Sprout Social, Inc. (SPT) Q1 2024 Earnings Call Transcript

Thank you for being here. My name is Dee, and I will be your conference operator today. I would like to welcome everyone to the Sprout Social First Quarter 2024 Earnings Call. I will now turn the call over to Jason Rechel, Vice President of Investor Relations. Please proceed.

Thank you, operator. Welcome to Sprout Social's First Quarter 2024 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. All statements, other than statements of historical fact, are forward-looking. These include, among others, statements concerning our expected future financial performance and business plans and objectives and can be identified by words such as expect, anticipate, intend, plan, believe, seek, 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 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, 2023, filed on February 23, 2024, as well as any future 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 first quarter 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 thank you to everyone for joining us. We always appreciate your time. I'm excited to get us started today by expanding on our news to promote Ryan Barretto to CEO before handing things over to him. Ryan and I have had an incredible partnership over the past eight years, but it only took me a few of those years to recognize that he should and would become our CEO. Several years ago, we both agreed and committed that it didn't matter which role either of us were in, as long as we put Sprout in the best position to win and that we were in it together. That's why we're so excited about the natural progression of this transition. Throughout our time together, Ryan has often had the biggest impact in the areas typically aligned with the CEO role. And I've often made my biggest impact when I can think deeply about our biggest opportunities, get frantic with our data and push our product strategy forward. Over time, and as we've grown, the role of the CEO has changed and naturally became more aligned with areas where Ryan is exceptional. The same skills and perspectives that allowed me to architect our success over the past 14 years aren't the same things required of the role today, and conversely, I've had far less time for the areas where I can bring exponential value to the business. Together, we're an incredible team. Adjusting the positions we play to match where we're heading gives us the opportunity to add significantly more value and move faster in capturing the opportunity ahead of us. In a moment, I will turn it over to Ryan to talk about how we intend to make that happen. But first, I want to say thank you and congratulations to Ryan. As a founder, board member, team member, and shareholder, I am as excited as I've ever been about the opportunity in front of us with you leading this incredible team.

