Sprout Social, Inc. (SPT) Q3 2022 Earnings Call Transcript

Good day, everyone. My name is Kathy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Sprout Social Third Quarter 2022 Earnings Conference Call. Operator Instructions. And Jason Rechel, you may begin.

Thank you, operator, and welcome to Sprout Social's Third Quarter 2022 Earnings Call. We'll be discussing the results announced in our press release issued after the market closed today and have also released an updated investor presentation, which can be found on our website. With me are Sprout Social's CEO, Justyn Howard; CFO, Joe Del Preto; and President, Ryan Barretto. Today's call will contain forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, among others, statements concerning financial business and customer trends, our expected future business, financial performance and financial condition, performance against our multiyear financial framework, our market size and opportunities, our plans, objectives and expected results for future operations, growth, products, investments, initiatives, pricing or strategies and our guidance for the fourth quarter of 2022 and full year 2022 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, 2021, filed with the Securities and Exchange Commission 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 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. I know this is a busy day, and we appreciate you all being here. To get right into it, we're in the fortunate position today to raise our annual growth and margin guidance for the third time this year. The business environment has changed, and we're mindful of the risks that remain. However, we're in a position today to guide to a record net new ARR in Q4, greater than 30% Q4 revenue growth and greater than 300 basis points of year-over-year margin expansion in Q4. We believe this is a testament to the power of our model, execution of our teams, and the mission-criticality of our software. We also have some exciting go-forward updates to share today that we believe position Sprout to accelerate both growth and efficiency heading into 2023. Some of the highlights from the third quarter include 40% year-over-year growth in customers spending $10,000 or more in ARR, 76% year-over-year growth in customers spending $50,000 or more in ARR, and our seventh consecutive quarter of positive free cash flow. Very strong enterprise new business growth also underscores accelerating growth momentum in billings and RPO, and as social continues to cement its strategic importance to the world's largest organizations. We also have a growing pipeline and business stemming from our Salesforce partnership, including sequentially more than doubling the number of new customers joining Sprout this quarter from Salesforce and an exciting new integration with Service Cloud. Conversely, we did experience sensitivity at the low end of our market. Like many software companies, we've seen those customers most affected by an adverse business environment behave differently in Q3. As the economy weakened, the low end of our customer base experienced slower expansion activity, and we converted these customers at a slower than typical pace. This reality ultimately capped a portion of our upside and net additions this quarter, though our overall performance remains strong. As you all know, we've been increasingly focused upmarket with our recent successes. We've also learned a great deal. The underlying shift of our resources and focus has been unfolding for several years, and we entered our annual planning period this summer compelled to sharpen our focus and priorities even further. As we now look ahead into 2023, we see an exciting opportunity to move faster in service of the fastest-growing parts of our business, to fully align our team around that opportunity, and to further accelerate our growth. Over the past 12 years, we've developed a duality in our customer base with significant investment and strategic focus going toward two dramatically different audiences. At one end of the spectrum, we see approximately 80% of our current revenue and more than 90% of our new revenue growth coming from customers with an average ARR of more than 10 times the rest of the customer base. These customers land with similar costs and similar sales cycles as the rest of our customer base, bearing an LTV many multiples higher and net dollar retention north of 120%. At the opposite end of the spectrum, we have a large population of customers contributing a small amount of revenue that are increasingly expensive to acquire, hard to retain, and are not mature enough yet to get the full value from Sprout. Our ability to serve all parts of the market has worked in our favor for more than a decade. But as the market, our platform budgets, and the strategic value of social media have continued to climb, our efforts at the low end of the market have slowly produced lower quality revenue as we've become very affordable to customers that were previously priced out of our offerings. This has come at a high opportunity cost with significant budget and resources applied to an unproductive part of our business, and it's created a juxtaposition to the healthiest part of our business. As a result, we've seen an underlying anchor on our growth margins and our strategic focus. We've also been disproportionately undervaluing what we delivered to our target buyers. Said plainly, we've been under-monetizing our platform by trying to serve the low end of the market and our core customers with a pricing model that works for everyone. The last time we made meaningful pricing changes was in 2017, which created more than 500 material new product enhancements, including the vast majority of features, workflow, networks, and integrations at core Sprout today. As we look to realign the entry price to Sprout to match the most productive parts of our business, we've made two changes. First, effective this week, we've changed the pricing that new customers see, including meaningful price increases across all of our subscription tiers and the addition of an enterprise plan, which includes our premium offerings. Second, starting in Q4, we will begin making modest price increases for our existing customers for the first time, many of whom are paying the same price they were a decade ago. By aligning our pricing, product, go-to-market, and customer success strategies around the most productive customers and potential customers, we believe we have the opportunity to accelerate our brand competitive and category leadership as well as our growth. Importantly, this evolution in our strategy does not require us to limit our TAM or scale back growing investments in our team. We're simply fully aligning our strategy and team with the customers at the right stage in their journey and maturity with social. And we're still going to lead with the same inbound product-led motion that's made us so successful. These changes properly reflect the growth and maturity of our industry and the value we're providing to our customers. Our software is more valuable than ever before. Our market is rapidly maturing as companies harness the full power and potential of social. We're seeking to maximize the value of the most productive parts of our market, which currently contribute the vast majority of our growth. By eliminating the strategic tension in our business, optimizing our monetization strategy, and capitalizing on our competitive advantages, we believe we're positioning Sprout to accelerate growth and efficiency on a multiyear basis. We're energized and excited to unleash our full potential into 2023 and beyond. And with that, I'll turn the call over to Ryan.

