Sprout Social, Inc. (SPT) Q3 2021 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to Sprout Social's Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. We will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jason Rechel, Head of Investor Relations. Please go ahead.

Thanks, operator, and welcome to Sprout Social's third quarter 2021 earnings call. We'll be discussing the results announced in our press release issued after 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, among others, statements concerning financial and business trends, our expected future business and financial performance and financial condition, our guidance for the fourth 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, shouldn't be relied upon as representing our views at any subsequent date, and we don't 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, filed with the Securities and Exchange Commission on February 24, 2021, 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. 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. And with that, let me turn the call over to Justyn. Justyn?

Thank you, Jason, and good afternoon, everyone. Thank you for joining us. Our team continues to execute at a high level, and we're pleased to report 46% quarterly revenue growth, our fastest growth rate yet as a public company. Following our first Investor Day, where we outlined our multiyear goals, and as we prepare for the last, the 2-year anniversary of our IPO, we've simply never been more excited about our business momentum. We believe we're well positioned to capitalize on the $100 billion opportunity in front of us. As always, we're grateful for your partnership and support. We covered a lot of ground at our Investor Day in September, so I'll keep my comments on the shorter side today. I'll cover a few highlights before turning the call over to Ryan and Joe to cover the details. On the heels of a 46% revenue growth quarter, we're pleased to raise our 2021 revenue growth forecast of 40%. This milestone reinforces the secular tailwinds in social media management, our unique go-to-market strategy, and the differentiation of our technology platform. Yet again, we managed to break a series of our own records this quarter, driven by outsized momentum in the mid-market and enterprise segments, which are now collectively approaching 70% of our ARR. During Q3, we added a record number of customers contributing more than $10,000 in ARR and added a record number of customers contributing more than $50,000 in ARR. We again achieved positive free cash flow, and we eclipsed the rule of 50 for a second consecutive quarter. Our large customer growth momentum has further accelerated as we head into the end of the year, underscoring the quality, durability, and increasing efficiency of our growth as our customers operationalize social. While we continue to rapidly improve our core platform and press on our differentiators, we're also making foundational investments in strategic long-term opportunities. Our investments in social commerce, listening, care, and advocacy are examples of how we're positioning ourselves ahead of the rapid shift in tooling and the expanding use cases of social media in modern business. We have the unique opportunity to work with more than 30,000 customers across segments, verticals, and various levels of social sophistication that help shape and inform our strategy to align with evolving customer needs and these emerging opportunities. This vantage point, coupled with the speed of our development model, provides a critical competitive advantage as our industry grows rapidly. The way we build our software also allows us to constantly improve our core capabilities in a market that we estimate has single-digit penetration of more than 200 million businesses that will rely on social media for nearly every aspect of their customer lifecycle. We're deliberately balancing these core improvements with innovation and adjacent opportunities because most of the addressable market is still on step one. Our team is well into 2022 planning, and we're thinking hard about the growing footprint and utility of social media across an organization and across the emerging use cases that we've spent this year speaking with you about. We're thinking about what specific capabilities those use cases will need and what opportunities that creates for us to empower our customers. We're going to expand on the foundation for the shift to social commerce, and we're planning to expand our premium module strategy. We'll also continue to expand our reach across the social channels that matter most to our customers and to their customers. Earlier today, we announced we're bringing WhatsApp business messaging into the Sprout platform, following other integrations we've announced in the past several quarters. WhatsApp is the messaging platform of choice for more than 2 billion people globally, and we're excited to allow our customers to seamlessly integrate this channel into Sprout's unified platform. This is only the latest example of our team constantly delivering more value to our customers, and you'll continue to see new technology and partner integration from us in the coming quarters. From a go-to-market perspective, we're going to further double down on the success we've seen in the mid-market enterprise while still positioning ourselves to be the only company able to address the full spectrum of an estimated $100 billion TAM that's growing very quickly. We're heading into the end of the year with significant momentum, and we'll approach 2022 with the same focus, ambition, and values that have always shaped our company. A recent analysis by Fast Company reviewed data over the past 18 months on Glassdoor and found Sprout to be the third highest-rated company in the U.S. for work-life balance. Considering the COVID backdrop and performance of this team during that time, this recognition is something that we're really proud of. While putting our people first, we'll continue to aspire to build the best software in the industry, take amazing care of our customers, and build value for our shareholders. We're a different kind of company, and we're excited to build on our success in the years ahead. With that, I will turn the call over to Ryan.

