Q4 2022 Sprout Social Inc Earnings Call
Good day and welcome to the Sprout social fourth quarter 2022 financial results call. Today's call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star one on your telephone keypad.
To remove yourself from the queue you can press star one again, we ask that you. Please limit yourself to one question and one follow up.
Thank you and now I'd like to turn the conference over to Jason <unk>, Vice President of Investor Relations and corporate development. Please go ahead.
Thank you operator, welcome to sprout, social its fourth quarter 2022 earnings call.
Well be discussing the results announced in our press release issued after market closed today and I've also released an updated investor presentation, which can be found on our website.
With me are sprout, social CEO Jetson, Howard CFO , Joe del Preto, and President Ryan Barretto.
Today's call will contain forward looking statements, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Looking statements include among others statements concerning financial business and customer trends, our expected future business financial performance and financial condition performance against our multiyear financial framework, our market size and opportunity our plans objectives and expected results from our future operations growth products.
<unk> initiatives pricing or strategies.
And our guidance for the first quarter of 2023, and the full year 2023 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. Please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2022 to be filed with the Securities and Exchange Commission as well as future quarterly and current reports that we file with the SEC.
During the call, we'll discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles in particular references to profitability refer to non-GAAP operating income non-GAAP net income and non-GAAP earnings per share.
Definitions of these non-GAAP financial measures along with reconciliations to the most directly comparable GAAP financial measures are included in our earnings press release, which has been furnished to the SEC and is available on our website at investors <unk> sprout social dotcom.
With that let me turn the call over to Jonathan Johnson.
Thank you Jason and good afternoon, everyone. Thank you as always for joining us.
We had a remarkably strong fourth quarter and I am incredibly proud of our team for the results that we'll be sharing with you today.
Despite a challenging environment brought delivered record net new <unk> in Q4, and an acceleration across our business.
Social continues to gain criticality and our strong execution puts us in a favorable position today to guide towards profitable accelerating our growth in 2023.
We're building a durable business that we believe will define our category and we appreciate your support as we continue on this journey.
I'll begin today with a notable breakout in net new <unk>.
We believe several multiyear trends are beginning to shape takes shape in our business, including a clear prioritization of customer investment in social further definition of our leadership in the enterprise very strong partnership momentum and a fantastic execution on our pricing changes.
With rapidly expanding deal sizes, we delivered 35% year over year growth in customers paying us $10000 or more in <unk> and 59% year over year growth in customers paying us $50000 or more in a R. R.
Exceptional new business strength in the enterprise and the early benefits of our pricing changes delivered meaningful acceleration in our rate of ACB growth alongside our record quarterly non-GAAP operating profit.
Taken with better than expected retention and top of funnel quality and conversion data under our new pricing plans and.
And we are planning to deliver profitable and accelerating our growth this year.
Our original thesis on Socials role in business transformation has never been more relevant than it is today.
We believe strongly from the beginning that social was going to become the epicenter of the customer relationship and we saw social as horizontal critical to the entire enterprise fast moving and highly disruptive to the way that brands attract engage service and retain customers.
We were committed to a single code base that could deliver innovation at the speed of social coupled with an elegant UI to empower customer adoption and success.
We maintained a stubborn and focus on the core problems to solve while others became distracted and we were careful not to chase revenue at the expense of our vision or future technical debt now.
Now social as the preferred communication channel for consumers and it has become critical for business success.
Across marketing customer care support sales operations HR business intelligence and product teams customers rely on sprout day in and day out to meet their objectives and succeed.
Our commitment to our people and culture has also never been more important we believe that being a great place to work and a great place to be a customer are deeply connected.
We were recently honored to be named glass doors 2023, Best places to work list for the fourth consecutive year.
Our deliberate and methodical pace of hiring ongoing investments in our people and culture and commitment to our values have allowed us to aggressively pursue our objectives, while building a career destination for people to grow and thrive.
The combination of our thesis on the market and the strength of our team have prepared us for the breakout opportunity, we see today and have afforded us the ability to continue our investment in our product innovation and people in any environment.
We believe sprout is now uniquely positioned to pull away in 2023.
Entering the year, we believe our full pricing product go to market and customer success strategies are aligned to the most productive parts of our market, where we're already winning and we are best positioned to provide outsized value to our customers within our platform.
Another strong reinforcement of our strategy, our upmarket momentum and the success of our pricing changes is the strength we saw this quarter in our premium products.
In Q4, we signed nearly 40% more new customers purchasing premium analytics than any prior quarter.
More than two three X more existing customers, adding premium analytics than any prior quarter and in total across new business and expansion added more than 80% net new analytics <unk> than any prior quarter.
Total premium analytics are roughly doubled year over year, and our social listening modules grew greater than 50% year over year.
Beyond the strong execution against our pricing changes. Another highlight was a series of new business wins in Q4 that serve to validate our emerging leadership at the high end of the enterprise.
The usability of our platform combined with powerful sophisticated enterprise functionality is resonating at the high end of the market more than ever.
We're also very excited to bring our recent acquisition of Rep state into this mix.
Revenue state will allow us to accelerate multiple dimensions of our product road map and social listening and extend AI and machine learning across our platform to social customer care publishing messaging and employee engagement.
We believe are meaningful investments in an AI and ml will strengthen the value we deliver to our customers.
Multiple new monetization passed in this technology over the next 12 to 18 months.
Our priorities and focus for 2023 are clear.
We're going to continue to execute on a compelling product roadmap can and continue to execute on our pricing evolution of momentum up market and continue to press our competitive advantages to make sprout the clear category winner.
As we continue to hire across the organization and invest in the most productive parts of our business. We're excited to balance strong growth with profitability for the first time.
We are fortunate to be operating from unique position of strength and we believe we're on the path to realize our full potential in the years to come.
With that and for more on the success of the quarter I will turn the call over to Ryan.
Thanks, Justin I'm grateful for our customers, who continue to see more value in our platform and for our teams who continue to execute.
