Q2 2020 Sprout Social Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to Sprouts Socials second quarter 2020 earnings Conference call.

At this time, all participants are in listen only mode.

After the speaker presentation, there will be a question and answer session.

I ask a question during the session you will need to press star one on your telephone.

Please be advised the today's conference is being recorded if you require any further assistance. Please press star zero.

It is now my pleasure to introduce head of Investor Relations Jason WRECO.

Thank you operator, and welcome to Sprouts, Social second quarter 2020 earnings Conference call.

We will be discussing the results announced in our press release issued after the market close today.

With me are sprouts, social CEO Justin Howard.

CFO Joe del Prado.

Senior Vice President of global sales Ryan Beretta.

Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private Senior Securities Litigation Reform Act of 1995.

Forward looking statements include statements concerning financial and business trends.

Our expected future business and financial performance and financial condition.

Our guidance for the third quarter of 2020 in the full year 2020.

And can be identified by words, such as expect anticipate intend plan believe seek orwell.

These statements reflect our views as of today only should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements.

Forward looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially.

For a discussion of the risks and other important factors that could affect our actual results.

Putting potential disruption from coated 19.

Please refer to our annual report on form 10-K filed with the Securities Exchange Commission.

Our quarterly report 10-Q to be filed with the FCC and our other periodic filings with the FCC.

During the call. We will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure is included in our earnings press release, which has been furnished to the FCC and is also available on our website at investors Dot sprout social dotcom.

And with that let me turn the call over to Jonathan.

Thank you, Jason and good afternoon, everyone. Thank you for joining us.

A lot has happened since we were together last and the second quarter 2020 was more turbulent than any of us would've guessed.

Despite numerous macro issues sprout was fortunate to deliver a strong quarter across the board.

We are grateful to our team for continuing to elevate our business and our customers while facing is issues head off.

Our strong performance speaks to the fabric of this company our resilient the importance of our platform and our conviction about the opportunities ahead.

This quarter, we shared performance details from the live limited period of time since Koby began.

With a full quarter of data under our belts, we've seen consistent trends and further confidence in our models.

We're pleased with the results that exceeded the high end of our guidance range across all metrics.

Well, we don't yet know the duration or depth of the pandemic. We know that our team is stepping up across the board and is handled the transition remarkably well.

We also know that digital transformation is becoming a top priority for brands across the globe.

Social communication remains mission critical and it's more important than at any time, our company's history, and we're perfectly positioned to help our customers lean into this new reality.

In addition to the pandemic. We also saw critical social issues rice, the forefront in the second quarter.

We were all reminded of the profound and systemic racial inequality that persists and the importance of being an active participant in dismantling those injustices.

We believe that black lives matter, we collectively stand against racism and racial when a quality.

We have responsibility to our people and our communities to not shy away from these efforts and to put our resources behind that.

Well grappling with the pandemic and exceeding expectations across the business. Our team also spent time in service of our communities.

Raised money for social and racial and Justice and took action to further our ongoing diversity equity in inclusion efforts as an organization.

This has long been a focus and priority for sprout, but like all aspects of this company, we measure ourselves by the work left on done there's more to do and we will.

Shifting to operational highlights our key metrics accelerated through the quarter and we have confidence our ability to perform at the high end of the expectations that we shared with you in may.

We saw meaningful acceleration across all key metrics in June as our sales cycles caught up to the top of funnel inflection we outlined during our last call.

We better understand our baseline and have further conviction around increasing our investments in growth throughout the remainder of 2020.

We've also seen more evidence that our business platform and go to market strategy are set up to thrive and the new environment, we find ourselves and [noise].

Our sales model has always been primarily remote are distributed engineering teams are found in new gear and our customers need a strong and agile partner more than ever before.

We delivered 28 material new features to our customers in the second quarter up from 18 in the quarter pre coated.

We also completed several substantial backend projects expanded our listening and analytics offerings and improved efficiency and how we build and support our platform.

Since moving to remote where we have more than doubled our output for customer facing product releases relative to the four month prior period.

We've also set the foundation for significant product enhancements in the second half of the year and it just 2021 and moved or simply metric measured migration into its final phases.

We told you in May that our trial in demo volumes were 24% in 14% higher respectively than pre coated levels.

Volumes in each instance remain consistently at or above may levels and top of funnel demand remains robust.

Our marketing team is focused on delivering high quality lead generation thought leadership and sophisticated content focused on organic brand development and are hitting the sweet spot of the market with organic and word of mouth channels as strong as ever.

Our brand awareness in both the Midmarket enterprise segments has increased by more than 30% relative to 2018.

Indicative of both the strengthening quality of the funnel and growing urgency for brands to lean into social our traffic. The conversion rate has meaningfully improved since March and we continue to see opportunities for optimization across the funnel.

We adapted to deliver our first remote sprout sessions digital customer marketing event, which was an incredible success, we have more than 7500 registered participants roughly 50% more than planned and will further enhance our digital engagements moving forward.

[noise] all of these factors are delivering a healthy funnel to our sales will success teams.

Customers need to lean on capable partners to help make strategic digital transformations as seamlessly efficiently and quickly as possible.

Our customer lands are increasing beginning with the full platform, which for us indicate stronger future expansion opportunity and considerably higher lifetime value.

Listening and premium analytics grew a are well over 100% year over year during the second quarter.

We're excited about the trajectory of the multi product customer adoption story.

Competitively speaking our already strong internally tracked win rates increased significantly during the second quarter.

In the SMB, our win rate and net new air our one each jumped to an all time high.

Several standard deviations higher than the trailing four quarter average.

[laughter] against our primary Midmarket and enterprise competitors, our win rate increased on average by more than 500 basis points relative to the trailing four quarter period.

This has been a consistent trend and as the global digital transformation has pulled forward by several years, we're increasingly confident we have the right technology the right approach to lead our market.

Operationally our people have adapted and are equipped to ensure that sprout run smoothly, whether we are fully remote partially remote or in our offices around the world.

The remaining flexible with respect to our office reopening plans that we do not intend to reopen offices during the third quarter.

We're also excited by what we've seen during this transformation of work and continue to explore what our optimal work environment will look like moving forward.

I want to wrap up by saying that I'm extremely proud of our ability to adapt and continue to execute against our goals.

As we celebrated our 10th anniversary in the second quarter. The culture. We stopped Liebelt has been a driving force to keep our teams aligned and our business momentum on track.

We now have more data that reinforces both the accelerating shift to social as a mission critical communications platform and our ability to when the market with competitive advantages that stand out in this new in digital environment.

We believe our relentless focus on world class products, the deliberate investments that we're making and our deep commitment to our people and our customers keep us well position to deliver durable growth through whatever environment persist into 2021.

And with that I'd like to turn the call over to senior Vice President of Global sales, Ryan Barretto, who will walk through some of our customer success stories this quarter.

Thanks, Justin and thanks, again to everyone for joining us today.

I'm really proud of the resiliency with softness team in Q2.

We've been building trust with our customers through incredibly challenging times by getting them in the platform and providing immediate value.

Coming off of a record breaking month in June we're very excited about the opportunity to build on this momentum into 2021.

Many of the current events transpiring per serving to accelerate the secular shift to social as essential communication channel for brands and the shift increasingly includes things like social care service brand management and commerce.

The need for brands to make long term digital transformations has never been more urgent are important.

Brands I understand that they need to be part of the conversations happening on social and they need a partner who can get in there faster and with unparalleled service and support.

It's because of all these factors that our customers are increasingly making strategic investments and sprout.

In Q2, inbound volume continued to exceed our expectations and we're finding that the quality. This funnel is at least consistent with our historical averages.

Now we've been sharing that in the age of the user the legacy software playbook has become antiquated.

Further validating this message was a mid July user satisfaction report from GE to which again placed sprout as a category leader for social media monitoring and every single category reviewed relative to our primary competitors.

The fact that we lead in every single category based on the feedback or thousands of customers speaks volumes.

We're incredibly proud of this recognition and particularly encouraged by our strong leadership rating in the product direction category, which reinforces that we're very well positioned for the future.

This type of feedback is only possible when you can make your customer successful.

In Q2, we have the opportunity to do just that for some amazing brands, including Verizon media will worse than NAACP event bright surely build dot com get hub and Autodesk.

To eat the largest travel company in the World was one of those customers.

Nicolas Smith their social media marketing manager shared that when the global pandemic hit they receive customer queries and an unprecedented scale.

And spread enabled them to get their teams up and running quickly with spread support going over and above when they needed at most.

This helped to respond to over 500000 customers in three months with a remote team of only 46 people.

She went on to say that they can have done it without spread.

Teach for America, an incredible not for profit focused on education and low income communities was another great story.

Darcy young the director of social media shared that social is really important tool that they rely on heavily to engage with their community.

Sproat has helped them get a much better understanding of who their audience is and what they're looking for.

Either Lula director brand research analytics and insights explain that their ability you spoke to explore individual topics like brand health Corona virus in school fall plans and to provide key data that easy to share has helped them present insights more regularly and efficiently.

Finally, Joann Wilson from Intercontinental Hotels group had a helpful perspective on the ROI social as she explained marketing budgets are under enormous pressure and it's become more important to use economical channels to target potential guests.

