Q1 2023 Sprout Social Inc Earnings Call
Please wait the conference will begin shortly.
[music].
Hello, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the sprout social first quarter of 2023 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session if.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Jason record Vice President of Investor Relations and corporate development you may begin.
Thank you operator, welcome to sprout, social as the first quarter of 2023 earnings call will.
We will be discussing the results announced in our press release issued after market closed today and they've also released an updated investor presentation, which can be found on our website.
With me are sprout, social CEO , and 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 provision of the private Securities Litigation Reform Act of 1995.
Forward looking statements include among others statements concerning financial.
In customer trends.
<unk> 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 future operations growth products Bachman initiative pricing partnerships or strategies.
And our guidance for the second 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 for.
For a discussion of the risks and other important factors that could affect our actual results. Please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2022 and.
Supplemented by our quarterly report on Form 10-Q for the quarter ended March 31 2023.
Each filed with the Securities and Exchange Commission as long as any future quarterly and current reports.
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 and margins refer to non-GAAP operating income non-GAAP net income and non-GAAP earnings per share.
Definitions of these non-GAAP 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 got sprout social Dot com.
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 and for your time today.
Late last year, we began making pricing changes that we believe will materially improve the long term growth and margin trajectory of our business by better aligning around an incredibly strong core business, while de prioritizing the long tail of low value business that had begun to anchor our growth.
Today, we're going to provide additional detail around our progress here and how those efforts have set us up to raise our forecast for accelerating our growth and margin expansion throughout 2023.
During Q1, we saw new business deal size is more than double year over year.
In addition to 46% year over year growth in customers paying us $50000 or more in a R and 59% year over year growth in customers paying us $250000 or more in a R. R.
Leading indicators like RP O and CRP O each meaningfully accelerated during Q1, which helped drive further acceleration in ACB growth alongside record margins and record free cash flow.
We also made meaningful improvement to the quality and health of our customer base with our noncore customers that spend below $2000 and they are now representing less than 5% of our total air are down from 12% of <unk> and 50% of logos in 2021.
The healthiest, 95% of our business delivered greater than 35% year over year AOR growth nearly 600 basis points faster than total air growth as we continue to shift our resources away from the very low end of our market.
These changes are also accelerating new business and expansion momentum within our highest ACP customers with better baseline pricing and focused energy across the team.
By drawing a line in the sand around the entry point to sprout and properly aligning our focus we've begun to accelerate the growth in the healthiest parts of our business and expect improvements across key metrics as we replace lower quality revenue with fundamentally healthier unit economics.
In Q1, we shifted customer success and growth teams away from our smallest ACP customers and at the same time change prices, which we believe accelerated roughly $6 million in churn of low quality revenue.
As I mentioned are less than two K customer cohort as a proxy for noncore customers is now less than 5% of total air are.
Until this quarter. These customers had been allocated a meaningful investment in sales and customer success resources, specifically accounting for more than 20% of our total customer success headcount in spite of MTR just barely over 100%.
This was an investment with negative ROI and we believer moving this anchor and shifting resources will position our company for fundamental growth and margin acceleration.
We've also made great progress on our top of funnel demand since making our pricing changes last November .
We anticipated an initially experienced a decline in our top of funnel trial volume, while we deemphasize high volume low value leads.
However, through the marketing teams exceptional work on content messaging and SCO, we've seen our overall trial volume move to pre price change volume levels beginning in March with further acceleration in April .
At far higher price points, we believe this underscores the size of our market and a far greater near term revenue opportunity.
We believe the shift away from our inefficient low end business consistent growth in the healthiest tiers of our business and renewed top of funnel demand through March and April positively impacted net new air our performance in April with enterprise being a positive outlier.
We expect that a healthy April performance will continue through Q2 and result in strong net new <unk> growth in Q2, and an ongoing acceleration as we progress through the year.
In spite of accelerating $6 million in churn during Q1 from our lowest ACP customers. We're pleased to increase our 2023 AOR growth forecast as we further build on these initiatives.
We're looking into Q2 with a healthier customer base, consistent new business and expansion execution, improving competitive dynamics and healthy top of funnel demand.
Our investments in enterprise also continued to deliver great results with enterprise Q1, net new <unk> growth of greater than 50% year over year.
During Q1, our acquisition of Rep. You stayed accelerated several facets of our roadmap and social listening and we're now quickly extending more sophisticated AI and machine learning across our platform to care publishing messaging and employee engagement.
Late in Q1, we further built on these advancements with the combination of open a ice GPT model.
We're going deeper into social customer care routing and workflow functionality, and allowing impactful and intuitive added greatly build upon existing customer workflows.
We're being thoughtful and intentional with our approach to AI to bring the most valuable aspects of these technologies to our customers to tailor unique solutions to social.
Premium module attach rates were again strong this quarter, improving by 100 basis points sequentially to nearly 23% of our total customer base.
We see ongoing success and opportunity with customers selecting our full suite of products as we continue to see meaningful expansion opportunities to drive each of these metrics higher over time as customers unlock social data to drive business decisions.
We believe our roadmap and AI, social customer care listening and analytics will unlock even greater value with our premium capabilities in the quarters ahead.
We are also very excited today to announce an extension of our long standing strategic partnership with Twitter.
Global consumers continue to validate Twitter is one of the most valuable channels for businesses to find the voice of culture to plastic authentic relationships with customers and to provide real time engagement.
Through the strength of our partnership our customers will continue to have the tools they need to execute a holistic social strategy at scale.
All said, our multiyear investments in the most productive parts of our market are coming into focus in 2023.
We've meaningfully said gross inefficiency anchors to fully benefit from our pricing evolution in momentum up market, which we believe will make sprout the clear category winner.
