Sprout Social, Inc. (SPT) Q3 2023 Earnings Call Transcript

Thank you for standing by. Welcome to the Sprout Social Third Quarter 2023 Earnings Call. I would now like to welcome Jason Rechel, Vice President of Investor Relations and Corporate Development to begin the call. Jason, over to you. Thank you, operator. Welcome to Sprout Social third quarter 2023 earnings call. We'll be discussing the results announced in our press release issued after 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. All statements other than statements of historical fact are forward-looking statements. These include among others, statements concerning our future financial performance and business plans and objectives and can be identified by words such as expect, anticipate, intend, plan, believe, seek, path, opportunity, or will. These statements reflect our views as of today only and 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 discussion of the risks and other important factors that could affect our actual results, please refer to our quarterly report on Form 10-Q for the quarter ended September 30th, 2023 to be filed with the SEC as well as our previous 10-Q and most recently filed 10-K. 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 reconciliation to the most directly comparable GAAP financial measures are included in our third quarter earnings release, which has been furnished to the SEC and is available on our website at investors.sproutsocial.com. And with that, let me turn the call over to Justyn. Justyn?

Thank you, Jason, and good afternoon, everyone. Thank you, as always, for joining us. At our Investor Day in Chicago last month, we spent time outlining our path to the $1 billion revenue milestone and on the opportunity to establish ourselves as the category winner in a rapidly maturing market. Our goal is to build an enduring software company centered on amazing products, amazing people, and over delivering for our customers every day. We're pleased to share fantastic Q3 results today, which reflect strong execution against these goals. The combination of our ongoing breakout upmarket, rising utility for our software, strengthening multi-product strategy, and our entrance in influencer marketing have Sprout at the starting line of our next great growth chapter. During Q3, we saw continued record new business annual contract values (ACVs), and total ACV growth at a record 40% year-over-year. This was driven by 49% year-over-year growth in our customers contributing over $50,000 in annual recurring revenue (ARR), an acceleration in our premium module attach rates, and a further acceleration in our enterprise business. We delivered ARR over performance across segments, geographies, products, partnerships, and RPO growth of 67% crystallizes this momentum. We spent a considerable amount of time at Investor Day discussing our product leadership through every stage of market maturity. And what is today a market that is more quickly maturing than at any time in our history. This was perhaps most evident at the high end of the enterprise and in our strategic accounts team, which delivered more than 100% year-over-year growth in net new ARR, powering total ACV growth of more than 40%. This combination of product leadership and market maturity will stand out in some of the branches that Ryan will share with you. You're going to hear stories that you haven't historically heard from customers that this group hasn't historically associated with Sprout. Another key component of our current and future execution is our platform strategy. Only 6% of our customer base has adopted two or more premium products. And we see massive potential to unify what should be standard social capabilities for all global businesses. Total premium module attach rates were even stronger than our impressive Q2, increasing by more than 27%. We were also excited to surpass $100 million in premium module ARR this quarter. This performance was, of course, complemented during Q3 with our acquisition of influencer marketing leader Tagger. Our acquisition thesis was grounded in our right to win in this category by leveraging our incumbent position in social with our ability to create a social suite designed to deliver customer workflow, reporting, and analytics that has not existed to this point. One of the more recent validations of our thesis was Snapchat's October launch of their creator marketplace API. Tagger was one of only a handful of companies selected to participate, and this further highlights the rising strategic role we play with the networks positioning Sprout and Tagger to deliver integrated and differentiated functionality that our industry has not previously seen. Business integration has also progressed smoothly, and early customer reception to Tagger has far exceeded our expectations. Our teams and our products have felt like cousins from the start, and we now have a differentiated value proposition to deliver for an expanding set of new customers, and customer excitement inside our installed base has been headlined by very large enterprise brands and small businesses alike. With 3x to 4x current Sprout annual contract values and a meaningful opportunity to further differentiate the customer value proposition, we believe Tagger has the potential to be a greater than $100 million ARR business by 2028. Our broader product evolution made meaningful progress during Q3 as well, almost specifically in AI and social customer care. Our foundational AI releases during Q3 include the listening content filtering, message sentiment analysis, enhanced listening queries, theme suggestions, and many more. We expect generative AI and new enrichments to the platform will create even more customer value during Q4 and into next year. We saw a high velocity of social customer care enhancements during the Q4 as we redefined workflow, case creation, and reporting with differentiated rules engine, elegant user experience, enterprise security, and governance, and a platform that allows our customers to engage everywhere their customers are. Our enterprise customer care momentum with new customers this Q4 was exceptional, and we're just getting started. Sprout has been fortunate to build a leading company centered on building a world-class team and over delivering for our customers. Recently, we were named to the 2023 Fortune Best Workplaces and Technology List and recognized by G2's 2023 Fall reports as a leader across 138 categories. We are also honored to be rated the number three software company in the entire software industry. We've proven our success in every stage of the evolution of our market with customers of all sizes and in all market conditions. We believe social is maturing as the primary communication channel between brands and their customers. Though our market is still early, both in terms of age and the maturity of adoption across the fast-growing list of use cases, we're all in on social; our holistic, differentiated approach and consistent focus increasingly stand out. We're early in our multi-product strategy, early in our international growth, and early in our upmarket evolution. We believe we have the right team and the right approach to fully capitalize on our expanding opportunity. And with that, I'll turn the call over to Ryan to tell you more about our progress.