He chose to centralize on sproat, because it was an easy to use platform to manage over 100, social profiles in one place and our reporting tools helped her to prove social ROI, which is critical one budgets are tight.

I couldn't be more impressed or grateful for the performance of our people at sprout.

We've delivered on our commitments to each other and to our customers are people have risen to the challenge and are operating at new levels of performance.

Whether it was dogs and meet ups virtual baby showers fitness challenges or external speakers focused on mental health. Our teams found new and creative ways to stay engaged happy and productive.

Our unique sales culture continues to separate us in the market and in May we were again named as one of Chicago's Best places to work.

Our strong employer brand continues to drive exceptional talent to sprout, which has us well position to capitalize on the growth opportunities that we see through the second half 2020 and into 2021.

With that I'll turn it over to Joe did run through the financials Joe.

Thanks, Ryan I'll now walk you through our second quarter results in detail before moving on to guidance, a third quarter and full year 2020.

Total revenue for the second quarter was 31.4 million, representing 27% year over year growth.

Excluding the impact from legacy said the measure organic revenue was up 35% year over year.

Total air are exiting Q2 was 130.8 million up 27% year over year.

Organic air our was 129.4 million up 35% year over year.

We added 273 net new customers in Q2, the finished the quarter with 24356 customers.

I do want to reiterate the Covidien pack, we discussed last quarter, including elevated SMB and AMC churn during March and April.

This essence, not only subsided, but reversed our.

Our net customer additions improved in May were very strong in June as our sales cycles intersected with higher trial activity and lower churn.

The answer to believe that customer addition trends trop for us in April of this year.

During the month of June we experience, our lowest number of monthly customer and total among our cancellation of any month over the past two years.

The number of customers contributing more than $10000 in air are these 2544.

Up 54% from a year ago.

In 2404 in Q1 2020.

Some other strong overall customer addition, you have begun to see more customers than ever before land and our entire platform and social proliferate throughout the organization.

In discussing the remainder of the income statement. Please note that unless otherwise stated all references to our expenses operating results in share count on non-GAAP basis.

Reconciles our GAAP results <unk> earnings press release that was just issued before this call.

In Q2 gross profit with 23.3 million, representing a gross margin of 74%.

This compares to a gross margin of 75% year ago, and 74% last quarter.

Sales and marketing expenses for Q2, with 13.5 million or 43% of revenue down from 47% a year ago.

We expect to continue to focus on optimizing our sales and marketing spend.

Selectively accelerating hiring with a focus on the enterprise and Midmarket. Thanks.

Research and development expenses for Q2 were 7.3 million or 23% of revenue.

Down from 26% a year ago.

We're particularly excited about the ability to continue invest while also improving efficiency and new product development as we complete the simply measured migration.

General and administrative expenses for Q2, or 8.4 million or 27% of revenue up from 24% a year ago.

This growth was primarily a function of public company expenses, which we did not have in Q2 2019.

We expect general and administrative expenses to decrease as a percentage of revenue as we continue to scale our operation.

Non-GAAP operating loss for Q2 was 5.9 million for negative 19% operating margin.

This compares with a negative 23% operating margin a year ago.

We outperformed our expectations due primarily to revenue outperformance in the timing of certain marketing expenses, which were shifted from Q2 Q3.

Non-GAAP net loss for Q2 was 5.8 million for net loss of 11 cents per share based on weighted average shares of common stock outstanding compared to a net loss of 5.5 billion a year ago.

Turning to the balance sheet and cash flow statement. We ended Q2 with 129.5 million in cash cash equivalents and marketable securities.

And 137.4 million end of Q1 2012.

Deferred revenue and ended the quarter was 35.5 million.

Okay. Both are billed and unbilled contracts are meaning performance obligations RPL total approximately 50.9 million up from 47.5 million exiting Q1 2020.

Approximately 63% year over year.

We expect to recognize approximately 86% of 43.8 million of total RPL as revenue over the next 12 months.

Operating cash flow in Q2 was negative 4.0 million compared to negative 2.6 million a year ago.

Free cash flow was negative 4.5 million in Q2 negative 40% free cash flow margins pretty negative 2.8 million and negative 11% free cash flow margin year ago.

We had anticipated that coded would adversely impact cash flow due to customers' ability to meet contractual payment terms, which ultimately did not materialize to degree than we expected.

Moving on to guidance.

For the third quarter fiscal 2020, we expect total revenue in the range of 32.9 million to 33.0 million or growth rate of roughly 25%.

Effect organic growth rate to be to mid to high single digit percentage points faster and our reported growth rate as we sent that simply measure.

We expect non-GAAP operating loss in the range of 7 million to six night.

Were continuing to invest in our long term growth.

Areas, we see opportunities to accelerate the pace of investment most notably impact in enterprise and Midmarket setting.

We began to see an improvement in marketing efficiency, which is an encouraging indicators as we look forward.

Historically, our free cash flow margins have been a couple hundred basis points better and operating margin.

However, during Q3, we're moving forward with their new office build in Seattle inspect to pay a onetime cash cost of $1 million, which will adversely affect our quarterly free cash flow.

And looking at Q4 will you typically see seasonally strong contract renewal.

The cash impact is typically realized during January or February of the following year.

We expect a non-GAAP net loss per share between 14 cents and plus that assuming approximately 50.6 million weighted average basic shares of common stock outstanding.

For the full fiscal year 2020, we now expect total revenue an opera half of the range you provided for you in May.

This implies revenue in the range of 128 million to 130.5 million.

At the midpoint. This unexpected overall reported growth rate of 26% up from our prior midpoint of 25%.

At the midpoint of our new guidance, we now expect our 2020 organic growth rate to be approximately 33%.

From a prior estimate of greater than 30%.

Even the strengthening in our business through Q2, we are increasingly optimistic but our metrics bottomed in April we do however remain cognizant of the risk that remain in our business in the context of a broader economic recovery.

For 2020, we expect non-GAAP operating loss in the range of 27 million 25 million.

Paired with our prior range of 28.3 million to 25.3.

We are continuing to invest for our long term growth, while delivering multiyear profitability leverage we're beginning to accelerate hiring during Q3 and anticipate higher marketing expenses given the high returns we have seen since April.

We also went to maintain flexibility around office Reopenings and expenses that may occur as we shift back to physical presence.

We expect a non-GAAP net loss per share between 53 cents and 49 cents compared with the prior range of 55 cents and 50 cents, assuming approximately 50.6 million shares.

In summary in adjusting Ryan have discussed the opportunity to have customers manage the social channel has never been more mission critical we are uniquely positioned to capitalize on the opportunity for multiyear growth I.

Our strong balance sheet and prudently manage cash flow give us high degree of confidence to continue to make balanced investment will enable us to achieve our potential in the years ahead.

With that Justin Reiner happy to take any of your questions operator.

Thank you.

As a reminder, ladies and gentlemen to ask a question you will lead to press star one on your telephone.

To withdraw your question first the balance sheet.

Please standby will be compiled the culinary roster.

Your first question comes from the line of Alex Kurtz with Keybanc capital markets.

Yes, Thanks, guys are taking a few questions your.

And congrats on on the good quarter here in really kind of dynamic.

Quickly evolving market. So just on the SMB turn it seems like you're you're pretty confident about the trends you saw through the quarter I guess my first question is.

Are you seeing current improvements sequentially through.

Through the June quarter and ended July that's the first question and then on this ACB disclosure in.

The deck.

He's got a little more detail about what that pertains to just how you calculate that that'd be helpful. Thanks.

Yeah. This is Ryan on the on the SMB side of the house in terms of suits against a sequential turn improvement through the quarter heading into next quarter, we did see really positive trends.

The worst what we saw happened in April you heard a little bit about that from us on the call that happened in may.

As the quarter continued saw really good progress within the SMB segment.

Strong land and expand opportunities from Smbs and on that line right into the beginning of Q3, so feeling really good about the position that we have across all business segments, specifically in SMB.

Okay.

And then now extend into the second part of your question on me and the ACB calculation. It's just the ending air are divided by ending customer count.

Okay.

Great.

Alright, thank you.

Thank you. Your next question comes from the line of our Joe box here with William Blair.

Hi, guys. Thanks for taking my questions and congrats on the quarter.

No time, you know the dynamic you mentioned with customers landing with the whole platform certainly great to see that no. One of the things that we've talked about them. The passes the extensive ability of the platform and how it can be used across various departments in R&D product development et cetera, just curious if you're seeing that kind of expansion across.

Other use case in this environment or customers right now so generally focused on the most immediate need in <unk> in marketing and customer service.

Thanks.

This is Ryan.

And then it's a little.

Yeah.

Yeah.

His participation.

Today.

Yes.

Yeah, I'm using the majority of the time with the marketing Department in terms of thinking about listening in listening data as they think about their content strategy to brand strategy.

But you're also seeing many organizations have that spread into thinking about competitive positioning which ties and but not just working but sales as well as product and really trying to figure out what people are saying about products in market and what people are seeing about competitive products. So.

I would say that still happens a lot marketing, but depending on the organization you're seeing in many other departments as well you I needed.

Great. Thanks, and then a.

A quick follow those those nice to hear that's on the win rates competitively I'm being at those historic high levels can you maybe just.