Thanks, Justyn. Once again, our teams rose to the occasion and overdelivered this quarter. The barriers to entry in our market are rising, our platform is becoming more differentiated, and our market opportunity is growing rapidly. We just delivered 46% quarterly revenue growth, our fastest as a public company. This success is increasing our ability to attract, retain, and lead an incredible group of people. They are the team that will help us capitalize on what we believe to be a $100 billion opportunity in front of us. During the summer of 2020, we shared that our competitive win rates have strengthened against each of our primary competitors. We are now more than a year into a new era with a full year of compelling data. Buying behavior has changed; distributed work is the new standard, and customers expect to evaluate and try software for themselves before making a contractual commitment. As we shared at Investor Day, we believe that the way we've constructed our platform enables us to effectively and efficiently deliver industry-leading software to all segments of the market while meeting customers in the way that they want to buy. I'm happy to share that through Q3, our year-over-year competitive win rates, both in terms of percentages and dollars increased again against each of our primary competitors. We've always taken the long view, and we believe that our unique approach to building software and democratizing access to it has positioned us to lead the market. The impact of our recent marketing focus on executives, strategic decision makers, and mid-market and enterprise organizations could really be seen this quarter. Both our inbound and outbound sales efforts continue to prioritize the significant growth opportunities we are seeing in these segments. These efforts helped drive the record net additions and acceleration in growth of our $10,000 and $50,000 customer cohorts as well as our acceleration in ACV. We continue to make big investments in onboarding and customer success to ensure that we're maximizing our opportunity to add value to these customers, and I'm proud of the way our teams are executing. As Justyn said, we're doubling down in each of these areas as we move into 2022 planning. Our success in capitalizing on a growing number of use cases and creating value with our premium offerings like social listening and analytics are compelling drivers of our growth. The seamless integration of our platform is a massive differentiator for teams of users at large organizations that need to collaborate and build insights from different parts of Sprout. Social has become a team sport, and we believe we're the software best equipped to help these cross-functional teams win. A sample of the brands that grew with us this quarter includes TESSCO PLC, TrueCar, Instant Brands, Atlassian, Zscaler, Blue Cross Blue Shield of Michigan, Northland Properties, Park and LHAC Group. Now shifting to a few customer stories. We had the opportunity to begin working with Zscaler this quarter. Suriti Sharma, Director of Digital Marketing, said, 'We needed to consolidate and up-level our social media publishing, content curation, engagement, listening, and reporting in one platform. Sprout has helped us manage these efforts with a unified approach and has delivered valuable insights to help us understand the social sentiment across the Zscaler brand.' Also, Sprout has given us the ability to uncover emerging trends and is a one-stop shop for everything social. Digital marketing is a critical business area for our new partner, Harris Blitzer Sports and Entertainment. They are highly focused on identifying digital partners who will transform how they engage fans and partners. Vice President of Growth Marketing, Tucker Taylor, said, 'Sprout Social's all-in-one platform was a natural fit, given the dynamic and fast-paced needs in managing our sports and entertainment social channels. In particular, the tagging feature has been a game changer. Our teams can now quickly aggregate and measure partner campaign performance while also gaining insights into proof of concepts that drive new deals.' I'm also really pleased with the early uptake of social commerce and the customer feedback on these new capabilities. Even more remarkable with this early adoption is that we didn't begin marketing social commerce to new customers until the very end of the quarter. Here's some direct insight from Newton Baby, an amazing digital native business. Taylor Johnson, Social Media Manager at Newton Baby, mentioned, 'We began using Sprout Social's commerce functionality this quarter. Our overall message volume is 5,000 messages per month. The integration to our product catalog saves nearly 5 minutes per message while empowering our entire customer service team to generate sales and upsell products with the click of a button without leaving Sprout Social's platform. The result from June to July, our average response time decreased by 60%, and our action rate increased by 62%. Using the Sprout Smart inbox to reply directly to customers has significantly upgraded our customer service and is absolutely a capability we plan to use more.' We also just shared a new case study for Klarna, which offers buy now, pay later services and an all-in-one shopping app for a frictionless retail experience. Social has been instrumental in helping the company build brand awareness, provide customer service, and engage followers while also acting as a key source of business intelligence. The Card Program Manager and Global Content Creative shared, 'One of our primary goals is to grow our user base, but first, we must understand our customers' needs and how using our smooth shopping service can improve their daily lives. Social is a huge asset for getting the message to customers and giving us the insights we need to effectively engage them.' To sum it all together, we had another record-breaking quarter. Our teams are delivering for one another and for our customers, and our momentum and pipeline heading into the fourth quarter has us very excited about the opportunity to close out the year strongly while positioning ourselves for growth in 2022. With that, I'll turn it over to Joe to run through the financials.

