Sprout Social, Inc. (SPT) Q2 2024 Earnings Call Transcript

Thank you for standing by. My name is Meg, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2024 Q2 Sprout Social Inc. Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Jason Rechel, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Welcome to Sprout Social’s second 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 quarterly report on Form 10-Q for the quarter ended June 30th, to be filed with the SEC as well as our most recently filed 10-K and 10-Q. 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 second 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.

Thank you, Jason, and thank you to everyone for joining us today. I am honored to kick us off in what will be my last earnings call as CEO before stepping into the Executive Chair role. When we founded Sprout 14 years ago, we believed that social media would change the relationship between brands and their customers in new and profound ways. Today, social has become a primary and mission-critical channel for the entire customer relationship and entire customer journey from awareness to acquisition to support. I am incredibly proud of this team's dedication and hard work to put us in this position as we strive to win this market in a category that is increasingly becoming a must-have for any brand that aspires to be competitive moving forward. I'm thrilled to be passing the torch to Ryan and excited for my transition into a supporting role for this incredible team, while we'll be able to dig into some of our most exciting opportunities. I am grateful to everyone that's been part of our journey so far and the support of our shareholders. And now the floor is yours, Ryan.

Thank you, Justyn. I'm excited to spend time with all of you today and to share the progress we've been making despite a more challenging environment we're all operating in. Sprout remains focused on leading our industry, which is driven by the success of our customers who rely on our platform as their social command center. Our ongoing recognition by G2 as the top product in all of software is a testament to their engagement and satisfaction. This success is fueled by the focus and execution of our amazing team who enhance our product and customer value. As social continues to become more central to how brands market, sell, and service their customers and the place where they gather crucial customer and market intelligence, we believe we are well positioned to lead in this critical space. And despite the current headwinds facing the broader software industry, we believe we have the right team to navigate these challenges while continuing to deliver for our customers. On that note, I'm pleased to share that we're tracking ahead of the plan we outlined for you in May. The buying environment in Q2 mirrored what we observed in Q1. As we identified and adjusted for last quarter, our buyers are managing through new approval processes and an increasing number of steps in the decision-making process, leading to lengthier evaluation cycles. In this environment, we extended our product leadership, improved our competitive win rates, further improved gross retention, and delivered notable Tagger upside. Our team is strengthening, our pipeline is rapidly expanding, and our platform is delivering incredible value. The three areas where we believe we can best deliver value are through: number one, our accelerated pace of product innovation; number two, by getting even closer to our customers; and number three, by accelerating our pace of pipeline and opportunity creation. We have the number one customer-rated product on G2, and our internal mantra holds true, especially now: we're a joy to do business with. These focused efforts drove the progress we saw during the quarter. Inside of our installed base, this approach was validated this quarter through improving gross retention rates across each segment of our business and a broader positive change as our mix further shifts to more sophisticated customers with annual and multi-year contracts. We also saw competitive win rates improve, and we grew this quarter with an incredible list of customers like Salesforce, Honda, Applied Materials, Church & Dwight, Cintas, Porter Airlines, Washington State University, Bausch and Lomb, Alterra Mountain, Oliver Wyman, MasTec, Allianz Partners, Metropolitan Transportation Authority, GreenState Credit Union, and Elanco Animal Health. Customers like these and many others contributed to a very strong large deal momentum, with customers spending more than $150,000 ACV with us increasing by 64% year-on-year. We continue to hear from our customers that they are seeing our competitors investing less in both customer support and innovation. We view this as an opportunity to further differentiate ourselves. Our AI and automation are helping our customers analyze over 1 billion messages a day to identify the best times to post, to create compelling content and to analyze and gain insights. We're building seamless solutions baked elegantly into existing workflows that allow AI to serve as assistance to humans. We're also accelerating our care offering with AI, unlocking efficiency for teams with the release of auto-classification of cases by intent, the ability to auto-assign cases, and to automatically summarize conversations. Listening customers can now leverage insights by AI assist, positioning our platform to solve more problems by keeping workflow in process. Our new publishing API endpoints enable enterprise marketing teams to integrate directly with their projects and content management tools, paving the way for future Sprout partnerships. Part of this competitive differentiation also comes from Tagger, which has further contributed to strengthening premium module attach rates. We've seen strong success after enabling all customer-facing teams to sell Tagger in January. A sample of that progress comes in the form of some incredible new Tagger customers this quarter like NETGEAR, Cummins, and Fairway Stores. Influencer marketing continues to be a rapidly emerging category that is top of mind for nearly every marketing leader we work with, and Tagger continues to be the fastest-growing product in our portfolio. This is also a great example of the opportunities we have to solve more problems for our customers while we expand our footprint within our 30,000 customer base. A year into the acquisition and enablement of our teams has also worked in reverse. The Tagger customer base has brought us a new spread of customers like GoodRx who recently shared how to leverage these complementary products on a panel at Salesforce connections. Nycole Hampton, Senior Director of Content and Engagement Marketing at GoodRx said as a team that focuses on content, social, creator, and community engagement and as a long-time user of Tagger, we're looking for a complementary social platform to help streamline the full scope of our efforts. With Sprout's intuitive platform and Tagger's influencer insights and workflow, we're excited to leverage these tools hand-in-hand while looking forward to what's to come as the platforms start to evolve together. With efficient tools, we're able to focus on interacting and building relationships with our customers, gleaning important insights that help inform content and creator strategies. During Q1, we were named as the number one best software product by G2's 2024 Best Software awards. We expanded on the success in G2's 2024 summer reports as a leader in 211 categories. We earned the number one ranking in 88 categories, including social customer service, social media analytics, social media suites, and social media listening tools, as well as the Enterprise results index for social media management. Meanwhile, our partner ecosystem further strengthened with a new Snapchat partnership in Q2 and as a beta partner for the Threads API. Here's what Meta had to say about our beta partnership: 'We're thrilled to partner with Sprout Social, a leader in social media management software, to enable our customers to drive engagement, build brand loyalty, and achieve their marketing goals across Meta's family of apps.' As a new member of Meta's ad tech partner program, we're excited to work with Sprout Social to bring innovative solutions to our customers, including as a beta partner for the Threads API. We believe our product and brand leadership, customer scale, and differentiated partnerships with both network and technology partners have Sprout better positioned than ever before to define and lead what it means for brands to operationalize a sophisticated social media strategy. April Pence, Head of Communications & Engagement at Kroger is a great example of how Sprout is bringing this to life with our amazing customers. As April shared, 'At Kroger, we are fresh for everyone. Not only do we sell fresher than fresh foods, our enterprise social team also delivers thousands of pieces of fresh content every year. Tools like Sprout Social allow Kroger and our family of companies to effectively and efficiently publish and analyze numerous pieces of content over multiple platforms to our brand fans, all while creating additional capacity for a world-class marketing team to focus their creativity and talent into creating content that is engaging and impactful.' In addition to our products, just on partner value we delivered this quarter, we are thrilled to add an amazing new leader with our new Chief Product Officer, Erika Trautman. Erika has been a founder and more recently an established product executive who has driven innovation and adoption with some of the most well-respected and successful products both at Google and Atlassian. Her leadership will be invaluable as we look to accelerate our foundation of product innovation, growth, and scale, which have been the drivers for our success and recognition. The hard work of our team is building into what we anticipate will be a stronger second half of the year. Our opportunity is improving after an acceleration in Q2 pipeline creation and strengthening competitive win rates. We're continuing to work hand-in-hand with the product teams at Salesforce and with our broader partnership strategy performing well. I'm excited for our team to have the opportunity and honor to present again at Dreamforce later this quarter. I'm grateful and energized to officially step into the CEO role a few months from now, and I'm looking forward to all the value we'll collectively create for our customers, partners, employees, and shareholders as we scale towards our multi-year goals. And with that, I'll turn it over to Joe to run through the financials.

