Q2 2023 Sprout Social Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sprout Social second quarter 2023 earnings call I would now like to turn the call over to Jason record, Vice President Investor Relations and corporate development. Please go ahead.
Thank you operator, welcome to sprout, social second quarter of 2023 earnings call, we'll be discussing the results announced in our press release issued after the 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 , Justin 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.
Forward looking statements include among others statements concerning financial business and customer trends, our expected future business financial performance and financial condition.
Expectations concerning the benefits of our acquisition of CAGR performance against our multiyear financial framework, our market size and opportunity.
Our plans objectives and expected results from our future operations growth products investment initiatives pricing partnerships, our strategies and our guidance for the third quarter of 2023, and the full year 2023 and can be identified by words, such as expect anticipate intend plan believe seek or will these statements reflect.
Our views as of today only should not be relied upon as representing our views at any subsequent date and we do not undertake any duty to update these statements.
Forward looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially for a discussion of the risks and other important factors that could affect our actual results. Please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2022 filed with the Securities and Exchange Commission on February 20.
2023, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2023 filed with the SEC on May 3rd 2023, and our quarterly report on Form 10-Q for the quarter ended June 32023 to be filed with the SEC as well as any future quarterly income.
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 margin non-GAAP operating income non-GAAP net income and non-GAAP earnings per share <unk>.
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 that sprout social dotcom.
And with that let me turn the call over to Justin Justin.
Thank you Jason and good afternoon, everyone. Thank you as always for joining us.
Late last year, we initiated several strategic changes that we believe are now beginning to materially improve our long term growth and efficiency and we will cover more of our progress throughout our discussion this afternoon.
Today I'm also excited to share our entrance into the Influencer marketing category, which broadens our reach expands our market creates more value for our customers and further differentiate sprouts as we uniquely define our industry.
Our product advancements strategic alignment and broadening set of capabilities have further established a highly differentiated value proposition for customers and have positioned sprout at the beginning of an exciting new chapter in our journey as sprout paces towards our new $1 billion subscription revenue target.
In Q2 record new business <unk> drove ACB growth to a record 29% year over year as our success upmarket continues to progress ahead of plan.
We're pleased to see 48% year over year growth in customers paying us $50000 or more in <unk> and 130% year over year growth in customers paying us 250000 or more in IRR.
Leading indicators like <unk> and <unk>, each continue to materially outpace our <unk> growth rate.
<unk> growth of 62% underscores the momentum we're seeing upmarket in Q2 RPM represented more than 63% of our total.
Are up more than 2000 basis points over the past two years.
Significantly improving quality of our business was further evident in record non-GAAP operating margins during Q2 and more than 140% growth in cumulative year to date free cash flow.
While we are seeing everything we want to see from our strategic shift late last year structural improvements in our business and accelerate our momentum up market. The unpredictability at the very low end of our business has remained difficult to forecast in Q2.
So we view this as a positive trade off and have deliberately de prioritized and removed resources from this part of our business, where ultimately committed to high confidence projections.
For that reason, we have elected to remove non core <unk> from our plan for the remainder of this year and our modeling to have it cycled out fully heading into 2024.
We believe this change provides investors with the greatest visibility into our performance and position sprouts to execute with a level of consistency that you have come to expect from us.
Meanwhile, the upside of our strategic shift is becoming even more pronounced we are beginning to see structurally positive impact on net dollar retention of our core customers in our enterprise business further accelerated during Q2, yielding the highest new LTV for enterprise compared to all prior quarters.
Enterprise grew nearly 50% year over year and represents a record 43% of total IRR.
Enterprise, New business was up more than 50% year over year and total net new <unk> from this segment also grew greater than 50% year over year.
Multiple factors are contributing to our success in this quarter premium module attach rates were very strong.
Total premium module attach rates increased by 160 basis points from Q1 2023 nearly doubled the uptick we saw on average in 2022.
During Q2, we further accelerated our roadmap and social customer care NII.
Our product team has already delivered 16 material care related releases in 2023, including reply suggestions by AI assist we've also made structural and organizational changes to rapidly expand our investments in AI and accelerate the work already underway to make AI pervasive across our platform and deliver significant new value to our.
<unk>.
The emergence of generative AI enhancements to large language models and new training techniques favor. The most skilled product teams and we believe will allow us to outpace anything being done in our space today.
Early momentum in this area, including language detection AI assist enhanced sentiment and content detection of filtering lay the foundation for an extensive roadmap of exciting product capabilities to come.
All of this progress brings me to our most important update today, our announced acquisition of Tiger.
Influencer and creator marketing has quickly increased in customer demand given how critical this category has become to our brands awareness and brand strategy.
In fact, we currently see Influencer marketing and more than half of our enterprise Rfps.
While the advanced signal is very strong brands have up to this point struggled to fully harness its potential because influencer marketing has been siloed with little connection to their core social marketing strategy and no ability to manage discovery approvals workflow and reporting.
And we believe sprouts brand and scale position us to pull ahead in this market.
For anyone unfamiliar influencer and create our marketing is today the third leg of the stool for social strategy and one of the most important and fastest growing.
As traditional media and paid advertising continue to be disrupted influencers creators and short form content are beginning to take priority for brands, along with demonstrably higher ROI.
Industry analysts have estimated that nearly 50% of Cmos are growing their spending on influencer marketing in 2023, representing the third fastest area of budget growth.