The technology industry is clearly undergoing change and as Justin highlighted the thoughtful nature of our organizational planning combined with the durability of demand for our software has positioned us to accelerate our growth through 2023.
Our competitors have spent the last six months distracted and pulling back on investments, which has and will continue to impact our product roadmap and customer support they are struggling with structural business challenges and we've begun to see an inflection point in migrations away from our competitors to this platform.
This migration spans all market segments and reinforces confidence that sprout is building a category defining company.
Earlier this month sprout was recognized by <unk> annual Best Software awards for the seventh consecutive year. We are featured seven categories, including best Global software companies and is a top 20 software product for enterprise what are the only social media management software recognized in the top enterprise software category and the only social.
Media management software right across SMB mid market and enterprise as I told the team and our 2023 kickoff, it's one time.
I'm proud that we are building a company where employees are aligned and rally around the opportunity.
Through this lens that we've executed so well on our recently implemented pricing changes and our increased focused around our most advanced customers.
Work like this is why people choose to join and build their career at sprouts.
The execution from our teams is being led with an urgency to move quickly excitement to work alongside our ideal customers and empathy and putting the customer first.
I want to share pricing feedback from the field is changes went into effect during the month of December we had roughly 200 more customers cancel in December as compared to the prior six month Rolling average.
Our smallest 100 of our customers that canceled had an average ACB of $936.
And the average ACB of the 200 smallest customers that canceled in December was $1056.
Across the entire customer base, our dollar based net retention rate shifted materially higher than the rolling six month average as the initial uplift more than offset low value low low cancellation.
Anecdotal feedback was even more encouraging many customers have begun to use pricing increases as an opportunity to upgrade their plan add users or added premium modules as they re prioritize their investment in social these.
These trends are so far resulted in better than expected <unk> performance within the customer base.
Our new business I'll begin with our lowest ACD customers and our monthly paying customer cohort, we added less than half the number of logos during December as compared to the trailing six month average, but added 5% more new business.
And our largest 100 new business lands in the month of December averaged 63, K ACB more than seven extra total average ACB and more than 60 X. The average ACB of the smallest 100 customers to cancel.
Overall, new business ACB.
More than doubled year over year.
We're maintaining our Arab growth at the lowest paying tier of our market with far fewer logos and now we're accelerating our monetization within the sweet spot of the market, where our platform delivers tremendous business value the.
The customers were lending today are higher quality across the board, creating endear benefits that we believe will compound for a very long time.
Some of the larger logos are attributable to the great work, we're doing with Salesforce, We announced our integration with service cloud at Dream Force in September and is highly differentiated integration went live in Q4.
Also during Q4, we introduced our integration with tableau that will empower our customers to strengthen their view of the customer with social data, particularly in the enterprise.
360 day review of the customer now, including Sprouts has never been more important.
Last quarter, I talked about momentum coming out of Dream force and the record pipeline.
Good to report that we added 175, new logos from a partnership during Q4, bringing our 2022 total to more than 250 logos.
We continue to bring our products closer together with differentiated and out of the box integrations and to accelerate our marketing and sales playbook, we expect a very strong relationship to continue to build well into 2023.
So at this point, we currently have a larger pipeline than we did 90 days ago, and we're focused on ensuring that our sales capacity matches demand.
The broader group of customers that we drew it skews our market and includes notable brands like Hormel Foods, six flags Entertainment Synopsys Visteon Booz Allen Hamilton carrier Square standard insurance and University of Michigan, Sotheby's and University of Kentucky Vitamin Shoppe.
Orange theory, fitness, Q2 holdings, and Louisiana State University.
The theme from the larger organizations that are selecting sprout is that they are upgrading which we believe is indicative of the fact that the market is moving in our direction.
Our first story comes from electronic design firm Synopsys.
We're excited to up level, our social program this quarter with Sprout said, Michael Lopez head of social media Synopsys is a key component of our 2023 strategy and we look forward to having further our publishing listening and reporting capabilities.
We're excited to up level, our social strategy by working with said Lori Remy as director of Global brand and communications at Visteon Corp. We have a new vision for social centered on building broader brand awareness and improving talent acquisition across our global footprint that includes more than 10000 employees.
The usability of social publishing listening and advanced analytics from a single platform gives us the tools, we need to extend Visteon is brand equity as we enable the future of digital and mobility.
I am proud of the way, we're delivering through in an uncertain time.
Nowhere on the past unlock our full potential our partnerships have strong momentum our pricing changes are resonating within the market new product enhancements are delivering tremendous value to our customers and our competitive positioning has never been stronger.
We are recruiting and hiring amazing enterprise sales talent and we're focused on the most successful tiers of our market. We're excited for the work ahead as we continue to scale category defining company and with that I'll turn it over to Joe to run through the financials Jeff.
Thanks, Brian I'll now walk you through our fourth quarter results in detail for moving it into guidance for the first quarter and full year 2023.
We're pleased to deliver record net new IRR durable growth and positive free cash flow for the eighth consecutive quarter, we expect to outperform our medium term financial goals in 2023, and deliver accelerating growth with non-GAAP profitability.
Revenue for the fourth quarter was $69 7 million, representing 31% year over year growth.
Subscription revenue was $69 2 million up 31% year over year and nicely ahead of our plan.
However, we experienced materially greater than expected inflection in partnership demand now for three implementation and Onboarding for all 175, social studio customers during Q4.
This resulted in $8 8 million to $1 $2 million shortfall in services revenue relative to our plan.
We've adjusted our forecast methodology and expect services revenue to be lower than 2022 levels moving forward.
Possibility that will continue this playbook.
Our exiting Q4 was $296 6 million up 32% year over year.
Enterprise New business was exceptionally strong in Q4.
We set a net new <unk> record in enterprise and mid market.
SMB and agency each accelerated in the month of December as pricing changes went into effect.
We had 132 net new customers in Q4, the finished the quarter with 34390 customers up 8% year over year.
The number of customers contributing more than $10000 and <unk> reached 6652 up 35% from a year ago.