Thanks, Justyn. I'm incredibly grateful for our customers who continue to see more value in our platform and for our teams who continue to execute. The global business environment and technology industry are clearly undergoing change. This impacts every team differently. And in our market, our competitors are distracted, backpedaling, or both. Meanwhile, we're continuing to invest in the most productive areas of the business and are hiring incredible talent. We've been on the offensive with the most compelling and innovative product roadmap that we've ever delivered, very strong momentum from our strategic partnerships, and now new monetization and alignment around our healthiest customers. We're working relentlessly to establish Sprout as a category-defining company. This cycle of leadership begins with great teams. During Q3, Great Place to Work in People Magazine named Sprout to their top 100 companies at Care list. Refu, which gathers feedback from thousands of verified sales professionals, ranked Sprout Social as the #1 best public company to work for. Revenue also named us on the top 20 Best Companies for Diversity & Inclusion, the 20 best companies for professional development, and the 20 best companies for culture and leadership. We have a truly special team. In our recent progress survey, our internal engagement score increased 200 basis points from last year. What was amazing to see was that 96% of our team would recommend Sprout as a Great Place to Work. These are the type of teammates that show up every day to take amazing care of our customers. Great teams are also the foundation of product leadership, and our product teams have been on fire. During Q3, we enhanced our video management functionality with the integration of Instagram Reels. We expanded listening to include LinkedIn comment aggregation, and we expanded our global partnership with Salesforce and launched our Service Cloud integration. We also launched our more integrated employee advocacy solution, which enables brands to manage their employee-driven amplification efforts within the industry's most natively integrated suite. For a product that remains the industry's highest-rated platform across most dimensions on review sites like G2 and TrustRadius, we're continuing to raise the bar and deliver more value to our customers. Coming back to the Service Cloud integration, we've been working directly with the Salesforce Service Cloud product team since March to build Sprout natively into the Service Cloud console, offering a truly unique approach to how Salesforce CRM can now connect with social. This empowers Salesforce customers to manage all of their social customer care directly from Service Cloud without changing their workflow. We changed the game for social customer care with a highly differentiated approach. As we continue to go deeper into social customer care, while unlocking increasingly large customer deployments, with an intuitive, frictionless approach, we've already seen our first customers go live in early Q4. Even prior to our integration with Service Cloud, our partnership with Salesforce built momentum in Q3 as the number of customers coming to Sprout more than doubled sequentially from Q2. In addition, we were at 100% of Dreamforce, an incredible opportunity to meet with many of our largest prospects and customers. Coming out of Dreamforce and on the heels of our Service Cloud integration, September represented our strongest ever month for enterprise pipeline creation, and we're excited to share our new business execution coming out of what we expect will be a strong Q4. Staying on the topic of Salesforce as we transition to customer stories for Q3, we were fortunate enough to win the business of the largest SaaS player, and this is what they had to share about their experience. We're working to lead our industry towards delivering on the business value of Social, said Marissa Cranes, Vice President and Global Head of Social Media at Salesforce. The intuitiveness and ease of use of the product have made for rapid adoption across our teams with minimal onboarding time. As a result of the completeness of Sprout's product, regular feature enhancements, and exceptional customer success efforts, we've accelerated our implementation timeline, and we feel well positioned to be industry leaders for many years to come. The broader super brands that we grew with this quarter is a cross-section of leading franchises across all segments of the economy. This success was clearly felt in our mid-market and enterprise segments. It is also clear in EMEA, which continues to be our fastest-growing geography. This speaks to both the magnitude of our opportunity and the critical nature of social and includes Peloton, JCPenney, Bachman, Carrier, Sunrun, Clayton Homes, Compass Canada, Shutterstock, Palantir, Monday.com, Vineyard Vines, Duke Health System, and the Department of Health and Human Services. Well, I'm proud of the way we're delivering through an uncertain time. I have never been more certain that we're on the path to unlock our full potential. Our partnerships are building momentum, our teams are up leveling, and new product enhancements are delivering tremendous incremental value to our customers. As we align around the healthiest and most impactful areas of our business, with an incredible team focused on the biggest opportunities, we believe Sprout is well-positioned for success in the near and long term. We're hard at work and excited about what we're building. And with that, I'll turn it over to Joe to run through the financials. Joe?