We are continuing to hire incredibly talented people across our company that will uniquely position sprout to flex all of our competitive advantages to maximize our potential in the years ahead.
With that I will turn the call over to Ryan.
Thanks, Jonathan I'm grateful for our customers, who continue to see more value in our platform.
Our teams are consistently strengthening the foundation for the future.
Adjusted highlighted we expect that the durability of demand for our products and our strategic alignment around the most productive tiers of our market will position us to accelerate our growth through 2023.
Our entire team is pointed at the fastest growing tiers of our market.
This is where we've already built considerable momentum and we believe we have our strongest competitive differentiation.
We believe this supports and durable and even more efficient growth beyond 2023.
Our competitive positioning in the Midmarket and enterprise continue to strengthen and are happy customer reviews are a key proof point.
In February spread was recognized by Q2's 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.
We're the only social media management software are recognized in the top enterprise software category and the only social media management software ranked across SMB mid market and enterprise we.
We take great pride in this recognition because it's completely based on the voice of the customer.
This type of customer feedback is grounded in delivering value and a strong return on investment.
Forrester total economic impact study recently found that enables customers to achieve a return of investment of 233% and a net present value of $1 $3 million over three years with a payback period of less than six months.
Commission study conducted by Forrester consulting found that our products enabled customers to boost productivity and improve their organic reach on social by 85% deliver faster response times and save nearly $500000 and legacy tech costs over a three year period.
We believe our distinct advantage in the market comes from our relentless focus on leadership and social the refined elegance of our products are unique architecture, which enables faster innovation and our highly efficient go to market motion.
Together these factors create a winning combination for our company.
We are incredibly grateful for our customers, who continue to vote as the industry, leading software, especially in the enterprise.
Also unique is our opportunity to partner with Salesforce. During Q1, we migrated 96 customers a handful of which are leveraging our out of the box service cloud integration.
When we announced our partnership in March of last year, we shared an estimate of 3000 4000 social studio customers.
We transition roughly 250 in 2022 and roughly a 100 during Q1 of this year.
We've also told you to expect some positive seasonality from this relationship in each Q4 and looking ahead. We believe that Q1 will be the low watermark for migrations. This year as contributions grow meaningfully and linearly over the course of 2023.
Social has also being built into service cloud for thousands of customers and this functionality is also unwinding over the next 18 months, which we believe has the potential opportunity that has multiple times larger than social studio alone.
Our data conversations with customers and work with sales forces typical multi year contracts provides visibility into momentum as we work through the opportunity a majority of which is still in front of us.
Beyond just this transition we are more excited for the medium to long term opportunities presented by our product integrations that we believe have positioned sprout social standard for all salesforce customers.
We'll have more to share on our work with service cloud later this year.
We grew with an amazing list of customers this quarter, including Campbell Soup company Universal Pictures Big lots, Dave <unk> Buster's, the Ohio Department of Health Samsonite, Europe , GE power and will.
Health services, Primera Whirlpool, UK and Pabst brewing.
Building on my conversations with customers I'd like to share my perspective on our served addressable market and medium term model framework, which we initially presented at our 2021 Investor day.
Planning, our second Investor Day for September 27, this year in Chicago, we look forward to welcoming many of you there.
We look ahead to this event like to help refine your expectations.
Since 2021, our market has evolved is growing social teams cemented their strategic importance to businesses.
Networks emerged to further fragment the complexity that we're solving for and the use cases evolve to pull on new teams of users.
We also believe we've accelerated our momentum up market and strengthened our competitive position while materially evolving our pricing strategy.
We assessed our served addressable market at $44 billion in 2021.
Which was based on the addressable number of businesses on social and Theyre segment level Acd's.
<unk> Q2, 2021 through Q1, 2023 total atvs have grown 43%, while our Midmarket and enterprise <unk> grew at an even faster rate year over year in Q1.
We anticipate stronger ACB growth ahead as the utility of social continues to grow.
We continue to see primarily new greenfield opportunities in the mid market and lower to mid enterprise with a mix of Greenfield legacy tour replacement and point solution consolidation and the upper enterprise.
While we're not prioritizing low HCV logos. These factors in aggregate create significant potential upside to our 2023, San forecast as well as our 2025 Tam forecast.
We also outlined plans to grow at least 30% annually through 2025, while expanding margins 100 to 300 basis points per year.
The change in quality of our customer base broadening new business applications in the Midmarket and enterprise and expanding opportunity inside of our installed base each support ongoing confidence in our ability to outperform this growth target.
We expect that improving total unit economics, and net dollar retention as well as expanding total deal sizes over the remainder of 2023 will each contribute to anticipated upside on this margin expansion forecast.
I am proud of the way we are delivering through an uncertain time and believe we're on the path to unlock our full potential.
Gartner ships have strong momentum our pricing changes are resonating with the market new product enhancements are delivering tremendous value to our customers and we believe our competitive positioning has never been stronger.
We are recruiting and hiring amazing enterprise sales talent and we're focused on the most successful peers of our market.
We're excited for the work ahead as we continue to scale a category defining company.
That I will turn it over to Joe to run through the financials Joe.
Thanks, Brian I'll now walk you through our first quarter results in detail so moving on to guidance for the second quarter and full year 2023.
We further aligned our playbook this quarter to our fastest growing and most efficient segments.
Our aim is to provide more detail into this shift with added customer metrics disclosures.
Strong growth across our core customer base, we are pleased to raise our forecast for accelerating our growth with even greater efficiency. This year.
Revenue for the first quarter was $75 2 million, representing 31% year over year growth.
Subscription revenue was $74 7 million up 32% year over year.
Services revenue was <unk> 5 billion down nearly 30% year over year.