Thank you, Justyn. I'm deeply grateful for this opportunity. It's been an amazing honor to work alongside Justyn for the last eight years, building this team and business together. Getting the opportunity to step into the CEO role with his continued partnership and support creates an amazing foundation for me and for Sprout. I want to thank the Sprout Board of Directors for your ongoing trust, my team for putting me in this position, our shareholders for your commitment, and our customers for your advocacy and for helping us get better every day. I want to be really clear upfront on my goals and aspirations for this team. We are here to win. This will be a winner-take-most market, and I believe Sprout is best positioned to be that winner in a growing market. We have the number one product in software, an award-winning culture, and the team most well-known for driving customer success. I'm going to be deeply focused on raising the bar on all of these competitive advantages. We intend to drive excellence in everything we do and to deliver outsized value for our employees, customers, and shareholders along the way. Our team can expect me to lead from the front as we work to deliver here. Let's start with Q1 results. We had a strong quarter on many dimensions, but ultimately didn't meet our revenue goals. After a record back half of 2023, where the majority of our focus was deeply weighted on closing deals versus creating new pipeline, we walked into 2024 with a different business. We're now enterprise-heavy, and the linearity of our business has changed materially, which affects our revenue recognition and planning. Our months, quarters, and years are now more heavily weighted to traditional enterprise buying cycles. We underestimated the magnitude of this shift and the quickly changing dynamics in our customer mix. On top of this, we made several important strategic decisions heading into Q1, such as building new vertical sales teams, accelerating promotions in our mid-market and enterprise teams, adjusting our account coverage model, and prioritizing Tagger enablement for all of our customer-facing teams. We thought we could manage these changes without disruption, but they collectively set us back. I believe each of these moves support our long-term strategy and better position us for the future. But in the short term, there were execution headwinds that were self-induced. Although Q1 net new revenue added was less than Q1 of last year and not where we expected it to be, there was a lot of important learning, progress, and momentum coming out of this process. I own this and fully expect us to be much better going forward. Our go-to-market order is now better positioned for scalable growth. Our total pipeline increased 37% year-over-year. Premium module attach rates continue to rapidly increase, and our gross retention is overperforming planned, each positioning Sprout for another strong annual performance. CAGR ARR meaningfully accelerated in growth and is seamlessly folding into our platform strategy. And we expect that our Q1 added new ARR will be our low watermark with strong sequential growth over the year. Shifting to the go-forward. Entering 2023, we took an important strategic step of deprioritizing the very low end and unproductive parts of our business. Coming into 2024, with that business largely cycled out, we have new clarity on where to optimize and redraw our teams and go-to-market efforts to accelerate our path to $1 billion in revenue. While we believe this is a powerful unlock for both our growth and efficiency, the benefits will not materialize overnight. We believe that redrawing our go-to-market model around the most successful cohorts is a massive unlock to our future potential. We know that our best customer cohorts are our most efficient customers to acquire. They are the most efficient expansion opportunities, and they are the least likely to cancel, each by orders of magnitude. We will invest aggressively against these cohorts with improved economic efficiency. At the same time, we plan to de-invest in the parts of the market where these attributes don't exist, even if this results in walking away from immediate revenue. We're already beginning to realize the benefits to gross retention from our 2023 model changes being nicely ahead of Q1 plan here. And we believe that by prioritizing the market cohorts where we can predict future economic potential and get surgical with where we will allocate our time, we can scale a durable, efficient upmarket land-and-expand motion. We believe the results will be higher future NDR and improved efficiency across the entire organization. As we all know, with compounding SaaS models, our Q1 performance does flow through the year from a revenue perspective. But the downward pressure from Q1 revenue flowing through, the changing linearity of the business, and the need to create space as we execute on our go-to-market changes, I needed to tighten up our forecast to ensure we deliver on our commitments. The underlying realities at our business today are orders of magnitude different from the business you knew at the time of our IPO. Once a completely inbound highly transactional model, we're now enterprise-heavy and are constructed that way from products to customer success. Because of this, we should be measured on different metrics that properly align with this current state. As I transition into the CEO role, I want to ensure that we move forward with this in mind. We told you that ARR growth should have a similar trajectory to revenue growth while metrics like RPO and CRPO are more appropriate indicators of performance trends for our business. As such, we'll no longer be disclosing ARR on a go-forward basis, an approach that is consistent with enterprise SaaS companies in our peer set, including our direct competitors. We've been consistently sharing for four years that we don't measure our success in total logos or total customer count, and our sales team are not measured or compensated on these metrics. We're now at a point where a single large enterprise customer is worth more than hundreds of smaller customers. With enterprise being the priority, total logo count is not a key performance indicator of our current business. As such, we'll no longer be disclosing total customer count. Further, with the goal of transparency, we had previously disclosed logo numbers and contributions from our partner channel. However, we recognize that this has actually served as more of a distraction than a helpful data point. So we won't be continuing that practice. The idea that all of our growth comes from temporal partner contributions is unfounded. So I want to ensure that everyone has the same understanding and more clarity into the actual data. Salesforce partner revenue, including both Social Studio and non-Social Studio businesses, accounted for slightly less than 15% of our new business in 2023 and less in 2022. This amounts to a roughly 3% contribution to our total 2023 revenue growth, which I believe is significantly less than many may have previously assumed. We value our partnership with Salesforce and other key partners, and we see a strong opportunity for future growth that powers through a 3% potential headwind in 2025, especially given all the opportunities we are creating within our ecosystem. We have a tremendous opportunity in front of us, and I'm excited about the innovation and change that we're driving the business to deliver on our goals. We're aligning ourselves with the best and fastest-growing cohorts of our market, which you can see in our 44% large customer growth, 41% ACV growth, and ongoing rapid growth in RPO and CRPO. We expect we're going to see both accelerating new business, accelerating expansion momentum, and improving efficiency over a multiyear period of time as we build on our product leadership, world-class culture, and history of overdelivering for our customers every day. I'm excited to bring Justyn and our founder's original vision to life as Sprout defines how businesses can operationalize social.