Thanks, Justyn. I'm incredibly proud of the way our teams are delivering for our customers. Social is unlocking new paths to revenue, customer satisfaction and loyalty, brand awareness, and business growth. Knowing that we have the technology, community, and customer validation to lead social into the next phase of growth is beyond exciting. An Investor Day assured several important building blocks that will allow us to execute against our $1 billion revenue milestone. And I want to update you on that progress today. Thinking about platform leadership and culture, it's worth stating again. We were recently recognized as the third highest-ranked company on G2, and of every software company on G2, we are number three. We're honored to be recognized as the top customer-rated platform in our category for every market segment from small and medium business through the enterprise and in virtually every customer satisfaction dimension measured by G2. We are also specifically named as the number one product in social media management, social media analytics, social customer service, best results for enterprise, and in 68 other categories. We have a relentless commitment to be the best place to be an employee and the best place to be a customer. This type of market recognition only comes after exceptional customer success. Our teams continue to over deliver, and during Q3, we had the opportunity to work with many iconic and leading global brands. These customers included American Honda Motor Company, HARMAN International, a Samsung company, Camping World, Hormel Foods, Danaher, Activision Blizzard, Welch Foods, NYU Langone Health System, Belden, and Mercado Libre. For those keeping track, I just mentioned the fourth biggest tech company in the world, the 20th most valuable brand in the world, four Fortune 500 companies, and the biggest commerce company in Brazil. These are just a handful of the iconic brands we have the approval to share publicly. It's also inspiring to see the scope of how our customers are now leveraging social. For those that know the Burradoo household, Papa John's is the pizza ordered for pizza night. Josh Martin, Papa John's Director of Social Media and Brand Engagement, said it well: We strive to be the most engaged pizza brand in the industry, and Sprout is the right solution to help us achieve that goal. We focus on high-value community engagement to improve our overall customer experience. Rich social listening data allows us to go deeper into customer sentiment while making UGC more accessible. Sprout's unified platform allows us to deliver value across content marketing, influencer identification, brand management, and social customer care. Long-time Sprout customer NBCUniversal, who expanded our relationship this quarter, echoes similar sentiments. Justin Karp, the VP of Social Media at NBC Cable Entertainment and Sports, said: Sprout Social has made many parts of our social business more efficient. From content creation, project management to analytics, Sprout's tools have made us a smarter and stronger operation. The product continues to improve, and we are pleased that our feedback on several of Sprout's tools has been taken and put into action. Expanding our partner ecosystem will also play a pivotal role in our future success. We have a massive opportunity to complement Salesforce, Service Cloud, and help brands respond faster than ever to their customers on social. After a record Q2 onboarding, we helped another 154 Salesforce customers implement Sprout during Q3, and the scope of deployments increased, resulting in record new Salesforce ARR. We expect another record ARR contribution in Q4 as complex deployments begin their migration to Sprout. A loyal community is another building block to reaching our $1 billion goal. We're fortunate to invite many customers to speak in our community, and just last week we had the opportunity to host McDonald's Customer Care Program Strategy Manager, Elly Moody, to hear her perspective on enhancing customer experience with social care. I'd encourage you to listen and learn about the inherent challenges when sending customers from social to the 1-800 number or other channels. As I shared in my presentation at Dreamforce, this is the future state of Omnichannel Customer Care, meeting customers where they are. This is the key to improving customer satisfaction and building customer trust. This intersection of partner success and community highlights exactly why Social Studio is only the beginning of our ecosystem opportunity. We have spent the last 18 months integrating Sprout natively into the common data layer of Salesforce. Our main goal has been to provide the most powerful and seamless collaboration across Salesforce, and to ensure that Sprout is the best and only choice for Salesforce customers seeking to solve for social. We believe this unique combination of partner and community success has Sprout well-positioned for growth in 2024 and well beyond. Speaking of 2024, according to socialmedia.org's recent 2024 Pulse Survey, more than 75% of enterprise social media leaders expect to maintain or grow their budget through next year, and more than 90% expect to stabilize or grow their social media team through 2024. Some top areas of planned investment include influencer marketing, employee advocacy, social listening, content creation, reporting, and analytics. Social is an increasingly important and necessary part of any business as it expands across many different departments, and Sprout is well-positioned to help our customers unify these social capabilities across the enterprise. I am proud of the way our teams are executing. Our exceptional team and exceptional product are foundational to how Sprout creates outsized value for our customers and are the pillars for how we will build a category-defining software franchise. 