The number of customers contributing more than $50000 in IRR reached 972 up 59% from a year ago.
Quarterly 10-K, and 50 K net customer adds were in line with our prior quarterly high watermark, even at materially higher price points and with rapidly expanding total deal size.
Q4, ACB growth up 22% year over year, it began to accelerate driven by enterprise new business momentum and the initial contribution from pricing changes.
In Q4, non-GAAP gross profit was $54 8 million, representing a non-GAAP gross margin of 78, 7%.
This is up 300 basis points compared to a non-GAAP gross margin of 75, 7% year ago.
But could you just scale favorably into our business model and benefit from it typically low services contribution this quarter.
non-GAAP sales and marketing expenses for Q4 were $28 6 million or 41% of revenue up from 39% a year ago.
We are fortunate to hire well throughout the quarter and continue to make meaningful investments in our future, particularly in enterprise and customer growth.
non-GAAP research and development expenses for Q4 were $13 3 million or 19% of revenue down from 20% a year ago. We've continued to make transport of the R&D investments to support the future evolution of our platform.
non-GAAP general and administrative expenses for Q4 were $12 3 million or 18% of revenue down from 21% a year ago. We.
We expect to deliver consistent G&A leverage as a percent of revenue moving forward.
non-GAAP operating income for Q4 was <unk> 6 million or positive <unk>, 8% non-GAAP operating margin improvement of more than 550 basis points year over year.
We are pleased with the ongoing efficiency improvements as we scale, even as we prioritize growth investments in the business.
non-GAAP net income for Q4 was $1 8 million for net income of <unk> <unk> per share based on $55 2 million weighted average shares of common stock outstanding.
Compared to a non-GAAP net loss of $2 7 million and <unk> <unk> per share a year ago.
Turning to the balance sheet and cash flow statement. We ended Q4 with $185 8 million in cash cash equivalents and marketable securities up from $181 9 million at the end of Q3.
Deferred revenue at the end of the quarter was $96 2 million.
Looking at both our billed and Unbilled contracts, our remaining performance obligations or <unk> totaled approximately $163 1 million up from $136 9 million exiting Q3.
Record sequential increase and up 51% year over year.
We expect to recognize approximately 75% or $122 million of total <unk> revenue over the next 12 months.
I do want to call it.
<unk> invoicing patterns.
$10 million of customer contracts were signed during Q4, but not invoiced the customer until January <unk>.
Turning to accounting rules this $10 million was captured in our PL, but not deferred revenue on our year end balance sheet.
We estimate our normalized billings growth rate to be between 35% and 40% over both Q4 and Q1.
Operating cash flow in Q4 was positive $3 zero million compared to $2 5 million a year ago.
Free cash flow was positive $2 6 million or a positive three 7% free cash flow margin ahead of our expectations.
For the full year 2022, free cash was $8 8 million or three 5% free cash flow margin.
Additionally, strong efficiency ongoing shift to annual and multiyear contracts continues to have a positive impact on our free cash flow as we grow.
In 2022, our overall dollar based net retention rate was 109% down from 112% in 2021.
Our dollar based net retention rate, excluding SMB customers was 116% in 2022 compared with 118% in 2021.
Slower expansion activity in our SMB and agency segments weighed out net expansion activity, primarily amongst our lowest value customers.
However, we believe a quickly changing mix towards mid market and enterprise pricing changes in our strategic alignment around our most sophisticated customers put sprout and a tangible path to improved dollar based net retention north of 120% by 2025.
Shifting to formal guidance.
For the first quarter of fiscal 2023, we expect revenue in the range of 75.0 million to $75 1 million or a growth rate of 31%.
Expect services revenue to decline year over year.
We expect non-GAAP operating loss in the range of <unk> 7 million to <unk> 5 million.
It represents an anticipated non-GAAP operating margin of negative <unk>, 8%.
We expect a non-GAAP net loss per share of roughly <unk>, assuming $55 4 million weighted average basic shares of common stock outstanding.
For the full year fiscal 2023, we expect total revenue in the range of 332 million to $333 million is expected overall reported growth rate of 31%. We expect services revenue will be lower than 2022 levels.
For the full year fiscal 2023, we expect total <unk> to grow at least 200 basis points faster than reported revenue decline full year <unk> growth of at least 33%.
We believe that year over year AOR growth will accelerate in 2023 and grow faster than reported revenue due to a growing mix of our enterprise and mid market segments tailwind from a pricing changes in our <unk> contribution from our partnerships.
We do not intend to guide <unk> each year, while our 2023 will be unique our installed base pricing changes will layer into our financial model over the course of the year, providing benefit to 2023, <unk> and partial benefit to revenue in both 2023 and 2024.
For 2023, we expect non-GAAP operating income in the range of $1 6 million to 2.0 million.
Implies annual non-GAAP operating margin improvement of 210 basis points to 220 basis points and a full year of non-GAAP profitability for the first time.
We're pleased to improve our rate of non-GAAP operating margin expansion and expect to deliver durable profitable growth on a non-GAAP basis.
We expect non-GAAP net income per share between <unk> and <unk>.
Assuming approximately 56.0 million weighted average basic shares of common stock outstanding.
Finally, I'll expand on Ryan's comments regarding pricing changes.
Both new business existing customer pricing changes or communicated in early November making the month of December the first months of effective pricing changes.
As such to foster a partial and early contribution.
And the installed base, but won't be back has been receptive understanding about the value we deliver to our customers and enhance innovation that we have delivered since most customers began their subscriptions with us.
I'll return with higher than normal by approximately 200 logos in the month of December . However, these are weighted to low value logos, an average <unk> of the 200 small logos turned was 1056.
I am sure the average ACB of the 100 small cell those that canceled the month of December had an ACB up $936.
Compared with an average ACB of $63000 for 100 largest new business levels in the month of December .