Thanks, Ryan. I'll now run through our financial results and guidance. Revenue for the fourth quarter was $96.8 million, representing 29% year-over-year growth. Subscription revenue was $95.8 million, up 28% year-over-year. Services revenue was $1.0 million, up 112% year-over-year. Despite underestimating the impact of the strategic changes Ryan outlined earlier, we continue to deliver top quartile growth in SaaS. The number of customers contributing more than $10,000 in ARR grew 24% from a year ago. The number of customers contributing more than $50,000 in ARR grew 44% from a year ago. ARR growth approximated subscription revenue growth in Q1, which underperformed our plan for the reasons Ryan outlined. We have materially fewer net customer losses compared with the back half of 2023, consistent with the early benefits from our model change. You should think about Q1 ARR being even smaller as a percentage of the full year compared with prior periods, and you should continue to think about the rate of growth of total customer base improving throughout 2024. Q1 ACV was $12,892, up 41% year-over-year. As we lapped our first full quarter of new business pricing, new business ACV again grew double digits year-over-year, and we expect strong ACV growth to continue over the medium term through my rapidly shifting enterprise mix, strengthening premium module attach rates, influencer marketing, and customer care. In Q1, non-GAAP gross profit was $76.0 million, representing a non-GAAP gross margin of 78.5%, up 30 basis points from a year ago. Non-GAAP sales and marketing expenses for Q1 were $37.2 million, or 38% of revenue, down from 40% a year ago. We continue to hire aggressively in our enterprise sales and growth organizations. As our customer base has shifted away from SMB and into enterprise, we have changed our accounting for deferred commission amortization from 3 years to 5 years. This is consistent with our peers in enterprise software. The accounting change resulted in a $4.4 million reduction in Q1 sales and marketing expenses, and we expect an operating income benefit in all future periods. This accounting change has no impact on cash flow and will mean that our non-GAAP operating margins and non-GAAP free cash flow margins are likely to be increasingly correlated moving forward. Non-GAAP research and development expenses for Q1 were $18.3 million, or 19% of revenue, roughly flat from a year ago. We continue to invest in our future and are increasingly targeted investments in AI and social customer care and are delivering strong returns. Non-GAAP general and administrative expenses for Q1 were $14.5 million, or 15% of revenue, down from 17% a year ago. We expect to deliver consistent G&A leverage as a percent of revenue moving forward. Non-GAAP operating income for Q1 was $6.0 million for a 6.2% non-GAAP operating margin. Non-GAAP net income for Q1 was $5.7 million for non-GAAP net income of $0.10 per share, based on 56.3 million weighted average of common stock outstanding, compared to non-GAAP net income of $3.4 million and $0.06 per share a year ago. Turning to the balance sheet and cash flow statement. We ended Q1 with $95.2 million in cash, cash equivalents, and marketable securities. This is down from $98.1 million at the end of Q4. Deferred revenue at the end of the quarter was $147.1 million. Looking at both our billed and unbilled contracts, RPO totaled $290.0 million, up from $275.0 million exiting Q4 and up 54% year-over-year. We expect to recognize 73% or $210.6 million of total RPO as revenue over the next 12 months, implying a CRPO growth rate of 48% year-over-year. We continue to believe that all our leading indicators are converging towards CRPO over time. Operating cash flow in Q1 was a record $11.2 million, up from $8.3 million a year ago. Non-GAAP free cash flow was a record $11.3 million, up from $7.9 million a year ago. Shifting to formal guidance. For the second quarter of fiscal 2024, we expect revenue in the range of $98.5 million to $98.6 million or growth rate of more than 24%. We expect non-GAAP operating income in the range of $4.6 million to $5.0 million, which assumes a non-GAAP operating margin of 4.9% at the midpoint and includes an estimated benefit of our deferred commission accounting change. We expect the non-GAAP net income per share to be between $0.07 and $0.08. This assumes 56.6 million weighted average basic shares of common stock outstanding. For the full year 2024, we are reducing total revenue to the range of $405.0 million to $406.0 million. This assumes a greater than 20% organic Sprout revenue growth and accelerated Tagger subscription revenue growth and incorporates each of the changes Ryan outlined. For the full year 2024, we are raising non-GAAP operating income to the range of $28 million to $29 million. This divides annual non-GAAP operating margin improvement of roughly 560 basis points. Excluding the accounting change, we are reiterating our prior non-GAAP operating income guidance, which now implies year-over-year non-GAAP operating margin improvement of 240 basis points. We expect non-GAAP net income per share of between $0.45 and $0.46, assuming 57.0 million weighted average basic shares of common stock outstanding. We believe we've transformed our business model to position us to deliver increasingly durable and increasingly efficient growth.

With that, Ryan, Joe, and I are happy to take any of your questions. Operator?

Your first question comes from Raimo Lenschow with Barclays.

Ryan, my first question is regarding the go-to-market changes. Historically, it usually takes about two to three quarters for such changes to stabilize within the organization. Can you elaborate on how you perceive this, particularly in relation to your prepared remarks? Is the two to three quarter timeframe still applicable? I also have a follow-up question.

Yes. Thanks, Raimo. Yes. I mean, we're kind of, I would say, most of the way through some of those changes today. We made a lot of those shifts heading into Q1. If I think about the things that we did, really important strategically for where we're going as a market organization. If you think about the investments into things like vertical sales in the account coverage that we implemented in the enablement that we're doing as a team, so all those things were playing through in Q1. When we think about the guidance, they've all been factored through both the compounding of the subscription revenue throughout the year as well as the impact of the changes that we're making through Q2 and getting the rest of our team ramped. So they've all been factored in here. And I think a good portion of it has been felt in Q1, and we feel really good as we're going into Q2 with where our teams are.

Yes. Since you removed ARR, we now need to figure out how to evaluate your performance and the company's progress. Joe, you mentioned that we might see a low point in Q1 regarding ARR. Is there any guidance you can provide us, or will we just have to wait for the results?

Yes. I'll start on that one. I think just going back to the rationale here, the linearity of our business and the composition of our customer base has been changing in really material ways. As we've been going through this transformation upmarket and becoming more back-end loaded, we view revenue and RPO as the best indicators for our business. And that's consistent with our peers. We also believe that for all of you, this is going to be the most accurate and less complicated and less noisy way to measure our business. So I'd highlight the revenue in the RPO as sort of the lagging leading indicators that are going to give you good indication of where the business is going. And we realize that this is a change, and we've added some work to all of you tonight. And so our team will make sure that we are providing the right level of support as you dial in your models.

And your next question comes from the line of Arjun Bhatia with William Blair.

To begin with the guidance, we've made a significant reduction to our full year forecast. Historically, over the past couple of years, there hasn't been much flexibility or leeway in our guidance to account for business variability. It seems that we are now facing some upcoming changes from both an operational and strategic standpoint. Can you explain what factors you are incorporating into the guidance and how much flexibility you have allowed as you navigate these changes throughout 2024?