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 2023. Revenue for the third quarter was $85.5 million, representing 31% year-over-year growth. Subscription revenue was $84.8 million, up 31% year-over-year. Services revenue was $0.7 million, down 5% year-over-year. Total ARR as in Q3 was $359.5 million, up 33% year-over-year and nicely ahead of our plan. Very strong ARR growth was led primarily by a meaningful acceleration in our enterprise business, stronger premium module attach rates, better than expected early Tagger momentum, and roughly $3 million less churn than we previously anticipated from our non-core business. The number of customers contributing more than $10,000 in ARR grew 33% from a year ago. The number of customers contributing more than $50,000 in ARR grew 49% from a year ago. Q3 ACV growth was a record 40% year-over-year. Record new business deal sizes, very strong enterprise momentum, earlier terms from influencer marketing expansion, and the aggregate from a number of low-value clients each compounded ongoing healthy expansion and much stronger premium module attach rates. We expect ACVs in the near term to grow similar to Q3 levels and expect faster than previously anticipated ACV growth over the medium term. In Q3, non-GAAP gross profit was $66.8 million, representing non-GAAP gross margins of 78.1%. This is a 50 basis point improvement compared to a non-GAAP gross margin of 77.6% a year ago. Non-GAAP sales and marketing expenses for Q3 were $35.9 million or 42% of revenue, up from 40% a year ago. We continue to hire aggressively in our enterprise sales and success organization and this quarter took on the Tagger team as well. Non-GAAP research and development expenses for Q3 were $15.0 million or 18% of revenue, down from 20% a year ago. We continue to invest in our future, and our increasingly targeted investments in AI and social customer care are delivering strong results. Non-GAAP general and administrative expenses for Q3 were $16.4 million or 19% of revenue, consistently 19% a year ago. We expect to deliver consistent G&A leverage at the percent of revenue moving forward. Non-GAAP operating loss for Q3 was negative $0.6 million for a negative 0.7% non-GAAP operating margin, an improvement of 150 basis points year-over-year in spite of near-term dilution associated with Tagger. Non-GAAP net loss for Q3 was $0.6 million for a non-GAAP net loss of $0.01 per share, based on $55.8 million weighted average shares of common stock outstanding, compared to a non-GAAP net loss of $1 million and $0.02 per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q3 with $121.4 million in cash, cash equivalents, and marketable securities. This is down from $192.4 million at the end of Q2 and reflects our acquisition of Tagger in August. Deferred revenue at the end of the quarter was $123.4 million. Looking at both our billed and unbilled contracts, RPO totaled $228.7 million, up from $206.4 million exiting Q2 and up 67% year-over-year. We expect to recognize approximately 73% or $167 million of total RPO revenue over the next 12 months, implying a CRPO growth rate of 51% year-over-year. Operating cash flow in Q3 was negative $5.5 million compared to positive $1.0 million a year ago. Pre-cash flow was negative $3.4 million, down from a year ago. We incurred Tagger integration expenses this quarter. We expect to shift back to positive operating and pre-cash flow beginning in Q4. Shifting to formal guidance. For the fourth quarter of fiscal 2023, we expect revenue in a range of $90.5 million to $90.6 million, representing a growth rate of 30%. We expect non-GAAP operating income in a range of $0.6 million to $0.7 million, which implies a non-GAAP operating margin of 0.7% at the midpoint. We expect a non-GAAP net income per share of between zero cents and $0.01. This assumes $56.6 million weighted average basic shares of common stock outstanding. For the full-year 2023, we expect total revenue in a range of $330.6 million to $330.7 million. This is expected to be an overall reported growth rate of more than 30%. We're raising our implied ARR growth rate exiting 2023 to approximately 30% versus our prior view of 28% to 29%. This continues to assume that our non-core low-end ARR declines to zero by the end of the year. For the full-year 2023, we now expect non-GAAP operating income in a range of $3.6 million to $3.7 million. This implies annual non-GAAP operating margin improvement of 270 basis points compared to our prior margin expansion forecast of 200 basis points. We now expect non-GAAP net income per share of between $0.12 and $0.13 compared to our prior guidance of $0.07, assuming $55.9 million weighted average basic shares of common stock outstanding. We believe we're building a category-defining company, and we did that through strong execution during Q3 as it's on the path to achieving our full potential as we carry strong business momentum into the end of the year. With that, Justyn, Ryan and I are happy to take any of your questions.