We saw fewer than normal customer downgrade in December as compared to the prior six month Rolling average, we saw many customers expand seats or adapt incremental printer modules as a means to expand bandwidth us rather than absorbing a pure price increase in fact, the attach rate of customers, having purchased a premium module increased by 160 basis points sequentially from.
Q3.
Roughly double the cadence over the prior four quarters.
December net dollar retention set a monthly record.
December total new business <unk> set a monthly record gross new logos were lower than prior trend line consistent with our expectation and new business <unk> in December more than doubled on a year over year basis. We expect these trends to each continue in 2023 compared to the prior periods, we expect to add a lower volume of customers that will be stickier and higher value.
We expect to turn a modestly higher volume a very low value customers.
A trade up as a meaningful tailwind to <unk> growth acd's cash flow in MBR.
We've had new business ACB is to continue to be materially higher than prior levels.
In total our customer growth in 2023 will likely be below historical trend line, but.
But ACB growth will further and more meaningful accelerate from our Q4 exit rate.
In conclusion, we're very proud of the execution of our teams, which underscores the resiliency of our business model and value of our software.
Social has never been more important or more valuable to our customers.
And we believe we're in a unique position to pull away from <unk>.
<unk> set an emergent as a category defining company and a $100 billion market now.
Now, we expect to deliver that growth with profitability as we continue to scale.
With that Justin Ryan I'm happy to take any of your questions operator.
Thank you if you would like to ask a question today. Please press star one on your telephone keypad again as a reminder, please limit yourself to one question and one follow up.
We'll take our first question from Raimo <unk> with Barclays.
Hey, Thank you.
Two quick ones, if I may 1st of all.
The customer wins, you pointed out like Synopsys square.
In the group that historically would have never kind of mentioned four for sprout, social because it kind of seems higher up in the market can you talk a little bit about the pipeline activity that you see.
In that kind of cohort it seems like more on the higher end to wherever you played.
Historically, and how thats kind of evolving and then one for Joe.
Yes.
And our kind of ticked down both for like the total but also look at slightly higher can you talk a little bit about the moving pieces that are that we should consider there as we think about that number. Thank you.
Thanks very much this is Ryan I'll start off on your first question around the customer wins in the large enterprise.
And this is.
This is a huge opportunity for us and something that we've seen a lot of success with thus far and I think it just continues to become more pronounced every quarter. There's a few things that are really tailwind for us here I think one has just been the historical success from those enterprise customers and I think we shared before.
One of the things that has really differentiated us is the way that we built this product it's incredibly intuitive, but it's also incredibly sophisticated.
And in previous quarters, we've shared some amazing wins from some fortune 500 fortune tens that have been in that group and in these accounts.
Typically have large populations of users that are accessing their product and that can be across marketing and care and sales and across the entire organization that usability becomes incredibly important.
A layer on top of that that we've built these incredible products across our analytics and social listening and advocacy and these are the products that our customers want and they want them all in one place they don't want to buy it from multiple vendors they want it in one suite and platform.
They love that they are getting it with the same UI and the same UX and so that organic build that we have here with that single code base has really differentiated us and the final piece that I'll. Just highlight is that our teams have done an amazing job both driving awareness in the enterprise, but also executing really well against these opportunities going out and building pipes.
Line with these accounts, taking great care of these customers through the evaluation process as well as when we win them and making sure that they get implemented quickly and that theyre getting great user adoption. So all of those things are really contributing to the success that we're continuing to see in the enterprise and I think it really stands out when you start to look at the 50 K wins, which are now.
59% growth year over year.
And then raimo on the on the.
And Dr front on the puts and takes that we've talked about this before where we saw pressure throughout the year was on the on the SMB low end SMB and then low end.
The agency side, if you look at our mid market enterprise actually the net dollar retention on that is well above the $1 16 number we gave SMB because that factors in the agency and if we think about where the business is shifting we think about the move up in the mid market enterprise, we do expect upside to these numbers through 2023 and then we also expect like we talked about.
120% overall.
By 2025, and early indications, but what we're seeing especially up in the mid market enterprise with the pricing changes with the new logos that we're landing there just higher quality and so the overall customer base. We believe over the next couple of years as the quality of it is going to totally change and so it gives us a lot of confidence as we move forward.
Okay. Congrats thank you.
We will take our next question from arguing Bhatia with William Blair.
Perfect, Thanks, guys and congrats.
On the quarter.
I want to start with.
I think Justin you mentioned that customers are increasingly prioritizing social and it seems like it's coming through your enterprise numbers, but with the net new customers that youre seeing come in particular it may be in December what differences are you noticing in terms of the scope of their sprouts deployment are there any particular.
Use cases or departments that are more involved less involved than you've seen historically, maybe just some color on that would be helpful.
Thanks, Larry I'll start there it's Ryan.
I think all of this is part and parcel of the really focused motion that we have into sophisticated customers, which tend to skew certainly in the midmarket and enterprise.
Those customers today that we're seeing come in they're prioritizing social they realize that it's a critical part of their business strategy yet.
Beyond marketing into things like customer service customer care, they see it contributing to the revenue growth from a sales perspective, and they really really want to capture the data that exists in social and leverage it to make business decisions. So when I think about the specifics of what we're seeing with those customers today, it's usually across multiple departments.
So certainly in the marketing department and customer care, but even outside of that we're trying to think about how they can consume that data to help them with with making decisions grabbing insights from that social data, which could contribute to and which products they need to evolve or perhaps introduce which markets. They want to go into how they want to compete.
And so we're seeing this also manifest itself in multiple products. So those lands are bigger they're coming into the core use cases across marketing and customer care. But then they are also adding in things like our social listening and analytics. So generally we're getting across a larger population, they're more sophisticated users with deeper.
Demands.
Again, they want to see all of these solutions in one place because they think it's really important given the horizontal nature of social that their team has equal access to the technology and the data.
This is Justin one thing I'll add there is just that I think.
Zooming out a bit what we're seeing is just a rise in the slope at the front end of the maturity curve right. We've got customers, who have been investing in social through varying amounts of time, we've got organizations there are different.
