All right, I think we're ready to get going. I'm DJ Hines. I'm the senior software analyst here at Canaccord. This is the 45th year we've put this event on. It's one of the hallmark of the firm and a big investment for us. We couldn't do it without the companies that come and support and bring all the content and the investors that show up and ask smart questions and host all the meetings and eat the food and drink the drinks. So thank you all for being here. Obviously, we have Sprout Social, Joe Del Prado is the CFO, Alex Kurtz runs IR. We're going to do this as a fireside chat. If there are questions in the audience, raise your hand. We can integrate them into the conversation. But Joe, I'm going to spare you the business intro conversation. I think people are probably familiar with Sprout at this point. But maybe we could just talk about Q2 results from last week. I think the message you were trying to get across is that it felt better than Q1. continue to make progress, maybe just hit on some of the highlights, kind of what stood out
to you and where you think we are. Yeah, for sure. So I think a couple of things come to mind. One is, you know, continue to see really large brands, landed some really nice deals, authentic brands, Honda, Smucker, some really good expansion deals with some of those folks. So a lot of momentum we're definitely seeing with some of the larger organizations out there. You know, sequentially really strong, you know, net ads in the 10K and 50K cohort. So we're seeing more momentum in the business there on a quarter-over-quarter basis. Also, the 50K cohort, the revenue on that cohort is growing over 30% year-over-year on a trailing 12-month basis. So really good momentum. It's becoming a larger portion of our business. It's not over 50% yet, but a lot of momentum there. We've got gross retention continues to improve on a year-over-year and quarter-over-quarter basis. So that's really good indication of our existing customer base is really stable. And then operating margin right on a year-over-year basis you know 400 basis points improvement continuously really strong free cash flow so feel good from an overall kind of like how we managing the business from a profitability standpoint yeah so those are probably some of the highlights i would call out yeah good
um i want to ask and kind of start with a thematic question we had the some rush guys were up here uh presenting earlier they're obviously involved in in the search world and we've had others throughout earnings kind of call out some trends, whether it was HubSpot or Monday yesterday about kind of what's happening in search. We've obviously seen the rise of these AI answer engines, and I think it's changing people's thoughts around kind of how they spend on paid search, organic search. I think that the bottom line is it's getting a little harder to get discovered, right? thematically in my mind that kind of plays into your favor because I think you could see brands invest a little bit more in their direct social presence so I'm curious are you hearing that in the market are you seeing it start to play out like how do you think about that as a thematic
driver going forward yeah we feel like this is going to be a tailwind to our business and we've been seeing this for maybe the last 12 to 18 months and I'll get into like where we think it's going and just a lot of brands aren't there yet because it's a pretty quick shift in the market. It's new. It's happening fast. Right. And so a lot of these businesses aren't set up to manage it. But a couple, I think, things to understand are key data points. Number one, like for example, Gen Z, the number one place they go to search is social, right? They don't, they're not going to the Googles of the world like they used to. Number two is like you said, the number of zero click on Google is rising and being able to discover that is really hard. And so what we're seeing is what we've seen some of our major customers saying is the same search terms they used to see in Google are now showing up in YouTube and TikTok and Instagram. So instead of going there to search, what they're seeing is customers are going directly into the social networks to go look for that. The other thing that's interesting is if you notice, for example, if you go to Google Gemini and you search, they're starting to show up like Reddit and like Instagram and kind of those like, you know, in those like search terms. you can see and click through in the Reddit and you can click through in Instagram. Well, the way that those are showing up in the LLMs is based on your social presence. And so what we're seeing now is brands are starting to realize, oh, wait a second, if all of a sudden some of these networks are showing up in the search, in order for me to show up, for example, in the Reddit, if you go to Google, I better have a real social presence. And so we do think all of those things are going to be a tailwind and maybe another accelerant for folks to rethink their social strategy if they weren't thinking about before. But like I said, a lot of these organizations have been set up in the traditional kind of advertising, SEO, SEM. That's how their marketing teams are organized and structured. And so even though we're seeing this structural change in the way consumers are behaving, a lot of these brands are not set up to manage it that way. They're just not mature enough. So we do think that overall, to what you called out, DJ, we do think this is a tailwind to our industry over time.
Yeah, but there's some change management and maybe, you know, philosophical thinking that needs to evolve a little bit.