Eight of our exiting Q1 was $309 9 million up 30% year over year.
Enterprise net new <unk> was up more than 50% year over year to a record percentage of our mix.
This is in part informed decision to ship customer success resources away from our lowest value customers, which we believe accelerated approximately $6 million or low value logo churn. They would have occurred over the course of 2023.
We expect strong net new <unk> growth in Q2, and accelerating <unk> growth over the course of 2023.
The number of noncore customers being less than $2000.
<unk> declined in Q1 to 10350 customers down 31% year over year.
Ore from these customers was less than 5% of total <unk> at the end of Q1.
Just two years ago, the number of less than two K aero customers with nearly 16000, which accounted for more than 50% of our total customer count more than 12% of our IRR.
Less than two K customer logo count and <unk> have each now declined sequentially each quarter for the past seven quarters.
As we focus our product and go to market strategies around mid market and enterprise have shifted we've accelerated over the past 90 days.
The <unk> growth rate to customers that contribute more than <unk>.
It has exceeded our total <unk> growth rate over the past seven quarters and was consistent with Q4 2022 at greater than 35% in Q1.
This focus cohort of more than 23000 customers now represent more than 95% of our IRR.
Given the healthy new business lower growth rate in this cohort expansion from pricing changes this year accelerating contribution from partnerships and expanding use cases for our software.
We believe that sharing this low value growth anchor position sprouts to optimize our growth potential.
The number of customers contributing more than $10000 and <unk> grew 33% from a year ago.
The number of customers contributing more than $50000 and they are.
Grew 46% from a year ago, and the number of customers completing more than $250000 and <unk> grew 59% from a year ago.
We also grew with an existing customer this quarter and now have two customers paying us more than $1 million.
Q1, ACB growth of 26% year over year accelerated from Q4 2022.
New business deal sizes that more than doubled year over year, the exit from a number of low value logos and ongoing execution on our installed base pricing changes each compounded the underlying expansion of seat counts and premium module attach rate.
We expect the ACB growth will further accelerate through Q3 before beginning to normalize to year over year ACB growth rates more consistent with our prior trend.
In Q1, non-GAAP gross profit was $58 8 million, representing a non-GAAP gross margin of 78, 2%.
There's about 180 basis points compared to a non-GAAP gross margin of 76, 4% a year ago.
non-GAAP sales and marketing expenses for Q1, or $30 3 million or 40% of revenue up from 37% 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 rose.
non-GAAP research and development expenses for Q1 were $14 3 million or 19% of revenue down from 20% a year ago.
Could you make transport of R&D investments to support the future evolution of our platform.
non-GAAP general and administrative expenses for Q1 were $12 5 million or 17% of revenue.
From 22% a year ago.
We expect to deliver a consistent G&A leverage as a percentage of revenue moving forward.
non-GAAP operating income for Q1 was $1 7 million for a positive two 3% non-GAAP operating margin improvement of 440 basis points year over year.
We are pleased to deliver record non-GAAP operating income and record non-GAAP operating margins, even as we continue to invest across the business.
non-GAAP net income for Q1 was $3 4 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 $1 4 million and <unk> <unk> per share a year ago.
Okay.
Turning to the balance sheet and cash flow statement in Q1 with $187 2 million in cash cash equivalence and marketable securities.
Includes cash paid for acquisition of refuse state and is up from $185 8 million at the end of Q4.
Deferred revenue at the end of the quarter was $109 8 million.
Looking at both our billed and Unbilled contracts, our Apio total approximately $187 8 million up from 163.0 million exiting 2022 and up 62% year over year.
We expect to recognize approximately 76% or $143 million of total <unk> as revenue over the next 12 months.
Last quarter, we talked about it in voice impact on Q4 billings.
Well, our billings growth rate is historically and will continue to be lumpy from quarter to quarter based upon the mix of monthly and annual contracts. The difference this quarter between deferred revenue and <unk> was again material without quantifying the impact we continue to expect very strong billings in RPM growth.
Operating cash flow in Q1 was positive $8 3 million compared to $5 4 million a year ago free.
Free cash flow was positive $7 9 million for a record 11% free cash flow margin.
This year's strong efficiency, the ongoing shift to annual and multiyear contracts continues to have a positive impact on our free cash flow as we grow.
Shifting our formal guidance.
For the second quarter of fiscal 2023, we expect revenue in the range of 76 to $78 7 million or growth rate of 28% we.
We've shipped a material amount of low quality revenue from our model and expect to accelerate through 2023.
Our healthier mix of business led by enterprise.
Services revenue declined year over year.
We expect non-GAAP operating loss in the range of $1 8 million to $1 5 million.
This represents and anticipate non-GAAP operating margin of negative 2% at the midpoint.
As a reminder, we execute a majority of our annual performance based compensation and R&D hiring in Q2 each year.
We expect a non-GAAP net loss per share of roughly <unk> <unk>, assuming approximately $55 7 million weighted average basic shares of common stock outstanding.
In spite of accelerating our migration away from $6 million in LOE and <unk>. During Q1, we are maintaining our full year 2020 through revenue forecast to a range of 332.0 million to $333 3 million.
This is an expected overall reported growth rate of 31%.
We continue to expect services revenue will be lower than 2022 levels.
For the full year fiscal 2023, we now expect total error or at least to 125 basis points faster than reported revenue.
From our prior expectation of <unk> growth to exceed revenue by 200 basis points.
And then 33% year over year.
For 2023, and we now expect non-GAAP operating income in the range of $2 1 million to $2 4 million.
<unk> annual non-GAAP operating margin improvement of 225 basis points to 235 basis points up from our prior margin expansion forecast of 210 basis points to 220 basis points.
We're pleased to improve our rate of non-GAAP operating margin expansion.
Deliver durable profitable growth on a non-GAAP basis.
We now expect non-GAAP net income per share of between <unk> and <unk> up from our prior range of <unk> <unk> and <unk>.
Yes, we had approximately 56.0 million weighted average basic shares of common stock outstanding.
In conclusion, we're very proud of the execution of our team, which underscores the resiliency of our business not on a 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 our competitive set and emerge as a category defining company and $100 billion market.
With that Justin Ryan and I are happy to take any of your questions operator.
Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Raimo <unk> with Barclays. Your line is open.
Hey, Thank you.
Obviously, a lot to digest here.
The main thing I think that the investors are struggling a little bit is like you all came in lower this quarter.
Actually raising the outlook for the year.
A little bit.
Can you just kind of.
And you talked on the call already but like what's the what are the factors that give you. The most confidence here that that's turning around because it does kind of suggest some nice improvements in the back part of the year.
Hey, Raimo this is Ryan I'll start here.
A few things that have given us a lot of confidence one as we tried to frame just the dynamics in the business and the differences between the.
The sub <unk> customers, which are now 5% of our customer base versus the 95% and the greater than two K, which are growing really well at a 35%.
Growth rate on top of that we're seeing just really great progress in our enterprise.
Enterprise net add perspective, we are seeing that group up 50% year over year and we have the benefit here also given the timing of the call of some some data just coming out of April as well. So a lot of the churn dynamics that we saw in Q1 were very different than what we saw in April from a top of funnel perspective, we saw.
Really nice come back thanks to the great work of our marketing team and our inbound model from a top of funnel perspective getting back to pre pricing changes volume levels.
And then continuing to see really great progress from a competitive standpoint in terms of the execution from the sales team. So all of those things are really putting us in a great position to have good predictability about.
The year and the confidence in the team and the opportunity.
And then one follow.
Follow up there.
You said, you have 5% less net and that lower core that we don't want whats the confidence there because I could that be the one that kind of core growth quicker than you are at the moment pink or what's the expectations for how that's kind of.
Moving for the rest of the year. Thank you.
Yes.
You're kind of at the remaining 5% in the sub two K cohort, if I, if I understood that correctly.
Yes.
I think as we look at that and what we saw in Q1. There is a bunch of things that were in play there that we mentioned in our prepared remarks in terms of the customers generally are pretty price sensitive.
The folks that are the least mature in terms of usage of social media management and the importance of it for their business and if we think about those folks. They're also probably the most impacted by the macroeconomic and so we certainly saw a bunch of that happened in Q1, but as we look at what we saw in the data coming into and out of April .
They had been.
Good improvement there and progress made our belief based on the data and what we see there is that the customers that remain in that bucket are stickier than the ones that left.
Certainly think that over time over the next few years those will ultimately likely roll off within that that pricing cohort. We also know that as we're adding new customers today, especially with the pricing changes and the opportunities we're seeing up market that they are being replaced by much larger customers much stickier customers.
With greater opportunity to expand.
Okay perfect. Thank you.
Thank you.
The next question is from DJ Hynes with Canaccord Genuity. Your line is open.
Hey, guys.
Ryan of the social studio customers that have already made a migration decision whats your sense in terms of where they fall on the spectrum of customer size or a contribution I mean, I think there's a narrative out there that it's been the larger customers that have moved first but we'd love to get your perspective on that and any thoughts on kind of the IRR opportunity that remains on salesforce.
Yes.
Yeah. Thanks T J.
Thanks is likely the opposite from what we've seen both in terms of what we executed on so far and the visibility into the pipeline that we have in front of US obviously, we feel great about that partnership.
In terms of numbers, we talked about 250 last year, we've got close to 100 in the first quarter. We went live with the integrations and service cloud and tableau in Q4. So we feel like we're just scratching the surface on that opportunity. We also note that salesforce customers are typically on multiyear contracts.
Probably not many people remember this but we certainly do we were still competing with Salesforce ending Q4 2021 right up into the first few months of.
Our Q1 of 'twenty two in there end of Q4.
And in some cases, losing the customers that are going on Elas. Obviously, we won our fair share of those those companies, which is why salesforce decided to partner with us, but we see a tremendous amount of opportunity remaining within that base today. The deal sizes are going to continue to impact our 10-K.
He came and we believe 250 K cohorts, but from what Im seeing in the pipeline I would say that we are still we're still pretty early on in the opportunity in front of us with a lot ahead of us in this ACD opportunities.
This opportunity of this relationship is strong.
We've closed 350 over.
Last year in a quarter, but.
But if you look at our <unk> customer account growth over the last two years Theres been about 10000, new logos added and so it's certainly a good opportunity for us we like the <unk>, we see tremendous amount of opportunity at Salesforce and outside sales force.
Yes that makes sense.
And then as a follow up I'd love to kind of double click on what's happening inside the Twitter ecosystem I mean, obviously it was nice to see the announcement today. The press releases kind of light on details theres been lots of changes inside of that organization lots of headlines around the kind of our strategy.
What is your relationship there today.
Do you think that might change in like what are the risks we should be thinking about as it pertains to kind of how sprout works with Twitter.
Yes, yes, great question. This is Justin.
There is.
Definitely a lot of commentary around some of the ecosystem changes some of the parts of the market that they may not be prioritizing the same way that they did before and a lot of the.
Plans that they have for the future.
As it relates to sprouts, a key takeaway is that.
This is a very strategic relationship obviously, a long standing one.
That falls into.
<unk>.
Current bucket than where a lot of the commentary has been and as far as where.
Where we are but within that relationship with that team.
Upon the transition we got to work early making sure that we were collaborating closely with that team.
Making sure that we have.
Established.
Mutual.
Value and strength of that relationship.
And as you saw in the announcement today and got off to a fast start in continuing that that strategic relationship. So while there may be.
More change happening within the marketplace was important for us to set the foundation for the next several years.
And work with that team tightly as early as possible to get that done. So we're really happy about that progress.
And as I mentioned a lot of the.
News and headlines that we're seeing out of the kind of the ecosystem more broadly fall into a different category of partners than where we sit.
Great. Thank you guys.
Got it.
The next question is from Arjun Bhatia with William Blair. Your line is open.
Hey, guys. Thanks for taking the question.
Just following up on the some of the noncore customer trends, if we look at it.
If we look at kind of what drove the churn would you attribute that more to the pricing changes or the the reallocation.
Location of the kind.
Customer success resources that maybe we are dedicated to those.
To those customers in the past.
Maybe I would the flip side of that I would love to hear a little bit about what that customer success reallocation might do in the core customer base in the upmarket that might get a little bit more.
Attention from from the from our sales team.
Yes, yes, great question suggested I'll start us off there right now more to add.
So it's.
A combination of things that we think went into that.
The impact that we saw in Q1 I think to start.
That has historically been.
A.
Unhealthy and declining part of the business for the past several years that was one of the.
Sort of a primary catalyst for some of the changes that we made.
It's.
A part of the market that is as we mentioned earlier less.
Less far along with their journey.
Sticky in general less inclined to grow.
And Dr from that group was.
We mentioned right around 100%.
So certainly very very different from the bulk of our business and 95% that we've shared is growing very differently.
And so when you layer that on top of some of the macro conditions the pricing change and the shifts we've made internally in terms of resources.
All of those things together contributed to some of that acceleration.
When we think about what that reallocation internally does.
We touched on a few of these things, we really think that there's an opportunity here to see.
Better.
Growth better new business et cetera, as we align the entirety of the company around.
We view as higher value higher potential customers, so not only improving sort of some of the fundamental.
Financial mechanics of the business by cycling out some of this lower quality revenue, but also giving us upside because we're paying more attention. We've got more resources pointed at opportunity elsewhere in the market in that 95% of our of our revenue base.
We felt like we had a lot of headroom and we wanted to talented people that worked across our organization all pointed there.
I think we saw some of that we referenced 50% year over year growth in enterprise as well as some of the other performance.
Solid performance that we saw across the rest of the business.
All contributing to that.
In the backdrop, not just the shift of resources.
That we made but also just the focus of additional resources in the future whether it be product roadmap sales and marketing talent et cetera are all pointed in the same direction is going to be really valuable for us as a company.
Perfect. Thanks for something that's helpful and then.
You announced this partnership with with open AI and Youre starting to.
It seems like think about integrating some generative AI capabilities into the platform. How do you think the advent of generative AI might actually change the role of a social media management or our marketing Department and how do you position sprouts kind of to be aligned with some of those trends longer term.
Yes, yes, great Great question I think.
Our role in this is to make sure that we're using generative AI.
Any of the adjacent capabilities to give our customers superpowers that allows them to be more effective and more efficient.
In the things that they do wear.
We can improve their optimization, where we can improve there.
Their content creation, where we can just.
Mick.
We think over time dramatic improvements to the efficacy to the.
Output et cetera of our customers and allow them to do.
Have much greater reach.
Greater.
Bandwidth essentially across social channels.
And our job is to build the tools that allow them to do that and build them in ways that are unique to social that are unique to sprout.
So that's where we're focused some of that we've talked about already introduced already a lot of that a lot of the more exciting parts of that are yet to come you'll hear more about this from us as we begin to roll more of that out.
But ultimately we expect that the.
Okay.
We should be a multiplier for our customers' efforts.
We should be eliminating some of the redundant task that allow them to focus on.
The parts of the work that are more centered around engaging with our customers building healthy relationships.
Really expanding their marketing messages, etc, and let some of the rest fall in the background on what's brought take care of that.
Alright, thanks for taking my questions.
The next question is from Parker Lane with Stifel. Your line is open.
Yeah, Hi, guys. Thanks for taking the questions Ryan some really nice traction in the Salesforce partnership in <unk> and then again this quarter.
Curious if you could go back to your comment on the confidence you have in the linearity of that relationship through the year and the number of migrations is that driven by things actively in the pipeline some visibility into contract durations. There can you just dig into that a little bit more please.
Yes happy to Parker, yes. It is a combination of those things certainly from a visibility into the pipeline that we're seeing now in the amount of opportunity we feel really good about the customers that we're working with I think I've mentioned this in the past, but we have a joint slack channel between ourselves and the Salesforce team and it might be one of the most active channels we have at <unk>.
<unk> with with lead going in both directions and collaboration happening in both directions. So we're really excited about that we're being pulled into more conversations both from a customer perspective, but also an enablement perspective.
With the sales teams over at Salesforce, and what started as the marketing cloud sales teams has quickly evolved into other teams, including servers cloud with that integration was released in Q4 on top of that we've got a bunch of events coming up that we're really excited about will be at the World Tour next next week with with our header solution engineering choline.
Having having a speaking opportunity there and then we're going to be a connections later this year as well so combination of visibility into the current pipeline as well as just ongoing traction on a daily basis in terms of lead pass and collaboration on the on the open opportunities.
Got it understood and then shifting gears over to the agency channel I was curious to hear a little bit more about resource allocation. There you talked about the prioritization of customer success and growth resources behind the highest to your customers, but just curious if you could give us a sense of how that is impacting the age.
The partner channel and what sort of traction youre seeing there at the start of the year here.
Yes.
Agency opportunity is one we're really excited about.
But in the past we've shared in certain parts of that especially in more of the SMB side of the house those folks are probably had more macroeconomic pressure on them as well as more price sensitivity.
The way that we're approaching that channel today is similar to what we've done in the past in terms of investing in those businesses to really has them, becoming our best referral source, our best pipeline source and we've continued to see that opportunity from a referral perspective, where a lot of these agencies today a great brand.
Partnerships.
Brand relationships, and they're bringing them to sprout and then contracting directly with us So I think a little bit of a.
A dynamic change in terms of the way that business is getting done in the agency World I think it'll be more referral versus direct as we move forward and we've set the team up from.
And org structure and strategy perspective, and that way both from a direct sales and our customer success perspective.
Got it I appreciate the feedback thanks again.
Yes. Thank you.
The next question is from Elizabeth <unk> with Morgan Stanley . Your line is open.
Great. Thank you so much I wanted to ask you in on that.
50, K customer ads, if we just look at the absolute volume of ads.
The lowest level since one Qs 21, and about half the rate of adds that you had in <unk> 2022.
I understand the macro is tougher, but it isn't that incremental resources, you're putting behind <unk>.
<unk> customers can you help us unpack some of the softness from the absolute logo add perspective.
Customer has dropped below that 50, K threshold and could we see some reacceleration later or any competition at the high end to call out. Thank you.
Yes, I think it's I think it's Mike. Thanks, Elizabeth I think it's a combination of things there I do think that there's opportunities from a reacceleration standpoint, and I think some of this is is that just the linearity of the quarters for us as we think about.
Yes.
Shape of our fiscal year.
Q4, being our highest coming off of that I think that there is a healthy building of pipeline thats happening across the enterprise I do want to point back to you.
<unk>.
The comment that we shared before around our net IRR being up over 50% from the enterprise perspective.
So we feel really good about the opportunity in front of US here the way that the teams are both building pipeline as well as executing on on the deals.
Part of the reason, we just disclosed a little bit more about things like the 250 <unk> opportunities in front of us as well in terms of the relative size of those opportunities that are coming in.
Got it and then just as a follow up I recognize it's early to be thinking about 2024, but can you shed some incremental light on the drivers that you expect to provide that durable growth against.
Really a harder comp just as pricing changes in social studio benefitted 2023 growth.
I know you highlighted some factors like a bigger Tam, but just how quickly can those play out as it relates to 2020 for growth what are some of our specific drivers of your confidence. Thank you.
Yes. This is this is Joe is happy to answer it I think what gives us the confidence here is really what we've kind of been talking about it is our move up into the mid market enterprise and the investments we're making if you think about it we've just started making those investments over the last like 12 months or so and it is probably the area, where we're hiring and focusing the most if you look at for example, the 50%.
<unk> and net new IRR from enterprise, if you look at the fact that our that our new.
New ACB is across the organization doubled on a year over basis, we just feel like the deals we're getting into now a much larger and we believe.
Just scratching the surface of that part of our business and those investments and so as we get into the back half of this year when we get into 2024 and then we also think about for example, some of the divestments, we are making on the R&D side as the momentum we have in customer care and social listening and some of the other things that we've talked about we just feel like.
The the growth that we're seeing in the most healthy part of our customers and then we also look at the <unk> that were driving the expansion in those customer base I think all of those give us a lot of confidence going into 2024.
Thank you.
The next question is from Michael <unk> with Keybanc. Your line is open.
Hey, guys, thanks very much.
Just given some of the color both obviously in Salesforce ads and then on the linear growth in net adds from here I was wondering if you could help US and you said that you spent there is quite a big opportunity ahead of you but.
How long do you see this opportunity is less than ours.
It's mostly a 'twenty three opportunity or do you see the Salesforce migrations is continuing in 'twenty, four and what might be the magnitude of that.
Impacts in 'twenty four versus 23.
Thanks, Michael This is Brian .
I do see it going through 'twenty four.
The.
Public announcement on that date is the end of 'twenty four.
From what we know of Salesforce contracts. They are usually multi year contracts from what we've seen in terms of conversations with customers. They.
They are spread out over the next 18 months to two years. So if we just think about the social studio opportunity.
I do think that where we're going to see through 'twenty, three and we're going to see it through 'twenty. Four I would also just highlight and we shared this a little bit before as well in terms of our perspective around the overall salesforce ecosystem, there's low hanging fruit is a social studio customers, but we're building this partnership and our integration.
<unk> and our product strategy would be one where if your salesforce customers strict social is the very best solution for you and we know that there is a couple of hundred thousand customers and Salesforce.
So, yes, the social studio 124, and the Salesforce opportunity itself and the ecosystem opportunity itself is much larger and goes well beyond 24.
Great and then I Wonder if you could comment on the competitive landscape a bit you're moving upmarket.
Smith was moving I Wouldnt say, there has been moving down market and I haven't said, but they have a lower priced offering now so are you encountering them more and do you feel like Thats a headwind does anyway.
Yes.
From a competitive perspective, we have not seen anything in the data and I as I look ahead in Q2 and beyond we have not seen any.
Any change to the data or the customers.
Feedback from that product, we're seeing them certainly a lot more in our enterprise space.
We're in more deals than ever before from a large enterprise an enterprise perspective, we feel really great about the win rates that we've seen within that space. So many of the customers that we have the opportunity to share details on our customers that are moving over to the platform.
And I think probably the only other thing I would say there is it will be interesting to watch over the next little while how that materializes, we feel really great. Obviously about the go to market motion that we've built and we've honed over 13 plus years are our 30 day free trial continues to be the best weapon within this space.
<unk>.
<unk> built the foundation of our business, there, where the majority of our customers actually get their hands on the keyboard and the products. So we get excited about the opportunity to have others do the same so they can do an apples to apples comparison with sprout.
Not seeing any material change or difference in the market certainly under enterprise and enterprise, we're in more deals against upmarket competitors like sprinkler than ever before.
Thanks, Ryan and thanks, everybody.
The next question is from Matt Matthew Vanvliet with <unk>. Your line is open.
Hey, good afternoon, guys. Thanks for taking the question maybe Brian a follow up on the last one from a little maybe different viewpoint.
I guess, what what mix of your deals go through a more formal RFP process or at least on a multi vendor evaluation from from best that you can sort of surmised from the data and maybe more importantly, there are win rates tracked.
Since prices were raised are you seeing any major changes in that albeit only a few months, but I'm curious what you're seeing on sort of both of those fronts.
Yes, Thanks, Matt.
From an RFP perspective, certainly more common in the enterprise, we definitely are more rfps over the last little while than we had historically been in.
If I rewind a few years ago and that just goes into the motion of the enterprise, we feel really great about that opportunity certainly over the last couple of years, we've added resources from our.
Solution engineering, and a legal perspective to enable us to be able to respond well to those rfps and win those deals we feel really good about that we're also in many way.
Asking those customers to go outside of their RFP process and besides checking the box to actually get into the product and so we really get excited when customers.
Go beyond that process and actually use the technology to inform their decision versus just checking boxes on a spreadsheet. So a lot in the enterprise I would say that underneath the enterprise, it's definitely more rare those mid market companies certainly in the SMB and the agency are not really doing rfps from a competitive standpoint.
<unk>.
Certainly in the Rfps Youll see multiple competitors, it's usually in the neighborhood of three might be more than that but it's usually three to four that are the main competitors that end up in that space and then even in the the underneath the enterprise and Midmarket and SMB it tends to be more than that.
Just us that are competing for the opportunity unless it is a customer or a company that's used our product before and so that again I think is a differentiator for that free.
Free trial, and the volume of customers that.
<unk> had used the product and come in and use the trial over time enables us to have really good word of mouth and oftentimes you'll see that we'll see it in the trial surveys that the customer just evaluated us because they've used us before so and then I think just around it. The question, we feel really great about the competitive win rates Q1 was another strong quarter in terms of our ability to compete with everyone else.
Yeah.
And were feeling great about the future here.
Alright, very helpful and then Joe on the margin and free cash flow side, a couple of good quarters here, especially since the prices were raised how should we think about sort of that on an incremental basis flowing through the model versus using some of that upside.
To continue to push the accelerator on growth and hiring.
Understanding if there is a little bit dropping out of the bottom of the bucket here, but.
What's sort of the overall viewpoint on the upside that you are gaining from the price increases.
Yes, Matt So I think you saw a little bit. This in Q1, we over performed on our Q1 guidance and then we didn't raise the full year on the operating income as much because we wanted to reinvest some of that back in the business. So I think youre going to continue to see that throughout the year I think we have a high level of confidence to continue to outperform.
And reinvest that money because we just see the opportunity. So I think to the extent that we continue to do that youll see us reinvest.
Majority of that money into the business, but not to the extent that we have to not stay within that 100 300 basis points I don't think Youll see us go backwards from the guidance. We've given so we expect upside to the guidance the expect to the extent that we over perform but youll see us still invest a majority of that back into the business right now just given the opportunity in front of us.
Alright, great. Thank you.
The next question is from Clarke Jeffries with Piper Sandler Your line is open.
Hello, Thank you for taking the question.
I just wanted to clarify that your current framework on a dollar basis for those non core customers is that.
Maybe exiting the year IRR contribution from that segment would be flat to down or sort of where guidance.
Kind of implies that there are number goes and I think that's a part of that could you help us understand.
On a relative basis, how much of that of those noncore customers are monthly versus annual customers.
In terms of when they churned or where they have renewal just to understand the pricing effect.
Yes, So Clark a couple a couple of things there.
We're not we don't necessarily break out on the second part of your question the percentage of that of the.
That 5% that's monthly to annual to obviously skew more towards monthly, but without giving out a direct percentage you can definitely make the assumption of that as far as how that flows through the rest of you there.
I expect like we talked about this we think it is going to be a multiyear process, where we talked about this on the earnings release or on <unk>.
Repaired remarks, where those customers kind of cycle out of the business. So we don't think it has a material impact.
This year's ending IRR, I think youll see it slightly down from the 5%, but it's not going to be.
<unk> impact on 2023.
Perfect and then just a clarifying question on <unk>.
And a couple of times enterprise there are up over 50%.
Are you defining that and is it fair to call maybe the business into three segments enterprise mid market and SMB.
Yes, so the way the way we split out those segments is SMB is below 50 employee business is 50 employees to 1000 employees as Midmarket and over 1000 employees as enterprise.
This is Justin I think the distinction there to make is just that our.
Our organization of that of the customer base is a little more nuanced in that.
We see there is part of for example, the S&P market.
Did is more socially sophisticated that is spending more like a mid market.
That is still a very attractive part of the market for us if they are advanced beyond those very low price points that we're beginning to shed.
Similarly, with with mid market there are mid market companies that outspend, some enterprises et cetera. So when we think about the total opportunity and kind of where we're focusing our resources I want to make sure not to complete that less than two K bucket with the entirety of the F&B.
We don't quite view it that way does that makes sense.
Yes, absolutely.
Maybe one last data point that we are in.
Excited about if I think about.
One of the recent deals that we closed in the SMB space is a 100 K ACB deal to Justin's point.
The sophisticated customers.
Can exist in these spaces in F&B and agency as well, we are certainly winning those businesses and supporting those customers.
Very helpful color. Thank you Ross.
The next question is from Rob Oliver with Baird. Your line is open.
Great guys. Thanks for taking my question Ryan.
<unk> talked about this a little bit but my first question would be for you just around some of those increased dollars that are going to be moving up to two sales and marketing focus more on high end and mid market and enterprise.
Thought around kind of use of those dollars support incremental enterprise salespeople can you talk about how your sales motion has evolved I mean, I know you said you've been holding it for quite some time, but certainly this quarter would point to.
You can even accelerating that moving more towards upper mid market enterprise. So just to get a sense for where you are with enterprise sales reps and how that motion has evolved and then a quick follow up thanks, Yes, yes, absolutely yes.
On there, we see a tremendous amount of opportunity in the enterprise we've been investing in the enterprise.
Predominantly an enterprise Aes and enterprise leadership as well as some solution engineers to come alongside of them and some outbound PDR reps to support the pipeline generation.
Just from a customer success perspective, we.
Shifting some of those resources that were on the noncore business up into the strategic customers in Midmarket and enterprise. So we're doing a much better job there as well, helping those customers improving the ratios and enabling us to not just improve that gross retention, but also to give us a lot more of a foundation to expand from.
Investments going through through all of those today in terms of the dynamics of what's changed on the sales motion.
It's a lot of the same things that we've historically been doing we've been adding more talent that's been used to selling into the enterprise. The key for US is folks that have the sophistication and the capabilities to close six figure seven figure transactions, but also have velocity and the way that they approach. The business. This is still not one of them.
Businesses, where our reps going to close one or two deals a year, they're going to be closing multiple accounts in a quarterly basis is probably more of those on a monthly basis. So it's a velocity play for us as well as sophistication up market. The other thing I think it's probably different.
The new chair just in Matt's question before you as just Rfps, we're doing more of those over the last 12 months than we've ever done before we're refining our approach to how do we differentiate in an RFP process, but.
But the thing that is underlying all of this that we really get excited about is getting the customers in the product, making sure that they're in there before they sign a contract with us proving out that the product works.
One of the things that has really stood out and competitive differentiation.
As our speed to value and our usability and the specification of the platform and so for US we want our customers in their running reports, we want them connecting all of their social profiles, we want them doing social listening they want them, we want them not just experiencing our technology, but our people. So that they are really mitigating risk and we found that especially in a time like this.
Customers appreciate having that certainty before they make a decision and they also appreciate the confidence that we have in leading with the product. So those are some of the things that have evolved that we've added to over the last little while.
Great. That's helpful. Thanks, Brian and then just just a general question for any of you guys I know DJ asked a little bit earlier about jet GPT. We saw the press release you guys put out just just thoughts I know, we're going to get more details on this but.
Clearly some of what you guys talk about in the press release are alright enhancements to things that we already here in our checks you guys are doing which are already saved a lot of time for social media people.
Just got to be thinking about.
I think we're all trying to figure out right now about <unk> got a seat based versus other types of pricing and to the extent that there is a tremendous amount of automation from chat GPT, driven and more value driven through.
Through the <unk> platform.
Think about that.
Relative to is it.
Just.
Factoring in when you when you when you buy sprout is it something you paid out on price for or is it something that would be an additional module is it too early to think about that thank you.
Yes.
Too early to think about but probably a little too early to indicate.
Where we think that goes I think some of the ideas that we're excited about that we're working on internally would probably fall into.
Something that would be monetized.
But I think importantly, when we think about the average social media manager today. The average person. That's in our platform is has more to do than they can possibly manage.
<unk> certainly makes that better.
They're going to continue to be looking to.
Expand those teams not shrink them even.
Where it gets easier and I think a lot of that has to do with the engagement.
Organic conversations that are happening through social.
Publishing of content et cetera.
And.
For all of the.
Sure.
Potential that we see with chat.
<unk> and others I think that the.
<unk>.
Inclination is going to be to offload more of the routine work that is keeping them from having that time to engage with our customers to put that time into their their campaigns and the content that they publish et cetera.
So I think over time, it's going to meter out that we're still going to have larger teams two years from now than we do today.
I think that we're still going to see growth I.
I think theyre going to be able to tackle more of what's on their plate and do a better job of it with a lot of the things that we're going to build.
But certainly there are going to be opportunities for us to monetize that differently than we have thought about in the past.
Maybe one other thing I'll just add there.
That I think we all get really excited about is obviously, we are sitting on a really important valuable set of data and all of the work that we're doing with <unk> and AI in general you think about the value of that data and you think about speeding up.
The disc.
Discovery of insights and you think about making those insights.
More and more usable and enable to have wider reach in an organization to make better business decisions. So if we think about that listening product today, we know that when customers are leveraging this appropriately.
They get these data points and these insights that allow them to make great business decisions on products, they might creator or innovate on competitive positioning in markets. They want to go into and so when we think about some of the opportunities in front of US. We believe that we can really speed up.
The manner in which they get those insights so that they get even more utility out of these things and that social data becomes an even more important part of their business and a lot of the work that we're doing here will impact of that.
Great helpful. Thank you guys very much.
There are no further questions at this time I will turn it over to Justin Howard for any closing remarks.
Great Yes.
Just want to thank everyone again for the time today, and specifically for the opportunity to get a little more nuanced around.
This duality that exists in our business with the 95% of our revenue performing incredibly well.
And where we saw the opportunity in kind of the impetus around the realignment and the pricing changes.
To really focus and accelerate there.
And.
How that's been playing out so far certainly more to come over the next several quarters.
As that continues to accelerate and as we continue to drive the performance that this was all meant to.
Drive so I appreciate your time and energy and we will look forward to chatting with a lot of you more over the next couple of weeks.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Please wait the conference will begin shortly.
Okay.
Yes.