Yes. Arjun, some of what Ryan mentioned has already been covered, but I want to reiterate the key points included in our guidance. First, the go-to-market changes that Ryan referred to are incorporated into our forecast, and we are still implementing those adjustments. They will carry over into the second quarter, and we are confident about the momentum, particularly regarding how the soft revenue from the first quarter will impact our overall revenue flow.

Okay. Got it. And then, Ryan, for you. You mentioned something in your prepared remarks, and I may have missed the details. But you indicated that there’s some immediate revenue you might forgo if it isn’t the right strategic fit for you in the long term. Can you elaborate on that for us? What are you deprioritizing? Is that different from the transition we’ve been discussing over the past year or so? And how much additional complexity does that add to your go-to-market strategy as you work to realign resources to your ideal customer profile?

Yes. Thanks for the question. I mean, step one of a lot of the change that we were making last year was getting the composition of our customer base to a place where we felt like it perfectly matched our ideal customer profile and really transforming both the inbound and outbound motions, so our new customers as well as our current customer base. In going through that, the next part of it and the biggest opportunity is really identifying where our most sophisticated customers live and where we had the greatest opportunity to be able to maximize our investment. And so as we've looked at the data and looked at our customer base and the cohorts of customers, we've identified some really exciting opportunities for us to really put our teams, the majority of which in the upmarket and mid-market enterprise, again some amazing opportunities when we think about our outbound motions and where we invest our time prospecting as well as where we think about our marketing efforts and all of the inbound actions that we take to drive really healthy inbound. So it was really a commentary that we've identified pockets of just the overall opportunity that we don't want to go as hard at because we know that it has different metrics like CAC and higher churn rates compared to the opportunity with some of these cohorts that just convert faster, they land bigger, they stay longer. So it was really a comment on focusing our team on some of these areas that we've just got more surgical with, with the data that we've got in our business.

And your next question comes from the line of DJ Hynes with Canaccord Genuity.

Ryan, if I interpret your comments right about Q1 softness, it sounds like it was a function of kind of shots on goal, right, a little bit less pipeline generation in the second half of '23. I'd be curious to kind of extrapolate from that and ask about like sales cycles. What are you seeing? I mean, Sprout has always had really quick close rates and short sales cycles. Is that changing now with the push to enterprise? I mean, you talk more about Q3-Q4 weighting. Maybe that's more tied to budget cycles. But I'd love to hear just specifically about sales cycles, what you're seeing.

Yes, thanks for the question, DJ. You're correct that we are experiencing longer sales cycles as our customer and prospect base evolves. These opportunities are larger and present greater potential for expansion. Despite this change, we are confident in our position as we utilize our product to help customers recognize the value of Sprout more quickly. Additionally, we are participating in more RFPs than ever before, which is encouraging for our business. If you examine some of the significant clients we've discussed recently, such as P&G, Universal Pictures, and American Honda, they represent larger deals for us with substantial future expansion possibilities. Therefore, the lengthening of the sales cycle is a factor in our business that is related to the transformation we are undergoing.

Yes. Okay. And then maybe as a follow-up. Just with all that's happening from a regulatory standpoint surrounding TikTok, can you remind us like, a, how material that is to the business from a revenue standpoint today? And then b, I'd love to pick up any industry chatter that you're hearing, how folks are thinking about this. Like what would happen if TikTok were to go away in the U.S.? Any comments there would be helpful.

Yes. I think the biggest thing to highlight here is we don't really monetize specifically on any of the networks. So if you think about just our customer strategy, the way that they think about it is they think about social holistically. And they've got all these different channels that they need to execute against. And so much of this is actually dictated by where their community and their customer base is, and that's where they lean in. TikTok has obviously been a great partner for us. We're really excited about the products we've built alongside of them. But at the same time, when we look at our customers, they typically have multiple networks that they're leveraging. And so any changes that happen here from a brand perspective will just mean that they end up leaning heavier on some other social network where the traffic goes, where their customers go, and where they will spend time. And so for us, that's a huge part of the importance of the work that we do, which is to make sure that we have excellent partnerships and that our products add a ton of value across all of the social networks.

And this is Justyn. I want to share some thoughts on the ecosystem commentary. At this point, it seems that brands are not largely considering the inevitable disruption caused by TikTok. That's the general sentiment we've gathered from customers. This has been a topic of discussion for some time, and while they're observing the situation, they aren't currently adjusting their time and energy. Overall, the platform is significant in many aspects, and we appreciate our partnership with it. The compelling aspect for consumers and brands is the brief, unproduced video content. If TikTok were to become unavailable, that focus would simply shift to another platform with similar characteristics, such as Reels and others. It’s about establishing a position in the market based on the type of content. The network acts as the carrier, but this is integrated into a social strategy. This type of content and the engagement it fosters will remain a part of the ecosystem and the landscape, no matter where it resides.

Your next question comes from the line of Parker Lane with Stifel.