Dig into that a little bit, what's what's driving that or you kind of seeing a combination of.

Product strategy or are there any changes that you've made the go to market side.

Ah that are really behind those that win rate acceleration.

Yeah.

It's a it's actually a lot of the same so I mean, we've we've talked about the fact that we've we've really led with the chronic right speed matters in our environment, especially right now.

As we saw customers that need social have an urgent need in this market.

And the fact that they're able to get into our products through the free trial tested out before they actually signing contracts or commit to us is a big differentiator for us and so we're doing that across the board from Smbs to enterprise companies and we're doing that with our most sophisticated products right not just the publishing engagement write up into in.

Ltchs and listening so that continues to be one of them major differentiators for US I would also just add that just the way that the product has been built usability that goes into it and the innovation that we continue to see has been a difference maker for us just im talking about the fact that we delivered 28 new features this past.

Order a customer seen feel that and often times are seeing while they're in the trial I think there's two things combined it really led to continued success, we've seen from a competitive standpoint.

Perfect. Thank you.

Thank you.

Our next question comes from a lot of Chris Merwin with Goldman Sachs.

Hi, Thanks, very much for taking my question and congrats on the on the great results.

I wanted to ask a a bit of a follow up to one of the prior questions about expansion it looks like a RPC group.

Healthy double digits again, and he talked about delivering some 28 new features this quarter.

So as it relates to cross sell in particular, unless about upsell, which and I was asked before but about cross sell are you starting to see you had better better uptake of some new modules like I guess like listening in particular, just just curious like what that has looked like you guys were in this more challenging environment. Thanks.

Yes. Thanks this is Ryan.

It's continued to be really strong and even in this challenging environment. One of the things that really stands out is the need for data and to use that data to make.

Business driven decisions and so the insights center products offer but on the premium analytics and listening enable our customers to really understand what's happening and not just with their social profiles and their social presence, but what's happening with the external voice of the customer through listening to social data and so we've seen really strong attachment rates.

Especially in our Midmarket and enterprise space with these products continued continued growth there even in a market where you would expect that budgets are really constrained and customers are scrutinizing their purchases.

Got it maybe just a follow up on on.

Hiring plans and it seems like that demand overall for the categories really healthy you've got the tailwind of companies need to digitally transform particularly.

When it comes to communicating with their customers via social.

Anything you can share about plans for you know any more aggressive pace of hiring.

On the sales front, just curious how you're thinking about managing that from.

For the rest of the year.

Yeah. This is Justin I.

Definitely thinking about you know for the second quarter, we focused a lot on some opportunistic hires in in key areas.

But really wanted to be mindful of.

How things were going to shake out for the quarter, how those trends were going to.

Hold to what are what our assumptions were but we feel like we're firmly.

Oh on solid ground in terms of we've seen those trends play out the way that we expected we understand what the rest of the years going to look like and we can get back into an aggressive posture in terms of.

Hiring and investments across the business. So you'll see a lot of that on the sales and and success sides of the organization, but across the entire organization, you'll see a ramp up in hiring from us.

Great. Thanks, so much.

Got it.

Thank you.

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

Great Hi, guys. Thank you very much for taking my question. So adjusted one for you and then I just had one follow up so obviously thing really nice growth in that customer over 10000 dollar metric I'm just curious if you're seeing that land start to be a multi.

Product land or is it still too early for that and then I'm kind of quick follow up thanks.

Yeah. So I think that we're definitely seeing the trend with ACB is both in our existing customer based on our new customers.

Growing nicely and Thats a function of in both cases.

In some cases, it's it's organizations are spreading social further across organization, they're bringing more use cases into sprout et cetera, but often times and probably most often that is the additional expansion into listening analytics reputation et cetera. So.

On both sides of the business existing customers and new business I think that trend has been continuing to pick up.

And we are seeing certainly and I think this has been consistent for.

Probably the last two to three quarters, where we're seeing just this continuous.

Lift in.

New business.

New customers that are landing with.

More than just the core platform in some cases the entire offering.

And we we'd like to see that trend, we especially like how that trend is playing out in may and June.

Great. That's really helpful. Thanks, and then just as a follow up maybe for for your adjusted or perhaps for you Ryan I'm just wanted to ask a broader question about about commerce I mean, Twitter, obviously keep you know partnering platform for you guys. You know there they're looking at alternative revenue stream that it seems commerce is likely a.

A part of that you'll Pentrust yep.

Strong commerce focused and that's I think driving a lot of shareholder interest in that one.

So just wondering the extent to which you guys are starting to see that manifest in some of that improved pipeline. It improved business trends that you guys saw in June or is it still little earlier is that sort of a focus for your customers as they kind of prepare for this new normal. Thank you guys.

Yes, so I I think people are definitely thinking about it our customers whether they've been.

Kind of tuned in to the social or the the commerce aspects of social.

Previously or not it's kind of on everyone's mind I think it's probably early to start seeing that both in our business and then that the networks.

Businesses themselves.

But I think that you're going to see that pick up steam pretty rapidly and you know for us I think theres two orders of impact. The first is every part of business that moves the social is something that we love to see.

As more business is conducted as more commerce is happening and social channels that requires engagement and follow up and support and publishing and all the things that our customers do with our platform.

But the second order impact there.

Or maybe swap those the first order.

Is that we will need to be thinking about it and are talking with our network partners about.

What did the tools at our platform looked like that are going to support that.

So indirectly through the increased engagement and volumes and just all of the things that this is going to bring into the social channels.

But more directly in terms of measurement and publishing and tracking and other aspects of social commerce.

How can we help them be successful with those efforts and those are ongoing discussions.

Thanks, Justin I appreciate the detail.

Yeah, you got it.

Thank you.

Your next question comes from a lot of Tom Roderick with Stifel.

Gentlemen, thank you for taking my questions. So Justin I'm going to just build on that last and a little bit and I know this isn't directly related to business, but I'm sort of interested in the trickle down effect here of a.

Of what happened there with the Facebook AD boycott. So could you just take a moment to address sort of the broader impact of that add boycott on the social media management space. I mean, obviously spread doesn't have any direct exposure to AD placement, but it would seem rates for to emphasize the importance of your customers and various brands out there with how they want to.

You sort of sprinkled their dollars around to be on multiple platforms and engage with customers in a different manner than the traditional AD buy can you just talk about what you saw out there and a and how that impacted perhaps other platforms than a desire to be on sprout, rather than a directed T. I a methodology with with one of those.

With one of the social media platforms themselves.

Yeah. So I think you know as as I think some of the data coming out of Facebook has suggested I think.

The that's the statement was a little bit bigger than the impact at least that we saw in the second quarter in terms of what that meant to their business. Specifically, however, I think you know the more important.

Thing that came out of that was.

Just.

Brands thinking hard about.

The organic versus paid aspects of their social efforts.

Where they want to be.

Owning those relationships organic engagement publishing et cetera versus advertising.

What those channels might look like in the future as they decide to start shifting things around so I think it put a bit of a spotlight or microscope on.

How brands, we're thinking about that however, I think.

From a certainly from a sprout perspective I.

I think we.

Anecdotally see people lean into more organic activities engagement and publishing when theres any sort of contraction happening in the advertising space, it's a bit of a hedge and that's something that works well in our favor.

But I think the long term impact in any material shift whether to other platforms or or other methods.

Is kind of yet to be seen I don't know that that event itself had the kind of.

You know.

Impacted that's going to dislodge anything meaningful yet I think we'll see more of that probably over the next couple of quarters.

Yeah. Good fair enough that that's great feedback and then Joe question for you I. This is a welcome to join being a public company were five months into a pandemic and my question now is gonna be why didn't you raised the high end, but I'm sure in fact that but the quarter fantastic the tone much much much better from where you guys are sitting 90 days ago.

The only reason to kind of keep your you keep one one foot or a couple of goes on the on the brakes with respect to not raising the high end of the ranges you think about your business, improving and offering the full year guidance here.

Yeah, I think for US Tom I think the biggest thing is you know we talked about this as we saw.

An improvement in May and then a really strong June and so I think we just want to see a little bit more of a track record in a couple of months, we'll really confident in what we've seen so far.

I think as we build confidence throughout the rest of Q3 and going into Q4, I think we'll have a better insight and.

Whether or not those trends kind of continue but that's probably the biggest driver is just getting a little bit more history for us.

Yeah, I lose a finer point on that question John So it sounds like the trends through a remains your fantastic I mean as the rest of the country has sort of hit some puts and hedges and reopening in small businesses or perhaps having some pockets of challenges are you seeing anything in real time that gives you pause or is this just.

Just a very macro level, let's just see with the future holds.

Yeah, we're not we don't see anything that gives us pause right now time I think it's more of a macro level you know approach than we had talked a little bit not that no on the call, but nothing given a spot right.

Fantastic really helpful. Thank you guys nice job.

Thank you.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

Hey, guys. This is Chris on for stand Congrats on solid results and the 10 year anniversary as well quick question on you talked about like.

Conversion rates and you talked about the top of the funnel volumes being really strong and the quality of the funnel as well being up to par with historical averages. So can you just help us better understand like the what are you doing actively to both.