Exactly, and just think of the skill sets of the people you've hired over the last 10 to 15 years. Like, most of them are not, unless you have a dedicated social team, those people are experts. But most of your marketing department is not in that, don't have that experience. And you can't just pivot. If you're in charge of, you know, if you're in charge of SCM, and all of a sudden you're saying, okay, can you go do social? They're like, that's just not a skill set that those folks possess.
You hit the highlights from the quarter. I think we focused on the organic business. There was also an acquisition that was announced, I guess, just before earnings, but we spent a lot of time talking about it on the call. So you bought Newswip. I think you paid $55 million with a $10 million earn out. Just talk about what that business does, why it's a logical fit for Sprout, and kind of how you think about it contributing.
Very excited about this business. And I give credit a lot to Alex and his team for finding it. It wasn't a business that was for sale. And it was something that we, similar to the trends you were talking, we've noticed over the last, let's say, 12 to 8 months, there's starting to be this overlap between traditional media outlets, right, like blogs and, you know, your media sites and social, right? You'll see, for example, articles popping up from, like, going deep into Reddit, right? You say, okay, you see this Reddit thread, and all of a sudden it pops up in some news article or vice versa. There's some article in some local paper, and it shows up on Twitter, Instagram, and it explodes. And so what Newswhip is solving for is the overlay of those two things in crisis management. So what they're doing every day is they're going across all media sites that exist, all blogs, and then also over social. And what they've built is this ability to identify potential issues for brands that are about to escalate or have escalated. oh, by the way, we've noticed this local article in Kansas City. It's getting traction. We're seeing it pop up on Reddit. And, oh, by the way, you need to deal with this, like, right away because we believe that this is going to be a big issue. And they built this – the really cool thing they built is this predictive analysis that tells you – they have all this data and information to say, okay, this article or this situation is going to die down pretty quickly. You probably don't need to deal with this. Or guess what? This thing is going to be a big deal. You need to get on top of this. And so it overlays really nicely with what we already do. It's working with the networks. It's working with the PR teams, like more of the crisis management part of the organizations. And so we thought it was a really good fit to what we do. Very similar buyers, you know, trying to solve very similar problems that we're trying to solve for. And built really good tech. And then during the diligence phase, the last thing I'll say, they released these AI agents that will do – You can set them up, very easy to set up. We'll do all this monitoring for you. So, for example, you don't have to be constantly, like, in the app managing or looking for these things to pop up. These AI agents say, oh, by the way, identify something, tell you what you should do or if you should take action, or guess what, you don't have to do anything. And so they just released those recently, and so they're doing some really cool things, and they'll be able to, instead of having an army of people trying to monitor all of this, like, having these agents help solve these problems.
I imagine there's probably a pretty good agency opportunity there as well. There is, for sure. Yeah, because I would think, you know, there's all these crisis PR management agencies out there that would love a tool like this.
That's definitely part of their business. But I would also say if you go to, like, the customer stories on their website and kind of see who the brands are working with, some of the biggest brands in the world, like Fortune 100 companies, are directly, you know, customers of Newsweb. So during the diligence process, besides the team and the product, when we started learning what the customers were doing and the stories were blown away by it. So really, I think spending some time and seeing those stories, especially the Ford story, I think might be on YouTube and kind of how they discovered some of the trends around some of the natural disasters. And it's a really neat little story to dig into. But the other thing, they had a really strong AI engineering team that was also really interesting to us. So they just got the AI agent product to market right as we were doing the diligence, and we were really excited about that. But there was a group of guys there, sorry, a group of engineers there that was going to be additive to our team. Yeah, yeah.
But you're right, DJ. The agency play is one of the key kind of distribution channels as well.
Sometimes it's interesting. It's very similar to our business in a way, which is they have the agencies in there,
but the customer is also in there too. They want to kind of be in there together because sometimes these crises, they escalate pretty quickly.
Yeah. And so they need to be working pretty closely together. Yeah. Makes sense. Yeah. I want to ask about AI. We're going to go there in a second. But I want to stick on the Newsweb thread and just how you thought about layering in contribution to the back half of the year and kind of maybe that bridges into a bigger discussion around kind of guidance philosophy. Yeah. Yeah.
Yeah. So, you know, we called out that we built in about two and a half million dollars of revenue in the last five months of the year. And we called out like, hey, we just bought this a year ago. We're just a year, a week ago. We're learning about the business. We want to be very measured in the approach. The run rate is definitely higher than that. But like, let's not get ahead of ourselves to understand like this business. They only have five AEs, so they don't have big distribution. And so we want to just take a very measured approach to make sure we had set expectations correctly. So that's kind of how we approach it overall in our guidance to give ourselves room to kind of figure some things out.