Thanks, Ryan. I'll now run through our financial results and guidance. We're pleased that we're tracking ahead of the rise plan outlined in May. Revenue for the second quarter was $99.4 million, representing 25% year-over-year growth. Subscription revenue was $98.5 million, up 25% year-over-year. Services revenue was $0.9 million, up 44% year-over-year. The number of customers contributing more than $10,000 in ARR grew 21% from a year ago. The number of customers contributing more than $50,000 in ARR grew 38% from a year ago. Q2 ACV was $13,403, up 36% year-over-year. We expect strong ACV growth to continue over the medium term, driven by rapidly shifting enterprise mix, strengthening premium module attach rates, influencer marketing, and customer care. In Q2, non-GAAP gross profit was $78.6 million, representing a non-GAAP gross margin of 79.1%, up 100 basis points from a year ago. Non-GAAP sales and marketing expenses for Q2 were $38.0 million, or 38% of revenue, down from 40% a year ago. Our change in deferred commission amortization reduced sales and marketing expenses by $3.9 million compared with a year ago. Non-GAAP research and development expenses for Q2 were $19.1 million, or 19% of revenue, up from 18% a year ago. We continue to make targeted multi-year investments in AI and social customer care. Non-GAAP general and administrative expenses for Q2 were $16.2 million, or 16% of revenue, down from 17% a year ago. We expect to deliver consistent G&A leverage as a percentage of revenue moving forward. Non-GAAP operating income for Q2 was $5.3 million, or 5.3% non-GAAP operating margin. Non-GAAP net income for Q2 was $4.9 million for a non-GAAP net income of $0.09 per share based on 56.7 million weighted average shares of common stock outstanding compared to a non-GAAP net income of $3.8 million and $0.07 per share a year ago. Turning to the balance sheet and cash flow statement. We ended Q2 with $93.2 million in cash, cash equivalents, and marketable securities. This is down from $95.2 million at the end of Q1. Deferred revenue at the end of the quarter was $149.3 million. Looking at both our billed and unbilled contracts, RPO totaled $295.1 million, up from $290 million at the end of Q1 and up 43% year-over-year. We expect to recognize 72% of $212.5 million of total RPOs revenue over the next 12 months, implying a cRPO growth rate of 38% year-over-year. We continue to believe that all of our leading indicators are converging towards cRPO over time. Operating cash flow in Q2 was $2.1 million, down from $6.3 million a year ago. Non-GAAP free cash flow was $2.5 million, down from $6.0 million a year ago. Shifting to formal guidance. For the third quarter of fiscal 2024, we expect revenue in the range of $100.9 million to $102.1 million or a growth rate of more than 19%. We expect non-GAAP operating income in the range of $6.5 million to $7.5 million. This represents a record non-GAAP operating margin of 6.9% at the midpoint. We expect non-GAAP net income per share to be between $0.12 and $0.13. This assumes 57.1 million weighted average basic shares of common stock outstanding. For the full year 2024, we continue to expect revenue in the range of $405.0 million to $406.0 million. This implies greater than 20% organic spot revenue growth and accelerated CAGR subscription revenue growth. For the full year 2024, we expect non-GAAP operating income in the range of $28 million to $29 million. This implies annual non-GAAP operating margin improvement of roughly 560 basis points. We expect non-GAAP net income per share between $0.45 and $0.46, assuming 57.1 million weighted average basic shares of common stock outstanding. With that, Justyn, Ryan, and I are happy to take any of your questions.