Our first question comes from Raimo Lenschow with Barclays. Please go ahead.

Hey, this is Frank on for Raimo. Congrats on the strong quarter. I want to ask one around Tagger. How has the integration process been going there? And has Tagger begun to weigh as a factor in those enterprise wins already?

Hey, thanks for the question. This is Ryan. The integration has been going well so far. We've been really excited by what we've seen, certainly from the product and as well from the team. We've got the team now working really well across the go-to-market organization embedded into our marketing, our sales, and customer success motions. And then certainly on the product side, our R&D organizations have been working really closely together, not only on the integration, but as we think about 2024 and some of the opportunities in front of us. As it relates to the second part of the question in terms of the value in the enterprise deals, we're really early with this so far. We've been generating some really nice pipeline and opportunities, but certainly from what we've seen in the short period of time, the value proposition of having social media management alongside of influencer marketing has been very compelling for customers. So we are seeing this as a great opportunity to differentiate ourselves from other social media management providers. And also to bring a product that's still pretty nascent to the 30,000 customers that we get to work with every day. So we see it as a really strong opportunity for us as we move forward here. And we certainly saw some good results already in Q3.

Thanks, Ryan. Any way to think about the ARR contribution from Tagger specifically?

Yes, so the way we've kind of talked about that historically, Frank, as we talked about this coming out of the acquisition after Q2 is we modeled out about $3 million of revenue over the last five months. From there, you can kind of infer the ARR from those numbers. We outperformed that in Q3 a little bit and we are a little bit ahead of that schedule. So you can expect a little bit more upside from an ARR standpoint based on what we've seen so far in Q3 going into Q4.

Awesome. Congrats again.

Thank you.

Our next question comes from the line of an analyst with William Blair. Please go ahead.

Yes, thanks. Congrats on the quarter and appreciate you taking the question. I was curious if you could give any additional color on the acceleration of premium attach rates. Was that primarily driven by like Tagger cross-sell? Was it more of the other premium modules?

Yes, thanks, Rachel. It would be the other premium modules that we'd highlight. These are things that we've talked about in the past. We've seen really good acceleration there. As we get really focused on this ideal customer profile, which are these sophisticated customers, more and more things like premium analytics, social listening, and advocacy are really important for the things that they're trying to solve at the enterprise level. We've continued to see really great success across all of those products. We certainly believe to the question before that Tagger is going to be a really nice addition on top of that. So this is really driven by the premium modules that we've always had and spoken about in previous calls.

Awesome. Thank you. And then just like one follow-up to that, if I could. Any thoughts on where you think premium attach rates could go in the near to medium term?

Thanks for the question. This is Justyn. I think that you've heard us talk a lot about where it is today in terms of percentage of customers with multiple premium products. We see a lot of utility across a number of the premium offerings now, including influencer marketing to a pretty wide part of our customer base. I think it's early for us to be directional on where we think that could ultimately be, but we certainly think there's a ton of headroom. We've seen that acceleration in the attach rates today. We talked about it on Investor Day, the amount of companies that are going to be kind of graduating through the maturity curve of where they are with social. And if that continues to improve, that utility and readiness for these more sophisticated future sets, it is only going to grow from there.

Awesome. Thanks so much and congrats again.

Thank you very much.

Our next question comes from the line of DJ Hynes with Canaccord Genuity. Please go ahead.

Hi guys, thanks for taking the question and really impressive roster of large customers here in the quarter. So kudos. Ryan, maybe one for you to start. I'm curious what kind of trends you're seeing in sales cycles as you move really up into that kind of large enterprise bucket. And I'd be curious, like how often are those deals involving multiple department decision-makers at land?

Yes, thanks, DJ. So one of the benefits, and we've spoken about this a little bit in the past, but worth mentioning again, one of the benefits that we have is that we have this trial model that we leverage even in the enterprise. So even in enterprise deals that might come from RFPs, we generally have a faster sales cycle than you might see with other enterprise software players, both in our space and outside of it because customers are in the product by the time they make a decision. Oftentimes, they've implemented a lot of the work. They've got users in, they're starting to publish through their social profiles or run reports directly in Sprout before they ever sign a contract for us. So we've seen really good cycles. There's still 35 to 41 days on average, certainly in the large enterprises. They will be longer than that, but we have this advantage that they're in the product leveraging it. We've seen this being a really big differentiator for us as we move forward.

And then, Justyn, maybe a follow-up from you. I'm curious how you think about more traditional contact center-oriented software firms and their ability to compete in social customer care over time?

Yes, it's an interesting question, and I spend a lot of time thinking about it. I think social has proven to be something that requires a lot of focus, energy, R&D expertise, and a historical buildup of that expertise. Social as part of the care stack, if you will, is really unique in that it's not the only thing happening in that channel. There is marketing, there is community, there is product feedback, and there are certainly questions, support issues, etc., that really require all of the stakeholders within an organization across business functions to be able to work together. For that reason, historically, and we believe going forward, there's a pretty big moat around the care aspects of social. We're seeing as more of these large enterprises that we've talked about in many other organizations are starting to make significant investments in social as a care channel, they're recognizing that as well, choosing Sprout for the reasons that I mentioned, where it's been a bit harder and disconnected in some of the other approaches, taking kind of legacy systems into account.

DJ, I also realized I didn't finish the second part of your question, which is departments, and it ties to what Justyn was talking about. But the answer is yes, we are getting into more departments than a few years ago. So when we go into Justyn's point, there certainly will be in care, but we're talking to marketing departments, we're talking to oftentimes sales departments, or it could be across the enterprise depending on the potential use cases for social. For us, that's a really important part of the new business cycle because we land them larger in these multi-departments with different use cases or receding and growing, knowing that we've opened up the opportunity to grow that, to expand that account later over time. A lot of the logos that you heard from us today, we're selling them multi-department from the get-go from a new business perspective. And then some of the logos that we talked about today were actually current customers you've heard us talk about before, where we've gone in and sold different departments later on that had different use cases. So we definitely see that as an important part of our go-to-market strategy.