We believe the combination of Tanger and sprout will allow us to create a market leader in both social media management and Influencer marketing.
We developed a thesis on this space in 2022 Integra very quickly became our target for three primary reasons first the team is world class, a smart innovative and customer obsessed group.
Second we found the technology infrastructure and products were built with the same emphasis on quality elegance approach ability and scale that sprout focuses on.
And third <unk> product has been recognized as industry, leading by both <unk> and the global Influencer marketing awards and has been chosen by iconic brands across the mid market and enterprise.
Similar to why we brought social listening into sprouts. Several years ago, we have identified silos that exist today, and influencer marketing and an opportunity for sprout to step in and provide a unified platform for executing a comprehensive social strategy together will.
To deliver the next generation of social insights to fuel business strategy execute end to end campaign management foster authentic customer engagements and deeply understand and measure the ROI of holistic social investments.
We believe our capabilities will further differentiate sprouts in our core market and we will make CAGR the category winner in Influencer marketing.
The combination of our ongoing breakout of market strengthening partnerships expanding use cases for our software and an accelerated entrance into the Influencer marketing category have sprout at the starting line of our next great growth chapter.
We're excited to outline our path above $1 billion in subscription revenue, our strategic changes have positioned us to deliver an even faster pace of margin expansion and free cash flow growth than previously anticipated and we're excited to share more of our vision and financial future at Investor Day next month.
I've never been more energized by our teams on momentum and alignment to deliver incredible results and value to our customers partners and stakeholders with that I will turn the call over to Ryan. Thanks, Justin the focus and momentum in our core business combined with the exciting. New addition of Tiger has me incredibly excited about the second half of this year and 20%.
Four.
I'd like to begin with some perspective on several of my most topical conversations with customers and investors this quarter before digging into the opportunity we have to change the game with Influencer marketing.
Research this quarter from the Harris poll and partnership with Sprout sound that social is importance within an organization is only growing.
80% of business leaders anticipate their companies social media budget will increase over the next three years and 44% of leaders expect their social media budget will increase by more than 50% even in spite of macroeconomic pressures on their total company's budget.
Underlying these trends business leaders nearly universally agree that social has become the primary channel for customer care customer retention and customer feedback.
Social is where your customers are and it has become imperative for brands to meet them there.
We can see this imperative and our partnership with Salesforce, which is accelerated momentum as we further capture the social studio opportunity and align ourselves as a standard social platform for all salesforce customers.
Our product alignment went even deeper this quarter with a native integration into the Salesforce marketing cloud, allowing marketers to personalize their customers' journey based on social data.
We on boarded a record 176 logos in Q2, and we continue to expect contributions to grow meaningfully and linearly over the course of 2023 building to a very strong Q4, as the largest and most complex deployments begin to make their migration over to spreads.
In total we grew with an amazing list of customers this quarter, including Packer syntax Clave Yo Irving oil Heartland financial <unk> Foods, Cedars Sinai medical Arnotts, Bobcat, Salix pharmaceuticals, and the federal deposit insurance Corporation or <unk>.
We also saw and heard some incredible things from our customers this quarter.
The FDIC use sprout listening data as part of congressional testimony on the banking sector in the wake of the SBB collapse.
One of our new enterprise customer shared with us I'm thrilled by the new AI assist functionality as.
As far as AI content generators go this may be the best one I've seen so far.
In a recent not for profit webinar I was invited to present at the host introduced us by saying.
As a CMO and marketing leader I spent over two decades buying enterprise software and investing in technology that would help me understand how to grow and social media engagement was always a top priority and.
In 2023 time, and social media continues to scale and business leaders are tasked with not only driving engagement.
Elevating their constituent experience.
Support to meet the bar that has been raised by the commercial sector.
Evaluated every tool in the market and it has been my preferred platform for over 10 years.
We know from our customer interest and market diligence that the Influencer marketing category is converging with social media management.
In a recent briefing and industry analysts shared if you aren't working with Influencers today, you can't really say you have a real social strategy.
With this as a backdrop, it's been incredibly exciting to get to know the tiger team in software over the past several months, knowing that we could solve multiple customer pain points together.
We knew immediately that Tiger would make for an incredible set with sprout.
The software is powerful and elegant and the team is hungry to define a category.
We believe our depth and scale will allow tigers products to innovate and grow at an accelerated pace and our go to market motion is perfectly suited to accelerate <unk> growth and drive even more customer success.
Joe will later share that we've made no cross selling assumptions and our commitments to you.
But influencer is a customer requirement showing up in more than half of our enterprise conversations.
Chris Atvs are meaningfully above sprouts, and we believe will now have the most comprehensive and competitively differentiated set of solutions in each of our markets.
We believe the cross sell opportunity for Tigris product is massive and orders of magnitude larger than tiger to that.
We also believe our new business win rates and Acd's are set to move higher than our core business as we combine forces.
It's this combination of factors that has our teams inspired to go big together.
Our alignment around the most sophisticated tiers of our market has our team is motivated to the future with Tiger poised as a new strategic catalysts that we expect will deliver significant value for our customers.
We've executed a similar playbook before when our acquisition of simply measured accelerated our value proposition and our momentum is social listening and advanced analytics, which are now foundational to our success with.
We've long shared that we aspire to be the best place to be an employee and the best place to be a customer.
After receiving multiple product award from <unk> and others last quarter I was incredibly excited that this quarter sprout was recognized by great place to work as a best place to work in Chicago and is the best place to work for millennials or.