Your first question comes from the line of Raimo Lenschow. Please go ahead.

This is Frank on for Raimo. Thanks for taking the question. I want to see if we could get an update on some of the macro and how that evolves specifically in regards to the pipeline issues from last quarter. Could you just double-click on those fronts? And just what you're seeing in the field now relative to last quarter? And I had a follow-up.

Yes, thanks, Frank, this is Ryan. I appreciate the question. The current environment is quite similar to what we experienced in Q1; it closely resembles it. This aligns with some of the points I mentioned in my prepared remarks. Generally, buyers are feeling pressure regarding new investments, which is leading to longer sales cycles. Many of these buyers are altering their processes, new stakeholders are becoming involved in the decision-making, and there are extended timeframes between the steps in that process. That said, as we move into Q2, we can see in the data that our execution is showing continued progress and success, which is reflected in the $10K, $50K, and $150K metrics. The team has done an excellent job of building more pipeline. Therefore, while sales cycles are longer, we are still seeing a healthy demand for our products and recognition of the value we provide to our customers.

And then maybe for Joe. Just in the past, you guys have talked about larger social studio ads potentially being up for grabs as we get closer to that shot clock going off in Q4. I just want to ask if there's anything embedded in the second half guide for that?

As far as, Frank, where we see that business headed or related to the guidance, like specifically, what color are you looking for there?

Right. Specific to the guidance, just what you guys are sort of embedding in the guide for Social Studio?

Yes. So Frank, as you know, historically haven't called out a separate kind of fallout for Social Studio. What I could say is very similar built into the guide that we had coming out of Q1. We're seeing really strong momentum on that side, especially on the Service Cloud side, and I'll let Ryan kind of chime in on what he's seeing on the front line. But Frank, I would say there's not any material change in what we had baked in when we gave the full year guide coming out of Q1.

Yes. I think the only thing I'd add is we have a healthy amount of visibility into the Social Studio pipeline in front of us here, even in this last quarter, we're introduced to some newer opportunities and have seen good progress in execution with that partnership and continue to see really good progress and opportunity with the overall Salesforce partnership, specifically around the Service Cloud. Actually, this morning, I was on a webinar with the Head of Product for Service Cloud, and we had about 300 customers talking a little bit more about the things that we're working on right now and some of the announcements that we will work on as we head into Dreamforce.

Very helpful. Thanks, guys.