Optimize the top of the funnel as well as the actual coverage across is making sure that your efforts our best utilized during this time.

Yeah. Thanks for your question Chris. This is Ryan there's a few things I think the first thing to note is you're pretty fortunate that we have a modest data we've been at this for a long time, we've always been a very heavy in no model with a strong volume of trials and demos and we were able to gather a lot of data on.

Those trials demos coming in demographic data as well as usage data within the trials and were able to actually based on historical data great in score them. So we know exactly as things are coming in with the quality of those trials should look like based on our other customers and these looking like or past customers. It's just that really helps our sales team figure out where they want it.

Okay. It also gives us good direction or what we should expect in terms of conversion rate revenue from that cohort of trials and customers.

Not only does it help the sales team and enabling this sales folks and where to focus but it gives a lot of information back to the marketing team in understanding the types of campaigns, we need to run in which sources, we need to double down on or maybe pull back on and so I think the headline for you here, there's a lot of data for us that we're tracking.

We know exactly what we should be getting in terms output based on the cohort of traffic in trials coming in and then we're constantly tweaking the model to make sure that we're optimizing for for growth.

Got it that's really helpful.

As a quick follow on so.

Related to the premium module. The I think you talked about listening and they've seen 100% error growth year over year, which is really encouraging to see especially in this environment can you help us better understand like condensate that as well as you know just investing longer.

Looking for the longer term growth in the business does that longer term growth involve more product development or is it more go to market oriented like basically I'm trying to understand where are we in the call like saturation of the premium modules within your existing customer base and how much left there is to monetize with your current threed printing modules.

Yes. This is just an i. I think you know what we think about.

The levers that we're investing in and where the opportunities in our business. There's a couple of different layers to that I think the first is just the understanding that we have on how much green space. There is still in this category and the fact that there are millions and millions of businesses that will be graph.

You waiting and meeting tools and a platform like sprout.

The second is as we start to expand our offering into some of those.

Premium skews those still being very early in their life.

Seeing the adoption that we have there, but those are still from a penetration perspective, even within our existing customer base. There's a lot of room left about there.

When we think about how we model our our our growth and what the rest of this year and 2021 looks like.

It's very much a combination of those things with the core business contributing a large amount of that with the premium offerings that we have today continuing to climb and with anything else that we may bring to market or packaging pricing changes et cetera.

Sort of being a third layer on that cake. So.

To directly answer the question I think we've got a lot of room left to run in terms of selling those into our existing customer base. We've also seen.

And we're really excited by the data in terms of our entire customer base adopting those meaning.

It's not just the large enterprise customers that are investing those tools. It's smbs agency, it's mid market et cetera. So we've got the evidence that says that those things are are applicable and beneficial across the entire customer base.

Now we've got to.

Go and work on driving that adoption, but we're also seeing just isn't the number of seats on the core product continue to climb as social becomes more important to businesses et cetera.

So, it's it's multi dimensional and something that we feel really good about.

Got it thank you so much.

You got it.

Thank you.

Question comes from the line of David Hynes with Canaccord.

Hey, Thanks, guys. Thanks for taking my questions I don't know if this is better for Justin or Ryan, but as we see more kind of support desk oriented.

Tools embrace strategies are on messaging right, which obviously includes a lot of the social tools. How do you think about kind of the intersection of what they're providing.

And kind of the broader sprout platform I mean that does that make those folks more competitive with you or is it just solving for a different need.

Yeah, I mean I think.

The need is fairly different in that one of the the premium advance toward the prime advantages of desktop platform is that we're giving our customers a place where all the departments can work together on one platform they really need visibility across.

Not just what's happening on the customer service side, but in the marketing side in the.

Community management, and publishing et cetera.

Those things really need to to be living together and we still see there are certainly organization to.

Our first our primary foray into social is.

Customer service and it may live and in that Department.

But that those that focus particularly from.

The folks that have been focused on the messaging side, that's been pretty consistent for quite awhile and there's not as much overlap.

As.

When you think about the different use cases, and the spread of use cases across the product relative to what.

The messaging platforms or the the other providers that are focused on the messaging side of things.

That's not to say that theres not a some overlap and certainly our customers enjoy the ability to do all of that in one place.

Yeah, Yeah, Okay that makes sense and then.

Joe maybe a follow up for you and this is a extra level of granularity I wouldn't normally ask for but just kind of given the abnormal progression of how Q2 played out.

And any comments on how customer adds came in during the quarter on a on a monthly basis. I mean was is there anyway to frame it on a percent was it like.

2030, 50% April May June like what are the shape of the quarter look like in terms of new customer ads.

Yeah, I mean, Yogi Jay kind of follow up on we talked about in the call without giving out specific data you can assume that you know April was was it the strongest market. We have talked about that given the SMB an agency churn in our last call and then May we saw that trend get better and then June was really style and so I think thats kind of.

Away were framing it and without getting too much into that in the actual numbers.

Yeah that makes sense had had asked alright, guys. Thanks for the color.

Yeah.

Got it.

Thank you.

Next question comes from a line of Matt Van flight with BP I G.

Hey, guys. Thanks for taking my question.

I guess as you look in the quarter, they're seeing seeing particular strength in those large deals on the enterprise side or even a sort of a larger mid market do you feel like there was an acceleration from customers that that were maybe thinking about bringing in.

A more advanced social media platform. Some point this year early next year that.

Really pull that forward from their own perspective, and maybe how some of that played out in the pipeline.

Being able to to close more deals as the rush to work from home and move everything is digital as possible played out in the quarter.

Yes. Thanks, Matt. This is Ryan yes, we saw some of that but I would say, it's there's a couple of different stories that go in there one person on the enterprise mid market there were a variety of customers where acceleration happened within the sales cycle deals.

That that May have started being early in Q1 move faster into Q2 because of the urgency around killed. It in the fact that for many most organizations all doors were closed except social and so we certainly saw acceleration. There I would also say that there is other enterprise and midmarket organizations that saw an influx in needs and that.

Might be social care or the needed just better engage with customers and the tools that they had today the platforms. The had today, we're cutting it ends up in those scenarios again, having the trial, having the ability to prove to an organization into the practitioners that the product works and works very quickly was essential for being able to accelerate deals.

Within the quarter, so definitely depended on the organization, we are working with but there were quite a few opportunities to accelerate some pipeline.

In that mid market enterprise base.

Got it and then I think you know last quarter, you talked quite a bit about some big deals in the travel industry and highlighted intercontinental on the call today, but curious what you're seeing as it was pandemic. It has really extended out I think a lot further then maybe expectations.

We're at the time, but when we were all together last time, but just overall kind of what some of the bigger and travel and hospitality industry customers are now thinking as maybe their initial plans for when they might reopened were either pushed back or they're now at much lower capacity there.

And then there might have anticipated before or they're relying on on your platform. Even further to stay communication with customers to to understand what some of the trends in the market, our or if any of them look to maybe pair back on budgets across across their space as their revenues decline.

Precipitously.

Yeah, Matt This is Ryan again.

So you had a few different things so.

As you stated all of these organizations, especially the hotels and they'd be in hospitality or events for travel.

There's a need to stay better engage with customers right now and everybody is paying close attention to what's happening in different pockets of the country worlds make sure that they're up to speed with what it's safe to do in terms of reopening and IND, enabling customers come back in order to engage with them.

So they are using sprout and our platform just a better connected to make sure that there are putting messaging out on the platform, but also responding very quickly to any comments or engagement coming in from social. That's continued you really important they're also listening using or listening products to figure out the type of content that they should be delivering and so.

One of the Big Hotel brands that we are we work with and it is actually be launching a new campaign and that campaign is really driven off of data that they pulled from social and there will be looking at the sentiment from that campaign that they're running to determine what kind of investments and make them, both organic and paid perspective as they continue.

Due to run it so it's a variety of different things that these organizations are thinking about but now more than ever they need to stay connected to their their clients and their community.

And this adjusted I'll, just quickly add to that I think that the.

The the reality that these businesses, particularly if they're not doing if they're not seeing customers face to face or if their businesses have been impacted over an extended period of time to ryans point.

This is in a lot of ways, the only way they have to communicate with their customers and if they want to be well positioned when things do open back up they need to be top of mind, you need to be front and center and they need to have been building those relationships. During this time when they didnt have those.

People visiting their locations because in their stores et cetera. So in a lot of ways. This is the the best thing that they can be doing right now is maintaining those relationships until that that goes in person or other channel types of communications pick back up.

And so it's really I think a hedge on the future of we've got to be more invested here than we ever happen.

Alright, great. Thank you guys.

Thank you I'll now turn the call back over to CEO and co founder Justin Howard.

All right cool so I want to thank everyone again for your time.

We look forward to the conversations will be having and the time, we spending with you in the coming months, we are planning to spend some time as investors virtually as well as attending the Keybanc technology summit and Canaccord growth virtual conferences in August.

And lastly, I want to thank our employees, our customers and partners for their hard work and support and for health and close a terrific quarter.

We are grateful for the hardware can resiliency to support our team is for our customers.

As we all work through these these challenging situations together.

And behalf on behalf of the entire team. We also want to thank the frontline and healthcare workers, who are keeping everything running thank you all and we'll talk to against them.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to Sprouts, Social second quarter 2020 earnings Conference call.