Thanks, Ryan. I'll now walk you through our third quarter results in detail before moving on to guidance for the fourth quarter and full year 2021. Revenue for the third quarter was $49.1 million, representing 46% year-over-year growth. ARR exiting Q3 was $204.6 million, up 44% year-over-year. We are pleased to see healthy new business; our best-ever quarter for new business mix on annual contracts, our best ever quarter for percentage logo retention, and healthy expansion activity. We added 1,093 net new customers in Q3 and finished the quarter with 30,705 customers, up 20% year-over-year. As always, we remain focused on high-quality revenue yield from our new customer cohorts leading to quality during Q3. We direct our teams against leads that we forecast will have the best revenue opportunity. We're very pleased as our marketing efforts continue to deliver high-value mid-market and enterprise customers. Our healthy top funnel continues to give us the opportunity to optimize for revenue yield while also delivering greater than 1,000 net new quarterly customer additions for the foreseeable future. The number of customers contributing more than $10,000 in ARR reached 4,380, up 57% from a year ago. The number of customers contributing more than $50,000 in ARR reached 478, up 98% from a year ago. As a direct result of record net customer additions in each of these cohorts, the growth rate of our large customers accelerated once again. When combined with our expansion efforts and new capabilities, our ACV growth accelerated to 20% year-over-year, which represents the fastest rate of ACV growth in at least 5 years. As I shared at Investor Day, we have a number of growth drivers to support durable ACV growth. In discussing the remainder 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 to exclude stock-based compensation expense that are reconciled to our GAAP results in the earnings press release that was just issued before this call. In Q3, gross profit was $37.0 million, representing a gross margin of 75.4%, which is up 100 basis points compared to a gross margin of 74.4% a year ago. We see a positive impact on gross margins as we lap legacy hosting costs, which also has afforded us the ability to invest even more in customer support and success, benefiting retention and growth. Sales and marketing expenses for Q3 were $19.1 million or 39% of revenue, down from 42% a year ago. We're continuing to accelerate our pace of hiring across both our sales and marketing teams. Even as our total sales and marketing expense growth accelerated for the fifth quarter in a row, indicating active investments into the durability of our growth, we're able to further improve efficiency. Research and development expenses for Q3 were $9.5 million or 19% of revenue, down from 21% a year ago. Our R&D headcount and asset expenses grew substantially this quarter as we accelerate hiring to meet an expanding set of product opportunities. But as our CTO, Aaron Rank, shared at Investor Day, we're continuing to prove the scalability and efficiency of our technology as we grow. General and administrative expenses for Q3 were $10.1 million or 21% of revenue, down from 24% a year ago. G&A expenses increased sequentially as we return to a more normalized spending environment. We expect G&A expenses to further decline as a percent of revenue as we scale from here. Non-GAAP operating loss for Q3 was $1.6 million or a negative 3.3% operating margin. This is an improvement of nearly 1,000 basis points compared with a negative 13% operating margin a year ago. We are pleased with improving efficiency as we scale, and we're surpassing our expectations primarily due to revenue outperformance. Non-GAAP net loss for Q3 was $1.8 million for a net loss of $0.03 per share based on 53.9 million weighted average shares of common stock outstanding compared to a net loss of $4.4 million and $0.09 per share a year ago. Turning to the balance sheet and cash flow statement. We ended Q3 with $175.0 million in cash and cash equivalents, up from $171.5 million at the end of Q2 2021. Deferred revenue at the end of the quarter was $56 million. Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $87.2 million, up from $81.2 million exiting Q2 2021, an approximate 62% year-over-year. We expect to recognize approximately 83% or $72.4 million of total RPO as revenue over the next 12 months. Operating cash flow in Q3 was positive $4.4 million compared to negative $2.6 million a year ago. Free cash flow was positive $4.2 million in Q3 for a positive 8% free cash flow margin compared to a negative $4.0 million and a negative 12% free cash flow margin a year ago. Our ongoing momentum into the mid-market enterprise and mix shift towards annual and multiyear contracts are each having a positive impact on free cash flow as they grow. We are pleased with the ongoing free cash flow generation of the business. The combination of strong free cash flow margins and accelerating revenue growth took us above the rule of 50 benchmark again this quarter, underscoring the attractiveness of our unit economics. I want to reiterate that we remain optimized for future growth. To keep in mind for our year models, we have historically seen many large enterprise customers signed in Q4, with invoicing terms beginning in Q1, which has created some modest seasonal headwinds and cash flow for Q4, with a positive offset in Q1. Shifting to formal guidance. For the fourth quarter of fiscal 2021, we expect total revenue in the range of $51.2 million to $51.3 million or a growth rate of 37%. We expect non-GAAP operating loss in the range of $4.0 million to $3.5 million. This represents an anticipated operating margin of negative 7.3%, an improvement of 150 basis points year-over-year. We're making aggressive growth investments across our company, improving efficiency as we grow, highlighting the compelling economics of our business model. We expect a non-GAAP net loss per share of between $0.07 and $0.06, assuming approximately 54.1 million weighted average basic shares of common stock outstanding. For the full fiscal year 2021, we now expect total revenue in the range of $185.8 million to $185.9 million. This is an expected overall reported growth rate of 40%, compared with our prior annual expected growth rate of 37%. For 2021, we now expect non-GAAP operating loss in the range of $7.8 million to $7.3 million. This implies a non-GAAP operating margin of negative 4.1%, more than 180 basis points better than our prior annual guidance and an improvement of nearly 1,200 basis points year-over-year. We are pleased to see even faster growth with greater efficiency. We now expect a non-GAAP net loss per share of between $0.15 and $0.14, assuming approximately 53.8 million weighted average basic shares of common stock outstanding. In summary, we believe we are strongly positioned to deliver on our multiyear growth goals. Our accelerated growth rate, compelling financial leverage, and strong free cash flow performance give us confidence to make optimized investments that we believe will enable us to achieve our full potential in the quarters and years ahead. With that, Justyn, Ryan, and I are happy to take any of your questions.