Our commitment to our core values and our people continue to make sprout and exciting career destination on our journey passed our $1 billion revenue target.
With that I'll turn it over to Joe to run through the financials Joe.
Thanks, Brian I'll now walk you through our second quarter results in detail before moving onto guidance for the third quarter and full year 2023.
Revenue for the second quarter was $79 3 million, representing 29% year over year growth.
Subscription revenue was $78 7 million up 30% year over year.
Services revenue was $26 million down more than 10% year over year.
Core IRR from existing customer spending greater than $2000 in <unk> with 33% now represents 96% of our total <unk>.
Total aon exiting Q2, with $326 1 million up 27% year over year.
The number of customers contributing more than $10000 and <unk> grew 27% from a year ago.
The number of customers contributing more than $50000 and <unk> grew 48% from a year ago.
And the number of customers contributing more than $250000 and <unk> grew more than 130% from a year ago.
Q2, ACB growth was 28% year over year again accelerated from Q1 2023.
Record new business deal sizes, the exit from a number of low value logos and ongoing execution on our pricing changes each compounded healthy underlying seat expansion and premium module attach rate.
We continue to expect that ACB growth will further accelerate through Q3, but now expect faster than previously expected <unk> growth over the medium term.
In Q2, non-GAAP gross profit was $61 9 million, representing non-GAAP gross margin of 78, 1%.
This is up 150 basis points compared to a non-GAAP gross margin of 76, 6% a year ago.
non-GAAP sales and marketing expenses for Q2 were $32 1 million or 40% of revenue consistent with 40% a year ago.
We were fortunate to hire well throughout the quarter.
non-GAAP research and development expenses for Q2 were $14 6 million or 80% of revenue down from 20% a year ago.
We've continued to make transparent of R&D investments, particularly around platform, AI and automation and social customer care.
non-GAAP general and administrative expenses for Q2 by $13 3 million or 17% of revenue.
One from 20% year ago.
We expect to deliver consistent G&A leverage as a percentage of revenue moving forward.
non-GAAP operating income for Q2 was $1 9 million for a positive and quarterly record two 4% non-GAAP operating margin.
Improvement of more than 500 basis points year over year.
non-GAAP net income for Q2 was $3 8 million for a net income of <unk> <unk> per share based on $55 5 million weighted average shares of common stock outstanding.
Turning to our non-GAAP net loss of $1 9 million and <unk> <unk> per share a year ago.
Turning to the balance sheet and cash flow statements. We ended Q2 with 190 $224 million in cash and cash equivalents and marketable securities.
This is up from $187 2 million at the end of Q1.
Deferred revenue at the end of the quarter was $116 7 million.
At both our billed and Unbilled contracts, our apio totaled approximately $206 4 million.
From a $187 8 million exiting Q1, 62% year over year.
We expect to recognize approximately 74% or $153 million of total <unk> revenue over the next 12 months.
And applying a CRP on growth rate of 47% year over year.
Operating cash flow in Q2 was positive $6 3 million compared to $1 3 million a year ago.
Free cash flow was positive 6.0 million up meaningfully from a year ago.
I'm going to focus on unit economics, and the quality of our customer base is beginning to deliver structural improvements to our cash flow generation.
Shifting to our financial expectations of the CAGR acquisition.
We acquired CAGR media for cash consideration of $140 million.
We financed the acquisition with cash on our balance sheet and liquidity from our newly established revolving credit facility.
We believe this to be an efficient use of our balance sheet and an attractive cost of capital.
We expect that CAGR will be accretive to our IRR, an ACB growth rates and accretive to our gross margin.
In addition, we anticipate that CAGR will be moderately dilutive to our non-GAAP operating margins in 2023.
Upside to our margins in 2024 and beyond as we aim to efficiently accelerate growth inside our distribution model.
<unk> incorporate approximately $3 million of revenue into our guidance for the remainder of 2023.
There was no customer cross sell and we anticipate meaningful growth in 2024.
Shifting to formal guidance.
Our core business continues to perform very well.
As a reminder, we have removed our low end customer cohort from our forecast for the third quarter of fiscal 2023, we expect revenue in the range of $84 1 million to $84 2 million a growth rate of 29%, we expect services revenue to decline year over year.
Expect non-GAAP operating loss in the range of $2 8 million to $2 7 million.
This accounts for the timing of our onetime global employee event in Q3 this year the.
The timing of sales hiring in Q2.
Then temporary impact of the absorption of CAGR expenses.
There are some of the non-GAAP operating margin of negative three 2% at the midpoint.
We expect a non-GAAP net loss per share of roughly <unk>.
This assumes approximately $56 5 million weighted average basic shares of common stock outstanding for 2023, we expect total revenue in the range of $328 6 million to $328 7 million.
This is an expected overall reported growth rate of 30%.
We expect services revenue will be lower than 2022 levels.
For the full year fiscal 2023.
This nicely models, our lowest customer tier <unk> to decline to zero exiting 2023.
Which we believe reduced forecast risk of this business that has been strategically prioritize.
With this change we believe investors can more clearly assess our outperformance on market and expect the total IRR exiting 2023.
We'll be growing at the same pace as reported revenue.
This implies a Q2 or present, the lowest pace of <unk> growth this year.
For 2023, we now expect non-GAAP operating income in the range of $1 4 million to $1 $5 million.
This implies annual non-GAAP operating margin improvement of 200 basis points compared with our prior margin expansion forecast of 225 basis points to 235 basis points.