At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.

Good question during the session you will need to press star one on your telephone.

Please be advised the todays conference is being recorded.

If you're acquiring any further assistance please press star zero.

Now my pleasure to introduce head of Investor Relations Jason.

Thank you operator.

Welcome to Sprouts, social second quarter 2020 earnings conference call.

We will be discussing the results announced in our press release issued after the market close today.

With me are sprouts, social CEO Justin Howard.

Yeah, So Joe del Prado.

Senior Vice President of global sales Ryan Beretta.

Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private figure Securities Litigation Reform Act up 1995.

Forward looking statements include statements concerning financial and business trends.

Our expected future business and financial performance and financial condition.

Our guidance for the third quarter of 2020, and the full year 2020.

And can be identified by words, such as expect anticipate intend plan believe seek orwell.

These statements reflect our views as of today only should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements.

Forward looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially.

A discussion of the risks and other important factors that could affect our actual results, including potential disruption from coated 90.

Please refer to our annual report on form 10-K filed with the Securities Exchange Commission.

Our quarterly report 10-Q, two you filed with the FCC and our other periodic filings with the FCC.

During the call. We will also discuss certain non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles.

A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measure is included in our earnings press release, which has been furnished to the FCC and is also available on our web site at investors Dot sprouts social dotcom.

And with that let me turn the call over to Jonathan.

Thank you, Jason and good afternoon, everyone. Thank you for joining us.

A lot as happened since we were together last and the second quarter at 2020 was more turbulent than any of us would've guessed.

Despite numerous macro issues sprout was fortunate to deliver a strong quarter across the board.

We are grateful to our team for continuing to elevate our business and our customers while facing is issues head off.

Shop performance speaks to the fabric of this company our resilient the importance of our platform and our conviction about the opportunities ahead.

What are we shared performance details from the live limited period of time since Koby began.

With a full quarter of data under our belts, we've seen consistent trends and further confidence in our models.

Were pleased with the results, which exceeded the high end of our guidance range across all metrics.

Well, we don't yet know the duration or adaptive the pandemic, we know that our team is stepping up across the board and is handled the transition remarkably well.

We also know that digital transformation is becoming a top priority for brands across the globe.

Social communication remains mission critical and it's more important than at any time, our company's history, and we're perfectly positioned to help our customers lean into this new reality.

In addition to the pandemic. We also saw critical social issues rice, the forefront in the second quarter.

We were all reminded of the profound and systemic racial inequality that persists and importance of being an active participant in dismantling those injustices.

We believe the black lives matter, we collectively stand against racism and ratio one of the quality.

We have responsibility to our people and our communities to not shy away from these efforts and to put our resources behind that.

Well grappling with a pandemic and exceeding expectations across the business. Our team also spent time in service of our communities.

Based upon your first social and racial and Justice and took action to further our ongoing diversity equity and inclusion efforts as an organization.

This has long been a focus and priority for sprout, but like all aspects of this company, we measure ourselves by the work left on Dot there's more to do and we will.

Shifting to operationalize, our key metrics accelerated through the quarter and we have confidence our ability to perform at the high end of the expectations that we shared with you in may.

You saw meaningful acceleration across all key metrics in June as our sales cycles caught up to the top of funnel inflection we outlined during our last call.

We better understand our baseline and have further conviction around increasing our investments in growth throughout the remainder of 2020.

We've also seen more evidence that our business platform and go to market strategy are set up to thrive in the new environment, we find ourselves and.

Our sales model has always been primarily remote are distributed engineering teams are on a new gear and our customers need a strong and agile partner more than ever before.

We delivered 20 material new features to our customers in the second quarter up from 18 in the quarter pre covenant.

We also completed several substantial backend projects expanded our listening and analytics offerings and improved efficiency and how we build and support our platform.

Moving to remote where we have more than doubled our output or customer facing product releases relative to the four month prior period.

We've also set the foundation for significant product enhancements in the second half of the year and it just 2021 and moved or simply metric measured migration into its final phases.

We told you in May that our trial in demo volumes were 24% and 14% higher respectively than pre covered levels.

Volumes in each of sense remain consistently at or above may levels and top of funnel demand remains robust.

Our marketing team is focused on delivering high quality lead generation thought leadership and sophisticated content focused on organic brand development and are hitting the sweet spot of the market with organic and word of mouth channels as strong as ever.

Our brand awareness in both the Midmarket enterprise segments has increased by more than 30% relative to 2018.

Indicative of both the strengthening quality of the funnel and growing urgency for brands to lean into social our traffic. The conversion rate has meaningfully improved since March and we continue to see opportunities for optimization across the funnel.

We adapted to deliver our first remote sprout sessions digital customer marketing event, which was an incredible success, we have more than 7500 registered participants roughly 50% more than planned and will further enhance our digital engagements moving forward.

All of these factors are delivering a healthy funnel to our sales will success teams.

Customers need to lean on capable partners to help make strategic digital transformations as seamlessly efficiently and quickly as possible.

Our customer lands are increasing beginning with the full platform, which for us indicate stronger future expansion opportunity and considerably higher lifetime value.

Listening and premium analytics grew a are well over 100% year over year during the second quarter.

And we're excited about their trajectory of the multi product customer adoption story.

Competitively speaking our already strong internally track when rates increased significantly during the second quarter.

In the SMB, our win rate and net new air our one each jumped to an all time high.

Several standard deviations higher than the trailing four quarter average.

[laughter] against our primary Midmarket and enterprise competitors, our win rate increased on average by more than 500 basis points relative to the trailing four quarter period.

This has been a consistent trend and as the global digital transformation has pulled forward by several years, we're increasingly confident we have the right technology right approach to lead our market.

Operationally our people have adapted and are equipped to ensure that sprout run smoothly, whether we are fully remote partially remote or in our offices around the world.

The remaining flexible with respect to our office reopening plans that we do not intend to reopen offices during the third quarter.

We're also excited by what we've seen during this transformation of work and continue to explore what our optimal work environment will look like moving forward.

I want to wrap up by saying that I'm extremely proud of our ability to adapt and continue to execute against our goals.

As we celebrated our 10th anniversary in the second quarter. The culture. We thoughtfully built has been a driving force to keep our teams aligned and our business momentum on track.

We now have more data that reinforces both the accelerating shift to social as a mission critical communications platform and our ability to when the market with competitive advantages that stand out in this new in digital environment.

We believe our relentless focus on world class products, the deliberate investments that we're making and our deep commitment to our people on our customers keep us well position to deliver durable growth through whatever environment persist into 2021.

And with that I'd like to turn the call over to senior Vice President of Global sales, Ryan Barretto, who will walk through some of our customer success stories this quarter.

Thanks, Justin and thanks, again to everyone for joining us today.

I'm really proud of the resiliency, we softness team in Q2.

We've been building trust with our customers are incredibly challenging times by getting them in the platform providing immediate value.

Coming off of a record breaking month in June we're very excited about the opportunity to build on this momentum into 2021.

Many of the current events transpiring are serving to accelerate the secular shift to social as essential communication channel for brass and the shift increasingly includes things like social care service brand management and commerce.

The need for brands to make long term digital transformations has never been more urgent are important.

Brands I understand that they need to be part of the conversations happening on social.

And they need a partner who can get in there faster and with unparalleled service and support.

Because of all these factors that our customers are increasingly making strategic investments and spreads.

In Q2, inbound volume continued to exceed our expectations and we're finding the quality. This funnel is that lease consistent with our historical averages.

Now we've been sharing that in the age of the user the legacy software playbook has become antiquated.

Further validating this message was a mid July user satisfaction report from GE to which again by sprout as a category leader for social media monitoring and every single category reviewed relative to our primary competitors.

The fact that we lead in every single category based on the feedback or thousands of customers speaks volumes.

We're incredibly proud of this recognition, particularly encouraged by our strong leadership rating in the product direction category, which reinforces that we're very well positioned for the future.

This type of feedback is only possible when you can make your customer successful.

Q2, we have the opportunity to do just that person amazing brands, including Verizon media will worse than double HCP as then right.

Early build dot com get hub and Autodesk.

Sure the largest travel company in the World was one of those customers.

Nicolas Smith their social media marketing manager shared that when the global pandemic hit they receive customer queries and an unprecedented scale.

And spread enabled them to get their teams up and running quickly with spreads support going over and above when they needed at most.

This helped to respond to over 500000 customers in three months with a remote team of only 46 people.

She went on to say that they can have done it without sprout.

Teach for America, an incredible not for profit focused on education and low income communities was another great story.

The director of social media share that social is really important tool that they rely on heavily to engage with their community.

Sproat has helped them get a much better understanding of who their audience is and what they're looking for.

Either Lula director brand research analytics and insights explain that their ability you spoke to explore individual topics like brand health Corona virus in school fall plans and to provide key data that's easy to share has helped them because that insights more regularly and efficiently.

Finally, joann Wilson from Intercontinental hotels group.

Helpful perspective on the ROI social as she explained marketing budgets are under enormous pressure and it's become more important to use economical channels to target potential guests.

He chose to centralize on sproat, because it was an easy to use platform to manage over 100, social profiles in one place and our reporting tools helped her to prove social ROI, which is critical one budgets are tight.