That's great. Thank you guys for all the color.

Thanks, DJ.

Our next question comes from the line of Adam Hotchkiss with Goldman Sachs. Please go ahead.

Great, thanks for taking my questions. I guess we'll start on the enterprise side and in the $50,000 plus deals category. I know you've talked about hiring aggressively here. Could you just talk a little bit more about the key drivers and what they've been in some of these much larger enterprise deals, how you're thinking about contributions from things like sales from some of your other partners and being more aggressive on the outbound direct side and anything you've learned as you've grown your team there or any color would be helpful.

Yes, thanks Adam. Clearly, we've seen a lot of success with our enterprise team. We've mentioned them a little bit in prepared remarks, but we just look at the growth rates in the $50,000 contracts as you mentioned, but also just enterprise in general going at over 50%. We've been very excited about the market opportunity that we have in front of us. What's really exciting about this is our products are perfectly positioned for these enterprises. As we're going into these enterprises, similar to the question that DJ had before, because we're going into multi-departments, we're getting access to many different users. Those users have very different use cases. The ability to have an elegant and approachable software like Sprout makes a difference. The idea of being able to get these folks up and running in the platform before they sign a contract makes a difference. When we think about the profile of our enterprise reps that we have on our team, clearly they have some great skills around understanding social and best practices for the enterprise. Our deals move faster than most enterprise organizations, so we expect those reps to have a certain level of speed to them in the way that they execute and to manage more accounts and transactions and deals than they might have at another legacy enterprise player. The speed and velocity of our business, as well as the depth and understanding of business strategy, is really important for our enterprise team. We're seeing really good success as demonstrated in the logos that our teams have been able to win.

Great, that's really helpful. And then just on Social Studio, appreciate the update on new logos there this Fall. Just curious if there's any update on the way you're thinking about conversions over the next 12 months and the impact of growth as we think about modeling. Thank you.

I'll start on the business side and see if any of the others have anything else they want to add. From a Salesforce partnership perspective, we continue to see great success there. We mentioned it before, but the Social Studio piece with obviously the sunset coming next year is certainly the immediate opportunity where we're seeing good execution. But we go into the full opportunity, which is all Salesforce customers. Our goal really is to build a partnership and product integrations that ensure that any Salesforce customer that's investing in social sees Sprout as the very best choice for their business. That's what we're seeing in the marketplace. I'd specifically call out the work that we've been doing with the Service Cloud. Our integration today lives within the service cloud console itself, and that native integration is adding tremendous value for customers. We're getting customers up and running very quickly there. They are really going from a 270-degree view of their customer to the full 360, because they now have this social engagement data from Sprout tapped in. We see success and opportunity there. We'll focus in on both Social Studio, but outside of that, the entire ecosystem of customers that may be on Salesforce.

Great, really helpful. Thanks, Ryan.

No problem.

Our next question comes from the line of Parker Lane with Stifel. Please go ahead. Your line is open, please go ahead. Our next question comes from Robert Michael Morelli with Needham & Company. Please go ahead.

Hey, yes, this is Robert Morelli on for Scott. Thanks for taking the question. Understanding you focused on hiring recently into the next quarter, how are you looking at your 2024 sales and marketing investments and overall market strategy? What do you think the year will entail? No more investment or should we expect more leverage in the model? Thanks.

Yes, I can take that one. And then if RB wants to give color on the key investments there. I think overall, we're not going to get too much into 2024 as far as guidance and what those numbers might exactly look like. But what I can tell you is based on the momentum we're seeing in the business right now, especially upmarket, you're going to continue to see us invest in the enterprise, in the mid-market, and integrations, and a bunch of other stuff that RB can touch on. What you can expect to see is a little bit of leverage overall. Off-tail is marketing, not a lot, just given what we're seeing in the business and the opportunity. We'll give you more color as we get into Q4 guidance or I'm sorry, 2024 guidance next year.

Yes, I think I just underline Joe's points there. I mean, it's going to be a consistent strategy. We certainly see these opportunities across the mid-market and enterprise, but all of our market segments have been performing nicely. A consistent approach to how we're going to invest going into the next year, and we feel really good about the motion that we have today. No major changes to call out.

Got it. That's helpful. And then regarding AI, any insight you can provide on customer feedback and demand trends with your AI assist functionality? Thanks.

Yes, this is Justyn. AI, I would say continues to be certainly a topic of interest across our customers. I think I would characterize that mostly as starting to get their heads around how it may improve the tools, their day-to-day workflow, and processes. We've gotten quite a few new releases powered by AI to our customers' hands over the last couple of quarters, and a lot more coming. The way we're thinking about this is we have a lot of foundational things that, as I mentioned, we've put into our customers' hands. We've built a lot of really powerful back-end that is going to start to power some really, really cool capabilities for our customers that is not just going to help them do the things they were already doing day-to-day, but unlock some entirely new opportunities and capabilities for our customers. I'm certain we'll have more to share around some of those specific releases as we get into 2024. I would say that the impact that our customers that have adopted some of these early features have been able to make is certainly improving their social efforts and their social strategy. I think the areas where we're going to start to see really big customer value unlocked are some of the things that are in the works now, some of the things that are coming down the road. But tons of excitement and interest from customers. A lot of really positive feedback from customers that we've shared more depth on our AI vision resonates really, really well with our customers across segments, but particularly in the enterprise. We will see a lot more interest build heading into next year.