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

This is Frank on for Raimo. Congrats on another great quarter. So large customer adds came in very strong again, can you speak to exactly what drove that strength there particularly? Was that more average users, better improving attach rates, better enterprise traction? Anything would be helpful.

Thanks for the question. This is Ryan. I can handle that for you. It was a combination of a lot of those things as we continue to sell into the mid-market and enterprise; there's certainly more user opportunities in front of us. We're seeing folks from various departments across marketing and customer care and across an organization having a need for social. So that's definitely continuing to be one of the major drivers, which is the seat expansion opportunity that exists. And then as we've added over the last couple of years, more of that sophisticated functionality with things like premium analytics and listening, the data and the insights from those products have been really compelling and important for organizations. So I would definitely say it's those two things there. So great execution from those new market and enterprise teams and then our marketing team has just done a wonderful job in really focusing in on going after these sophisticated buyers through our SEO and content strategy. And so it's provided us with a really healthy pipeline of big opportunities.

Ryan, my question is also for you. And I wanted to dig in a little bit on some of the social commerce related activities. Obviously, the WhatsApp deal you guys put on the tape comes on the heels of some of the summer announcements you guys made around Instagram and Facebook. So I'd love to get an update on how those are ramping, and if they were a contributor to some of the cross-sell and upsell that we saw this quarter and the momentum you guys had. And then also, there was a mention of 'buy now, pay later' on the call as well. And it strikes us that, that's also a significant driver of social commerce. So I would just love to hear your thoughts on that.

Yes. I’ll address the first question regarding social commerce and its impact. Generally, there is a significant opportunity ahead of us. If we consider the innovations in social commerce from various social networks and their product releases, there's still much more to come. Many organizations are discussing their future plans, but not all have implemented them yet. For those that have, such as Facebook Shops and Shopify, we saw strong success, particularly from companies that already had e-commerce capabilities. They are quickly reaping the benefits. For instance, Newton Baby is a prime example, and several companies adopted this functionality within the quarter, viewing it as a key differentiator for us. While we are not monetizing this opportunity just yet, it adds value for customers by enabling quicker responses to their clients. It enhances the customer experience as companies gain better insights into their customers. Many organizations are reevaluating customer service and support as a revenue-generating function rather than just a cost center, utilizing social commerce to boost revenue. Overall, we see it as a positive differentiator, though it's still early in its development. Regarding 'buy now, pay later,' we have a new customer example from Klarna that conducted a case study with us, which I see as another promising opportunity for organizations to drive revenue through their social commerce offerings.

And then just one very quick follow-up. I know these can bounce around a little bit. You guys had phenomenal enterprise traction here. But in terms of the overall customer adds, sequentially was down a little bit. I'm just curious if there's anything to call out in terms of the growth that is. I'm just curious if there's anything to call out there.

Yes, this is Justyn. There's nothing significant to mention. We expect to see some fluctuations, especially as we concentrate our resources on marketing and sales for the mid-market enterprise and larger deals. This quarter, we observed a shift in the volume of large deals. While there's nothing major to highlight, we have the opportunity to continue refining our focus on revenue yield from new additions, which remains our priority. We anticipate ongoing progress in both new additions and the revenue generated from them.

Justyn, maybe just to pick up on your last answer there. I mean, with more and more of the base shifting to mid-market and enterprise, what are some of the measures and investments you're putting in place to make sure that, that SMB cohort feels the love from Sprout, and make sure that they're seeing the same level of care and innovation that those higher-level customers are going to receive?

Yes. Yes, it's a great question, and it's something that's really important to our strategy. We've talked about this a bit in the past, but just to recap. When we think about the capabilities that our customers need, the real difference between the mid-market enterprise versus the SMB has to do with scale and collaboration and team capabilities and maybe some more sophisticated features around data. But the core needs are not solved, in our opinion. There's a ton of work still to do there and a ton of things that the average customer needs, that the SMB customer needs, that the enterprises also need. So when we think about the way that we're balancing our roadmap and making sure that we've got that balance there and that we're driving continuous value across all of our segments, a lot of them go hand in hand, right? And so we're able to deliver value in the SMB that's realized up through the enterprise as well. Then from a go-to-market perspective, making sure we're continuing to invest in the SMB, that we've got the marketing focus that we've always had in the SMB and agency segments, and that we're continuing to identify new pockets of growth and opportunity there. All of those segments are performing quite nicely. It's going to be something that the progress that we're making in the mid-market enterprise is going to be additive there and not a give and take relative to the other parts of our business. At least that's our strategy and intention with the way that we're building and going to market.

Yes, makes sense. And in terms of investing in the premium modules and add-ons, it sounds like there's going to be some incremental investment there going forward. Is that something you're comfortable sharing today, maybe some insights on what customers are looking for, areas of improvement into 2022? Or is it something that you're going to share maybe in future quarters with us?