I couldn't be more impressed or grateful for the performance of our people at sprout.

We have delivered on our commitments to each other and to our customers are people have risen to the challenge and our operating at new levels of performance.

Whether it was dogs and meet ups virtual baby showers fitness challenges or external speakers focused on mental health. Our teams found new and creative ways to stay engaged happy and productive.

Our unique sales culture continues to separate us from the market and in May we are again named as one of Chicago's Best places to work.

Our strong employer brand continues to drive exceptional talent to sprout, which has us well position to capitalize on the growth opportunities that we see through the second half 2020 and into 2021.

With that I'll turn it over to Joe did run through the financials Joe.

Thanks, Ryan I'll now walk you through our second quarter results in detail for moving on to guidance, a third quarter full year 2020.

Total revenue for the second quarter was 31.4 million, representing 27% year over year growth.

Excluding the impact from legacy simply measure organic revenue was up 35% year over year.

Total air are exiting Q2 was 130.8 million up 27% year over year.

Organic ANRR was 129.4 million up 35% year over year.

We added 273 net new customers in Q2, the finished a quarter with 24356 customers.

I do want to reiterate the cobot impact, we discussed last quarter, including elevated SMB and agency churn during March and April.

This essence, not only subsided, but reversed our.

Our net customer additions improved in May we are very strong in June as our sales cycles intersected with higher trial activity and lower churn.

They have to believe that customer guessing trends trop for us in April of this year.

During the month of June we experience, our lowest number of monthly customer in total our cancellation of any month over the past two years.

Number of customers contributing more than $10000 in air our Ace 2544.

Up 54% from a year ago.

2404 in Q1 2020.

So let her strong overall customer additions, we have begun to see more customer than ever before land then our entire platform and social proliferate throughout the organization.

In discussing the remainder of the income statement. Please note that unless otherwise stated all references to our expenses operating results in share count on non-GAAP basis.

Reconciles our GAAP results.

Press release that was just issued before this call.

In Q2 gross profit with 23.3 million, representing a gross margin of 74%.

This compares to a gross margin of 75% year, though it's 74% last quarter.

Sales and marketing expenses for Q2 was 13.5 night or 43% of revenue down from 47% a year ago.

We expect it can can you just focused on optimizing our sales and marketing spend.

Why selectively accelerating hiring.

Enterprise and Midmarket. Thanks.

Research and development expenses for Q2 were 7.3 million or 23% of revenue.

Down from 26% a year ago.

Particularly excited about the ability to continue invest while also improving efficiency and new product development as we complete the simply measured migration.

General and administrative expenses for Q2, or 8.4 million or 27% of revenue up from 24% a year ago.

This growth was primarily a function of public company expenses, which we did not have in Q2 2019.

We expect general and administrative expenses to decrease as a percentage of revenue as we continue to scale our operation.

Non-GAAP operating loss for Q2 was $5.9 million for Leggett, 19% operating margin.

Compares with a negative 23% operating margin a year ago.

We outperformed our expectations due primarily to revenue outperformance in the timing of certain marketing expenses, which were shifted from Q2 Q3.

Non-GAAP net loss for Q2 was 5.8 million for net loss of 11 cents per share based on weighted average shares of common stock outstanding compared to a net loss of 5.5 million a year ago.

Turning to the balance sheet and cash flow statement. We ended Q2 with 129.5 million in cash cash equivalents and marketable securities.

137.4 million end of Q1 2012.

Deferred revenue at ended the quarter was 35.5 million.

Okay, both are billed and unbilled contracts are remaining upwards obligations RPL.

Approximately 50.9 million up from 47.5 million exiting Q1 2020.

Approximately 63% year over year.

We expect to recognize approximately 86% 43 million of total RPL as revenue over the next 12 months.

Operating cash flow in Q2 was negative 4.0 million compared to negative 2.6 million a year ago.

Free cash flow was negative 4.5 million in Q2 negative, 14% free cash flow market pretty negative $2.8 million and negative 11% free cash flow margin year ago.

We had anticipated that Kobe would adversely impact cash flow due to customers' ability to meet contractual payment terms, which ultimately did not materialize to degree that we expected.

Moving on to guidance.

For the third quarter fiscal 2020, we expect total revenue in the range of 32.9 million to 33.0 million our growth rate of roughly 25%.

We expect organic growth rate to be mid to high single digit percentage points faster and I reported growth rate as we sent that simply measure.

We expect non-GAAP operating loss in the range of 7 million to six night.

We're continuing to invest in our long term growth.

Areas, you see opportunities to accelerate the pace of investment.

Most notably impact in enterprise and Midmarket setting.

But then the seen improvement and marketing efficiency, which is an encouraging indicators as we look forward.

Historically, our free cash one market had been a couple hundred basis points better and operating margin.

However, during Q3, we're moving forward with their new office build in Seattle inspect to pay a onetime cash cost of $1 million, which will adversely affect our quarterly free cash flow.

And looking at Q4, well, we do you typically see seasonally strong contract renewal.

Cash impact it typically realized during January or February of the following year.

We expect a non-GAAP net loss per share between 14 cents and clubs that assuming approximately 50.6 million weighted average basic shares of common stock outstanding.

For the full fiscal year 2020, we now expect total revenue in the upper half of the range you provided for you in May.

This implies revenue in the range of 128 million to 130.5.

At the midpoint. This unexpected overall reported growth rate of 26% up from our prior midpoint of 25%.

At the midpoint of our new guidance, we now expect our 2020 organic growth rate to be approximately 33%.

From a prior estimate of greater than 30%.

Given the strengthening in our business through Q2, we are increasingly optimistic that our metrics bottomed in April.

However remain cognizant of the risk that remain in our business in the context of a broader economic recovery.

For 2020, we expect non-GAAP operating loss and the rate of 27 million 25 million compared with our prior range of 28.3 million to 25.3.

They're continuing to invest for our long term growth, while delivering multiyear profitability leverage were beginning to accelerate hiring during Q3 and anticipate higher marketing expenses given the high returns we have seen since April.

We also want to maintain flexibility around office Reopenings and expenses that may occur as we shift back to physical presence.

We expect a non-GAAP net loss per share between 53 cents and 49 cents compared with the prior range of 55 cents and 50 cents.

Being approximately 50.6 million shares.

In summary in adjusting Ryan have discussed the opportunity to have customers manage the social channel has never been more mission critical we are uniquely position to capitalize on the opportunity for multiyear growth.

Strong balance sheet as prudently manage cash flow give us high degree of confidence to continue to make balanced investment.

Enable us to achieve our potential in the years ahead.

With that Justin Reiner happy to take any of your questions operator.

Thank you.

As a reminder, ladies and gentlemen to ask a question you will need to press star one on your telephone.

To withdraw your question first the balance sheet.

Please standby well be compiled it una roster.

Your first question comes from the line of Alex Kurtz with Keybanc capital markets.

Yes, thanks, guys for taking your questions your.

And congrats on on the good quarter here and I'm really kind of dynamic.

Quickly evolving market. So just on the SMB turn it seems like you're pretty confident about the trends you saw through the quarter I guess my first question is.

Are you seeing turn improvement sequentially through.

Through the June quarter and ended July that's the first question and then on this ACB.

The disclosure in.

And the deck.

He's got a little more detail about what that pertains to just how you calculate that that'd be helpful. Thanks.

Yeah. This is Brian on the on the SMB side of the house in terms of suits against a sequential turn improvement through the quarter heading into next quarter, we did see really positive trends.

First of what we saw happened in April you heard a little bit about that from us on the call that happened in may.

As the quarter continued saw really good progress within the SMB segment.

Strong land and expand opportunities from Smbs and that led right into the beginning of Q3, so feeling really good about the position that we have across all segments, but specifically in SMB.

Okay.

And then now extended into the second part of your question on me and the ACB.

Calculation, it's just the ending a are divided by ending customer count.

Okay.

Great.

Alright, thank you.

Thank you.

Next question comes from the line of our Joe boxer with William Blair.

Hi, guys. Thanks for taking my questions and congrats on the quarter.

Well I'm trying to know the dynamic you mentioned with customers landing with the whole platform certainly great to see that no. One of the things that we've talked about on the passes the extensibility or the platform and how it can be used across various departments and on the product development et cetera, just curious if you're seeing that kind of expansion across.

So the use cases in this environment or customers right now so generally focused on the most immediate need anything in marketing and customer service.

Okay.

Hi, Susan this is Ryan.

And then it's a little.

Yeah.

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Its participation.

Today.

Yes.

Yeah, our meeting the majority of the time with the marketing Department in terms of thinking about listening in listening data as they think about their content strategy their brand strategy.

You're also seeing many organizations have that spread into thinking about competitive positioning which ties into not just martin, but sales as well as product and really trying to figure out what people are saying about products in market and what people are saying about competitive products. So.

I would say that still happens a lot in marketing, but depending on the organization you're seeing in many other departments as well you are I needed.

Great. Thanks, and then.

A quick follow those those.

Nice to hear that's on the win rates competitively.

Being at those historic high levels can you maybe just.

Dig into that a little bit what's what's driving that are you kind of seeing a combination of over your product strategy or are there any changes that you made in the go to market side that'll really behind those that win rate acceleration.