Ryan, maybe just to double down on one earlier. You referenced that the sales changes happened really before the start of the year. A lot of it took place in Q1, but it's still lingering here in 2Q. When we look at your tight guidance range, how confident are you that peak disruption in go-to-market is behind us and that there's not going to be any level of additional sales execution risk here in 2Q?

Thank you for the question, Parker. To clarify, decisions were made in the fourth quarter, and the execution of those changes took place in the first quarter. We are confident about the guidance we've established for the second quarter and the remainder of the year. Most of the necessary actions and changes with the sales teams, along with the enablement efforts, were implemented during the quarter. We feel positive about this, and it is reflected in our guidance.

I think it's also helpful context here, just to talk about the type of changes that we're talking about, where a big change in go-to-market strategy might take a couple of quarters to take hold, this is a layer lower than that, in that we're talking about some pretty tactical decisions around account coverage, spending time with the team on Tagger enablement, things like this. So rather than a large kind of strategic change or going after a different part of the market or something like that, these are some tactical things that, from a time energy and calorie spent in Q1 perspective, created some headwind for us. But I just want to make sure it's clear that we're not talking about some radical change that's going to take a while to play out. Most of it, things like the enablement, et cetera, are done. That's a binary thing, and the momentum stutter is fairly finite.

Got it. Appreciate that feedback. And then Ryan, one more. You talked a lot about aligning your go-to-market around your best customer cohorts. From our perspective, should we interpret that to mean $10,000, $50,000 cohorts? Or is there a level of depth beyond that so that customers under $10,000 that are providing the right signals are still going to be emphasized here?

Yes. This is Justyn. I’ve spent a lot of time on this project, so I’ll dive in. When we discuss advancing beyond the lower end of the customer base, we now have a healthier overall customer base that can yield better unit economics. There’s another layer to consider: rather than assuming all customers behave and perform similarly, we can get a clearer view of different patterns across various industry types, such as B2B versus B2C, and varying approaches to social media. This allows us to see the differences within segments. For example, in the enterprise sector, companies of similar size can have very different growth profiles. Instead of generalizing, we can categorize these further and identify opportunities, particularly in the under $10,000 segment, where there’s a significant difference in potential compared to the $10,000 to $15,000 range. Within that customer group, we’re observing distinctly different behaviors and potential. We have refined our focus on where to allocate our resources and time. Considering how we engage with these varied groups differently is a crucial opportunity, and that’s some background on those points.

Your next question comes from the line of Adam Hotchkiss with Goldman Sachs.

Great. I guess to start, how should we think about the performance of your direct and partner channels in the quarter? Is it fair to say that sales productivity was just below where you thought it'd be despite the record RFPs you mentioned? Or is there just more of a ramp that your direct sales force has to get through before you can reaccelerate ACV? Just anything around sales productivity or morale would be useful.

Yes. I think some of it relates to your comment towards the end. Some of this is a natural progression for our team, as we had new hires and role changes occurring in Q1. We anticipate that this progression will fully materialize as we move into Q2 and beyond. From a partnership and distribution channel standpoint, we experienced relatively strong performance and are optimistic about the latter half of the year and the partnerships we've established. I believe these are all just natural developments within our business model today as our team increasingly focuses on larger markets.

That's really helpful. I'm curious about your $1 billion revenue target. Previously, your long-term guidance suggested a compound annual growth rate of around 25% or 26%. Based on that guidance, it looks like we're going to finish a bit below that by the end of this year. Are you still sticking with that outlook? How confident are you about reaccelerating growth after this year?

Yes. We still very much have this in sight and in focus. The Q1 impact, when you think about it in isolation, is relatively small. It's a relatively small number relative to the $1 billion target. And our intention here is really to set up Sprout to accelerate to and through that number. And so we think about that $1 billion target certainly as the next milestone, but not the finish line for us. And so much of the work that Justyn actually just even touched on, from a go-to-market perspective, will impact our timelines and just how fast we can get there. So I'd say no changes right now. And as we have more data to share on this in future quarters, we'll definitely come back to you and share that.

Your next question comes from the line of Rob Oliver with Needham & Company.

Yes, Ryan, you mentioned in your prepared remarks the rapidly changing dynamics within the customer base, and I want to make sure I understood correctly. I assume this change partly relates to the transition to enterprise customers. Is there anything else you are referring to? Clearly, your shift upmarket has been evident since you moved away from the lower end of your customer base at the beginning of last year and continued that trend through the end of the year. I'm curious about what you meant by those dynamics and if there’s more to it than just that your customers are getting larger.

Yes, thanks, Rob. The business has really transformed significantly. It's very different from what it was at our IPO, which was focused on highly transactional inbound activity primarily with small SMB-type businesses. Today, we have an opportunity in front of us that reflects changes in our customer dynamics, staffing models, and the types of customers we are engaging with. We are now dealing with larger, more sophisticated customers that present bigger opportunities for both acquisition and growth, along with longer sales cycles. This remark highlights the evolving dynamics of our business that we have been experiencing.