Yes, something that we'll share in future quarters is we've got kind of more firm plans there. I think I can reiterate some of the things that we've talked about in the past, which are the primary capabilities that our customers come to us looking for; the more sophisticated customers just need another layer of horsepower and sophistication in those, and rather than trying to plug those into the core platform and give them away across our entire customer base. We'll often lean on carving those out into these premium modules. So things like customer care, publishing, advocacy, and others are some of those that we've talked about, and we'll get more specific when we're nearing the time to bring those to market.

And I'll maybe just quickly add for you there, Parker, as well; our customers are seeing this every day in terms of the innovation. Just picking on a couple of those things, this past quarter from a listening perspective, we've rolled out a lot of listening reporting functionality into our premium analytics product. For customers that have both of those products now, there was a lot of strength in that. We've enhanced that reporting to make it even more powerful for our customer care customers to be able to see activity happening by agents, but volume that's coming in, how their agents are responding, how quickly. So we're continuing to evolve some of those things. They don't all make the headlines, but our customers are seeing it and feeling it.

So we're curious with holiday shopping around the corner, are there KPIs or milestones you're watching to measure early days success with your Social Commerce products, understanding obviously that it's not a material revenue driver in the near term?

Yes. So I think for the foreseeable future, we're really focused on adoption and completeness of the feature set as our primary metrics and objectives internally. The holiday volume is certainly can be a catalyst for some of that adoption and bringing more customers into the fold there. But the specific volume related to the holidays is not something that we're terribly focused on. We're going to be bringing those capabilities to customers who are going to participate in that holiday cycle, and that's a great learning opportunity and feedback opportunity for us to get further embedded with those customers. But our focus is on getting as much learning and adoption as we can as we're still sort of crystallizing our roadmap and the things that we want to bring to market over the next year there.

And then maybe just add in there that we think of that certainly on the sales side in terms of the value prop. You've heard it from Newton Baby; there have been a number of customers that are leveraging social commerce that are seeing this as just speed to respond for customers. We know that the volume is going to be up and going to be on social. Enabling our customers to be able to be faster in responding to their customers is going to be huge. That's leading into how we hope to help customers be even more effective in this fourth quarter during the holiday season.

I think some of my time on the two topical questions just on the commentary from Shopify, obviously, very bullish commentary around the growth of GMV over social channels. I just wanted to maybe unpack what you're seeing from a commerce perspective in each channel. I think in relation to this, WhatsApp announcement, there are very different trends emerging across the platform like Facebook versus a platform like WhatsApp. I'm just wondering if you could give some examples of how social commerce is being deployed for different use cases, and sort of how you think there are some interesting developments happening depending on the platform?

Yes. I believe the essence of your question aligns with what we're observing in the market, where each player is adopting a slightly different strategy. Some strategies are more advanced than others. Our role is to help standardize the commerce initiatives for our customers across any platform they choose. Ultimately, we aim for the specific channel or strategy for social commerce to become less critical, enabling our customers to engage through a centralized solution in any way they prefer. This is a key objective we are working towards, as businesses have diverse needs, product requirements, formats, and standards across various networks. If we can reduce market confusion and facilitate product closings and pre-sale and post-sale discussions across these networks, we consider that a success. Regarding the varying approaches of different platforms, some are starting to integrate with one another. Our current strategy is to remain neutral and focus on the common aspects. Ultimately, businesses share the same goal of increasing sales, and the specifics from one channel to another are of lesser concern. We believe this approach is effective for now, while we stay attentive to how the situation develops.

And then just as sort of an indication of the WhatsApp business announcement, it made it seem like there was definitely a global angle to the product integration. Just thinking about where social commerce is happening today, using the situations like this integrations like this can really help capture a lot of the global social commerce opportunity for a lot of the growth that's happening, and maybe the early stages of the domestic social commerce investment is still early, but there could be an opportunity to kind of stretch yourself to the rest of the world social commerce growth.