On an organic basis, we expect to outperform our prior plan and we expect that CAGR will become a net benefit to operating margin expansion. In 2024, we now expect non-GAAP net income per share of approximately seven.
Compared to our prior range of seven to eight.
And assuming approximately 56.0 million weighted average basic shares of common stock outstanding.
To conclude thank you preview of our Investor Day next month, we believe that removing <unk> from our forecast allows investors to most appropriately focus where we are focused and <unk> continue to execute on our goals.
We have introduced our new medium term financial plan and expect to exceed $1 billion in subscription revenue in 2028, we can exceed this target sooner if our mid market enterprise segments further accelerate if salesforce builds further upside if we're successful in cross selling CAGR to our customer base.
We are able to execute additional future strategic M&A.
We expect to deliver 20% non-GAAP operating margins at $1 billion in scale.
We expect free cash flow margins of 20% to 22% in 2028.
Until then have a meaningful amount of free cash flow over this horizon.
We look forward to sharing further data details and assumptions with you next month in Chicago.
Where the starting point of the next great growth chapter and Sprouts journey.
We're grateful for your support as we continue to scale the category defining social media management company.
With that Justin Ryan and I are happy to take any of your questions operator.
The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad at any point you would like to withdraw from the queue. Please press star one again youll be provided the opportunity to ask one question and one further follow up questions. We will now take a moment to compile a roster.
Our first question comes from the line of Raimo <unk> from Barclays. Please go ahead.
Thank you and could you just go one more through come through like the changes we're seeing.
So basically youre moving the low end.
Yes, our calculation, which kind of makes a lot of FEMSA that kind of pressure.
How does that impact revenue or what's driving the change in the revenue guidance and that's my first question I have one follow up.
Yes, Ryan this is Joe I can probably help you model that out a little simpler I think the way we're thinking about it is if you look at.
The comments I made around if you if you assume that <unk> exiting.
Q4 is in line with our revenue growth.
Exiting in Q4, and then you can imply from our guidance, that's probably in the 28% to 29% range. So if you use that as the IRR kind of growth rate year over year, you can kind of back into the IRR, we plan to add into the back half of the year and then from there you can kind of get the the revenue.
That flows through your model.
Yeah and then.
I remember last quarter, we talked about like.
The low end kind of maybe exiting you quicker Dan.
The unexpected and you kind of talked about some stabilization trend in April .
How does this play quarter play out and where are we on that journey.
Yeah, Yeah, Great question. This is Justin.
So, yes, I mean.
The loan to the business has been.
Obviously, a bit challenging for us over the last couple of quarters, when we spoke last.
We saw some signs some really positive signs of stabilization early in the quarter in.
In the second quarter.
And then kind of reverted back to what we had seen in the back half of first quarter. Shortly after that and so while we're optimistic that there is there is future stabilization there.
We wanted to make sure that we're just eliminating that risk from a model.
As its remained fairly unpredictable both on the <unk>.
Contraction as well as the new business side with not only the pricing changes, but also just the organizational alignment and prioritization that we've put further upmarket.
That that segment of the business has just remained a bit more challenging.
Okay.
Thank you.
Okay.
Our next question comes from the line of Arjun Bhatia from William Blair. Please go ahead.
Perfect. Thank you Paul.
One.
Maybe for Joe.
I think you called out the medium term you expect <unk> growth to be faster than expected can you maybe just walk us through some of the drivers there or what are you seeing more fall.
I'll get back in.
Both to be higher right.
Great. Thank you.
Yeah. Good question there.
I think it's some of the momentum we're seeing up and definitely in the enterprise space. Some of the data points, we gave out the enterprise business growing 50% year over year, new business growing over 50%. The deals that are coming in are just much larger these days than they were last quarter or the quarter before that and so I think as we.
Continuing to move up into this midmarket and enterprise business, we continue to see larger and larger ACB is if you look at the stat on the on the 50 K.
Cohort growing over 48% to 250 K court that grew over 130% origin will just seeing larger deals.
Across the organizations that work that we're doing business with so it gives us a lot of confidence that that momentum upmarket will continue throughout the year.
I would probably just also add in from a premium attach rate perspective, we've seen a lot of progress there up 160 basis points now 24% of our total customers have one of those products, but we see a lot of headroom there with.
With the products, we have previously when we think about the fact that only 6% of them have both of those products and then we add in something like Tiger, there's additional growth to come in in the future for US. There. So we feel really good about the quality of those customers coming in and the ability to attach some of these other products from an ACB perspective.
Okay got it and then.
Salesforce it seems like a pretty good quarter.
In Q2.
Getting migration.
What are you seeing in the pipeline Ryan and how do you think.
The cadence of that partnership kind of progressing through this year and even clearer.
And just 124.
Yes, we feel great about the partnership.
We delivered 176 logos in Q2 up 75% sequentially.
A lot of value being viewed by these customers as it relates to the integrations that we had built cross tableau in slack and more recently in Q4 service cloud and then we added the marketing cloud integration in this quarter as well, which we had a great opportunity to speak to customers live about at the Salesforce connections event.
We share this previously, but we continue to see a lot of amazing opportunity with these customers, both social studio customers that need to transition off.
There are very large in size as well as just salesforce customers in general that are looking for a fully integrated solution into the Salesforce Tech stack and so we feel really great. The pipeline is continuing to grow we anticipate we will continue to see strong results in the second half of this year.