Thanks, Frank.

Your next question comes from the line of David Hynes. Please go ahead.

Hey, guys. Ryan, I was hoping you could talk a little bit about pipeline coverage ratios heading into the back half of the year? And perhaps how that compares to the prior year? I mean, look, this is normally not a question I would ask or really expect you to answer. But kind of given the turbulence coming out of Q1, what we can glean about bookings in Q2. I think it's fair in this case. I'd love to get your thoughts.

Yes. No, I appreciate the question. Yes, our pipeline ratios are the highest we've ever had. We actually created more pipeline than we've ever created within the quarter. And I think everybody is seeing this in the environment today with some of the pressure on sales cycle times here; the coverage ratios need to be better. And we've seen some great things, give a lot of credit to our folks in the marketing organization and our sales organization. We've done a great job really increasing the amount of customer-facing time and increasing the initiatives that we have to go out, make sure that we're in front of customers building strong demand. And so the best way to think about this is we're heading into the back half with a larger pipeline than we've ever had before, which gives us a lot of confidence around the back half performance that we're expecting from this team.

Yes. Okay. And then maybe as a follow-up. Look, one of the elements of the new pricing model that you introduced in late 2022 was the layering in of annual price escalation. I assume you've had the chance to renew a small cohort of customers under those terms. Can you just talk about kind of realized price uplift at renewal? What would the customer feedback has been there? How you think about that aiding growth going forward? Anything along those lines would be helpful.

I think it's important to highlight our performance with gross revenue retention. We continue to see a strong trajectory in this area even in the current market, which demonstrates the strength of our products and the value our customers derive from them. We have successfully completed annual renewals for many of these customers, and for the majority, especially those on annual contracts, the actual increases were generally single-digit. Therefore, there weren't any significant changes in what they are experiencing. As we consider future price increases, we are constantly evaluating to ensure our pricing aligns with the value we provide. However, in a market like this, we are carefully contemplating these decisions. I don't have anything further to share on this topic as we look ahead.

Yes. Very good. Thank you, guys.

Thanks, David.

Your next question comes from the line of Parker Lane. Please go ahead.

Yes, guys. Thanks for taking the question. Ryan, last quarter, I know you guys talked about some changes you made to go to market, one of those being verticalization of the teams. How do you feel that those changes have impacted the business to this point through the year? And specifically on that verticalization piece, is there any particular areas of strength that you're seeing?

Yes. I appreciate the question. The changes have been helpful for us. The reps are ramping nicely. I mean, you could see it in some of the customers that we talked about today that represent those verticals across healthcare and financial services and public sector. The biggest thing I'd highlight for us that's been exciting aside from the logo ends is just the learning in terms of the nuance and the use cases and the nuance in the language. Oftentimes, some of the very specific associations and groups that you need to align with to ensure that you're in the best possible position to build pipeline and execute. And so we've seen some really good progress there. And again, similar to our commentary on the pipeline building in the back half, the team has done a really nice job building a bunch of pipeline and opportunity that we're looking forward to executing against.

Got it. That makes sense. And then maybe to circle back to the pipeline and dig a little bit deeper. If you break it down by potential use case, call it, marketing, care, PR, influencer marketing, is there any particular subsegment there that you're seeing pipeline to still be the strongest? Or is it pretty level across those different areas?

We've observed strong demand across most areas. This is largely due to our ideal customers being socially savvy individuals who engage with our products, which has contributed to our success in the premium module attach rate. One area that stands out is customer care, which makes sense as it often involves intense interactions on social platforms where customers seek support. Initial comments on platforms like Redhead, X, Facebook, or Instagram are very public, putting pressure on brands to respond quickly and effectively to prevent issues from escalating. Additionally, we are noticing an increasing volume of customer interactions on social media, where they expect to communicate with brands. This highlights customer care as a particularly successful use case for us. Our product teams have excelled in driving innovation and value in this area. It's crucial for this product to be user-friendly and quick to learn since many users engage in social customer care, allowing for fast responses. This aligns seamlessly with Sprout's core principles, making it attractive to customers.

Got it. Appreciate all the colors, Ryan.

Thank you.

Your next question comes from the line of Arjun Bhatia. Please go ahead.

Hi, there. Thank you guys for taking the question. Ryan, one for you, if I can start out with. I'm just curious what you're observing in terms of how the market and your end customers are prioritizing social at this point and whether you've seen any change in terms of whether it's moving up or down their priority list? I know there's certainly CMOs and other buyers have a lot on their plate right now to consider budgets as well. But I'm curious if the application of social to certain domains is outpacing that of others, whether it's service over core presence, and how you think that might play out towards the rest of the year here?

