the traction you’re seeing?

Yes, I think that’s something we are always assessing. Some of what Joe mentioned regarding the increased investments we have made through Q1 really prepares us to address that specific question, which is about the return on these investments compared to the opportunities and how we want to optimize. We achieved positive free cash flow sooner than we expected, which is great. However, we want to ensure we are focused on the opportunity and the necessary investments, so it's not our top priority right now. You can expect us to continue to pursue opportunities aggressively and ambitiously.

Thank you. And your last question for today is from DJ Hynes from CGS. Your line is open.

Hi, guys. This is Luca on for DJ. So I’m curious about some of the more nascent social platforms out there that you don’t currently integrate with. TikTok being one of the more prominent. How do you think about that particular platform as well as other social channels opportunistically, and as you add more channels like Reddit recently or TikTok potentially, do you see those being meaningful incremental adoption for monetization catalysts down the line?

Yes. Yes, good question. I’ll start with the second part. I think there are some second-order effects to any time the scope of what we help our customer expands. And so on one end of that is the more networks to manage, the more places that our customers need to be present and have a solid strategy that makes our value proposition that much stronger. The more people involved and permissions and nuances across the networks. That all is strong. We also monetize the profiles themselves, so the addition of additional networks has an impact there. In terms of what we kind of look for and what we’ve seen, specific to TikTok, I think it’s a fantastic platform and I think that they’re thinking about all the right things. I think we’ve mentioned on this call, maybe sometime last year, the typical trajectory there is the networks will see a critical mass in adoption. They’ll start to think about monetization, then they’ll start to invest in the APIs and business tools, and that’s where we get involved in the conversation. And so there’s a pretty natural progression that these networks go through. We kind of know what to look for and when to get involved and have those conversations with them ahead of time to figure out how we can help them as they’re thinking through those programs. So the two primary things that we look for are customer demand and the network's readiness. Do they have the resources, the APIs, etc., for us to give our customers a world-class experience? And then we look to make those investments in the case of TikTok and others. We’re leaning into those out of time and we’ll be ready to go in there.

Awesome. That’s helpful. Thanks.

Thank you. That’s all the questions that we have for today. I will turn the call back to Justyn Howard for any closing remarks.

Wonderful. All right. Well, thank you, everyone, so much for your time. As always, thanks for the great questions. Really appreciate the support. As always, we look forward to connecting with you all throughout the quarter and back again a quarter from now. We’ll let you get to the rest of your day but thank you, as always.

Thank you, ladies and gentlemen. This concludes today’s conference call. Thank you all for joining. You may now all disconnect.