Great. Okay, helpful. And then just one other thing. I can't remember if it was you or Joe who mentioned the Salesforce contribution in 2023. I think you were trying to indicate that we're not dependent on Salesforce. However, I recall you mentioning it was down year-over-year from 2022, which surprised me because of the end-of-life transition of Social Studio and the momentum around the Salesforce customer service native integration. I'm curious about this potential deemphasis of the Salesforce partnership. You've been speaking about it more in the context of a long-term opportunity, but I'd like to hear your comments regarding Salesforce.

Yes. This is Justyn. I want to start with just a quick clarification. That wording might've been a little tricky, but it was up significantly year-over-year from '22 to '23. We were saying that it was a smaller contribution in '22. But want to make sure that that's heard. I'll let Ryan comment on the forward momentum, which is still something that we are very excited about, a lot of opportunity in front of us. So I want to make sure that we don't take away the wrong things from those comments.

Yes. I would just add, we still feel great about that partnership. You're right. We were at New York World Tour. We will be at Connections, where CMO Scott will be speaking next month. And so we feel really great about the relationship and the opportunity, especially around a lot of the other product lines beyond Social Studio. The commentary is really to make sure that we are properly framing the size and the impact of the business on our overall growth levers and the impact on Sprout. And so that was what the commentary was about.

Your next question comes from the line of Rob Morelli with Needham & Company.

This is Rob Morelli on for Scott Berg. I'd love to get some color regarding the early results for your customer care solution. Have you seen any incremental upsell activity with this new release? Or is it still too early to tell?

Yes. Thanks for the question. We're really excited about what we're seeing in Care. I think there's been a lot of great feedback from customers today. If you think about some of the stuff that we've been building out just in terms of our prioritization of cases and routing of cases and the analytics that come along with agent productivity, we feel really good about the opportunity that we're developing in the marketplace. Our customer feedback has been really strong because we know they are seeing more and more volume showing up in social, and it is critical for them to be in front of these customers every single day. We know that the expectations for consumers on social is much higher than any other channel. And so showing up fast and intelligently is what they expect when they're leveraging a platform like Sprout. So we are seeing lots of good opportunity. There's still lots of roadmap that the team has been working on. And I think you'll expect to see, as we go through the year, more and more features and functionality added in there and more and more success stories from us on that note.

Got it. And then regarding the go-to-market shifts, you touched on continuing to enable customer-facing teams with Tagger while also noting Tagger ARR meaningfully accelerated. Has this, I guess, outperformance shifted your outlook for Tagger for the remainder of the year? And I guess, what's the overall opportunity here with the remainder of the year?

Yes. All that's contemplated in the guide. I'd highlight we feel really good just about the way that the team and the product is performing. There's clearly a ton of value that we're being able to deliver to customers. A big part of the thesis that we had shared with all of you before is that this is an area that our customers really cared about, and they were either doing this very manually, trying to figure out how to build a strategy around this, or were leveraging things like groups like agencies to execute. And so what we've seen from our customers today is that they really appreciate the ability to be able to do their influencer discovery in our platform, to be able to find the right folks that they should be leveraging for their strategy to be able to run campaigns through Sprout and then properly report on the ROI from all that, all in one place with one team. And so we've seen a lot of great progress so far, both from a new business perspective as well as going back to our current customer install base and attaching it. So all this has been sort of contemplated within in the guide. But we certainly see good progress and we'll continue to update you on the things that are progressing here.

Your next question comes from the line of Jackson Ader with KeyBanc Capital Markets.

Joe, you mentioned that there are still some go-to-market changes being implemented in the second quarter. Can you clarify which ones have already taken effect and which ones are still pending?

Yes. My comment was more about not necessarily the changes are still going on, but the impact of those has been contemplated in our Q2 guide in the back half of the year, Jackson. That's what I was referring to.

Okay. So all of the go-to-market changes that you plan to make have already been made?

I'll defer to Ryan to reiterate what he was talking about earlier.

Yes. I believe the commentary is more about the changes implemented in Q1 and how they will carry over into Q2 as the team adjusts to their roles. Additionally, it relates to the key focus areas for our go-to-market teams. However, to connect this with what Justyn mentioned earlier, there are no significant changes being made in Q2 that would alter any of the data we've shared.

Got you. Okay. And then I'm just curious about the timeline. When in the first quarter did these changes go into effect? And how soon after that did you start to see issues in deal closures and pipeline?

Yes. I want to highlight a few factors that contributed to our Q1 performance. We noticed some self-induced challenges related to execution, such as introducing new teams, adjusting account coverage, and taking the team off the floor for training. These changes affected the amount of time we spent with customers in Q1. Additionally, we pointed out that our focus in Q4 was more on execution rather than building pipeline for Q1. There are also natural shifts in our business, including longer sales cycles and larger deals that are expected to close in the second half of the year. All of these factors played a role in the overall outcome. Furthermore, we are aware of the challenging macro environment we are operating in, which we typically do not emphasize. However, over the past few years, our team has managed to navigate such headwinds effectively. If we were in a different macro environment, these issues likely would not have been as pronounced in Q1.