I might just add onto that that the way the product team has approached this I think is really impressive. Clearly, similar to everything we've done at Sprout, we want this to be approachable and elegant and fit within the workflow. That's part of the feedback we get from customers as well: implementing these AI features fits within the workflow. They don't have to change to get the benefits from it. To Justyn's point, the roadmap that's coming is really exciting. Some of the stuff we've done in care is a great example of how we're changing the game for our customers. Think about the volume of customer feedback, particularly customer care feedback that you get on social; those social teams typically are already small and there's a lot of volume. Our product enables them to prioritize where they should be spending time because we've given them the ability to see sentiment in their customer care inbox. We’ve allowed them to respond in a way that’s better for the customer and faster through our AI assist functionality. All these things are starting to take shape right now. The initial feedback to Justyn's point has been great, and we see a lot more in the future.

Got it, appreciate the color. Congrats on the quarter.

Thank you.

Our next question comes from the line of Rob Oliver with Baird. Please go ahead.

Great, good evening guys. Thanks for taking my question. I wanted to follow up on the question earlier or touch on Tagger. I guess two parts to the question. One is what sort of an impact are you seeing Tagger having on these large customer wins over $50,000 and over $200,000? And then the second part of the question is what, obviously there's a strategic element to the acquisition here, and just curious to hear any color around the extent that this improves your competitive position with the upper end of mid-market and enterprise in some of these larger deals given the sort of depth and breadth that this adds to your product and portfolio? Appreciate it.

Yes, thanks Rob. So I think on the first piece, in terms of large deal execution and opportunity, I think we're still early. We see a lot of potential and opportunity, and we've shared a little before that Tagger has performed ahead of expectations during this short period of time that they’ve been a part of the company. We're very excited about what we've seen, both in terms of being ahead for the quarter as well as the pipeline that we're developing. Certainly, we see this in the mid-market and enterprise. That was a huge part of our thesis when acquiring Tagger—that they had great progress and success already in the enterprise space, where we saw them playing really nicely with Sprout. We continue to see that in the pipeline that’s being developed, and we think we’ll have more specific stories to share on the success that we’re seeing. From a competitive positioning perspective, absolutely we believe this is going to have really positive impacts on our ability to win against other competitors within the space, to really differentiate and to increase our aggregate contract values in the deals that we're in. When we looked around at the market and at the opportunity, we didn't see anybody else with anything like Tagger. When we think about the combination of Tagger and the core Sprout product, it adds tremendous value for customers. If you just think about it today on the core Sprout side, organic customer engagement and analytics are really important, and now this influencer marketing piece is an additional investment for customers. You can have all that in one place now through one company. This is certainly going to be a major differentiator for us, and the teams are doing a great job getting enabled and taking it to market today. We expect to have more stories for you in future quarters on the progress.

Thank you.

Our next question comes from the line of Michael Turits with KeyBanc. Please go ahead.

Hi, this is Michael Vidovic on for Michael Turits, and thanks for taking my question here. Just wanted to follow up on the Tagger contribution question. Could you point to the level of ARR contribution you'd expect for the fourth quarter and full-year '23 or just not at this time?

Yes, Michael, not this time. The data point, like I said earlier, the one we’re getting out is the revenue we expect to generate from that. We talked about the $3 million over the last five months and more ahead of that pace. From there, you can probably back into the ARR number. Similar to last quarter, we’re not giving out specific guidance on the Tagger ARR.

Okay. And then on the Salesforce opportunity, are you landing material numbers of Salesforce customers not in Social Studio today? Or is that something you'd expect to pick up maybe starting in 2025?

We are starting to, and we expect to see more and more of those. That's the long tail of the opportunity that we have in front of us. What’s been really exciting is some of these deals that we've already closed from a Social Studio perspective, in some cases, we were only using one part of the platform, and it might have been more on the marketing side. As we introduced our integration to the service cloud, all of a sudden, you have this opportunity that goes beyond marketing into social customer care and they're starting to use the service cloud integration. Some of the logos that we talked about this quarter are great examples of that happening today. So, it's growing, and we expect to see more of it going into next year and beyond.

Great, thank you. I appreciate it.

Our next question comes from the line of Fiona Hynes with Morgan Stanley. Please go ahead.

Hi, good afternoon. This is Fiona on for Elizabeth Porter. Thank you for taking the question. I wanted to ask on macro and understanding that you guys just put up a good quarter. I'm curious for your perspectives on how trends may have shifted in Q3 relative to Q2 and whether or not—understanding that execution was definitely a part of the performance. Just curious for any perspectives that you can share there. Thank you.

Yes, thank you for the question, Fiona. I think that execution, as well as getting a little further along with some of the strategic changes that we made last year, the momentum that we continue to see in the enterprise, etc., is the bulk of the story for Q3. We've got a lot of tremendous work happening inside the organization, and the team across the board is doing a phenomenal job. We haven't seen some of the same macro impacts that we are aware that others have seen. We're cautious of it. We're keeping an eye on it, and we feel like we're factoring it adequately. Something that we talked about on Investor Day continues to be a key trend, not only in this environment but in others that we faced over the last couple of years, which is that social is still an emerging space. It's still a space that many companies are very early in their adoption and their maturity through. Social teams continue to be generally understaffed. We see marketers from recent surveys expressing that they expect to maintain or increase headcount into 2024; 90% of them expect to maintain or increase despite current conditions. So, social has proven to be fairly all-weather in that regard. We want to be mindful, and certainly, we want to make any adjustments that we need to make as conditions continue to change, but execution of the team is going to continue to be the main driver of our ability to outperform.

Thank you. And then one follow-up to that on AI and the monetization strategy there. Appreciate that it is early; I'm curious for your thoughts on how you expect those to layer into the model over time. Do you think about some of these AI features that you're rolling out as drivers of more customer acquisition, more higher monetization per customer side, or potentially both? Thank you.

Yes. I think potentially both is a likely answer. I think we've talked about this before. There are certain capabilities we've introduced today and will continue to introduce that really fit nicely into the core jobs to be done within Sprout; it makes the user experience better, makes the product stickier, and makes the customers more impactful. For those, that'll help us with conversion rates, competitive advantage, and retention. There are opportunities, including some of the things that we're working on now where we expect to deliver pretty outsized value to our customers, particularly when we start thinking about customer-specific modeling and some of the innovative new capabilities that AI unlocks. It will make sense; it’s too early to put a line in the sand or make specific predictions here. I think it makes sense that there’s some monetization involved in some of the more powerful AI capabilities. They could also be wrapped up into other monetization opportunities; AI will certainly improve listening and customer care capabilities, etc. We’re kind of watching and starting to form some opinions around how that layers in from a monetization perspective across the board, particularly as we get more of these exciting things in our customers’ hands.

Thank you.

Our next question comes from a line of Matthew VanVliet with BTIG. Please go ahead.

Hi, good afternoon, guys. Thanks for taking the questions. I guess, first on the fact that we're almost a year into the new pricing strategy, curious on a couple fronts what you've seen from a realization standpoint with your existing customer base through the renewals and potential upsells, cross-sells, how much pricing you've actually realized at this point. And then on the new customer front, any estimates on sort of where you're landing there relative to maybe deals of similar scope and size in the past and how much uplift you're actually realizing there as well, please.

Sure, thanks, Matt. I'll start. This is Ryan. I'll start with the second one just in terms of new customers. Probably the best indication of the opportunity there is just the ACV growth, right? We've had record ACV growth of 40%. The customers we're in front of today with the strategy shift and our focus on sophisticated customers, as well as the fit that they have with our premium modules, can be seen in the growth of our larger size deals and the attach rates. We continue to see great opportunities and think there’s a lot more opportunities like that as we continue to sell into these sophisticated customers and continue to grow our attach rates. Now as we add Tagger as another great solution for these customers. When we go back to the attach rates, we think about our current customer base; we’re still sub-7% of our customers having more than two products. We have a lot of opportunity to go back to that current customer base; some of that will be making sure that we’re educating them on the products that we have and the problems that they solve. Some of it is just the maturity that’s happening within the marketplace, where they’re going to be ready for these products. So, continuously, lots of great ACV opportunities today, and the ACV growth number is probably the best indicator of that.

Yes. And then Matt, the follow-up on your question around the impact of the price increases. When we talked about this over the last couple of quarters, I think it's a combination of a couple of things. Coming out of the first few quarters, we talked about the increased churn we saw in the market, partly related to moving around resources and partly related to price-sensitive customers. We gave those price increases, and when you think about when you get into the mid-market and enterprise deals, we went to those customers who have been really successful with renewal rates, but a lot of the time, it wasn't about the price increase as it was about entering other conversations, such as adding listening, premium analytics, or adding another department instead of focusing just on price increase. So net-net, when you factor all those things in, we expect about a low single-digit increase or impact from the price increase, and we probably expect the same thing going forward with the Evergreen clause we now have in our contracts. We feel like that'll have a similar impact in 2024.

Okay. Very helpful. And then when you look at none of the outlook for '24, but even beyond that, especially as the Salesforce partnership ramps up some new opportunities that maybe weren't as evident before, what's the plan for headcount, maybe very specifically in the go-to-market team and what you're expanding there? But even if you zoom out from there on the other support roles, how are you thinking about headcount heading into '24?

I can talk more at a high level, Matt, and maybe not to get into too much specifics as we're not trying to talk too much about 2024 right now. If RB wants to chime in on where he might see some of that in the go-to-market side. I think what you can expect to see is a very similar level of investment from an employee standpoint as you're going to see in 2023, maybe not as many, but very close. We feel like we've got a lot of momentum in the business. We want to keep investing, especially on the R&D and go-to-market side. I don't think you'll see a significant change in the level of investment in the business as it relates to the number of employees that we're adding next year versus this year.