Yep, okay. Alex, let's talk about AI, right? You talked about you were excited what the Newswhip team was doing, but you have your own organic initiatives as well. So, yeah, just help us think about kind of what the strategy is, where you see it going, and how you see it contributing.
Yeah, there's kind of two things. I'll say the last couple of earnings calls, we spent a lot of time talking about our main initiative called AI Assist, which is our taking some really great engineering capabilities, leveraging the LLMs, and then applying it to this decade-long kind of tail of data that we have internally and allowing customers to basically generate suggested posts, do a lot of analytics, do a lot of reporting and insights. So those products have basically been coming out into the market basically the last two to three quarters, and we're seeing really good uptick. So that's the first big push of it is bring AI assistant to the daily workflow of someone in the marketing team, right? So they may want to create a new organic post, but here's like five different suggestions based on trends that you've seen in past data, right? And so it's really built into their day-to-day. I think over the longer term, we see a really big moat that we're developing around our data pool at Sprout just in general, right? So I think to understand this, you had to take a step back. We have exclusive kind of contracted access to all the APIs with the networks, right? I mean, our competitors do, but it's not open to the general public. And so we've been seeing, what, 2 billion messages a day over many, many years. We ingest that data. We normalize it, right? And then we put a lot of wrappers around it so it's really accessible to all of the products across our entire portfolio. So I think over time, we see elements of like AI insights and reporting kind of going deeper into this bigger pool of data that we've collected and that being differentiated to us in the market, right? So that's another thing that you're going to see from us over the next, you know, a couple quarters to a year is a lot more around how we leverage all this data that we are training on AI and then giving it back to customers.
Yeah, yeah, yeah, it makes sense. um so you had a a better enterprise quarter yep layering news whip in one of the the questions i was getting off of q2 earnings uh were largely tied to rpo dynamics right and i think folks were just trying to make sense of you know we saw rpo sequentially decline for the first time ever it seems like the message for management's better you know optimistic about pipeline second half all that sort of stuff help me make sense of the RPO that was the question I was getting so I'll turn it to you yeah how do you make sense of it and how should we think about kind of the trajectory
into the back half yeah I think a couple things one for us given that you know we still don't have as many multi-year deals that we would like we have mostly annual deals and still some month to month we definitely see more pressure on on RPO and CRPO in the first couple of quarters until those renewals come up in the back half of the year. And so that's generally a trend that we've seen. We saw a little bit more pressure this year than we have historically. A lot has to do with the number of deals we signed in the back half of last year that was seasonally higher than normal. And so that's put a lot of pressure on the first couple of quarters. As we get to the back half of the year and the strength we're seeing in the back half, I do think you'll see those numbers rebound. And I think you'll see in Q3 and Q4, DJ, I think you'll see those numbers back to what you would expect. So what I would say is, hey, let's see these deals flow through that we signed last year, they were new, and then we land new deals. that'll help. But then also, you know, we all would like to be selling more, you know, new business deals, right? Like we talked about the pressure on the business has been on the new business side. So there's definitely pressure there. And we definitely want to see that get better. But like I said, Q2 is better than Q1. Obviously, it's not where we want it to be overall on the new business side, but we feel like there's some momentum in the back half.