Yeah. Thanks, Arjun. I think there's a couple of flavors to that. Flavor one is what we were just touching on in terms of social customer care and marketing leaders care about this; anybody who's responsible for the customer experience cares about this. But in this environment, if you have a lot of volume and interaction and your customers on social, which is the case for pretty much everybody, you need to be there. Whether you're there or not, customers are going to be on your social profiles and trying to engage with you. You need a platform like Sprout that has the ability to programmatically enable you to capture all those interactions to respond fast, and these customers expect oftentimes responses in minutes and to leverage that right into different places like your CRM, for example. And so that is definitely one thing that's standing out. From a marketing use case, one of the things that's really stood out over the last little while is just the value of organic. In many of these places, we're seeing a cut on paid spend. When you think about marketers, when they're having budgets cut in certain areas, they are looking for better performance in channels like social and social organic. It's really about the staff that you have and the campaigns and the creative that you're executing against. So we're spending from a customer perspective and a new business perspective, really making sure that customers see the true value in the reporting and the data that they get on which campaigns are working. And then again, even though you might be reducing on paid, because we have both paid and organic reporting in Sprout, our platform gives you the ability to see what's working really well so that you can amplify it. That might mean you're doing more organic campaigns, or it might mean that you're boosting, you're putting more dollars behind some of your campaigns that have been performing really well. So those are a couple of things that I'd highlight there. And then maybe one last one just on Tagger and influencer marketing, I think this is another example where we think of and it certainly is influencer as a more new area of growth. But if we think about the idea of celebrities and types of people who for years and years and years, been endorsing products, it's a flavor of that. And so what we've seen from a lot of our customers is oftentimes the very expensive influencers don't have perfect overlap with their audience. They're spending a significant amount of budget and not getting the return that they need. So we've been having a lot of conversations around how do you optimize your campaigns and your spend with a more localized influencer strategy. So I'd highlight it's all about ROI across this group and how can you, in many cases, drive better returns on the investments that you're making.

Perfect. That's super helpful. And then just another one, if I kind of zoom out and think about what's happening in the social landscape, I know your value proposition was to kind of unify across all the social networks, obviously, right? But when you look at activity from your customers, are you seeing any change in which networks are more active than maybe they were one or two years ago and whether that activity is getting more concentrated at all? If there are any changes there, I would be curious to hear that.

It is really so dependent on the brand and the business that we're working with. And if you think about it, we have the benefit of working with 30,000 plus customers across pretty much every industry and vertical globally. What that means is so many of these organizations have different social networks that they lean into. B2Bs will be more on LinkedIn. You'll see retailers that tend to be more on Instagram. You'll see folks who are on TikTok. So I'd actually highlight that it tends to be dictated by the type of brand and where their customers are. Certainly, we continue to see a lot of gravity around things like TikTok. And more recently, with the introduction of threads, that's been something that has been really interesting for our customers as well. For us, though, you're right, the value prop is the unification of all these things, the complexity that comes with it, and the ability for customers to know that when they invest in Sprout, you have the opportunity to execute against their individual strategy.

Understood. Perfect. Very helpful. Thank you, Ryan.

Thanks, Arjun.

Your next question comes from the line of Adam Hotchkiss. Please go ahead.

Great. Thanks for taking the questions. Ryan, I just wanted to follow up on an earlier question. Could you just talk a little bit about what you've learned over the last three months as you reevaluated the pipeline and the sales team? I'd just be curious what you view as being in your control on turning growth around versus maybe just some of these more macro-driven issues. I know you've called out some sales changes previously, but when you look at the growth turnaround here and how much needs to come through changes on your side or just the ramping of reps versus the macro, how do you think about those factors?

Yeah. Thanks, Adam. I think wrapped up in your question is something that we talk about a lot internally here at Sprout, which is controlling what we can control. For us, there are a few things that we think about a lot. One, we think about just over-delivering for our customers. We think about showing up faster, showing up more knowledgeable, and thinking about the ways in which we differentiate. So this accelerated pace of innovation from our product clearly has been something that has differentiated us, and it has helped us with our win rates and put us in a position, especially with these new products that we have, to be able to solve new problems for customers. Getting closer to customers has certainly been a theme for us as well. We know that in today's environment, the pipe coverage ratios need to be larger. So we've been increasing the amount of customer-facing time. We've also been continuing to evolve the initiatives that we have from a pipe generation perspective across marketing and our sales organization and really getting in front of those opportunities is going to be the biggest difference maker. As we look at these things, we know that the team is continuing to get better every single day; the level of effort has never been higher. The customers that we're getting a chance to interact with are providing great feedback. For us, it's not just the feedback; it's been in the products oftentimes before they ever sign a contract with us, and then it's showing up in our gross retention in our $50,000 and $150,000 range. So yes, underlying continued pace of innovation on the product, continued increase in terms of customer-facing time and just making sure that when we show up, we're really differentiating ourselves from everybody else in the market.