I just underline the consistency. Our go-to-market strategy is working. We're going to add in some of these places where we just see outsized return opportunities. It's happening across all parts of our business, but mid-market and enterprise certainly are the ones that have been growing the fastest. There are going to be continued opportunities to drive through these premium modules with our customers. That's probably some combination of just thinking about solution engineers and customer success managers. But again, I’d highlight that these things are all going to be very consistent with what we’ve done before, so no surprises for all of you in the way that we grow our business.

All right, very helpful. Thank you.

Our next question comes from the line of Clarke Jeffries with Piper Sandler. Please go ahead.

Hello, thank you for taking the question. Just one from me. Joe, you had mentioned a few million dollars better in terms of expectation of churn and that low-end cohort. Just wanted to ask at this point. I know the full-year is de-risked by that number, but is there an update on the rhyme or reason for why customers churn or don't in that segment, any change in the last 90 days in terms of the net new funnel there if there still is one active? Just any color on that segment because that does seem like some amount of swing factor in the end result when we get to Q4.

Yes, Clarke. Thanks for the question. So first of all, on the net new side, there are no new customers coming into that part of the funnel. If you looked at the new pricing and the way we set our lowest tier, there are no customers that are going to come into that part of the business. I think that was one of the main reasons we decided to make the pricing changes we did a year ago. We identified that part of the market and the customers that weren't just as efficient and as strong as the rest of our business. That's why we made the pricing change. As far as why some of these customers haven't turned out as fast, I mean, I think it can be a combination of things. Some of these customers may have gone out in the market and realized for the value that they were getting, even though they didn’t have as many resources on the accounts, it was still the best product in the market. It may be a little bit more expensive than they thought, and maybe they're not getting the amount of support they had before, but versus what else is in the market, it's still a good value for them. That's probably one of the main drivers that they're still sticking around. I don’t know if RB has any other color on what he’s seen from the success team on these customers.

Yes. I'd say there's no change in behavior or actions that we've been taking with those groups. I think some of this is also just timing. We've seen this to be a very tumultuous group, which is why we forecasted it the way we have and why we've moved away from that part of the business. Some of this is just the timing of it. We've set up the model and built the forecast in a way that can provide predictability for our investors. So we feel good about the strategy and the outlook for everybody.

Perfect. Thank you very much.

Our final question comes from a line of Nicholas Zangler with Stephens, Inc. Please go ahead.

Hey, guys. Thanks for getting me on. I'll note Papa John's is the pizza delivery choice in my household as well. Obviously, some great results here, and I just wanted to parse this out. Given the guide, I think what you're suggesting is that the new ARR that was generated in Q3, the incremental ARR, it's actually expected to outpace the level of new wins that you may be expecting in Q4. I think typically, Q4 is the strongest quarter for some of these incremental ARR wins. So, do I have this right? And if so, is there any reason to suggest that you see superior strength in Q3 on the new ARR win front versus Q4?

Yes, so Nicholas, great to have you on. I'm really excited to talk with you today and going forward. I think if you were to back out the net new ARR that we added in Q3 from the Tagger acquisition, and we've kind of given you some of the numbers to calculate that, then you compare that to Q4. Q4 will be bigger than Q3. I think it's just the Tagger piece that you're seeing in Q3 that is probably throwing off your math.

Got it, helpful. And then I do want to hit on the Salesforce partnership, just because it's so important here, but another 154 accounts shifting over. That's great. I think you're at 780 now of what I would assume is around 4,000 Social Studio accounts. So, still suggest there's a ton of room left, maybe 3,200 incremental targets. From what I understand, these contracts exist on that side; as they expire, they're non-renewable, even though the product doesn't go dark until November of next year. Given that, should we actually start to see a significant acceleration in the pace of these clients migrating over to Sprout Social over the next 12 months? Just any reason to suggest otherwise, given that assumption for acceleration going forward?

Yes, thanks for your question, Nick. In terms of the opportunity, I think you're right in the way that you're framing it here. We've got about a year left from what we've seen, non-renewable. We don't control those contracts, though, but we have seen the same thing that you mentioned. We're still seeing new accounts and new deals that we hadn’t seen before coming up. There's still customers that are on it. In terms of the opportunity, we feel great about what's in front of us here today, and we feel like, as we mentioned in the prepared remarks as well, we'll continue to see really good ARR opportunities from those, as well as we move forward. But I don't think I would take the next step of forecasting out any of those numbers, but we feel great about the opportunity in front of us and our position to win those accounts.

Much appreciated. Thanks, guys.

Thank you.

Thank you very much. Thank you all for your time. I'll keep this really short, because I know everyone's got a very busy night. But we appreciate the time, we appreciate the questions. We're looking forward to follow-up conversations, spending more time with all of you over the coming weeks and just want to close with recognition for our team doing a remarkable job. We're looking forward to sharing lots more with you next quarter. Thank you all very much.

I'd like to thank our speakers for today's presentation and thank you all for joining us. This now concludes today's call, and you may now disconnect.