Sure.
There's been some amazing stories, we've seen from customers coming in where this combination of.
Moving from social studio Trialing, our products seeing all of the value adds that we have and spread that they can immediately get benefit from and then for customers that are salesforce customers that were honest another social media management platform, realizing the importance of having that.
Full 360 degree view of the customer and having that social data pervasive across the Salesforce CRM record now we are uniquely positioned to deliver this for customers. So feeling really good about the visibility and a lot of traction and will be heavily active at dream force coming up in September .
Perfect. Thank you very much.
Our next question comes from the line of Parker Lane from Stifel. Please go ahead.
Hi, guys. Thanks for taking the question here Joe wanted to go back to the non core customer cohort here.
I know, it's not in the numbers and there is a lack of certainty around modeling that but what should we think about as a realistic timeframe for these 7400 customers to either move off the platform or recent point of stabilization I mean, we're about nine months into the price changes a lot of these customers are month to month.
Just give us a sense of what a realistic timeline is to approach stabilization in that cohort just absolute customer logo terms.
Yeah.
Yes, Parker, so what we'd mentioned on the call the way were kind of giving our guidance, we're actually assuming that that goes to zero by the end of the year. So we wanted to just kind of take that risk off the table. So from from that standpoint. That's how you can kind of think about that as it relates through to the end of this year. So we've got that zeroing out by by the end of this year from a.
Guidance standpoint.
Understood and then maybe Tiger can you give us a sense of that business model and who exactly theyre targeting what size of organization. They are looking at does that tend to skew more enterprise given the higher Suvs there or is it relatively balanced mix of organizations they are targeting.
Yeah. Thanks, Mark this is Ryan so it skews very much into sophisticated customers in the enterprise.
And one of the reasons why it's so much to us as they've got customers like Este Lauder Bose Omnicom and a stable of really great customers that they work with.
Their technology, which we love is just incredibly scalable it's al again.
It looks and feels a lot like sprout and so our R&D team, who certainly biased.
The internal side of building. This is one of the first companies we've ever seen that they've just been incredibly impressed with and we liked it because.
Obviously, you have a certain go to market motion within the enterprise and the way that they've built their software and implemented customers in the way that customers get utility quickly lines up really well to us. So they are definitely focused in on the enterprise part of the market.
So that again speaks to just some of the ACB opportunities, we see in the future as well as the impact we think that they can eventually have on our competitive win rates.
Got it I appreciate the responses here you guys. Thanks again.
Our next question comes from the line of Adam Hotchkiss from Goldman Sachs. Please go ahead.
Great. Thanks for taking my questions I guess to start would be great to just dig a little deeper on what youre seeing in the mid to high end of the market. It looks like on one hand, the 50 K class eight TV.
<unk> was your strongest <unk> that you've seen to date.
But I think it was a little bit softer or once you got below 50, K, even when you back out the very low end of the market. So I guess to ask the question in two parts. One how would you characterize the success youre seeing in the <unk> plus is that more wins in the enterprise against some of your larger competitors is that upsell how should we be thinking about that and then two.
Is there anything to call out from that sub 50, K cohort that we should be aware of thank you.
Yes. Thanks for the question, we're incredibly excited about the progress that we continue to see in that 50 K.
48% in terms of representative.
Logos was up nearly three X sequentially.
And then the 10-K side of things what I would highlight there is from an <unk> perspective is pretty similar in terms of value from Q1s from Q1, but if we look at the <unk> contribution in the 50 K bucket was much greater in Q1 with an accelerating growth rate. So.
Just highlight that the deals were much bigger and.
And we were seeing a lot of deals within that bucket than that more than made up for the reduction in logo count in the sub 50 K.
Okay, Great. That's really helpful. And then second just to double click on CAGR I. Appreciate all the color that you've given there, but could you give us more of a sense for why now on buying that business and.
And how you thought about that from an M&A environment and balance sheet perspective was this just a function of youre hearing accelerating demand for this in your customer base and wanted to be sure to build out a presence there early or how did you think about sort of why now.
Yes. This is Jonathan I can speak to that.
Kind of why now and how we are thinking strategically about this.
So you've.
<unk> heard me start talking about this space, probably as early as beginning of last year late to prior year.
This is a part of the market and part of the category that we know has grown increasingly important.
To our customers we referenced in the remarks, we're seeing this in a substantial amount of the enterprise and even the mid market deals that we're working on.
And thats been on an upward trend for some time now when we think about.
The timing on this.
We're mostly focused on finding the right partner here.
Finding the right team the right products.
Didn't have specific designs around the win.
But it's certainly and lines up nicely I think that it's.
Happening when it is because we've got a real opportunity not only to meet a much larger set of customer demands and kind of followed the demand trends that we're seeing around this space.
Also reached the level of maturity, where CMO as they're starting to take it seriously.
As you heard around kind of the interesting increased investments there.
But also it gives us.
Immediate opportunity to create a category winner here.
<unk> the competitive win rates in our own business in.
In the core products.
And really stand out.
Competitive differentiation standpoint.
To have a foothold in this part of the market that we expect is going to grow pretty substantially.
Over the next many years and I'll, maybe just add from a customer perspective, the folks on our team.
<unk> been paying a lot of attention to this space just as <unk> been talking about this space for a while we've been developing a point of view around this space for a while and the Tiger team and product just really stood out and when we started to bring some of the rest of our team and the go to market Org as well as R&D together to take a look at Tanger.