Your next question comes from the line of Elizabeth Porter with Morgan Stanley.

You have Ryan Bressner on for Elizabeth here. Just kind of curious if we could touch on Tagger here. Just how is progress to the platform? How ramped is the sales team with this? And just how much work is there still have to do here?

Yes. We've seen a lot of great progress. We've been really excited about the things that the team has been shipping. From a sales team perspective, the maturity of the sales team, we did a lot of enablement in Q1 across our entire customer-facing to make sure that we're up to speed with all of the elements of influencer in our Tagger platform. So we're seeing really good progress from there, and that's why we called it out as well just in the prepared remarks. Our customers really see value in this. We believe it is the best solution that is on the market. We've got this really exciting opportunity to educate customers on the value of influencer and how this can nicely fit into the social strategy. And then we're bringing along this incredible technology that allows them to execute. And then when you think about the value of the return on investment, you put it against the rest of the things that we do in core Sprout, it provides customers with really great opportunities to increase their share of voice and their brand and their only generation in revenue. So lots of good progress. The team's ramping really well, and we expect to continue coming back to you sharing the progress we're making with the team and with customers.

Your next question comes from the line of Matt VanVliet with BTIG.

You guys talked about quite a bit of changing dynamics in the business: going after a different customer set over the last couple of years, the product is expanding quite a bit. What gives you confidence that the go-to-market team, especially the sales reps you have in place are trained, have the right skills, are the right folks to lead this different market motion and go after a different set of customers, especially as you're making changes and it doesn't seem to be sticking right away?

Yes. Thanks for the question. I mean, I think the first thing that I'd highlight is we've seen a lot of success in this customer base of the market. If we look at the $50,000 being up 44%, the ACV being up 41%, and the metrics in RPO being up 54%, and CRPO being up 48%, there's a lot of good signal in the execution that we've seen. Then you add in a bunch of the logos that we've talked about over 2023. And here, in Q1, we're seeing good execution from this team. A lot of this, when we think about Q1, is also, again, just the shape of the way that our years are going to go in this new model as we shift the business. We've also, over time, just continued to add really great talent to the team. When I look at the folks that we have on the squad today, they're really, really excellent. We've taken the great people that have been at Sprout and continued to own their skill set and prove that they can execute, and we've complemented them with great folks from across the SaaS industry that have joined our team. So I think it's a combination of seeing it in the data today, and then feeling like we've been raising the bar and the talent we're bringing in. And we're confident that you're going to see the fruit borne in future quarters here as we get into the back half.

Your next question comes from the line of Clarke Jeffries with Piper Sandler.

Ryan, I think we've touched on a lot, but what comes to mind is sort of endogenous, exogenous. And I think the biggest framework that we've always appreciated with the guidance is it seems like the guidance is really set by the ARR that you exit at the prior quarter at. And so when we think about that time spent away from customers aspect, was there anything surprising in terms of retention characteristics? Or was there just that lack of time in front of customers that may have contributed to something that you'd characterize as worse retention metrics? And then I have sort of one follow-up for Joe.

Yes. Thanks for the question. I wouldn't characterize retention metrics within my commentary. In fact, our gross retention performed nicely above plan within the quarter. I think a lot of that is the moving upmarket and the dynamic of these larger customers that are going to have a greater lifetime value and be growing faster with us. I think a lot of that is also the strategic shifts that we had made last year and changing the dynamic of our customer base and the folks that we were proactively targeting and going after. And if I think about it, for us, it was really this combination of not enough customer-facing time from an execution perspective within the quarter. I feel good about the work that the team did to create future opportunity. Our pipeline was up 37% within the quarter, but we just didn't get the number of deals we want to get done in the quarter. And for me, that's this combination of we didn't cultivate enough of it in Q4, and then we didn't have enough time executing on deals in Q1. And then the shifting in that business model into the back half adds some natural pressures behind it as well.

And then, Joe, just before we put ARR to bed, I was hoping you could maybe frame maybe the exit growth rate of the business in any way you would choose, just as we think about maybe a seasonality of the business that puts less time for ARR booked to be recognized as revenue, just any way to frame maybe gross in net new ARR. Do you expect that to be higher in the second half year-over-year versus the Q1 commentary of being down year-over-year?

Yes, Clarke, I agree with your point. Ryan mentioned that our business is increasingly weighted towards the third and fourth quarters, and even within those quarters, the last month is becoming more significant. If we look at our ARR, it will likely be higher than the implied revenue growth rate. Therefore, we can expect to see much more ARR generated in the latter half of the year. I believe that’s a reasonable expectation as we progress in the enterprise sector.

Your next question comes from the line of Surinder Thind with Jefferies.

When I kind of think about all of the changes that were made on the quarter, how should we actually think about the impact on the opportunity pipeline here? Has it effectively been reset at this point? Do we need a couple of quarters to rebuild it? Also given more focus on enterprise, which even has a longer sales cycle, so is there perhaps a larger-than-anticipated air pocket here that we should be thinking about?

Thank you for the question. First, I want to assure you that all those factors are being considered in our guidance. I should clarify that as we entered Q1, we didn't have a sufficient pipeline to close the deals we needed. Much of this situation was due to the increased load at the back end compared to previous years, which is reflected in our Q3 and Q4 numbers. Our focus during that time was on execution, and as a result, we didn't enter Q1 with the ideal level of preparedness for closing. With the changes we've implemented, we simply didn't have enough customer-facing time to execute as effectively as we would have liked. However, I'm optimistic about the pipeline we've developed, which is up 37% in Q1. Additionally, we have a significant amount of pipeline that we brought into the year that isn't ready to close in Q1 but is very much active for this year. We've also engaged in longer sales cycles, particularly with RFPs from larger companies, which will also contribute to back-end loading. Overall, we're optimistic about the opportunities ahead. Our sales representatives continue to ramp up and the team's maturity is improving, reinforcing our confidence in the prospects in front of us.

Ryan, can you clarify why the decision was made to stop reporting ARR? Are you sensing a structural change in the business that suggests there is more churn and less predictability over a 12-month period? Are you leaning towards more transactional revenue types? I'm a bit confused by this decision since it typically reflects the revenue expected over the next year, which should be secured.

Yes, this is Justyn. I believe the essence of the question is about the changes we've experienced. We actually view it differently. The shift towards the end of the period, whether that's a quarter, a month, or an entire year, has introduced significant variability in our Annual Recurring Revenue (ARR) figures and how we compare those numbers. Our business is moving toward the end of the year, which contrasts with when we started, a time characterized by high predictability and stability across months, quarters, and the annual timeframe. As we transition to being a publicly traded company and share these metrics, we are navigating through this challenge in real time, especially since this metric can be difficult to scale within an enterprise context. We don't believe it serves as the best indicator of our business's health, especially given the pronounced differences between the first and second halves of the year. We think it is neither the most effective approach for measuring our business nor conducive to informing our internal decision-making as we pursue our long-term strategy to maximize the company's value.

The only other thing I'll add is that we mentioned in our prepared remarks that retention outperformed our plan for Q1, and we expect this strength to continue. I would also like to emphasize that RPO and CRPO are excellent indicators of the health of the business and its future trajectory.

Your next question comes from the line of Brian Schwartz with Oppenheimer.

Ryan, lots of transparency on what's going on with the business, and you talked a little bit about the macro. Can I just touch upon that? Do you feel that the macro had changed at all, had deteriorated at all since you last reported Q1? Because it's been pretty tough for a while now, and just wondering if you feel like it was the same or had deteriorated somewhat in the first quarter.

Yes. Yes. I mean, I think the first thing that I'll highlight, and I want to say it again, for those that have been following the story and alongside on us, I don't think we've really ever leaned into the macro. We certainly acknowledge that this is a more challenging environment to execute within. But we've always just really been focused in on controlling the things that we can control and making sure that we're highly accountable to our own execution. But like all of you, we listen to the calls from our peers. And we network within the industry, and we see the things that we see within our own business as well. And so I would highlight that the things that we have seen within the business is you're seeing more scrutiny on budgets; you're seeing more decision-makers involved in making decisions. I think in some cases, it's probably elongating some of the sales cycles. Those are all things that are happening. And for us, the way we think about it is how do we make sure that we absolutely show up at our best for our customers, how do we make sure that we are really clear on the value that we can deliver for them, how do we make sure that we're differentiating against the competition in every conversation and making sure that our customers see just how Sprout can help them with their share of voice, with their pipeline, with their NPS, with their customers. So I would say, I think for most folks, it exists in the environment today. We're really just focusing on controlling what we can control and delivering on our goals.

And then my follow-up question for Joe. Thank you very much for the color on the seasonality that we should expect for CRPO and RPO. But what can you share for us in terms of your growth expectations for CRPO this year?

Yes. So we still see Q1 as kind of like the low watermark in the way that you should look at those metrics. And you could expect those to be steady and continue to increase throughout the year, with Q4 being the high watermark part of the year, just given the way the curve of our business, so low watermark in Q1 and then high watermark in Q4.

That concludes our Q&A session. I will now turn the conference back over to Justyn Howard for closing remarks.

All right. Thank you. I know everyone's got a busy schedule tonight. I'll keep this quick. But really appreciate the opportunity to talk to you about what's going on in the business, some of the things that we're excited about. I think that kind of contrary to the backdrop of Q1, the excitement that Ryan and I have, we've been jamming in a way that feels that energy and opportunity in front of us feels something it came to four or five years ago. The plans that we have, the strategy changes that we've got in motion, the foundation that we've built on top of making the adjustments that we need to make in expectations with all of you to be able to outdeliver is something that has us incredibly energized. You'll see that play out from us across the year. I appreciate the chance to check a bit more with some of your folks later on and over the next several weeks. So appreciate your time and look forward to catching up with you all soon.

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