Ages in terms of their investment their sophistication and their maturity with social.
And so we're seeing more and more companies come into the funnel.
With more sophisticated demand they've proven used cases within their organizations.
Looking to operationalized social in ways is just continuously declined.
Year over year for the last several years is that does that maturity clients.
And so we're seeing more of those we're seeing them at a higher.
Certainly a higher deal size, but just a higher level of maturity and involvement across the organization overall.
And I think that that's going to be a trend that we're going to continue to see.
Because we're still very early I believe.
Broadly in social adoption within these organizations.
Perfect.
That's helpful and then.
I wanted to touch on Salesforce and now it seems like you've got some pretty good traction there in Q4, but.
I think you pointed out the social studio customers, but obviously the opportunity in sales force is much larger right beyond the core social studio customers can you talk a little bit about what youre seeing there.
Rest of the sales force space, maybe those core service type customers that work using social studio before how are you thinking about penetrating that base.
Are we in that process today.
Yes, I'd say, we're really early in that process today, we're incredibly excited about the partnership that we have in house continued to develop and mature as.
As you mentioned the service cloud piece that service cloud integration went live in Q4 alongside of Tableau, which went live in Q4, and we added those to the integrations that already exists with the sales cloud and with slack and so that's really all contributing to sprout being the best choice for any customer that.
It's really invested in and Salesforce CRM.
So all of that has really helped I think the other pieces from a go to market perspective, we're seeing tremendous support from the Salesforce sales teams in the field getting in front of customers. So many of the logos that we spoke about we're joint sales, where we had a chance to go in with that Salesforce AE and partner with that customer.
And from a service perspective, even the customers that are not on social studio that are moving over that our great service cloud users. They are thinking about social data. They are thinking about that 360 degree view of the customer and how social data taps into that.
Clearly become the best option for those companies to be able to integrate these platforms together and to leverage that data to make better decisions for their customer base. So just great great partnership across the product and go to market teams and again I'd say, we're early we think we have a tremendous opportunity here and partnering with salesforce for years to come.
Not just against the social studio opportunity, but the entire customer base.
That's very helpful. Thank you guys. Congrats again, thank you.
We will take our next question from Elizabeth quarter with Morgan Stanley .
Great. Thank you so much I just wanted to understand some of the composition of the record high net new a little bit more I know you hit on some of the drivers but was there any outsized contribution from either kind of the new customers landing at higher prices existing at higher renewals at closing of more of those.
Salesforce deals following momentum that Dream force.
And I'm, just trying to get a better sense for how durable the net new IRR additives in Q4, and what drivers could moderator or even accelerate into 2023.
Thanks, So much Ryan I'll start off there.
I think for me.
The durable nature and one of the things that we're really proud of is just the consistency of execution across our teams and so we certainly have seen the new business plans as well as our current customer base increase in size, which you can see it in the 10-K and 50 K, but I think what also is really important here is that there isn't a dramatic concentration of <unk>.
Single account or a couple of accounts that skewed this whole number in one direction. There is a lot of consistency in terms of just the the increase in average ACB is across all of these customers.
I think I'd probably go back to.
Something that <unk> commented on just a few minutes ago, just in terms of the composition as we're seeing the sophisticated customers coming in with with needs.
Better more than than might have been the core use case, a few years ago right Theyre thinking about this across marketing customer care. They are thinking about the value of social data as it relates to our analytics product and our social listening product.
So the main points are that we're seeing it across many customers, which you can see in the volume in the 10-K and 50 K and we're seeing it across our core use cases as well as the add ons.
That for us this reinstates the confidence we have in the durability of this yes. The only other thing the only other thing I'll call out Elizabeth and you know there is like on the <unk>.
Pure number. It's now Q4 is always going to be consistently has been a high watermark net new way our quarter. So I think that is consistent what we've seen the last couple of years. All those factors are definitely can lead into 2023, but just calling out that we definitely see outsized kind of momentum, especially upmarket and in Q4.
Versus the rest of the year.
Yes, Scott.
And then just a follow up on the margin.
Great to see that 210 plus of margin expansion.
In line largely in line with the initial target for 100 to 300 that you provided before the pricing change.
Wanted to understand.
Now that there is a pricing change.
Would there otherwise be some sort of upside to profitability and are you offsetting that with accelerating investments elsewhere in the sector.
Yes, so thats a great question, because I think right now obviously, just being 60 days into the pricing changes, we want to make sure we get a bit more information before we start kind of adjusting our investments but to the extent that we continue to see the success. We saw towards the end of Q4 and into Q1 and when you start outperforming due to the pricing changes I do think that's a more efficient.
Set of revenue that we're going to acquire and then at that point, we kind of look at do we reached at the model that we look at investments.
Outside of making incremental investments, we would expect to outperform.
The margin guidance, we gave assuming we outperformed the revenue number because of the pricing changes, but obviously, we wanted to make sure that there's not other opportunities to invest in our business. When we made those types of decisions.
Okay. Thank you.
We will take our next question from Parker Lane with Stifel.
Okay.
Hi, This is Matthew kicker for Parker, Thanks for taking my questions to start off when Youre looking at the topline growth outlook for 2023, how much of that growth would you attribute to those pricing changes that you announced last year.
Yes, so Matt we're not we're probably not calling those out specifically.
The impact of the price increase I think when we think about the guidance that we gave coming into this year, we contemplated all of that we contemplated hey, what's the momentum we're seeing in Salesforce whats the momentum we're seeing in pricing changes on existing customers. What are the new pricing on the website. So I think all of that was factored into the guidance, we gave and we talked about this before we'd like to come into the year.
Giving guidance it at a really high confidence level and so to the extent that these things continue from what we saw late last year, we feel pretty good about the guidance, but thats something that we specifically looked like X percent is coming from price price changes.
Not something historically that we've done.
Got it and then change in pace, a little bit as you look across the base what share of your customers have fully embraced tictoc is a social channel and how big of a differentiator is your support for that channel and the social media.