Thanks, Ryan. I'll now walk you through our third quarter results in detail before moving on to guidance for the fourth quarter and full year 2022. We're pleased to deliver durable growth, positive free cash flow for the seventh consecutive quarter, and to raise our expectations for the year, underscoring the mission-criticality of organic social media management. Revenue for the third quarter was $65.3 million, representing 32% year-over-year growth. ARR exiting Q3 was $271.3 million, up 33% year-over-year. With the global business environment showing strain, we did see slower Q3 customer activity for both new business and expansion with our lowest touch, least sophisticated customers. Our mid-market and enterprise segments continue to outperform our expectations and are powering a disproportionate amount of our net new ARR. Driven by healthy momentum in our enterprise business, our ramping partnerships, and previously unanticipated pricing changes, we expect to have a record net new ARR in Q4. We had 638 net new customers in Q3 to finish the quarter with 34,258 customers, up 12% year-over-year. The number of customers contributing more than $10,000 in ARR reached 6,111, up 40% from a year ago. The number of customers contributing more than $50,000 in ARR reached 843, up 76% from a year ago, and our strongest ever 500,000 net addition quarter outside of a Q4. Q3 ACV growth of 9% year-over-year was again driven primarily by larger initial deal sizes. In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share count on a non-GAAP basis to exclude stock-based compensation expense, and are reconciled to our GAAP results in the earnings press release that was just issued before this call. In Q3, gross profit was $50.7 million, representing a gross margin of 77.6%. This is up 220 basis points compared to a gross margin of 75.4% a year ago, and again represents our highest gross margin in five years. Sales and marketing expenses for Q3 were $26.2 million, or 40% of revenue, up from 39% a year ago. We're fortunate to hire well throughout the quarter and continue to make meaningful investments in our future. Research and development expenses for Q3 were $13.2 million, or 20% of revenue, up from 19% a year ago. Headcount and absolute expense growth continue to match the trajectory of transformative R&D investments. General and administrative expenses for Q3 were $12.7 million, or 19% of revenue, down from 21% a year ago. We have normalized our G&A spending and expect to deliver consistent leverage as a percent of revenue going forward. Non-GAAP operating expense loss for Q3 was $1.4 million for a negative 2.2% operating margin. We are pleased with the ongoing efficiency improvements as we scale, and we exceeded our expectations this quarter due to revenue outperformance. Non-GAAP net loss for Q3 was $1.0 million for a net loss of $0.02 per share based on 54.7 million weighted average shares of common stock outstanding compared to a net loss of $1.8 million and $0.03 per share a year ago. Turning to the balance sheet and cash flow statement. We ended Q3 with $181.9 million in cash, cash equivalents, and marketable securities, up from $181.7 million at the end of Q2. Deferred revenue at the end of the quarter was $85.0 million, a strong sequential increase. We continue to progress nicely to our high water mark anticipated in Q4. Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $136.9 million, up from $127.6 million exiting Q2 and up 57% year-over-year. We expect to recognize approximately 81% or $110.3 million of total RPO revenue over the next 12 months. Operating cash flow in Q3 was $1.0 million compared to $4.4 million a year ago. Free cash flow was positive $0.5 million for a positive 1% free cash flow margin, ahead of our expectations. Shifting to formal guidance. For the fourth quarter of fiscal 2022, we expect revenue in the range of $69.8 million to $69.9 million, along with a growth rate of 31%. We expect a non-GAAP operating loss in the range of $1.0 million to $0.9 million. This represents an anticipated operating margin of negative 1%. We expect a non-GAAP net loss per share of roughly $0.02, assuming approximately 54.8 million weighted average basic shares of common stock outstanding. For the full year fiscal 2022, we now expect total revenue in the range of $254.0 million to $254.1 million. This is an expected overall reported growth rate of greater than 35%. We're pleased to have our third consecutive quarter increase to 2022 annual guidance. For 2022, we expect non-GAAP operating loss in the range of $5.5 million to $5.4 million. Sprout has annual non-GAAP operating margin expansion of roughly 130 basis points, up from our prior margin expansion range of 110 basis points to 120 basis points. We're pleased to forecast faster revenue growth with improved efficiency even as we continue to make growth investments for our future. We expect a non-GAAP net loss per share of roughly $0.10, assuming approximately 54.6 million weighted average basic shares of common stock outstanding. Shifting to the financial considerations for the focus we've outlined today. As Justyn and Ryan have discussed, we've tightened our strategic focus around the healthiest customers in our market. We believe this path will unleash our full growth potential. While we're early, I do want to lay out a framework for how we are thinking about this focus. Our lowest tier standard plan has been increased in price by more than 2x, and we've shifted pricing higher across our plans as we begin to appropriately monetize the value we deliver to our customers. They've also begun to implement price increases on existing customers for the first time. In the immediate term, we expect these changes to drive an acceleration in the rate of ACV growth. In the intermediate term, we expect these changes to drive a step function change in ACV growth. In the long term, we expect continued durable ACV growth as the market matures into our sweet spot. Aligning to much higher ACVs and a more sophisticated customer base, we also expect to work towards world-class NDR at or above 120% on a multiyear basis. We're also shortly improving our unit economics. This strategy may price out those customers that are not yet right to invest in Sprout, which will result in a smaller number of net new customer additions each quarter. By keeping prices low to cater to the low end of our market, we've been anchoring our growth everywhere else, especially where our customer value proposition increases exponentially and demand is more inelastic. We expect the impact on margins will be net positive and will not be shy about investing in new sales capacity behind strong enterprise demand signals. All else being equal, we expect to see improvement in our rule of 40 calculation through a combination of faster revenue growth and/or stronger margins. In summary, our Q3 financial performance highlights the underlying resiliency of our business model, driven by a very strong enterprise new business ramping contribution from our Salesforce partnership and a powerful pricing evolution. We expect the momentum to strengthen through Q4. As we look forward, we remain confident in our ability to outperform our medium-term goals to deliver greater than 30% annual revenue growth and 100 to 300 basis points of annual operating margin improvement. Even against the backdrop of this business environment, we believe we are positioned to pull away and define category leadership in the $100 billion market opportunity ahead. With that, Justyn, Ryan, and I are happy to take any of your questions.