Okay. Great. That's really helpful. And then I would just love if you could touch on the broader Salesforce relationship. How helpful are they being on the go-to-market side? And I guess, how should we think about the mix of business coming through partner versus direct?

Yes. The partnership continues to be something that we're really grateful for, and we're really enjoying. As I mentioned this morning, I was on with Ryan Nichols, the Head of Product at Service Cloud, and we had 300 customers that had joined our webinar today that was very focused on Sprout and Service Cloud and AI. We're continuing to find opportunities to integrate and make sure that our products are adding a ton of value across the entire Salesforce customer base. We've been getting a lot of support going in jointly with the Salesforce team. I would still consider these deals very direct in nature. When we go in with the Salesforce team, we're signing on our own paper. We are helping each other, but individually, we are closing these accounts. For us, it's one of those ones where we've got these great product integrations to add more value to customers. When we go in together, it's a combination of it reinforces oftentimes the Salesforce platform, and it enables the Salesforce person to be able to grow their wallet share through some of their other products where we have integrations like Tableau and Slack, for example, and certainly Service Cloud. It adds more value to the customer in getting that 360-degree view. So it's been really positive. And for those that will be there, you'll see us at Dreamforce as well, sharing more about the progress that we've made with our joint customers and then sharing a little bit more about the continued product innovation that we're going to have together.

Okay. That’s really helpful. Thanks, gents.

Thanks.

Your next question comes from the line of Jackson Ader. Please go ahead.

Great. Good evening, guys. Thanks for taking my questions. I have two questions, and they're actually both on the go-to-market changes. The first is, is it possible that actually the slower pace of decision-making just due to the macro environment is actually helping in the sense that it's giving the changes that you made in the first quarter time to settle in for people in new roles, people in new geographies, or new verticals rather than maybe needing to make these changes while you're on a fuller spring?

Hey, Jackson, no, I don't think so. I mean, I think that's the first thing, and we shared this a little bit with some of the folks coming out of last quarter as well. I mean so many of the changes that we talked about in Q1 really tied to the accountability I talked about before in terms of controlling what we can control and really wanted to be clear on the things that we had worked on in Q1 that we felt also probably impacted the quarter. That was a combination of some investments into our vertical strategy and then some enablement. But those things I would highlight as really important things for us, not just this year, but in the long term. I wouldn't characterize the lower macro environment as helpful to those changes.

Yeah. Okay. That makes sense. Thank you. And then, so as a follow-up, just pipeline builds as a good thing, but this will be the first kind of the first year where it's time to close that pipeline, right, as we head into the third and fourth quarters. What are some of the changes that you would highlight that you've made that might help you actually start to get ink on the paper as we come to the all-important kind of fourth quarter for the enterprise?

Yeah. I mean, I think the first thing is, certainly, we have more pipeline than we've had before; we created more pipeline this quarter, but we've been selling into these customers for a while. If I think about even just a lot of the Fortune 150 logos, we've talked about on these calls in the past, the team has executed across some incredible logos. We've got a bunch of them that we named here today as well. But in terms of the dynamics of the pipeline and the things that we're constantly looking at and making sure that we're executing well, for us, there are the customer-facing times that I referred to before, really focused on ensuring that we have the right velocity and activity happening in the field across our AEs and our Leaders. We're constantly looking at tight progression in the way that things are changing between stages to make sure that we're seeing enough movement in that pipeline, and it's heading in the right direction. We think a lot about just executive sponsorship, both on the customer side and our side, and making sure that we've got good connectivity inside and out within those organizations. The other piece for us is just making sure that we continue to have velocity; the intention for us is to continue to ensure that we're having the right amount of healthy pressure on our team, but more importantly, the right reasons for the customer to close at a certain time period. The backdrop of the trial, for example, and having customers in the product is another helpful thing to help prove the value of the product that we're a perfect fit. All those things are ingredients that go into making sure that the team is executing and that we're going to finish the year strong.

Got it. Okay. Thank you.

Thank you.

Your next question comes from the line of Elizabeth Porter. Please go ahead.