Yes, Great question. This is Justin so I think that we're still.
And we've seen similar.
Kind of adoption curves with other networks in the us.
I think we're still pretty early.
Certainly theres a lot of <unk>.
Energy and excitement about <unk> I think the number of organizations.
Embraced it the same way that they've embraced some of the other social networks is we're still on the early side there I think our functionality as is.
Category, leading I think we've got.
<unk>.
A lot of momentum with our initial release that we've talked about.
Few quarters ago, releasing to talk functionality across the entire platform in one go we've seen great adoption. There we've got a roadmap of things that we want to continue to build we're also seeing a lot of really exciting things from that team in terms of the capabilities that theyre turning on as they make more investment in there and their partners their API et cetera.
So feeling great about that.
I think that we've got.
I wouldn't want to handicap, what the adoption curve looks like I think it is faster than most networks that we've seen historically.
But I would still put us.
Relatively early from a how do we operationalize this across the organization beyond kind of the initial use cases.
So we will see that develop I think probably a lot of movement during 2023.
Terrific. Thank you very much.
We will take our next question from Michael <unk> with Keybanc.
Hey, guys.
I just.
This may have been asked before I'm not sure, but maybe you could talk about some of the things in terms of forward looking indicators that give you give you the most confidence a solid quarter, but obviously a tough environment.
Very good guide so level of confidence that guide what are the things that give you the most confidence there.
Yes, Michael Good question. So I think for US is a couple of things one is if we look at.
First of all Ryan Tycho as you think about the momentum we're seeing with the price changes on existing customer, let's start there we've seen very little pushback.
The only the only areas of pushback on the really low end of the market and so overall, we feel really good about our strategy to rollout those price increases across <unk>.
2023, because we just haven't seen a lot of churn from that and then you layer in what we saw on the new pricing on the website. So far I know, it's early 60 days in what we talked about we doubled our new business Acb's doubled in December from on a year over year basis, we like the momentum that we're seeing are in the mid market enterprise, we talked about that.
The increase in our premium attach rates.
And so we're just seeing a lot of momentum and what we consider the healthiest part of our business and then you layer in the success that we're seeing with the Salesforce relationship.
Still think like Brian said, I think we're really early and that opportunity not only with the salesforce studio customers, but the customers across all of the sales force kind of ecosystem with the service cloud integrations. So theres a couple of things there now obviously, we're early in the year and we see a lot of momentum right now, but those are kind of the key things Michael that we're seeing that kind of gives us confidence.
Into 2023.
Thanks, Sean.
If you could just give me a second one a follow up.
Okay.
Not necessarily quantitative quantitative question, which is.
ACB.
<unk> 9000 rounded.
It's not that I wanted to tell me, where that's going to go long term, but how do you think about that long term in terms of your opportunity, whether you're giving me order of magnitude or just telling me where you are addressing in the market, but but obviously that's one of the places you look at the model.
This could be something really different.
Yeah. So this is just a couple of things that I think are really powerful as we think about where ACB is go where were deal sizes and just our customer investments go long term as we're adding more value.
Really come from the past for us so when we look at.
Average deal sizes.
Several years back and the consistent trend line that we've seen since day one of those continuing decline when we look at the.
Dollar value of our top decile five years ago.
Being smaller than our average customer size is today.
We see numbers like we talked about earlier.
The top 100 customers in the averages there.
There is no.
No scenario, where.
That we contemplate where we don't continue to see consistent growth in the ACB. Some of that is due to our execution. Some of that is due to <unk>.
The continued investment and where we are in the maturity curve that I mentioned earlier.
And the value of social to these businesses.
No.
If we were to extrapolate some of what's happened in the past when we look at our top decile versus our average and how that's grown into one has grown into the other.
We think that there is a lot of headroom.
And where these things go in the other thing I'll point to is just if we look at the growth.
10 came 50, K and what's the trajectory of that has looked like.
And certainly many customers eclipsing that by a good deal.
That that trend line for us is.
Very reliable.
And as we mentioned in the prepared remarks, something that we think accelerates in 2023.
Great Thanks, and congrats on the quarter.
Thank you.
We'll take our next question from Matt Vanvliet with BTG.
Matt Your line is open. Please go ahead.
Matt Please pickup your handset.
Alright, and hearing no response move onto click Clarke Jeffries with Piper Sandler Matt If you can hear US please re queue.
Alright, Thank you for taking the question.
The first question is you have established a pretty impressive cadence here in social studio conversions $25 575.
But still very early there single digit percentage of the few thousand potential customers do you have a sense on that on what those numbers look like in 2023, or maybe give us a sense on how much larger the pipeline of active conversations are compared to that $2 50.
Yes happy to thanks, Mark This is Ryan here.
Continue to see quite a bit of momentum I think in the prepared remarks. There. We just shared that the pipeline heading into this year is bigger than it had been ending the year. So we're continuing to see really good momentum in the conversations that we're having with the social studio customers, there's still a decent amount of time left on.
On the process to Sunset for Social studios. So we think that those will happen over time.
But we're certainly working in partnership here with with Salesforce and Salesforce account teams to get in front of these accounts. So we feel really good about the imminent and heading into this year. We think that there is plenty of upside we're going to continue to look for additional product opportunities to add even more value to social studio customers customers, but also sales.
<unk> customers in general so we haven't really broken out the numbers, specifically, but I would say that the pipeline looks really healthy and the opportunity continues to look really good for us for this year in the year after.
Great and then just a question maybe for Joe.
Maybe just to round out this this whole conversation around the focus up market.
And the cancellations and the low end.
What's the gross additions number on a logo basis in the sort of cohort below 10-K, consistent with prior quarters and really the only change here or cancellations.
No we've talked about this before.
We got into the pricing changes on our web site Clark towards the end of November and December we talked about before we're going to land way more mid market and enterprise customers. So overall, we're going to see less net new even growth because we're just not bringing in that low end SMB. We spent a lot of those customers in.