And our first question will come from DJ Hynes of Canaccord.

Nice to see the strong results and exciting updates as we look forward. Joe, maybe I'll start with you just on the pricing stuff. So I think I've heard you quantify what's happening at the low end, right? You said a 2x increase on the lowest tier. Justyn said earlier that 90% of your growth is coming from customers that are kind of 10x the size of the rest of the base. What's happening to pricing for that majority of customers that are contributing to growth? I'm not sure I heard you quantify it there, and that would be helpful as we think about the model going forward.

Yes. So I think if you look at the other plans that we have like on the professional and the advanced, you're probably seeing about close to a 50% to 100% increase on the initial entry price. And then when you get into the enterprise modules there, that's where we don't have the pricing on the website. So we think there's a lot of opportunity up there.

Yes. And this is Ryan, maybe I'll add in there. All of our plans went up in a very healthy way from 2 to 2.5 times where they were before. We've added an enterprise plan at the top end where it's a bit more of a custom build, and a big driver there was that we know that those customers want to consume a lot more of our products. In our previous pricing strategy, I think we were anchoring ourselves too low with some of the plans, and we know that those enterprise customers do prefer the opportunity to customize the plans for themselves. So our enterprise team is really excited about having the ability to bundle a bunch of our premium products together. So we expect significant increases in the ACV opportunity for them as well.

Yes. Yes. That's helpful color. And just one clarification. So you expect to have by the end of Q4 that rolled out to your entire customer base, is that right?

This is Justyn. So I'll clarify that. The pricing for new business went live earlier this week. You can find that on the website. That is for all new customers who are coming to join Sprout starting Tuesday, late in the day to day, we rolled that up. For existing customers, we are looking at a different approach there. So I just want to make that clear. We're looking at nominal increases to existing customer pricing that's going to roll out over the next 12 months to varying degrees, depending on the agreement that they have with us, their tenure, et cetera.