Yeah. Is that renewal expiry based more of a Q4 phenomenon? Or do you think we see some of it in
Q3? Some of it in Q3, but more of Q4 definitely is where we see most of those deals. And that's where most of our new business deals are you know have been geared to over the last couple of years you've seen that in the data too so like more of the larger deals are definitely more back-end
weighted and definitely more q4 yeah yeah which is probably a good transition to just talk more broadly around kind of the enterprise strategy and what you guys are trying to do and some of the organizational changes that you've made to position yourself to execute against that so maybe i'll turn it over and just kind of give your thoughts on where we're headed for enterprise
yeah i think on the enterprise side i think before we get in kind of like the maybe the go to markets i think it's important to understand a couple years ago we started down this okay what what's the product and r&d investments we need to make in order to kind of serve that that enterprise business more we're always serving it but like the more sophisticated more complicated more um you know widespread customer base and so we've made investments in for example in that part of the market social customer care is a big deal because like they're dealing they're very sophisticated most of their incoming like complaints and everything are coming through social and so okay we have to evolve our our customer care offering is number one number two is the workflows within the system having multiple like large hundreds of people in the product making sure they can only deal with the things they want to care about so like making sure you have these more mature workflows is a big deal and then investments in things like social listening where oh by the way these larger organizations are using this for deep research understanding trends and sentiment, launching new products, and so over the last couple years, we've made some investments in those areas. For example, on the customer care side, the investment in the service cloud and that integration, some of the integrations we've worked on with Zendesk, so we've made great strides in those areas to serve these larger enterprise customers. A great example of this is one of the accounts we talked about with this really global health tech company, six-figure expansion deal. We had won the marketing business, you know, over a year ago, and we were able to do a huge expansion of the customer care. They were using one of our competitors on the customer care side. And because of the service cloud integration, they went out and said, okay, we're really struggling with one of your competitors. The care functionality is not very good. And we went in there and this customer, and Ryan talked about this maybe on the call, they're doing about 90,000 cases a month. Two years ago, we could not have managed that. We just couldn't have won that customer. We just did not have the R&D capability to do that. Fast forward a couple years now, we can go into those customers and manage that type of volume. And that's probably one of the higher volume customers you're going to see if you think about that number of cases flowing through on just the social side. So that's a great example of how the R&D investments helped us kind of go up into the enterprise. And then on the go-to-market side, really what it's been is getting away from kind of like feature selling into, hey, we have to be value selling, ROI selling, multi-product, right? Like, going up into the enterprise, you've got to be making sure you're explaining to the customer you're solving a larger problem, not trying to trade features with some of the enterprise, which is when you're in the mid-market and S&B, a lot of time it's very feature-based. Okay, I want to do these three things. Do you do these three things? You get the enterprise, they're trying to do a lot of things, and you have to make sure you're not trying to sell them on these features. You're trying to sell them on, okay, here's the ROI if you move to social. Here's, you know, the volume of messages. Like, we've got to be solving bigger problems. So I think on the go-to-market side, what we've done, and Mike Wolf, you know, our COO has been here about a year now, he's really kind of changed the positioning of, like, hey, when you go into these larger enterprises, you've got to just sell differently than you would if you're a down market.
I was going to ask about that. Like, does it feel like the front door into these enterprise clients is changing at all? Like, is it, do the conversations now start maybe with social customer care, whereas before it was publishing and social management? Like, how do you see that evolving?
Yeah, it definitely varies depending on where the customer is. And so, DJ, I would say we're definitely getting more outside of core marketing sometimes as the original, like, use case for some of these customers. They might come to us and say, hey, by the way, we've got massive volume of care, or we've got, you know, we want to do some really deep analytics on the data. So we're getting more, a lot more data requests, which is like, hey, by the way, we'd like to take and be able to ingest your data maybe into our BI tools. And so sometimes they're coming out in the data front as well. And so we are definitely seeing the evolution of, like, the use cases and where they're coming from. I will say, though, you still need, you know, a lot of the time is, like, you might be getting all these inbounds, but you've got to be able to engage with those customers. And so you've got to make sure you're doing the core part of social as well. Because you've got to remember, I think people forget, I don't have to remind them, like, the social networks and data is very unstructured. So when this is all coming in, when you're getting stuff on Instagram and Facebook and TikTok and YouTube, it doesn't always say this is a care issue. And so you still have to be able to triage those messages. And you have to have a way to say, okay, this message is actually not a care message. This is actually for the marketing team or the product team. And so if you don't have that ability to manage all that inbound volume and triage it appropriately, which is what our core platform does, it becomes really hard to just say, I just want to do this one thing. And so you still need the core use case is still part of that selling process. Yeah, it's the foundation that enables everything else that sits on top of it.
I want to hit on Influencer. We haven't had a chance to talk about that. So you guys bought Tagger, how long ago was that? Two years now. You've kind of rebranded it to Sprout Influencer.
Influencer Marketing.
Yeah, Influencer Marketing. And talk about what you're seeing in that business and kind of maybe help folks understand what that product does if they don't understand already.