And on the low price point plan, you'll definitely going to see less gross new logos as well given the pricing changes on the website, but that's by design I mean, the <unk> that we're generating from those those customers is dwarfing the number of customers and they are we would have gotten from that low end of the market. So that was a conscious change and we feel really good.
That tradeoff that we've been seeing so far.
Okay.
Add to that and just use this as an opportunity to kind of continue the conversation we've been having for the last couple of years.
Which is around the focus on the revenue from from the new customer adds.
And maybe like the cleanest way to illustrate this if you look back for the 2021, when we had some of the high watermark quarters from a net adds perspective.
Versus Q4, where we added.
Roughly twice as much revenue from substantially smaller net adds number and this is consistent with where we wanted to make sure that we were we were pointing all of you that the revenue yield, particularly with the price changes and the move to the mid market enterprise is going to be the focus for us.
To be the focus for us since youre going to see that continue to play out.
Will.
Start to have more visibility to establish baselines, but.
The net.
<unk>, especially as we're contemplating those those much smaller customers cycling out of the business over time.
It's going to be the thing we want to continue to focus on.
Thank you very much.
We will take our next question next question from DJ Hynes with Canaccord Genuity.
Hey, guys.
On for Ryan to start and then a follow up for you Joe. So Ryan there is a light touch trial led go to market model resonate as well at the high end of the market or do you need any refinement. There as you focus more on the enterprise and maybe that bridges into a conversation around kind of how you plan to invest in our sales org in 'twenty three.
Yeah.
It is the same motion and we are incredibly excited about that trial motion, especially in the enterprise because it is incredibly differentiated.
Most enterprise solution certainly in our space, but I think in many software categories.
Don't lead with our product and the enterprise they usually lead with really.
Heavily customized demos and really long sales cycles type sales cycle times, and heavy services and Thats the opposite of the way that we approach the market.
And we've seen great excitement and progress in having these conversations with customers, even when we get rfps from enterprise customers, we certainly feel those out for them, but we make it incredibly important for them to actually get their hands on the keyboard and get into the product to get into the trial to prove that sprout is going to fit them perfectly for what they need.
Before they sign a contract so it's actually been I would call. It a secret weapon for us in the enterprise is something that we try and have every customer engage with the product because we're so proud of the product itself and we know that it works really well for enterprise customers and then in terms of investment or for us from a capacity perspective.
We've been adding to a variety of our teams certainly outsized investment going into our Midmarket and enterprise teams and the teams that are supporting them across solution engineering and outbound BTR some customer success as well.
But that continues the midmarket and enterprise continue to be the largest part of our business is the fastest growing.
Yeah perfect good to hear.
Joe and the follow up for you is just.
With the focus on the enterprise, what's your expectation for the mix of business that will come in with annual billing terms versus month to month.
Yes, so DJ we expect that to continue.
To be heavily weighted towards the annual I think.
Historically, our overall customer base is probably more closer to like we've talked about this on an annual tank side by more 60, 40, but I can tell you right now the new business coming in.
It's actually higher than that ratio and so I do think you'll continue to see that kind of trend line continue through two.
2023, 2024, we've got a long way to go to make that mix I'd love to get that mix to 85%, 90% annual versus month to month.
And I think we can get there over time, but youre definitely going to see the new business coming in NAR basis is definitely more heavily weighted towards the annual.
Does that mean, we should see more.
Cash operating leverage than non-GAAP operating margin leverage.
Yes, so what we've talked about is yes, we expect it.
<unk> talked about this before very consistent we expect a couple of hundred basis points.
The improvement over operating margin for free cash flow free cash flow should be a couple of hundred basis points of operating leverage DJ. So we expect that trend to continue okay got it thanks guys.
Yes.
We will take our next question from Matt Van Vliet with BTG.
Alright, guys hopefully it's worked in this time can you hear me all right.
There we can hear you Matt.
Alright, sorry about that I had to switch phones, okay. So I guess when looking at the Salesforce partnership.
Couple of clarifying questions I know you kind of touched on a little bit of this earlier, but curious how much of the sort of 250 plus customers you sign this year. We're in fact, social studio customers. So should we think about most of what's come in so far as being that first component of the partnership and the more recent part.
It has expanded beyond that and then also within that on the.
Average ACB.
Youre getting from those Salesforce partnerships customers understanding it's very early but are they consistently in sort of the 10-K or even the 50 K bucket.
Any any kind of directionality on the size of the customers that youre getting would also be helpful. Thanks.
Yeah, Yeah happy to answer both of those Matt.
Yes in terms of the logos coming over a majority of them are the social studio customers not service cloud and we watch that integration, we talked about at a dream force in Q3, but it didn't go live until Q4, So just really recently and so for US we see tremendous.
This opportunity with the rest of the service cloud customers that might not be social studio customers today, but.
But certainly the value of what we do is going to be incredibly important for them as they think about the 360 customer record. So we see a lot of upside, but what youre seeing right now.
Really the social studio customers. There is some overlap, but I would say it's small in comparison to what was just core social studio for US and then from an ACD perspective, youre spot on those customers.
Generally fit within that 10-K 50, K. So there are a perfect fit for our area of focus in.
Where we're already supporting customers today. So we're really excited about how they just generally fit into our strategy.
Okay, Great and then when you look at the international markets.
No you've kind of had some additional investments, especially in Europe , but.
Curious on what Youre seeing trends there is the macro seemingly impacting some of those customers to a greater extent.
The war in Ukraine is sort of more top of mind and right in front of them.
And anything from kind of an ACB perspective that youre seeing there are you getting as much uplift.
Or is that sort of yet to come as the price increases roll through over across the park. Thanks.
Yes from an international perspective, we continue to be really excited about the opportunity and really excited about the execution that we're seeing from the team, especially in EMEA.
<unk> continues to be the fastest growing part of our business.
Certainly there is things that are happening in the macro.
Those markets, but our team in Europe is just Phoenix executing incredibly well, we've seen really good ACB uplifts from that group as well both from a current customer and a new business perspective.