Yes. Okay. Perfect. And then just shifting gears, I'd love to ask about the Salesforce adds. Obviously, we saw meaningful acceleration there. I think you had talked about that being more of a renewal dynamic happening at renewal. So maybe it's just timing. But a double versus Q2 feels like it might be something more. So can you just talk about what's happening with that relationship?

Yes, happy to. We are continuing to see really great success in growth there coming off of Dreamforce. We saw one of our best pipeline months ever, specifically with the enterprise group. The Service Cloud integration that we've been working on that has been in beta, where we've got our first set of customers going live now in early Q4 is a great example of that partnership. We continue to see a lot of progress co-selling with the Salesforce team. So having them introduce us into accounts, many of those certainly are customers that are coming off of the Social Studio product, but we're also starting to see some customers that are examples of just Salesforce customers, not necessarily using the social product, whether they do need social, and Sprout's being introduced as the preferred partner.

Awesome. Appreciate all the color.

Perfect. I wanted to touch on some of the comments, I think, that you made around the Q4 pipeline and with it being expected to be the best, I think, ARR, incremental ARR quarter in history. Is that when you think about the composition of that pipeline, is that going to be mostly existing customer expansions? Or do you see quite a bit of new business in there, whether that's organic at these new pricing plans or with the Salesforce partnership? We just love to understand the dynamics there a little bit.

Yes. Thanks, Arun. Yes, it's really a combination of both. So we've continued to see really healthy new business and our expansion as well, especially in our upmarket customers and mid-market and enterprise. So it is a combination of those, a really good balance between new business and growth weighted more to new business in Q4, just given the dynamic of the business in the ending of the year and certainly will include some of the Salesforce pipeline that we've been creating sort of in the last couple of quarters here.

Okay. Got it. If we take a step back and consider the broader market and macroeconomic conditions, how are customers currently prioritizing their investments in social efforts, particularly in your area? Is there an increase compared to last quarter or the one before that? Are you observing a slight decline as customers become more cost-conscious, or do you see a long-term trend that suggests less impact from macroeconomic issues compared to other market segments?

Yes. I mean I think there's a couple of different examples of what we're seeing in the market here. As Justyn mentioned in the prepared remarks, in the lower end of the market, I think that's where you're going to see the most compression from a new business perspective and then a little bit from an expansion perspective. As you go upmarket, we're continuing to see really, really healthy demand, and that flows through when you look at just the $10,000, $50,000, and our pipeline creation and success in our mid-market and enterprise, those customers continue to have the same needs, if not more, they're continuing to need social as a primary channel to market in times like this. I think there's also an opportunity to continue to look at the organic as a massive opportunity, and when you may be cutting paid spend. From a customer care engagement perspective, where we have a lot of our roadmap dedicated, customers are increasingly coming in, wanting to ensure that they've got a better answer for how they're solving for customers on social. So really good demand upmarket. And the low end of the market is where most of the compression is coming, but it's being offset by what we've been doing with our larger customers.

I wanted to revisit the pricing a bit. Clearly, there has been considerable analysis regarding price elasticity and similar factors. As we prepare for our modeling, what assumptions should we consider? While we might have fewer customers, there could also be an increase in churn; however, we may achieve higher pricing from those who remain. Can you assist us in understanding how this might unfold? Or should we simply wait until it becomes clearer?

Yes, Ryan. I think the way we're thinking about it and we've talked about this before. We really haven't focused on the number of customers that are coming in. So the way we've been talking about this price increase and what we think on the website is that I think it's just going to drive higher ACVs going forward. Obviously, the price that's coming in is just being much higher for our current customers. So if you think about how do you model that to start, I think it's very consistent with what we talked about over the last three years, which is we're optimizing for the ARR per customer. So as you continue to look at what our ARR growth is and then what our ACV growth is, I just think you're going to see, as you can imagine, going forward, and I talked about this a little bit in my prepared remarks, you're just going to see a much faster ACV growth in the near term. And then probably over the next immediate term, you're going to see probably a step function change in our ACV growth. So that's how I would think about it from a modeling standpoint.

Yes, that's correct. It's great to see. However, it's important to note that this decision comes at a time when the market is somewhat volatile. What factors influenced the timing of this decision, choosing to make the call now instead of earlier or delaying it further?