Great. Thank you so much for the question. I wanted to dig into the cRPO growth. Another metric that we look at is cRPO-based bookings growth. When looking at that number, it suggests that cRPO-based bookings have been growing kind of mid-teens year-over-year for both Q2 and Q1. So I was hoping to get a bridge on kind of what drives the confidence to the low-20s growth rate in revenue? What could be some of those factors making revenue grow faster than what we're seeing on the cRPO-based bookings growth side? Thank you.

Yeah, Elizabeth, this is Joe. Thanks for the question. I think, first, I want to just call out that the RPO and cRPO numbers were consistent with our expectations in the line of the guidance of just what we made last quarter. As you know, these balance sheet metrics primarily reflect the seasonality of the amortization of these accounts; as we come more heavily weighted to enterprise in Q4, you're naturally going to see the most value added in these metrics in Q4. You saw that last year. We haven't seen anything that would change this dynamic in 2024 and continue to expect that you will see very healthy contributions in the back-end. I think it's just the dynamics of how this amortizes over the first couple of quarters, and then you're going to see this pick up in the back half.

Got it. And then just as a follow-up, I wanted to get a sense for the competitive environment as you're increasingly expanding the portfolio and looking at those larger customers. How much is around competitive displacement versus greenfield? You noted some great logo wins, but just in larger customers, is it still as much of a greenfield opportunity? Or has it switched to a little bit more displacement?

Yes, it's a healthy balance right now. We are still in the early stages of this market, and many of the customers we've discussed previously did not have a platform like Sprout before their investment. As they face increasing complexity and demands, particularly due to customer engagement on social media, they realize they can't manage everything manually and need our platform. Often, we enter organizations, even in the enterprise space, win a use case or a department, and discover numerous other similar or larger opportunities without current solutions. We view these as significant opportunities. The team is particularly enthusiastic about competitive displacement. We firmly believe that our product is the best in the market and that our team can serve customers better than anyone else. We've observed a lot of potential this quarter, and I'm very proud of the execution from our team.

Great. Thank you.

Your next question comes from the line of Matt VanVliet. Please go ahead.

Hey, good afternoon. Thanks for taking the question. I guess when you look at some of the newer channels that you're supporting, whether that's Reddit or Threads that you talked about on data or TikTok, how should we think about these as net revenue retention drivers? How much of this is then also kind of tying into just more usage, more stickiness rather than monetizing it? Just curious on how you think about that on the balance going forward.

Yes, thank you for the question. We definitely see this as providing real value in terms of adoption, usage, and benefits for customers. We don’t directly monetize the new networks as they emerge, but it indicates the complexity that customers face. The more networks their customers engage with and receive information from, the more challenging it is for them to manage. Since these channels are often disconnected, they require a platform like Sprout to bring everything together, enabling them to interact with and respond to customers effectively and utilize the data. This might involve understanding customer sentiments on the platform, identifying potential opportunities, or analyzing competitors' strategies for differentiation. We view this as enhancing usage, adoption, and overall value. The relationships we've built over more than 14 years with many of these networks are incredibly valuable. We take pride in how our teams, particularly the partnership and product teams, have performed. We are usually among the first to participate in any new outdoor beta releases, and we frequently become one of the first companies to launch these products across our entire customer base. This sets us apart significantly and has resulted in positive feedback from the social networks over time, due to our ability to deliver customer solutions at scale.

All right. Very helpful. And then you mentioned Tagger is the fastest-growing product right now. Curious if that's just based on sort of year-over-year percentage growth rates or actually on sort of an ARR added basis? And then maybe more importantly, what's the rate of attach that you're seeing on net new customers buying Tagger versus being sort of the first or second kind of expansionary sale that you're seeing down the road?

Yes. Today, it would be percentage, but I imagine, given just how well that product is growing over time, we'll continue to see that compete pretty strongly as one of our most important modules that's being added in. I would say just in terms of product, if it's the first or second, I think for us, it's interesting, and we kind of touched on it a little bit in the script, but we are seeing this opportunity to have Tagger customers turn into core Sprout customers and certainly in the reverse as well. Oftentimes, as we're going into these accounts, it might be the first additional product that they've had, not necessarily the third or fourth. There is a lot of optionality for us in terms of being able to have these conversations around Tagger. We are just seeing a ton of interest in this area because it's something that most companies aren't doing today or if they're doing it, they're doing it very manually. If you want to execute on an influencer strategy at scale, you need a platform like Sprout that's going to enable you to be able to pull that all together and programmatically execute on and then have the data you need to scale it efficiently.

Great. Thank you.

Thanks.

Your next question comes from the line of Brian Schwartz. Please go ahead.