The excitement was off the charts in terms of the fit for us and the opportunity and to Justin's point.
In our enterprise over half of that.
Opportunities we have are talking about influencers. So we saw just a great fit there we saw the opportunity to differentiate and remember when I think about real time my team sending me tax rate now even in the hour plus since this news has dropped.
Over 40 inbounds from from brands and companies that you know well that are incredibly excited about spending some time with us on this product either because they need it and.
And they've been asking us for and asking us to get in this space. So all of those things that really lined up to this massive opportunity that we're excited about.
Okay really helpful. Thanks, Josh and thanks, Brian .
Our next question comes from the line of Matt then Bill It from BTG. Please go ahead.
Yes. Good afternoon, thanks for taking the question.
Alright, I guess when you look at that last comment about.
A number of customers, especially larger ones looking at the Influencer market and probably waiting to see kind of how things emerge from a technology perspective.
Where are you projecting this to be in terms of contribution or any kind of premium.
Lift in pricing or anything like that so whether its contribution to net dollar retention or anything.
Or anything like that what's what's sort of baked into the plan this year and maybe more importantly, if you will.
Look towards next year, how much of a lift can you get at existing customers from a product like this.
Yes, I'll start off and then Joe maybe you can just chime in with the modeling and the forecasting I think I would just tell you from a qualitative perspective right now we see a lot of opportunity as we move forward and most of my comments will be 2024 focus on just the combining of our efforts here from a win rate perspective.
Active both.
In our core business as well.
The deals that would have just been tiger on its own we see opportunities from an ACB perspective.
At the same success, we've seen in attach rates from listening and analytics, we expect that our go to market motion will drive progress and success on that side as well.
I'll, maybe let joel get into a little bit more of the modeling forecasting yeah. So Matt I think right now what we talked about is we've got $3 million with the revenue guidance for this year and we're not assuming right now any kind of cross sell in that number in the sprout and so I think that will be all upside depending on how the rest of the year goes and then as far as the other data point I think is important to note here one of your.
Questions, which is the <unk> of these deals are significantly higher than our average AC ACB and so when we think about going into next year any upside that we have in our business I think this contributes to our move up into the mid market enterprise.
ACB growth that we're seeing so I think this all kind of fits into.
The model from that aspect.
Yes.
Justin I'll just quickly add to the question you asked about <unk> I think.
Honestly, a little bit early to be thinking about modeling that but we know that anytime we've got additional functions that additional users or additional product touch points with our customers, particularly in this part of the market.
That's absolutely a contributor on.
We expect.
We will have some benefit on both sides of the business for for both product set as we are able to start to execute on that on that cross sell in.
Combined selling motion.
Alright, and then Joe I wanted to follow up just to make sure.
Calculating this all correctly, but if you are adding $3 million from Tiger and the rest of the year guide.
Then it looks like you took kind of the guidance range down call it $7 $5 million at the midpoint.
If we if we try to calculate out what the lowest end cohort is that 4% of <unk>. It looks like the rest of the business Youre actually lowering the second half contribution a little bit. So can you just tie. These together in terms of how much revenue you're taking out of the guide for the low end cut.
<unk> group going to zero and then what the remaining Delta is in terms of the forward guide.
Yeah.
Yes, so I think the way to think about it as an antibody is little earlier up Matt, we're taking out that kind of that sub.
Two K bucket down that low value bucket down to zero by the end of the year.
And so we are not lowering any other part of the guidance of the model and then the other data point that takes important there is that I think to think about the revenue and maybe what you originally had would be back to that comment I made earlier about our exit IRR. If you think about exiting.
Year end IRR with a 28% year over year growth rates, you can kind of get what we think we're going to add to the business and then back into the revenue overall revenue contribution factoring in the $3 million with CAGR.
Okay, great. Thank you.
Our next question comes from the line of DJ Hynes from Canaccord Genuity. Please go ahead.
Hey, guys, Ryan I'll start with you.
May be early but I'd love to get your thoughts on expansion dynamics with the early customers that have moved over from social studio I know they are generally larger in scope at land, but it would be great to get any observations on how these larger lands might impact <unk> going forward and what you're seeing with those social studio customers.
As they get acquainted to the sprout product.
Yeah. Thanks T. J I mean, I think we are pretty early on that journey, but generally I wouldn't say that those lands are coming in larger than they were with social studio. So we are getting a premium on most of those accounts as they move over.
The things that I get excited about more from a qualitative perspective is typically when they're coming in in the enterprise they might be in one part of the business right. It might be one business unit or might be one use case and then we've got this opportunity to land and expand across the organization I think because those customers are such a great fit for us in terms of ideal.
Customer profile, they tend to skew very much into the mid market and enterprise, we still see a lot of headroom for them even beyond the initial land and then I think the other piece that I would share is if I think about just the social studio product and what it offered.
You, usually see customers in one or two places one.
Doing the marketing publishing side of it or they might be doing the customer care. We know that we've got a lot of benefit to expand beyond that into the analytics side and into the efficacy side in many cases into the social listening side and now influencer. So I think that there is quite a bit of headroom there, but we're still pretty early in that journey.
Yes, It makes sense and then just maybe a follow up for you it would be great to hear a bit more about what youre doing with revenue state and AI on the social listening side of the business I mean, how meaningful are the advancements you can drive here compared to kind of what that listening product was prior.
Yes.