Yes. This is Justyn, Raimo. I appreciate the question. So this is something that's been brewing for a while, right? We talked in the prepared remarks about how our entry price having done, which really, over time, kind of changing the dynamic of the long tail at the low end of the market for us. And those customers behave very differently, have different needs. And this was something that we saw as both limiting in the sense that we weren't monetizing the core part of our customer base the way that we felt like there was certainly appetite for and relative to the value that we are giving to our customers, but also just in terms of attention and resources and opportunity costs. So this is something that we felt like was maybe a bit overdue, something that's been brewing for a while. What was important for us to make the right decisions that the data tells us are the right decisions to really align around the part of the customer base that we can best serve and the one that is contributing most to the success of the business, obviously. And another factor for some of the specific timing, making sure that we were able to get as much data and have this as fully baked as possible as we head into 2023 as we figure out what the priorities and roadmap and planning look like. We wanted to make sure that we didn't carry this decision with us until '23. The time was right, the delta between those two groups of customers was big enough that we felt like we just really wanted to take action here and set ourselves on the right foot heading into the next year.

Curious, in light of the more uncertain macro? Are you seeing any meaningful change in the number of channels that customers are looking to support and/or the size of social media management teams inside of the customer base you're serving?

Yes, I understand your question, and I’ll do my best to address it. We are not observing any change in the number of networks and profiles our customers want to serve in their communities. In fact, with TikTok's introduction over the past few quarters, we’ve actually seen that number increase slightly. There’s nothing in the broader economic environment that alters this situation from our viewpoint. The same applies to social teams—the size of these teams largely depends on the number of channels to manage, the audience size, and the volume of messaging and publishing, which hasn’t materially changed, according to our data. Additionally, as we incorporate more use cases and departments, we remain on an upward trajectory. However, as Ryan mentioned in his prepared remarks, teams at the lower end of the market, which are less experienced, may not scale up as quickly as in the past. Nonetheless, once they become committed to strategic social media efforts, we haven’t seen any issues in that area.

Got it. Appreciate that. And then there's a lot of stuff in the news obviously about TikTok and Twitter, curious to hear from some of your top customers, how they're thinking about the prioritization of spend across each of those channels through the remainder of 2022 and into '23.

We may not have the best insight into spending since we are not part of the advertising discussions, which is outside our focus. From what our customers are saying, it seems like their priorities haven't changed much. There has been some adjustment over the last couple of years regarding their balance between platforms like Meta, Twitter, and TikTok, but based on recent events, I don't think they are indicating a significant shift in strategy. In both cases, they appear to be waiting to see how things unfold, as these situations are quite distinct and currently lack clear outcomes. While there are some discussions occurring behind the scenes, it hasn’t yet reflected in actual spending.

I guess, first, maybe, Joe, any you could help us out on kind of what your buildup in thinking that net dollar retention remains very strong and sort of industry-leading, as you mentioned, how much price are you including in that number of 120 plus, given that you sort of mentioned that nominal price increases will be rolling out over time through the existing customer base? Any expectations of what churn might look like, especially at the low end of the market, factoring in that number? And then ultimately, kind of what the upsell, cross-sell comes in. If you could just either stack rank those or give us a little more color.

Yes, Matt, just to clarify the comments. I think when you were talking about the 120% NDR, we believe that that's kind of like the progression that we'll get to by our mid-term model of 2025. And the reason we have conviction around that is if we look at our current customer base, and we look at the higher mid-market enterprise customers, when we look at the NDR in those customers that we're really starting to focus on, the ones that Justyn talked about that are 10 times the low end of the market, they're already close to that 120% or above that 120%. So that's why we think we can get the overall customer base to that level by 2025. And so from that perspective, we feel really confident based on our current existing customer base even before we kind of put these price increases. And so we do think that's going to be a combination to get to the point that combination of the cross-sell, the ability to upgrade our customer base and also the fact that we know historically that the largest customers that come in are our fastest growing. And so when you think about the fact that we're going to be focusing on these higher-quality customers, and we know historically, those are our fastest growing, we believe that over time, that will just shift the overall quality of our customer base and thus bring in what we believe is that 120% NDR in 2025.

Okay. Helpful. And then as you look at social commerce, it seems like a lot of early excitement in the broader market, but maybe getting to a point where that's a higher mix of e-commerce sales or retail sales, everyone wanting to think about that is just taking more time. I'm curious, are you still seeing a lot of interest from your customers trying to be poised and ready for when that takes off a little more? Or is there a pushback from how the social networks are going to allow that to happen? Just any update around how you guys are thinking about social commerce and sort of how that maybe is going to evolve into a pricing or a separate SKU potentially?