Yeah, so very excited about that. It's still, you know, it's our fastest growing product. Now, granted, off a smaller base. And so still a lot of momentum and still very early in this space in the influencer marketing creator space. And so for the folks that aren't familiar, what the software does is it helps brands identify and find the creators that will most likely fit with their brand. And it helps you find the long tail of micro-influencers. I think it's really easy to find, like, the big celebrities. And the ROI on the celebrity influence has actually gone way down. The real value is, like, there's all these influencers out there in local communities. Maybe there's golf experts or golf pros that people follow. Speaking my language. And so it's really hard to find those. If you're a titleist, how do I find, like, all these folks that are in these different communities? And what the software does is allow these brands to go in there, put in all sorts of different search terms or search words, and we'll go in there and go find those creators. It'll pop up their videos. You can watch their videos. You can say, okay, oh, by the way, is this someone that's going to fit our brand? And then you can reach out to those creators and say, hey, by the way, we'd love to work with you. And we also give you, for example, here's the average cost. We have all the data on what it costs to hire these creators. You can go through the processing contract with them, and then you can run all your campaigns. So it kind of runs the gambit of running your influencer marketing kind of camp, your process. And then it has all the analytics and ROI and, like, earned media value so you can actually see, hey, is this working or not working? And recently we launched some really cool features in there using AI that basically helps them, for example, a couple things. One is here are all the things I want to make sure that they've never talked about or said. Like, hey, did I talk about alcohol or smoking because I'm going to launch them to a bunch of, it's like a kid's brand. And so they can put in these things now. We can go back to everything they've ever, any video they've ever done and say, okay, they never mentioned this. And so basically gives you this brand health score that says, hey, by the way, is this someone that's a good fit or not a good fit? And so that's really important for these brands because what they don't want to do is hire these creators and then find out, by the way, like a year ago, they posted some video. So, and we're the only ones in market with this ability to go do that in a very instantaneous way. And so that, we launched that in the last quarter and it's been a huge benefit to these brands to make sure, okay, I know there's a very good fit for my brand. Yeah, it secures their investment.
Yeah, future-proofs it, I guess.
And I think, because that's the biggest concern people have with these creators is like, hey, are they going to go off-brand or are they going to go do something, say something that's not aligned with what I want them to do?
Their values and all that. Okay, we've got a couple more minutes. I want to kind of set up positioning for the second half of the year and what we should be thinking about. I mean, you already mentioned earlier some of the seasonality in the business. We're getting into a more active enterprise, you know, selling and buying period. How do you feel about pipeline coverage ratios, kind of those sort of metrics as we go into the back half?
Yeah. So we feel, you know, like we said, going to the back half of the year, it's seasonally been strong for us in Q3 and Q4. And we definitely feel like there's momentum in the business coming out of Q2. Now, granted, is it, was it like two years ago? No. But when I think about it, like a where are we versus the first half of the year? I feel like there's a lot of momentum going in the back half. Is it related to some of the changes in search? Is it related to some momentum in influencer marketing? We're getting some more of these larger care use cases, so we feel good that we've got a good base of deals and prospects and things going in the back half of the year. You layer a news whip, which we'll see how quickly that can materialize. It probably doesn't have a huge, for example, impact on the back half of the year. It's probably more for next year just given the size and scale of that business, but feel we have some real good momentum going into the back half right now.
We've talked about a lot, right? You look across, you get the enterprise story, you have influencer, social customer care, Newswhip. There's a lot of stuff. As you look at kind of the two or three key priorities for the back half where it's like, man, if we get these right, it's going to really set us up for 26. Like, what would those be?
I think a couple of things. One is we've got to make sure, back to what I was saying earlier, in these larger enterprises, we've got to make sure we're selling, like, multi-product. You know, we're solving more than these smaller features. If we can really get into these enterprises and sell them on the fact that we're solving more than one thing, I think you'll just see larger ACV deals. You'll see much more momentum in the business. And then I do think, you know, we talked about this earlier, but there is a lot of momentum around the social customer care, you know, use cases in these larger brands. it's becoming a bigger and bigger problem, and I don't think a lot of these brands have been able to solve for it. So I do think the more momentum we see, the more eyeballs moving to social, the more moving away from search, traditional search, I definitely think all of a sudden when people are going and discovering your brand on social, that means they're going to start asking you questions on social too. And so it kind of is this flywheel of like, okay, this is where I'm going, this is where I'm going to get help too.
Yep, yep, makes sense. Maybe that's a good spot to leave it. look, you know, the business is still growing nicely, you're expanding margins, the stock's awfully cheap. So I think if you kind of fulfill promises made in the second half and, you know, set up for a better 26, there's a lot of value to be created here. So thank you for telling the story. Thank you for being here. We appreciate it, guys. Thanks, TJ.