Yes. I think it's kind of a two-sided opportunity for us as it relates to global growth. When you think about social commerce activity that's taking place globally and our ability to broaden our lens past the domestic side of things, specifically around the channel that we've restored the support. That's definitely a positive, and you want to have as wide of a view as possible on where the market is and where it's going. The other aspect, too, is this is kind of pulling us into a more global opportunity just generally. So what's happened in the channel is he had not previously supported a ton of global usership there, and it kind of solves two objectives for that one: both reaching into the commerce side, but also just to some of the channels that are more globally used as we think about how we're going our core business across the global markets.

I guess as we look at more of a focus on spending around enterprise and mid-market go-to-market team more broadly, how much more are you thinking about establishing direct sales teams that are going to be a lot more outbound focused and going after accounts maybe that you haven't seen any free users? Just kind of thinking about that as you widen the aperture here.

Yes. Well, I think the positive news for us here is not a lot changes with our motion. You heard Joe kind of touch on this. We continue to make a lot of great investments in sales and marketing. The marketing organization is really focused in on going after these sophisticated buyers for both the content driving and SEO strategy. We're adding more capacity in our mid-market and enterprise organizations, as well as our outbound efforts with BDRs. Our product still continues to be a huge part of our sales motion, and we see that as very differentiated. Many of the deals that we're closing every single quarter, even in the enterprise, start with these customers in the product. For us, we really like this motion. We know it's only disruptive to our competitive set that typically sell on demos and much longer sales cycles. When we get the customer in the product, leveraging our most sophisticated products like premium analytics and listening and starting to build in their workflow and create data and starting to rely on it before they even sign a contract, it sets us up for really great execution. You'll continue to see us invest in the mid-market marketing approach as well as in capacity, but not a lot has to change in our current motion. We're doing a lot of those things that you mentioned at the beginning of your question already today, and it's really just doubling down on those.

Yes, so our immediate thinking centers more around both the increase in seats potentially as the feature set becomes more robust. There’s an opportunity to monetize that as an add-on. Additional opportunities can bring to the top of the funnel, etc. Those are our immediate focus areas from a revenue contribution standpoint. We're not taking volume-based off the table, but it's not part of our immediate plans.

This is John on for Scott. Just kind of curious if you could fill the one in a little bit more on what you're seeing as far as how the nature of the buyer has been changing over the past few quarters. It really still trending towards that end user. And as you look to expand across different departments, where are you really seeing the most kind of natural expansion, whether it be marketing or customer success? Any color there would be helpful.

Yes, thanks for your question, John. In terms of the nature of the buyer, yes, we've certainly seen an increase in the amount of leaders getting involved in those. Leaders are across departments. You see it certainly on the marketing side, but you see it with folks that are responsible for customer care, customer experience. Sometimes we see it from executives that are just really focused on social, specifically the insights from social data. More and more, our team is being involved with not just selling to the practitioner, the social media manager, the folks that are responsible for that, but people further up the decision-making chain. This has been really promising for us. It tells us a lot about the opportunity in front of us today and where companies are thinking about their go-to-market strategy. If I think about just the future growth of how this is going to evolve and where we're going to spend time, there's going to be more of that for us. One of the advantages of our go-to-market strategy is we've done really well in meeting with the product and getting the end users and the practitioners involved in getting their hands on the keyboard improving for themselves that the products work really well. But with things like social listening and data and analytics, we have a great opportunity to also provide some amazing insights to executives before their team signs a contract to show them how this is going to be highly differentiated in the way that they think about the data and their go-to-market strategy.

Question for you. Thanks at the Analyst Day for giving the range of 1 to 3 points of margin expansion for the year. As you look into next year, can you talk about some of the puts and takes? On the one hand, you are investing somewhat, at least indirect, as well as in product, and to some extent, as you could have some return to the office impact. On the other hand, you're getting more efficient. So how do those things play out? Does that drive you to the high end or the low end of that range next year?