Yes, this is Justyn. Regarding the first part of your question about market interest and excitement, I believe that enthusiasm remains strong. You are correct in your observation that businesses are eager and prepared to initiate discussions, but they require a clearer understanding of how networks are approaching these opportunities and what the outcomes will look like. We have experienced significant success in the social commerce sector, which we remain very enthusiastic about and view as having considerable long-term potential. However, I have always regarded it as a long-term investment, one that will take time to fully develop for us to quantify properly. We are continually working towards that goal and have built a robust set of capabilities within our platform to assist our customers. We’re not quite ready to release a separate SKU yet, as we are still dependent on the progress the networks are making, which will impact the timing of any potential market introduction of such a SKU.

The other thing I'll quickly maybe just to add there, it's not exactly social commerce, Matt, in the way you asked the question. But even if the transactions are happening directly on the social networking sites, our customers are still thinking about revenue and revenue growth and social as a channel to get there. And whenever they're doing that, they're driving their marketing campaigns through Sprout. The feedback that's coming from those marketing campaigns are happening through our inbox and in customer care through Sprout. The data that they're gathering on the effectiveness of those marketing campaigns and the pipeline that they're generating is also coming through Sprout as well. So I think that's another piece that even if we're not in the transaction yet for all the platforms, they're still warming up towards that, and we're participating in those conversations with them.

This is Michael Vidovic on for Michael Turits. As far as that refocusing on the enterprise customer mix, are you looking to make any changes around the go-to-market or the sales motion, either with more upon sales hires or enterprise-focused sales individuals? Just any changes outside of pricing that you're looking to do would be helpful.

Yes. Thanks, Michael. We're already doing a lot of those things today. So it's probably just continuing to invest there. So if I think about just the teams themselves, we have some great enterprise leadership and sellers that are already in the marketplace today that are closing a lot of these accounts and growing these accounts that we've spoken about. We're continuing to invest in those teams. We see a tremendous opportunity in front of us from a marketing perspective. You'll see a lot of our focus and investment going into marketing to those large, sophisticated customers, forms of things like account-based marketing. We also have continued to grow our outbound BDR teams that are building pipeline within those accounts. And I also underline, even though we're doing all those traditional enterprise strategies, we also still leverage the product like we always have. So our customers continue to come in and trial the product; that continues to be a major differentiator for us even in the enterprise, and it's one of our #1 plays to get their hands on the keyboard. And so for us, we love that in the enterprise, massive differentiator, and so we'll continue to be working on that as well.

In regards to your, I guess, Q4 being a record net new ARR quarter, I think your previous record was just shy under $20 million. How much of a record are we expecting? And then going forward, should we expect kind of net new ARR in '23 to be kind of return to your growth cadence? I guess, so far year-to-date this year, you guys are about flat in terms of what you added in net new ARR versus last year?

Yes. Brett, I'll take that one. I think just to clarify, I think we talked about as well as a record Q4 ARR. We're not going to give much more guidance past that. And then as it relates to 2023, we're probably not in a position to talk about what our guidance will look like and what net ARR will look like in 2023. We'll probably do that in our February when we release year-end and give guidance for next year.

Understood. Can you clarify your medium-term framework by breaking down the assumptions regarding the mix between customer growth and ACV growth? Also, within ACV, how much of that was attributed to pricing or seat expansion, and how does that compare to the current situation regarding customer growth, seat expansion, and pricing?

Yes, I can start it off. This is Justyn. I think the probably the best way to characterize how we're thinking about that is the price increases for existing relative to what you're seeing in the increases in the new business side. And so as we think about the framework, the growing ACVs, growing expansion, the vast majority of that relates to getting closer to a line on pricing of the new business; winning more deals, particularly in the mid-market enterprise; and doing a better job with the expansion of our existing customers. and not a material amount coming from the changes themselves. I think that was the framing of the question, but let me know if I did get that right.

I think you got it. I guess maybe just same question asked differently. If I look at the number of customers added this quarter, is that a decent run rate in terms of net adds on a quarter on a go-forward basis given maybe the deprioritization of on markets?

We touched on this earlier in the call. Regarding the number of customers we plan to add, it's not something we are concentrating on internally. The best approach, Brett, is to focus on the annual recurring revenue (ARR) from those customers and the annual contract value (ACV) growth. You can expect an acceleration in our ACVs. If you consider the ARR we mentioned in record Q4, you can gauge what the customer count might look like. However, it's not a number we traditionally provide guidance on, and we don't focus on it internally. For us, the emphasis is on the growth of ARR and ACV.

Fiona on from Elizabeth Parters team. So wanted to follow up on the lot of questioning on the 2025 framework. Previously, you had talked to a 30% revenue year-over-year growth rate. Is that still a reasonable way to think about it? Or is it more of like a 30% CAGR basis, expecting a near-term acceleration from the pricing increases? And somewhat relatedly, how are you factoring in the risk of any macro impact to that? Is there any risk that some of the softening in the economy takes us below that original framework?

Yes. No, we don't see any change. And just to be clear, it's not a CAGR. It's 30% every year between now and 2025, and we don't think either the macroeconomic conditions or any of the other things we've talked about recently, whether it's the price increases have a material impact on that. We actually feel really good about where the business is going. We've talked about some of the highlights and the momentum we're seeing, what we consider like our core customer base. And so at this point, we don't see us getting off of that plan right now and something I talked about in my prepared remarks as well, we feel really confident about our ability to continue to hit the 30% every year through 2025.

Great. This one is for Justyn and for Ryan. You guys talked a little bit about the macro and stuff. And I kind of wanted to ask because it's a question we've been getting specifically about Obviously, historically, a very important relationship for you guys and recognizing that you guys are agnostic, I think, and indeed, adding value across a whole host of social media platforms which is the value we deliver, but there's just a lot of practical things going on there right now. I mean half the staff being let go, potential change in the business model. And some advertisers walking away at least temporarily. So just curious what you guys are hearing. I don't think you guys have posted anything on your blogs yet just to how customers should be thinking about that. You guys are always really active about that. We follow that. So just curious to hear your thoughts and any implications potentially from that? And then I just had a quick follow-up for Joe.

No, I'm not. Yes. Thanks for the question. I'll get it started here. So I mean I think, obviously, we're a couple of days in to these leadership changes there. And so I'm going to be really thoughtful and patient about forming longer-term views here. I think obviously, there's a desire to make some changes and make them fast. And most of the ones that we're hearing about being related to monetizing the blue check, I think, is fairly benign in this context and some of the other things that they may look to do. I don't think we have a lot of information on. We haven't seen from our customers' perspective in terms of the organic growth that they're doing on social, the importance of connecting with their audience, et cetera. We haven't seen anything bubbling up there that really changes the value proposition for them in the near term. I think that advertising is one area that may be a little shakier at the moment, but again, it's not an area that we play in. And then it's for us and where we want to continue to provide our support and to build alongside Twitter is anything that they're doing to increase the trust and safety and vibrance and growth of that community, we think is going to be positive. We just don't know enough about which of the ideas being floated are going to be priorities exactly how those are going to shake out, et cetera. So we may have more to say. Certainly, we'll guide our customers the best we can as the approach is and some of the different models that they've been talking about come to life for our customers, but a lot of it is obviously related to the consumer and the advertising side.

Got it. Okay. Yes. That's really helpful. Appreciate that. It's early; I appreciate that. And then, Joe, one for you. I think this was partially answered with the comments on the last question, but it sounds as if the majority of these price increases are going to be on new customers, not existing customers. So just, I guess, from your thought perspective, any additional churn that you would expect or think about as you think about maybe Q4 as some of these renewals start to roll in into next year? Or is it too minimal relative to the value you're adding for you guys to anticipate any additional churn on that price increase?

Yes, Rob, thanks for the question. If we think about the fact that we talked about doing a record new record net ARR in Q4, we factored in any potential churn with the price increases. And like Justyn said, the way we're rolling out the price increases for existing customers. It's just going to be more methodical over the next 12 months or so. So I don't think there's any major impact in any one quarter right now from what we can see in our plan to roll these out. And it's like, it's not going to be to every single customer, it's going to depend on tenure, the price point they're at, and so we don't see any major churn impact in Q4, and that was all factored into our commentary around it being a record Q4 on a net ARR basis.

And with that, that does conclude today's question-and-answer session. I would like to turn things back to Justyn Howard for any additional or closing comments.

Yes. Just a quick thank you for all of your time today and all the other things going on. We are appreciative of the team, as always, all of our supporters, investors. We'll be out chatting with you all over the next couple of weeks. Looking forward to that, and we will catch up with you all soon. Thanks again for your time today.

And thanks, everyone, that does conclude today's conference call. We'd like to thank you again for your participation. You may now disconnect.