Yeah.

It's actually a lot of the same so I mean, we've we've talked about the fact that we we really led with the product right speed matters in our environment, especially right now.

As we saw customers that need social have an urgent need in this market.

And the fact that they're able to get into our products through the free trial tested out before they actually Sony contractor commit to US is a big differentiator for us and so we're doing that across the board from Smbs to enterprise companies and we're doing that with our most sophisticated products right not just the publishing and engagement write up into it.

Ltchs and listening so that continues to be one of the major differentiators for US I would also just add that the weight of the product has been built usability that goes into it and the innovation that we continue to see has been a difference maker for US just talked about the fact that we delivered 28 new features this past.

In order for customers seem feel that and often times are seeing it while they're in the trial I think those two things combined it really led to continued success, we've seen from a competitive standpoint.

Perfect. Thank you.

Thank you.

Next question comes from a lot of Chris Merwin with Goldman Sachs.

Hi, Thanks, very much for taking my question and congrats on the on the great results.

I wanted to ask a bit of a follow up to one of the prior questions about expansion it looks like a RPC group.

Healthy double digits again, and you talked about delivering some 28 new features this quarter.

As it relates to cross sell in particular, unless about upsell, which and I was asked before but about cross sell are you starting to see you had better better uptake of some new modules like I guess like listening in particular, just just curious like what that has looked like yes. We're in this more challenging environment. Thanks.

Yes. Thanks this is Ryan.

It's continued to be really strong I mean, even in this challenging environment. One of the things that really stands out is the need for data and to use that data to make.

Business driven decisions and so the insights that our products offer but on the premium analytics and listening enable our customers to really understand what's happening and not just with their social profiles and their social presence, but what's happening with the external voice of the customer through listening to social data and so we've seen really strong attachment rates.

Especially in a mid market enterprise space with these products. So continued continued growth there even in a market where you would expect that budgets are really constrained and customers are scrutinizing their purchases.

Got it and maybe just a follow up on on.

End of hiring plans and it seems like that demand overall for the categories really healthy you've got the tailwind of companies need to digitally transform particularly.

When it comes to communicating with their customers via social.

Anything you can share about plans for you know any more aggressive pace of hiring.

On the sales front, just curious how you're thinking about managing that from.

For the rest of the year.

Okay.

Yeah. This is just an eye.

[laughter] definitely thinking about for the second quarter, we focused a lot on some opportunistic hires in key areas.

But really wanted to be mindful of.

How things were going to shake out for the quarter, how those trends were going to.

Hold to what are what our assumptions were.

But we feel like we're firmly.

Oh on solid ground in terms of we've seen those trends play out the way that we expected we understand what the rest of the year is going to look like and we can get back into an aggressive posture in terms of.

Hiring and investments across the business. So you'll see a lot of that on the sales and and success sides of the organization, but across the entire organization, you'll see a ramp up in hiring from us.

Great. Thanks, so much.

Got it.

Thank you.

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

Great Hi, guys. Thank you very much for taking my question. So adjusted one for you and then I just had one follow up so obviously thing really nice growth in that customer over 10000 dollar metric.

I'm just curious if you're seeing that land start to be a multiproduct land or is it still too early for that and then I'm kind of quick follow up thanks.

Yes, so I think that.

We're definitely seeing the trend.

With HCV is both in our existing customer base on our new customers.

Growing nicely and Thats a function of in both cases.

In some cases, it's it's organizations are spreading social further across organization, they're bringing more use cases into sprout et cetera, but often times and probably most often that is the additional expansion into listening analytics reputation et cetera. So.

On both sides of the business existing customers and new business I think that trend has been continuing to pick up.

And we are seeing certainly and I think this has been consistent for.

Probably the last two to three quarters, where we're seeing just this continuous.

Lift in.

New business.

New customers that are landing with.

More than just the core platform in some cases the entire offering.

And we like to see that trend to be especially like how that trend is playing out in may and June.

Great. That's really helpful. Thanks, and then just as a follow up maybe for for you just an or perhaps for your Ryan.

Just wanted to ask a broader question about about commerce, I mean, Twitter, obviously keep partnering platform for you guys. There they're looking at alternative revenue stream that it seems commerce is likely a a part of that you'll pentrust yes.

Strong commerce focused and that's I think driving a lot of shareholder interest in that one.

So just wondering the extent to which you guys are starting to see that manifest in some of that improved pipeline.

Proved business trends that you guys saw in June or is it still little earlier is that sort of a focus for your customers as they kind of prepare for this new normal. Thank you guys.

Yes, so I think people are definitely thinking about it our customers whether they've been.

Kind of tuned in to the social or the.

Commerce aspects of social.

Previously or not it's kind of on everyone's mind I think it's probably early to start seeing that both in our business and then that the networks.

Businesses themselves.

But I think that you're going to see that pick up steam pretty rapidly and for us I think theres two orders of impact the first is.

Every part of business it moves to social is something that we love to see.

As more business is conducted as more commerce is happening and social channels that requires engagement and follow up and support and publishing and all the things that our customers do with our platform.

But the second order impact there.

Or maybe swap those the first order.

Is that we will need to be thinking about it and are talking with our network partners about.

What did the tools at our platform looked like that are going to support that.

So indirectly through the increased engagement and volumes and just all of the things that this is going to bring into the social channels.

But more directly in terms of measurement and publishing and.

Tracking and other aspects of social commerce.

How can we help them be successful with those efforts and those are ongoing discussions.

Thanks, Jonathan I appreciate the detail.

Yes, you got it.

Thank you.

Your next question comes from a line of Tom Roderick with Stifel.

Gentlemen, thank you for taking my questions. So Justin I'm going to just build on that last and a little bit and I know this isn't directly related to business, but I'm sort of interested in the trickle down effect here of.

Of what happened there with the Facebook AD boycott. So could you just take a moment to address sort of the broader impact of that add boycott on the social media management space. I mean, obviously spread doesn't have any direct exposure to AD placement, but it would seemingly sort of emphasize the importance of your customers and various brands out there with how they want.

To sort of sprinkled their dollars around to be on multiple platforms and engage with customers in a different manner than the traditional AD buy can you just talk about what you saw out there and a and how that impacted perhaps other platforms than a desire to be on sprout, rather than a direct apiay a methodology with with one of those.

With one of the social media platforms themselves.

Yes, so I think.

No as as I think some of the data coming out of Facebook.

Has suggested I think.

The.

The statement was a little bit bigger than the impact at least that we saw in the second quarter.

In terms of what that meant to their business, specifically, however, I think the more important.

Thing that came out of that was.

Just.

Brands thinking hard about.

The organic versus paid aspects of their social efforts.

Where they want to be.

Owning those relationships organic engagement publishing et cetera versus advertising.

What those channels might look like in the future as they decide to start shifting things around so I think it put a bit about a spotlight or microscope on.

How brands, we're thinking about that however, I think.

From a certainly from a sprout perspective I.

I think we.

Anecdotally see people lean into more organic activities engagement in publishing when there is any sort of contraction happening in the advertising space, it's a bit of a hedge.

And thats something that works well in our favor.

But I think the long term impact in any material shift whether to other platforms or or other methods.

It's kind of yet to be seen I don't know that that event itself had that kind of.

No.

Impacted that's going to dislodge anything meaningful yet I think we'll see more of that probably over the next couple of quarters.

Yep, Okay fair enough that that's great feedback and then Joe question for you I. This is a welcome to join being a public company were five months into a pandemic and my question now is going to be why didn't you raised the high end, but I'm sure in fact that but that quarter fantastic the tone much much much better from where you guys are sitting 90 days ago any parts.

Secular reason to kind of keep your keep one one foot or a couple of codes on the on the brakes with respect to not raising the high end of the range as you think about your business, improving and offering the full year guidance here.

Yes, I think for US Tom I think the biggest thing as you know we talked about this as we saw.

And improvement in May and then a really strong June and so I think we just want to see a little bit more of a track record in a couple of months you know really confident in what we've seen so far.

I think as we build confidence throughout the rest of Q3 and going into Q4, I think we'll have a better insight.

Whether or not those trends kind of continue but that's probably the biggest driver is just getting a little bit more history for us.

Yeah, I lose a finer point on that question John side. It sounds like the trends through a remains you are fantastic I mean as the rest of the country has sort of hit some puts and hedges and reopening in small businesses, perhaps having some pockets of challenges are you seeing anything in real time that gives you pause or is this just.

Just a very macro level, let's just see with the future holds.

Yeah, we're not we don't see anything that gives us pause right now time I think it's more of a macro level approach than we kinda talk little bit thought that no on the call, but nothing's given as pause right.

Fantastic really helpful. Thank you guys nice job.

Thank you.

Your next question comes from the line of Stan Zlotsky with Morgan Stanley.

Hey, guys. This is Chris on for Stan Congrats on solid results and the tenure at a richer as well.

Quick question on you talked about like.

Conversion rates and you talked about the top of the funnel volumes being really strong and the quality of the funnel as well being up to par with historical averages. So can you just help us better understand like the what are you doing actively to both.

Optimize the top of the funnel as well as the actual conversion process and making sure that your efforts our best utilized during this time.

Yes. Thanks for your question Chris This is Ryan.

Thanks.

I think the first thing to note is you're pretty fortunate that we have a modest data we've been at this for a long time, we've always been a very heavy in no model with a strong volume of trials and demos and we were able to gather a lot of data on those trials demos coming in demographic data as well as usage data within the trials and were able to actually.

Based on historical data great in score them. So we know exactly as things are coming in with the quality of those Trauson book like based on our other customers and the looking like or past customers that really helps our sales team figure out where they want to focus. It also gives us good direction or what we should expect in terms of conversion rate do revenue.

From that cohort of trials and customers.

Not only does it help the sales team and enabling the sales folks and where to focus but it gives a lot of information back to the marketing team and understanding the types of campaigns, we need to Ron and which sources, we need to double down on or maybe pull back on and so I think the headline for you here, there's a lot of data for us that we're tracking.

We know exactly what we should be getting in terms output based on the cohort of traffic in trials coming in and then we're constantly tweaking the model to make sure that we're optimizing for for growth.

Got it that's really helpful.

That's a quick follow on so.

Related to the premium module. The I think you talked about listening analytics seeing 100% growth year over year, which is really encouraging to see especially in this environment.

Can you help us better understand like comments like that as well as you know just investing longer investing for the longer term growth in the business does that longer term growth involve more product development or is it more go to market oriented I basically I'm trying to understand where are we in the call like saturation of the premium modules within your bigger.

Just in customer base and how much left there is to monetize with your current three previous modules.

Yes. This is just and I think.

Well, we think about.

The levers that we're investing in and where the opportunity is in our business.

There's a couple of different layers to that I think the first is just the understanding that we have on how much.

Green space there is still in this category and the fact that there are millions and millions of businesses that will be graduating and meeting tools and a platform like sprout.

The second is as we start to expand our offering into some of those.

Premium skews those still being very early in their life.

Seeing the adoption that we have there, but those are still from a penetration perspective, even within our existing customer base Theres a lot of room left about there.

When we think about how we model, our our our growth and what.

The rest of this year and 2021 looks like.

It's very much a combination of those things with the core business contributing.

A large amount of that with the premium offerings that we have today continuing to climb and with anything else that we may bring to market or packaging pricing changes et cetera.

Sort of being the third layer on that cake. So.

Directly answer the question I think we've got a lot of room left to run in terms of selling those into our existing customer base. We've also seen.

And we're really excited by the data in terms of our entire customer base adopting lows, meaning.

It's not just the large enterprise customers that are investing most tools. It's smbs agency its midmarket et cetera. So we've got to evidenced that says that those things are are.

Replicable and beneficial across the entire customer base.

Now we've got it.

Go and work on driving that adoption, but we're also seeing just in the number of seats on the core product continue to climb as social becomes more important to businesses et cetera.

So, it's it's multi dimensional and something that we feel really good about.

Got it thank you so much.

You got it.

Thank you.

Question comes from the line of David Hynes with Canaccord.

Hey, Thanks, guys. Thanks for taking my questions I don't know business better for Justin or Ryan, but as we see more kind of support desk oriented.

Tools embraced strategies are on messaging right, which obviously includes a lot of the social tools. How do you think about kind of the intersection of what they're providing.

I'm kind of the broader sprout platform I mean that does that make those folks more competitive with you or is it just solving for a different need.

Yeah, I mean I think.

The need us fairly different in that one of the premium advance toward the prime advantages of the spot platform is that we're giving our customers a place where all the departments can work together on one platform they really need visibility across.

Not just what's happening on the customer service side, but in the marketing side in the.

Community management, and publishing et cetera.

Those things really need to to be living together and we still see there are certainly organization to.

Our first our primary foray into social is.

Customer service and it may live and in that Department.

But that those that focus particularly from.

The folks that have been focused on the messaging side, that's been pretty consistent for quite awhile.

Theres not as much overlap.

As.

[music].

When you think about the different use cases in the spread of use cases across the product relative to what.

The messaging platforms are the providers that are focused on the messaging side of things.

That's not to say that theres not.

Some overlap and certainly our customers enjoy the ability to do all of that in one place.

Yeah, Yeah, Okay that makes sense and then.

Joe maybe a follow up for you and this is a extra level of granularity I would normally ask for but just kind of given the abnormal progression of how Q2 played out.

And any comments on how.

Customer adds came in during the quarter on a on a monthly basis. I mean was is there anyway to frame it on a percent was it like.

2030, 50% April May June like what are the shape of the quarter looked like in terms of new customer ads.

Yeah, I mean, you know DJ kind of following up on we talked about in the call without giving out specific data you can assume that April was wasn't the strongest market, we kind of talk not that given as can be an agency churn in our last call and then may we saw that trend get better and then June was really stop and so I think thats kind of that.

They were framing it and without getting too much into that the actual numbers.

Yeah that makes sense has had asked alright, guys. Thanks for the color.

Yes.

Got it.

Thank you.

A question comes from the line of Matt Van Flight with BP G.

Hey, guys. Thanks for taking my question Oh.

I guess as you look in the quarter, they're seeing seeing particular strength in those large deals on the enterprise side or even a sort of a larger mid market.

Do you feel like there was an acceleration from customers that that were maybe thinking about bringing in a more advanced social media platform. Some point. This year early next year that.

Really pull that forward from their own perspective, and maybe how some of that played out the pipeline.

Being able to close more deals as the rush to work from home and move everything is digital as possible played out in the quarter.

Yes, Thanks, Matt This is Ryan.

Yes, we saw some of that but I would say, it's theres a couple of different.

Stories that go in there one for sure on the enterprise mid market there were a variety of customers where.

Acceleration happened within the sales cycle deals that that May have started being early in Q1 move faster into Q2 because of the urgency around cove. It in the fact that for many most organizations all doors are closed except social and so we certainly saw acceleration there I would also say that there is other enterprise and Midmarket organized.

Stations that saw an influx in needs and that might be social care or the needed just better engage with customers and the tools that they had today. The platforms ahead today weren't cutting it ends up in those scenarios again, having the trial, having the ability to prove to an organization into practitioners that the product works and works very.

Quickly was essential for being able to accelerate deals within the quarter. So definitely depended on the organization. We are working with but there were quite a few opportunities to accelerate some pipeline.

In that mid market enterprise base.

Got it and then I think.

The last quarter, you talked quite a bit about some big deals in the travel industry and.

They are highlighted intercontinental.

The call today, but curious what you're seeing as you know this pandemic has really extended out I think a lot further then.

Maybe expectations were at the time, but when we're all together last time.

But just overall kind of what some of the bigger.

Travel and hospitality industry customers are now thinking.

Maybe their initial plans for when they might reopened a more either pushed back or they are now at much lower capacity than than they might have anticipated before or they're relying on on your platform. Even further to stay in communication with customers to understand what some of the trends in the market our or have any of them.

Look to maybe pair back on budgets across across their space as their revenues declined pretty precipitously.

Yeah, Matt This is Ryan again.

So you had a few different things so.

As you stated all of these organizations, especially the hotels and maybe in hospitality or events or travel.

There's a need to stay better engage with customers right now and everybody is paying close attention to what's happening in different pockets of the country worlds make sure that their speed with what is safe to do in terms of reopening and enabling customers come back in order to engage with them.

They are using sprout and our platform to stay better connected to make sure that there are putting messaging out on the platform, but also responding very quickly to any comments or engagement coming in from social that's continued to be really important they're also listening using or listening products to figure out the type of content that they should be delivering and so.

One of the Big Hotel brands that we are we work with it is actually be launching a new campaign and that campaign is really driven off of data that they pulled from social and they'll be looking at the sentiment from that campaign that they're running to determine what kind of investments and make them, both organic and paid perspective as they continue.

To run it so it's a variety of different things that these organizations are thinking about but now more than ever that needs to stay connected to their their clients and their community.

And this adjusted I'll, just quickly add to that I think that the.

The the reality that these businesses, particularly if they're not doing if they're not seeing customers face to face or if their businesses have been impacted over an extended period of time to ryans point.

This is a lot of ways the only way they have to communicate with their customers and if they want to be well positioned when things do open back up they need to be top of mind, they need to be front and center and they need to have been building those relationships. During this time when they didnt have those.

People visiting their locations because it in their stores et cetera. So in a lot of ways. This is.

The the best thing that they can be doing right now is maintaining those relationships until that that goes in person.

Or other channel types communications pick back up.

And so it's really I think a hedge on the future of we've got to be more invested here than we ever happen.

Alright, great. Thank you guys.

Okay.

Thank you I'll now turn the call back over to CEO and co founder Justin Howard.

Alright.

Cool so.

Want to thank everyone again for your time.

We look forward to the conversations will be having and the timely spending with you in the coming months, we are planning to spend some time as investors virtually as well as attending the Keybanc technology summit and Canaccord growth virtual conferences in August.

And lastly, I want to thank our employees, our customers and partners for their hard work and support and for health and close a terrific quarter.

We are grateful for the hardware can resiliency to support our team and to support our customers.

As we all work through these these challenging situations together.

And behalf on behalf of the entire team. We also want to thank the frontline and healthcare workers, who are keeping everything running thank you all and we'll talk to against them.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.