Yes, Michael, thank you for the question. I don't think we're changing the range right now. As we approach the end of this year, we will evaluate which investments are effective. The reason we can continue investing in the business while still showing operating leverage includes a couple of factors. Firstly, our single code base in R&D enables us to make significant investments, as demonstrated in this quarter, and to continue doing so next year while driving operating leverage. We want to keep our range open to maintain flexibility in case we identify great opportunities midway through the year or after the first quarter. If we find areas that are performing well, we want to be able to invest in those. Ryan and I have dedicated a lot of time to this, and our teams collaborate closely. Every month, we review what is working in SMB and the agency space and assess how mid-market enterprise is performing. We want to maintain that flexibility, Michael. Therefore, we will likely keep that range open for a while. As we move through the year, we will have more updates as those investments develop.

Justyn, can you elaborate on whether you could focus more directly on specific departments like marketing, sales, or customer care, considering that some of your competitors are successfully doing so?

Yes, we're doing that today, and we're actually seeing it because of where our product is today and also just where the market is going and what businesses need to take care of their customers. If I think about it from a customer care perspective of our customer experience, the customers that our customers want to get in front of are on social. More and more of that volume is coming in, and the current solutions that they have aren't equipped to help them there. Many of the customers we talked about on the call in the prepared remarks earlier and just our customer base in general have a high reliance on some form of engagement or customer care with their customers today. We've built products to specifically support within this area. We've also done things like we've built integrations into products like Zendesk and Salesforce Service Cloud and Microsoft Omnichannel to ensure that the work that's happening on social from these social agents is actually getting back to things like the CRM and the help desk to ensure that these businesses best position to create amazing customer experiences. We're seeing it today. We're turning those folks today. They're naturally being involved in our sales cycles, and you'll continue to see us develop our roadmap to make sure that we're taking great care of them.

I was just hoping, Justyn, maybe you could give us a little bit more background on the WhatsApp announcement and kind of what drove that latest addition? Was it something that customers were asking for? And when you think about the future, is there room for you to add others in this messaging space, whether it's Apple Business Chat or Line or WeChat or others as you develop this strategy further?

Yes, that's a great question. It's a mix of customer requests and our goal to engage as much of our customers' audience as possible by introducing these integrations over time. This feature set has been highly requested, and we are excited for our customers to manage that channel alongside others with Sprout. It aligns with our efforts to broaden our reach. As you mentioned, we've focused on messaging, particularly regarding private channels with Facebook, Instagram, and Twitter, and we will continue to enhance our offerings by adding additional channels like those you mentioned. Our belief is that consumers choose where they want to engage, and businesses need to be present to seize market opportunities for their customers. We aim to build a comprehensive presence in this area, especially in private channels, which we currently support and will expand in the future. This approach is consistent with our strategy, and we are particularly enthusiastic about adding WhatsApp, given its scale, usefulness, and global reach. And then I want to touch on maybe the 2020 cohort of customers that you added. It's been a year now since your net new customer count accelerated. Is there anything you can share in terms of how that 2020 cohort has performed in terms of expansion or retention or utilization versus historical cohorts now that we have a full year of data for those customers? Yes, to provide some general observations, our cohorts have been acquiring higher price points, more seats, and more products on average over the years. All of our data supports the idea that larger customers tend to be more engaged and have greater potential for growth once they start using Sprout. I'm confident that these trends apply to our newer cohorts compared to the older ones, especially when we consider the past periods with lower price points. While I don’t have specific details about that cohort, these are some general behavioral patterns we’ve noticed.

Thank you, presenters. I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Justyn Howard for any closing remarks. Sir?

All right. Awesome. Thank you. So as always, thank you all for your time, and for your support. We've appreciated not just the time today, but over an Investor Day and the conversations that we've had. We look forward to staying in touch with you all and answering any questions: reach out if there are any. But thank you. Great job to the team. Really a fantastic quarter. We're excited about the momentum that we're carrying into the end of the year, and we will look forward to chatting with you all again soon.

Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you all for joining. You may now disconnect.