Yes. Hi. Thanks for taking my questions this afternoon. Ryan, I just wanted to ask you a question about the elongated sales cycles that I guess everyone has seen these days. But does it vary at all between the sales cycles between what you're seeing with new logos versus the expansion business?

Yes. Yes, it would. I mean the new business tends to generally at any time take longer than on the expansion side. I would say that it tends to be longer there. When you dig into it, many of those make sense in that for our current customers from an expansion standpoint, we've typically had a relationship with them for a while. They've typically seen success, a lot of success from the products and are using it. Sometimes we've got PLG type approaches within the product; they might, for example, see listening or analytics on the platform every day but don't have it turned on. Those are opportunities where there's less education and awareness and then credibility and trust to build over time. I would say that it is faster generally on expansion versus new business.

Okay. And then the follow-up question I wanted to ask you is just where the business is today or the company in terms of the go-to-market transition that you've been embarking on. Maybe it's a difficult question to ask because of the macro headwinds that are out there. But where do you feel that the company is today in terms of optimizing those go-to-market changes that you started about a year ago. Thanks.

And Brian, when you say the changes we made a year ago, just more specific to our focus and execution on sophisticated customers?

Yes, not on the product side but more just on the distribution side and sales side and the move up market. I don't know if there's a baseball analogy. I'm just wondering how much more or how much further you think it will be to kind of optimize that initiative moving up market.

One thing I want to clarify is that many of the changes we discussed in the first quarter are adjustments we would implement in any year. These modifications help scale the business, whether through verticalization or new product enablement. Our transition into the enterprise sector has been ongoing for several years, and with each passing year, we have recognized the opportunities and growth within those accounts. Consequently, we have been investing with a strong belief in the potential that exists and our competitiveness. You will always hear me emphasize that we have room to grow and improve, and we are actively pursuing that. When considering our progress quarter-on-quarter, I would assert that we aim to improve daily. We continue to innovate our initiatives and focus on developing our personnel while bringing in excellent talent. Overall, this team has demonstrated strong execution over time, and we believe they will continue to deliver moving forward.

Very helpful. Thank you.

Thank you.

Your next question comes from the line of Surinder Thind. Please go ahead.

Thank you. Just following up on the prior set of questions around just the Salesforce and the go-to-market strategy. How should we think about where we are in terms of a productivity perspective of the sales force? How quickly should they be able to get to the run rate in terms of performance as we look out? Obviously, you've shifted people into new positions and new responsibilities. When should we expect to see full productivity?

Yes. I mean, we expect to be heading into productivity here in the back half. Certainly, the productivity changes by segment. The reps that are in segments that have faster sales cycles tend to ramp much quicker than the enterprise reps, and that has so much to do with the natural course of how enterprise deals close over time. But very much associated with the investments that we've made and the pipeline that we've built. We anticipate we're going to see increased productivity changes from a positive perspective in the back half year.

Got it. And then I guess, what does that mean from a capacity perspective? At what point do you think about headcount, accelerating headcount, and those kinds of changes within the sales force?

Yes. I mean, we're constantly looking at the data to make sure that we feel great about the investments that we're making, that we're seeing the right type of rep productivity. When we look at the addressable market that we have in front of us, the pipeline that we have in front of us, the opportunities we see to win in the marketplace. We're constantly looking at that equation to determine if we feel great about capacity. Typically, this happens from an annual planning perspective, but we're constantly between myself and Joe and our organizations across finance and the go-to-market organizations are looking to see how we feel about the productivity metrics and where there might be opportunities to invest more or pause on investment. So these are things that are pretty fluid through our business. As we think about this year and the capacity we have, we feel really good about the investments that we've made here and the productivity that we anticipate is going to increase in the back half.

So it sounds like from a planning perspective, it's kind of steady state on a go-forward basis with all the changes you've made, and then you'll maybe reevaluate closer to year-end, depending on how the metrics are shaking out in terms of the pipeline and wins and so forth?

Yes, that's a fair assessment of generally how our planning goes and how we'll execute as we go into 2025.

Thank you.

Thank you.

Since there are no more questions, I will now turn the conference back over to Mr. Justyn Howard for closing remarks. Please go ahead.

Yes. Thank you so much. I appreciate all of the questions and discussion. We are very grateful to be able to talk through this progress and our perspective on the business moving forward. The team has done a tremendous job, and I want to thank our team specifically for continuing to show up and deliver every day for our customers in all conditions and particularly now, and we're seeing that in the progress that we're making. I appreciate everyone's time. I know this is a busy evening for you all. We'll have more time to spend with you in the coming days and weeks. I hope everyone has a great evening.

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