We see a lot of headroom in terms of the total addressable market and EMEA and then certainly when we think about the rest of the world as well, where we have smaller investments, but we'll continue to.
We invest over time.
A tremendous amount of Tam that we haven't got to yet that we're excited about it. So we feel really good about the trends that we're seeing it's operating very similarly to North America today, and performing well with with some upside.
Alright, great. Thanks for squeezing me back in I appreciate it.
Yes, Thanks, Matt.
As a reminder, everyone. Please limit yourself to one question, we will take our next question from Brett Knoblauch with Cantor Fitzgerald.
Hi, guys. Thanks for taking my question just want to make sure I heard you correctly did you say total churn in December was 200 customers or was that just a reference point for the average ACB of the smallest 200 customers and then off the back of that I guess, what percentage of your customer base have you rolled out the price increases too.
And do you expect kind of similar levels of churn throughout the year or is there a quarter or two where theres a bigger renewal cycle and you would expect kind of a bigger churn.
Yes, so when we talked about was that we had on average December we had 200 logos logo churn higher in December than we had over the trailing average so that wasn't the total logo churn that was just the increase we saw in December and then we talked about the average ACB of the smallest 200.
It's about $1000 of the logos that churn and so overall.
We're not super worried about that churn is very low end of the market and thats, what we kind of expected. It actually it was probably we had less churn overall from an IRR standpoint, as you know Brett we're not really focused so much on the logo churn at front, we're more focused on the AOR growth and retaining our highest quality customers that remained really strong I think.
We talked about in the call. We had we had our highest LDR in December on the revenue side. So feel really good about the momentum there as far as the price increases we've talked about this before we kind of are they kind of come evenly.
Through December of this year through our of last year through December of next year. So it was probably evenly over 12 months.
And like we talked about its early we saw from an IRR standpoint, we saw very low pushback in very low churn, we might've saw higher logo churn, but on an IRR standpoint, we didn't get a lot of pushback overall, and we don't anticipate a lot of pushback going forward either just based on the customers. We've already talked to so no real impact we don't believe materially on our IRR.
But you might see like we talked about a little bit of impact on our on our logo churn.
We will take our next question from Andrew Scott Perry Bahrenburg capital markets.
Hi, This is Stephanie on for Andrew. Thank you for taking my question.
I'm wondering on when you.
Move up market and gaming is more sophisticated customers.
How we should think about potential product investments or R&D investments going forward. Thank.
Thank you.
Sure Yes.
Question. Thank you this is Justin.
<unk>.
So.
I think generally you've seen from us over the last probably three and four years are.
Product Roadmaps R&D investments the way that we've organized the product team and the products that we've been putting on in the market.
Sort of.
We're ahead of the.
The progress that we've seen in the mid market enterprise I think in anticipation of that grade as our customers were getting more sophisticated as we were being pulled higher up into the market.
We've been building against those problems and really focus our roadmap has been biased.
Towards the sophisticated in the Midmarket and enterprise for quite some time. So you should expect that to continue certainly.
But it's also true that as we see larger deals more sophisticated customers.
Across large organizations.
We are being.
Yes.
We're exploring how we can be a better platform for those customers with a more.
Intense lens and so figuring out how we.
How we can be building the tools that the largest of our customers need to be successful.
That comes in the way of.
Areas like collaboration across the team compliance et cetera, youre going to see more investment.
And a lot of the things that the large organizations and larger enterprise need.
May be biased more in 2023 than you've seen from us historically.
But the short answer is we've been building for that space for quite some time youre not going to see material strategic shifts.
In the R&D focus and investment youre going to see incremental.
Continued investments to meet the needs of our of our largest customers.
We will take our final question from Patrick Schultz with Baird.
Hey, great. Thanks for taking my question just on the recently announced Rep. You State acquisition I believe you noted that the financial impact should be immaterial to any near term financial goals, but could you just talk a little bit more about the rationale behind the acquisition how does advanced technologies, such as machine learning AI et cetera, better positioned sprout competitively over the longer term potentially drive some operating leverage.
Yeah, Yeah sure so.
Yes.
Team the technology behind it.
Sure.
Our.
That organization is one that we've been familiar with for some time in the tech that they have been building I think.
Thinking about how we're able to leverage that near term in things like our listening.
And our customer care tools in the engagement side.
Even into things like publishing and other areas of the application I think.
Are going to be.
Accelerate road map and ways in areas that we've wanted to get to very quickly in 2023, I think we mentioned in the prepared remarks also we see some opportunities to increase.
Monetization in some areas with that addition, and specifically applying and layering their technologies on top of.
What we have today.
What's even more interesting, though I think is with the area that that team has been focused on for as long as they have and thinking about how AI ml and some other related technologies can advance our customers' pursuits in social and make them more effective.
And give them greater.
Reach.
Greater horsepower and their social efforts.
Where we start to get really excited so thinking about not only how we can layer. There are technologies there are existing technologies as well as the ones that <unk> been working on.
But also.
Embedding that team across our platform to start thinking about new ways and innovative ways that we can start.
Start to leverage things like generative AI and machine learning into other parts of the platform I think that's where we start to think about into 2024 and beyond where we're going to see a lot of really exciting opportunity.
Leveraging again some of the things that team has built but more specifically their expertise and the things that <unk> been focused on and applying that to our R&D work.
And that concludes the presentation for today I would like to turn the call back over to Justin Howard for any additional or closing remarks.
Great. Thank you. Thank you so much.
I'll make the closing brief just appreciate everyone's time today, we look forward to spending time with everyone.
In the coming days and weeks.
<unk>.
Have a wonderful day.
You all.
Thank you that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Please wait the conference will begin shortly.
Sure.
[music].
Okay.
Okay.
[music].
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Sure.
[music].
No.
Yes.
[music].
Yeah.
Okay.
[music].
Yes.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
[music].
Yes.
<unk>.
[music].
Yes.
[music].
No.
Yes.
Yes.
Okay.
[music].