Pretty substantial in my opinion I think that.
The things that we've released today the things that we've got in play et cetera are interesting and are going to add a ton of value, but once we get to kind of the next generation and the next.
<unk>.
Bits of our road map, where we're really.
To start tying in things like <unk>.
Understanding the trends that are coming in through listening applying that back to the content that is resonating best with your audience tying that there again too.
Influencers that may be helpful. In driving the messages that you want to drive et cetera, and be able to seamlessly and very easily tie all of the aspects of the social strategy together, which are largely driven by listening.
With AI and give our customers an easy button to do those things to draw those insights.
To frankly develop their action plan for the outcomes that they want to drive as one example.
That's where it starts to get really interesting to me and Thats, where I have got a lot of confidence in the.
The team that we have in our product teams ability to take something that may look.
Barely.
Hi.
Simpler pedestrian on the surface and turn it into something that creates a ton of value for our customers and that's differentiated in the market.
That's that's the part that I'm most excited about we're already seeing improvements across the entire platform, including listening.
And I think one of the earliest ones that.
Give me a lot of excitement I think are going to drive a lot of value for our customers is.
Listening is.
A pretty interesting endeavor and that you're consuming and trying to draw meaning from massive massive amounts of data.
Often nuanced, meaning and often multiple meanings theres not a single thread theres not a single kind of analysis.
Or a single bit that's going to be useful to the organization. There's many.
And as we start to deploy the large language models and the things that we're building around listening.
To unlock all of that for our customers and then again turn it back around onto their strategy, that's going to be a game changer in my opinion, yes, I might just add on that.
Just the major I think is really really powerful is that I think that spread is just so uniquely positioned to help year because of the way that we built this product how approachable.
Elegant it has been for folks that have never leveraged listening. So you think about all those things that Justin mentioned and all of a sudden we can take folks who are new to listening and really superpower supercharge their ability to get at that data and make it actionable and so I think that one piece with the work that we're going to do there just allows us.
US to have a much bigger market to go after because of the way that we've built this product.
Yes.
Thank you guys.
Our next question comes from the line of Scott Berg from Needham and company. Please go ahead.
Hi, everyone. Thanks for.
Taking my questions here, Joe I wanted to just ask a couple of things on the CAGR guidance here together I guess first of all is there any purchase accounting impact on their revenues don't know what standards you've adopted this year in the transition year around that and then secondly, what's the linearity of that $3 million looks like.
Sure.
Yes. So on your first question, Scott Theres, no theres not going to any purchase accounting.
Adjustments or impact to the revenue number the way that that the guidance. We gave so we feel like that's a pretty.
Pure number and nothing to worry about that on that front and I know, what youre talking about but not the concerns you might see from other companies that have other.
Services bundled in with the subscription side and then as far as the linearity, we definitely see that there'll be a little bit more of that in Q4, obviously just given the deals are definitely more enterprise similar to our business and so a little bit more weighted.
In Q4.
Yeah.
Got it helpful. And then from a follow up question I guess, just more strategically with this product is.
Now part of the rationale was on the.
Differentiation side of the house I guess as you think about other vendors out there that are selling the traditional social media product that you all pet for a long time, it looks like youre, probably the only vendor that really will have this functionality, but I guess in that question.
50% of your Rfps have the Senate is.
Do you see this typically being selected in the sales cycle or is the sales cycle, maybe different than what you usually see for your social media solutions. Thank you.
Okay.
Yes, thanks for the question Scott Yeah. So.
I would tell you right just on the on the stat in terms of half of the deals in the enterprise, we're seeing this being a requirement.
From a competitive perspective, as we did diligence on the market and really looked at it.
There really wasn't much relevance from what we can see in our direct competitive set it seem to be a lot of folks that just <unk>.
Competing directly against CAGR and Tiger just stood out for us in terms of just their their technology and the solution in their approach to the market and all of the things I mentioned before in terms of of fit and so we see this as a really great competitive advantage in our core business as we move forward as well.
Some of Thats been referenced just in the last hour with all the inbound leads that we're seeing from some of these accounts.
And then from a sales cycle perspective, the other piece that was exciting for US is as we spent time with the go to market team there their sales cycles aren't quite as rapid as ours.
Our trial model, but they are fast for enterprise and we believe that from what we've seen in how we're running the rest of our cycles.
That they can attach nicely and the work that we're doing without along gating.
Our core business. So that was also part of the thesis for US on this is as we're doing that cross sell that we can we can really tie these things together, we're going to market.
And I'll, maybe I'll quickly add on the inbound demand and what we're seeing in the asks.
From our prospects and customers both in Rfps and just generally.
It was a very important part of their strategy and an important part of their ask.
It wasn't something that anyone to your point than anyone in this space was able to meet and so it was a demand that was largely left unmet.
Unless it was sourced separately and now we've got an alternative for those customers.
That we're really excited about.
Excellent. Thank you for taking my questions.
Our next question comes from the line of Michael <unk> from Keybanc. Please go ahead.
Hi, This is Michael the debit comes from Michael <unk>. Thanks for taking my question. So just on the pricing changes you made last year, just wanted to get sort of an update on it.
We're able to kind of achieve that 10% uplift on existing logos that you talked about last year and I was just playing as you expected it to play out.
Yes, Michael this is Joe.
Right now, we're feeling really good about the price lift the price lift for the existing customers that have rolled out it throughout the year I think it ranges anywhere from like we talked about.
Low middle single digits to low middle double digits I think in a lot of the larger deals on the enterprise side and we've talked about this in the last quarter do is a lot of time, it's not so much about the price increase in these deals, but it's bringing them to the table to maybe add more users buy more products and so what we're seeing overall is that necessarily an impact directly related the price uplift, but basically seen.
And our ability to expand in these larger accounts. It is bringing really interesting conversations to the table and so we feel like overall that that the pricing changes, we've made especially up market had been really beneficial to sprout.
Great.
He is a quick one here just baked into your guidance I guess what are your expectations. It sounds like the demand environment is it just the same as you currently saw into Q slight improvement or what are you expecting there. Thanks.
So on the demand side, if we think of the top of the funnel and what we're seeing we talked a little bit about this in our prepared remarks, we saw a little bit of pressure.
In the lower end of the business in a low value customers I think what the strategic changes we made on the pricing side.
We definitely anticipated a little bit lower <unk>.
New business on that front, but I think overall.
From a demand standpoint, especially up in the mid market enterprise has never been stronger right we talked about the.
The 50% uplift, 50% year over year increase in the enterprise business.
I will talk about the ACB growth. So I think we're really happy with what the demand we're seeing in the part of the business we're focused on.
Our next question comes from the line of Clarke Jeffries from Piper Sandler. Please go ahead.
Hello, Thank you for taking the question.
First.
Just on the $1 billion plus revenue for calendar 'twenty eight.
I wanted to ask how significant.
His tag or in that number or maybe another way of saying it is that a.
Completely organic number with assets that you have today.
Maybe a slight kind of detail of that no entry into any other material product categories, even if that was organic development.
And then I have a follow up.
Yes, so I think.
We talked about this a little bit in the prepared remarks, there is definitely that CAGR organic.
Business Standalone business in that projection I think it's a little early for not for us to kind of predict how much of the CAGR cross sell into the sprouts will go to that number we think that's more upside we'll talk a little bit more at Investor day, but for now it's basically assumes kind of the organic side of the CAGR business with upside with the sprouts.
Cross sell.
Alright, perfect and then Joe.
Reaching a 20% free cash flow margin by 28.
That averages out to be maybe at the high end of what.
EBIT expansion you're targeting so just.
How linear will free cash flow improvement be would you expect this to be more backend weighted in terms of the improvement up to 20% any kind of color on the path there would be would be helpful.
Yes, we definitely think it's going to be more linear up through 2028, and a lot of that just has to be has to do with our business has shifted up into that mid market enterprise, we've talked about this but the unit economics.
That business is much stronger the size of those deals and the length of those contracts are longer and so theres a lot of upside.
On a free cash flow side, so we feel like Thats, a pretty linear progression through 2028 versus running the business as is and then seeing this big uptick towards the back half. So I would I would expect that to be pretty EBIT.
Alright, Thank you very much.
Our final question comes from the line of Elizabeth quarter from Morgan Stanley . Please go ahead.
Great. Thanks, so much.
Again on Tiger.
Any sort of overlap with the customer base, we should think about currently I understand you aren't assuming any cross sell in 2023 guidance, but how should we think about just the balance of benefits from the acquisition skewed to either landing more customers with this asset now in your portfolio versus the cross sell opportunity.
Yeah.
Yes. Thanks.
Yeah.
30000, plus customers.
Certainly been some overlap, but I would categorize it.
As one where we think we have a lot of upside for bus so upside for both landing net new customers for both organizations as well as being able to cross sell.
So core to CAGR, and vice versa going to tiger customers and being able to sell <unk>. So we see quite a bit of opportunity on both sides of that and as you might imagine with the overlap that there was some opportunity for us to just go back to our customer base.
Feedback from some of our customers that are leveraging the product, which made us even more confident about the fit with tiger and sprout.
Got it and then hoping to get some color just higher level MLR trend that you guys may be seeing.
More recently across the software space, we are seeing more optimization of spend.
Yes, you are also benefiting from the mix to higher.
Deeper wallet customers. So any commentary on just hasn't is positive or negative factors, maybe impacting your current and are are any change in trajectory.
Yes, So I think Elizabeth I think a couple of comments there one I think when you think about the move up in the mid market enterprise and Ryan talked about that.
Catch rates 160 basis point improvement in the growth. We're seeing there we're really confident that the <unk> were seeing in that part of the market is really strong and actually improving and obviously thats offset probably by what we've talked about in the last couple of quarters is the churn on the low end of the market, obviously will impact our over overall IRR.
But we are overall happy about the progress, we're making up market knowing that we made a strategic change that was going to kind of put pressure on the low end of the market that's impacted on our as well.
Thank you.
I would now like to turn the call over to Justin Howard for closing remarks.
Alright, thank you.
And thank you everyone for your time today, we appreciate the opportunity to be talking about and providing some more visibility into this important transition for us.
We're certainly very excited about all of the the positive momentum that we're seeing in the parts of the business that we're focused on.
And being able to.
See the benefits of a lot of the strategic changes that we're making so we're excited to be able to continue to add clarity there.
And look forward to doing more of that just as a reminder, September 27 Investor day.
We look forward to talking more about.
The future of what we have planned.
And giving you some more.
Some more visibility into how we're going to get to that $1 billion revenue Mark.
And a lot of the other exciting things that are happening in the business. So we'll look forward to seeing you all there thanks, everyone for your time today.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
While there thanks, everyone for your time today.
Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation.