Sprout Social, Inc. (SPT) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Sprout Social Second Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speaker's presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jason Rechel, Investor Relations. Sir, please go ahead.

Thank you, operator and welcome to Sprout Social's second quarter 2021 earnings call. We'll be discussing the results announced in our press release issued after market closed today. And we've also released an updated investor presentation, which can be found on our website. With me are Sprout Social's CEO, Justyn 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 statements concerning financial and business trends, our expected future business and financial performance and financial condition, our guidance for the third quarter of 2021 and the full year 2021 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, 2020 filed with the Securities and Exchange Commission on February 24, 2021 as well as any future quarterly and current report that we'll file with the SEC. During the call, we will discuss non-GAAP financial measures, which are not prepared in accordance with Generally Accepted Accounting Principles. Definitions of these non-GAAP financial measures, along with reconciliation to the most directly comparable GAAP financial measures are included in our earnings press release, which has been furnished to the SEC and is also available on our website at investors.sproutsocial.com. And with that, let me turn the call over to Justyn. Justyn?

Thank you, Jason, and good afternoon, everyone. Thank you for joining us. Our company is executing at exceptionally high level and we're pleased to report our best quarterly metrics you get as a public company. I want to hit our second quarter highlights before turning the call over to Ryan and Joe to cover the details. Social continues to submit itself as the center piece of digital strategy. As new secular tailwinds to our market begin to emerge, our momentum has never been stronger and our opportunity never greater. Our growth rate has shifted into an even higher gear which reinforces confidence in our opportunity, our strategy and the aggressive investments we continue to make in our future. Yet again, we managed to break a series of our own records this quarter. We added a record number of net new customers added a record number of customers contributing more than $10,000 in ARR, and further accelerated our ARR growth to 45% over-year. We reported our first ever non-GAAP quarterly profit, we achieved positive free cash flow for a second consecutive quarter and we eclipsed the Rule of 50. Simply put, our businesses rapidly accelerating while our growth is simultaneously becoming structurally more efficient. All of this underscores the vacancy of our market and the attractiveness of our unit economics. We're pleased to rate our guidance forecast across the board. During the quarter and with our sales momentum was exceptional our product and development teams were hard at work shaping the foundation for our future growth. We brought to market multiple new capabilities, including a first-of-its-kind social commerce solution, expanded access to Instagram messaging and expanded case functionality to our integrations with Microsoft, Salesforce, Zendesk, and HubSpot. We continue to innovate quickly to create new and differentiated value for our customers. This focus enables us to fundamentally drive retention and growth higher over time while unlocking new pockets of addressable opportunity. And one of the biggest opportunities we now have in front of us is the rapid convergence of social and commerce. We've been speaking with you recently about the proliferation of use cases for our platform. This trend continues, but we've seen a new use case emerge and begin to crystallize socialist becoming a true commerce platform. We're able to move quickly and in June announced new and expanded integrations with Shopify and Facebook shops to enable brands to seamlessly manage their social commerce efforts within Sprout's unified platform. Being first to market with this type of disruptive social commerce solution was exciting for our team and for our customers. But it's only the beginning because this use case is continuing to expand. According to a study by the Harris Poll earlier this year 93% of executives agree businesses are increasingly moving their ecommerce strategies to social media as social becomes more ingrained in the buyer journey, and about eight and 10 businesses anticipate selling products via social commerce platforms in the next three years. Consumer preferences and expectations are shifting. We will now enable the extension of digital storefronts to social where our customers can deliver engaging content, world class customer care and personalized interactions throughout the entire purchasing journey. The full buyer cycle from marketing to service will live within Sprout's platform and allow our customers to unite their commerce and social workflows and reduce friction in the buying process. The functionality and partner integrations, transform how our customers think about publishing and engagement. And we've made the solution easily accessible for customers to adapt and leverage. These capabilities are powerful, elegant and timely to the market, but we expect to deliver even greater value to our customers in the years ahead. Not to be overshadowed by the commerce launch was our expanded rollout of the Messenger API support for Instagram. This was one of our most requested features from our customers and will empower businesses to more efficiently utilize messaging at scale. This also aligns well with what our network partners' term conversational commerce. We have worked for more than six months with the Instagram team on this release, and we're heavily involved in early beta programs highlighting the depth of our partnership together and our ability to jointly move quickly to deliver value for our customers. Behind the scenes, our teams are also doing some incredible things. We continue to priorities our DEI work and during the quarter expanded our technology giving program in which we donate more than $1 million in software annually to advance more than 75 global causes as part of our effort to broaden the social impact of our software. We're working hard to provide more transparency to our ESG efforts overall and anticipate that we'll publish our first fully formed ESG disclosures later this year. We've also used the past year to rethink the future of how our team will work. Our offices in Chicago and Seattle officially reopened in a phased voluntary approach last month. But at Sprout we know that the future is hybrid. Our goal is to empower our people to work wherever and however they thrive and to adapt quickly to changing demands and habits. We're committed to giving our employees the resources, support and freedom to grow and succeed at Sprout. And we believe this approach will enable us to attract and retain elite talent as we continue to grow. To close I want to revisit our core investment thesis. Social media has fundamentally transformed the way consumers connect with brands, which has changed the entire customer experience across virtually every part of an organization. Social cannot be compartmentalized. Billions of consumers are driving businesses to adopt new use cases as the market becomes consistently more complex and more challenging to manage. We've built organically and on a single codebase the social system of record, intelligence and action in a platform to be horizontally leveraged across a business of any size. From publishing and engagement to reputation, reporting and advocacy to listening analytics and now commerce, there is no business on the planet that can't benefit from either a more sophisticated social strategy, or a business strategy that is sharpened by social data. We're the industry's highest rated technology platform across every segment in the market, according to GQ, and others. And while we're incredibly proud of the company we built to date, we've also built a company that inspired by and prepared to thrive in the future. We look forward to meeting with many of you this quarter and digging deeper into this investment thesis at our first Investor Day in September. With that, I will turn the call over to Ryan.

Thanks Justyn. I couldn't be more impressed by the work of our teams this quarter. We're delivering for our customers today while strengthening the foundation for our future success. The barriers to entry in our market are rising, our platform is becoming more differentiated, and we're adding value to growing with the stakeholders. Our annual Sprout Social index, which we released this quarter, really brought the current state of the market to light. The report found that 71% of consumers are using social more than they were a year ago. And 88% of marketers believe their social media strategy positively influences their bottom line. It's clear, social is more mission critical today than ever before. And Sprout's already efficient go-to-market motion is well aligned to software buyers that want to prove value for themselves before committing. We've continued to hire aggressively across the company and have remained incredibly impressed by the caliber of people that are choosing to join Sprout. Our recruiting efforts have been propelled by recent awards like Fortune's Best Workplaces in Technology, Fortune's Best Workplaces for Millennials and Great Place to Work's Best Workplaces in Chicago. Because of all this, we feel well positioned to capitalize on the many opportunities in front of us. Justyn mentioned how our product teams which along with their partner teams are moving at a fast pace to take advantage of emerging new opportunities. In our marketing efforts, we're seeing accelerating customer demand, resulting in an increase in the number of qualified trials and an improvement in our trial conversion rate. Our new business and customer growth sales teams were on fire during Q2. While there are increased investments in customer success and onboarding continue to pay off with structural improvements to retention. A new record in customer additions combined with our rising ACVs underscores the incredible market opportunity we are seeing. The metric that jumped out to me most this quarter was our 10K net additions, which set another record and our accelerated growth of the 10K customer cohort, which grew at 55% year-over-year, contributing to the success with the expansion of use cases our momentum at market especially mid market and enterprise and our success in selling our premium modules across the entire customer base. To that point, a sample of the brands that grew with us this quarter is a fantastic list that includes Kraft Heinz, The Department of Energy, Independence Blue Cross, Agrium, Franklin Electric, Levi's, Whataburger, Sisense, BARK, The AARP and Kaplan Test Prep. Now, shifting to a few customer stories, we're incredibly proud to partner this quarter with Penn National Gaming. Jennifer Weissman, Senior Vice President and Chief Marketing Officer said we picked Sprout to unify our various unique social media accounts under one management platform that will enable us to cultivate the most engaging conversations and content for our guests. Sprout was a natural choice to help us grow the social presence of our many locations, because of its powerful intuitive capabilities that our casinos will quickly harvest the benefits from. Penn shares a commitment to diversity and inclusion with Sprout. We are pleased that Sprout's capabilities helped us amplify recently launched efforts like Penn's Diversity Scholarship program, as well as the introduction of the mychoice myheroes program, an exclusive set of benefits offered to members in the military, veterans and first responders. We also executed an exciting addition to Nutanix already expensive enterprise package with Sprout. Nutanix, a leader in hybrid multi-cloud computing recently expanded their social listening relationship with Sprout and during Q2 added a number of new users to help scale and better manage their global secondary handles on social media. By broadening their publishing and engagement requirements, they were able to level up their reporting systems and processes to build a more strategic and focused social strategy at scale. As they head into their next fiscal year, Nutanix is also leveraging our professional services for reporting. We are grateful to continue our work with Nutanix as they unlock insights from social data that will drive their strategy forward. We also recently partnered on a case study with New Jersey Transit, which had 15 million Twitter impressions last year, and serves nearly 1 million daily riders across its trains, buses and light rail. Customer care and experience are at the heart of the New Jersey Transit brand. By leveraging the Sprout smart inbox they were able to deliver 142% year-over-year increase in the reply rate and also reduce the average customer response times on social media to just 30 minutes. Carolyn Mack [ph], New Jersey Transit's Director of Events and Social Media; when people think of transit, we don't want them to think of just equipment and stations, so we use social to give our employees a voice and to humanize them to the public where Sprout came out on top with understanding us and treating us as individuals. Every time you reach out, Sprout gives us the same customer care that we were promised from the first time we spoke to them. They really are 100% there for us, incredible stuff. To bring it all together, we had another record breaking quarter where our teams delivered and our customers saw tremendous value. I'm really proud of the way our people are showing up for each other and our customers. And because of that we're heading into our third quarter with a tremendous amount of energy and momentum. With that, I'll turn it over to Joe to run through the financials. Joe?

Thanks Ryan. I'll walk you through our second quarter results in detail before moving on to guidance for the third quarter and full year 2021. Revenue for the second quarter was 44.7 million representing 42% year-over-year growth. ARR exiting Q2 was 189.1 million up 45% year-over-year. We were pleased to see record quarterly customer additions, healthy retention and very healthy expansion. We added a record 1490 net new customers in Q2 to finish the quarter with 29,612 customers up 22% year-over-year. This is a reflection of balance and very strong performance in each of our segments. We continue to be focused on high quality revenue yield from our new customer core. The number of customers consuming more than $10,000 in ARR reached 3936 up 55% from a year ago and up from 3514 in Q1 2021. Our ACV was up 19% year-over-year. The rising strategic importance of social, blogging use cases as customers operationalized social, rising chat for our premium modules and the momentum market remain seven sustainable growth drivers for 10,000 customer cohort in our global medium term ACV growth. In discussing the remainder of the income statement, please note that unless otherwise stated all references to our expenses, operating results and share count are on non-GAAP basis and are reconciled in our GAAP results in the earnings press release that was issued just before this call. In Q2, gross profit was 33.8 million representing gross margin of 75.6%. This is up 160 basis points compared to gross margin of 74.0% a year ago. We've seen a positive impact on gross margins, as we lapped elimination of infrastructure hosting costs from legacy simply measured from the natural efficiencies of scale and our business. Sales and marketing expenses for Q2 were 17.1 million or 38% of revenue, down from 43% a year ago. We are pleased with the quality of people that are choosing to join Sprout and we are continuing to accelerate our pace of hiring across both our sales and marketing team. These are total sales and marketing expense growth accelerates for the fourth quarter in a row, indicating a healthy trend line of investment, we're able to further improve efficiency. Research and Development expenses for Q2 were 8.1 million or 18% of revenue down from 22% a year ago. We continue to have aggressive R&D growth goals in 2021 as we address and expanding set of opportunity. We had many key R&D hire start in June and many that are planned begin throughout Q3 of 2021. General and administrative expenses for Q2 were 8.5 million or 19% of revenue, down from 27% a year ago. While we continue to expect G&A expenses to further decrease as a percentage of revenue as we scale. We do expect these annual margin gains to come at a much slower pace over the coming 12 to 18 months than they have been realized over the past 12 to 18 months. Non-GAAP operating income for Q2 was 0.1 million or a positive 0.3% operating margin. This compared with a negative 19% operating margin a year ago. We are pleased with improving efficiency as we scale the company and outperformed our expectations due to higher revenue and the timing of many key hires. Non-GAAP net income for Q2 was 0.0 million for net income of $0.0 per share, based on 54.8 million weighted average shares of common stock outstanding compared to a net loss of 5.8 million and $0.11 a year ago. Turning to the balance sheet and cash flow statement, we ended Q2 with 171.5 million in cash, cash equivalents and marketable securities, up from 167.8 million at the end of Q1 2021. Total revenue at the end of the quarter was 54.5 million. Again, both our built and un-built contracts are remaining performance obligations or RPO, put approximate at 1.2 million up from 74.9 million exiting Q1 2021 and from approximately 59% year-over-year. We expect to recognize approximately 84% or 68.2 million of total RPO as revenue over the next 12 months. Operating cash flow in Q2 was positive 4.4 million compared to negative 4.0 million a year ago. Free cash flow was positive 4.1 million in Q2 for a positive 9% free cash flow margin compared to negative 4.5 million and a negative 14% free cash flow margin a year ago. Our ongoing momentum into the mid market enterprise and mix shift towards annual multiyear contracts are having a positive impact on free cash flow as we grow. We are pleased to report positive non-GAAP operating income for the first time in our history and positive free cash flow for the second consecutive quarter. The combination of accelerating free cash flow margins and accelerating revenue growth puts us above the Rule of 50 benchmark this quarter, underscoring the attractiveness of our unit economics. I do want to reiterate that we continue to optimize for future growth. We do now expect to be sustainably, profitable or free cash flow positive in all subsequent quarters. We generally continue to expect free cash flow margins to be several 100 basis points better than operating margins throughout the remainder of 2021. Shifting to formal guidance, for the third quarter of fiscal 2021, we expect total revenue in the range of 47.3 million to 47.4 million or growth rate of 41%. We expect non-GAAP operating loss in the range of 4.3 million to 3.9 million. This represented an anticipated operating margin of negative 8.7% and improvement of more than 400 basis points year-over-year. We're making aggressive growth investments across our company. We are doing this while delivering improving our margins, highlighting the efficiencies in our business as we scale. We expect a non-GAAP net loss per share of between $0.08 and $0.07 assuming approximately 53.9 million weighted average basic shares of common stock outstanding. For the full year of fiscal 2021, we now expect total revenue in the range of 182 million to 182.6 million. There's an expected overall reported growth rate of roughly 37% and compared with our prior annual expected growth rate of 32% to 33%. For 2021, we now expect non-GAAP operating loss in the range of 11.0 million to 10.6 million. This implies a non-GAAP operating margin of negative 5.9% more than 400 basis points better than our prior annual guidance and improvement of roughly 1000 basis points year-over-year. We're pleased to see faster growth with greater efficiency. We now expect the non-GAAP net loss per share between $0.21 and $0.20, assuming approximately 53.8 million weighted average basic shares of common stock outstanding. Of note our offices in Chicago and Seattle did reopen in mid July and we continue to hire aggressively across the organization. We've accounted for this office reopening in our expense forecast for the remainder of the year, which we expect will likely lead to moderation and the pace of G&A margin expansion over the next 12 to 18 months relative to the prior 12 to 18 month period. In summary, we believe we're strongly positioned to capitalize on the opportunity for durable multiyear growth as social moves to the center of digital strategy. Accelerating growth rates, compelling financial leverage and strong free cash flow performance gives us confidence to make optimized investments that we believe will enable us to achieve our full potential in the quarters and years ahead. With that Justyn, Ryan and I are happy to take any of your questions. Operator?

Thank you, sir. [Operator Instructions] And speakers, our first question from Raimo Lenschow of Barclays. Please go ahead. Your line is open.

Hey this is Frank on for Raimo. Congrats on another really great quarter here. So you told is strong performance and lower costs first, what was the biggest contributor there? Was the most of the premium products like listening or analytics or was it more by growing seats expanding across the departments?

Yeah. Thanks for the question. What were really important to the growth of our customer base if I was to prioritize them, it continues to me, the user seats, additional use cases and individuals from different departments being involved, followed by the premium add-ons like listening and analytics. As you might - yes, depending on the specific company, and their maturity within the market is very - quite definitely prioritize users than the use cases of the add on modules.

Okay, very helpful. And it was great to see you guys moving to social commerce. I know that's on the horizon for a while. Could you help to quantify the opportunity here? And how do you see this as a potential area for further partnerships for M&A in the future?

Yeah, great question. So this initial launch back in June is really, as we've indicated, a small part of the total what we think is the total opportunity, and certainly the totality of our plans there. I think a lot of it is still developing. We expect that the work that we do there will be a combination of - certainly additional integrations are on the table there. We wanted to start with the platform that we felt would get the most reach and kind of early traction to the market. We favored some existing relationships there, but extending into additional integrations there. But also a lot more on the capability side, right. We started with what we thought were broadly applicable, very powerful capabilities to be bringing to a broad range of customers. We've got a long roadmap to expand there, could be something that becomes an additional monetizable skew et cetera, as we build those out, but we're really taking our time with it. While the opportunity is still unfolding, not only for us, but I think for the broader network partners in general, what this is going to look like, what the ultimate opportunity is. The important thing for us there was forming a thesis, getting in the market, making sure that we've got those relationships pegged and that we've got the opportunity to learn and build from there, so expect to see a lot more from us on the commerce side.

Great. Thanks again.

And our next question from Arjun Bhatia of William Blair. Please ask your question.

Perfect, thank you and congrats on the great quarter. I maybe wanted to touch a little bit more on the ecommerce opportunity. It's great to see that out in the market. Is there anything that you can say just in terms of initial customer reaction or adoption, usage, et cetera that you're seeing from that? I know it's relatively early, but any color would be great. And then just as you're thinking of customer adoption trends, should we think of this as primarily being adopted by existing customers? Or is there an opportunity here to maybe attract new customers from verticals that are maybe under penetrated and to get them onto the Sprout's platform?

Yeah, great question. So to the first half of that certainly, it's early for us to probably share much in terms of deal contribution and how that's shaping up in terms of adoption. I will say that, we've been excited to see many fantastic brands adopting that. We'll have a better idea of what we want to share specifically in terms of metrics as we get a little further ahead. Certainly, I think the initial release, with the number of customers that we have, we see a great opportunity in the existing customer base. But part of our thesis here was to the last point that you made, which is we want to make sure that for businesses that are either doing the - all or significant part of their sales through ecommerce and now social commerce specifically it's an obvious choice that we can go out to market to any brand that is using the platforms that were integrated with and be a very obvious solution for them to be able to make all of this strategy work together cohesively. And so we definitely see this as an opportunity to expand our TAM overall, but more specifically, just take that to market and make some significant progress in the install base of our partners.

And Maybe I'll let's just also add in there quickly, I think the exciting part - I think your question about new customers versus existing, we've already seen some impact in helping new customers understand the benefit of Sprout because of our early entry within this market and the ability to make their workflow much easier leveraging social commerce within Sprout with the integrations. So I think that's a piece you'll hear from us in future quarters as well in terms of the impact for customers, but we see it as both the existing customer and new customer benefit.

Got it, that's very helpful. And then, Ryan, this next one, actually, probably for you, but you clearly seeing great momentum in the business and I think I heard Joe mention that you're accelerating hiring across both sales and marketing. Can you maybe just help us flesh out a little bit where you're hiring, in the go-to-market or is it inside sales? Do you see more opportunity in the enterprise expansion reps? Just how should we think about the marketing investment you're making?

Yeah, absolutely. What everybody's thought of an inside sales rep right now with just - with the current state of things. But we're hiring across a variety of our segments, continuing the trends in terms of mid market and enterprise, growth and success there, so you'll see that from a career perspective and roles that we're hiring for. But I would say, it's new business for mid-market and enterprise and then our growth teams as well are getting a lot of investment. And then we've started to hire some more in our international markets as well. So it's kind of across the board, that we're seeing this opportunity right now. And we just want to make sure that we have the right level of capacity and distribution in the areas where we're seeing it.

Alright, thank you very much, and congrats again on the quarter.

Thank you.

And our next question from Parker Lane of Stifel. Sir, please go ahead.

Hi, guys. Thanks for taking my question. A lot of talking about social commerce and wondering if you can talk a little bit about advocacy for a second, something we haven't heard about for a while. Maybe give us an update on the demand environment for that particular use case and how some of the customers are thinking about the ROI in that area.

Sorry, I was muted there for a moment. Yeah. So advocacy is an interesting space for us. This is an area of impact for businesses that we recognized several years ago, maybe even a bit ahead of demand of the market, but had been building against this idea that social is not just an opportunity for external voices, but also for the ability for internal and related voices to be amplifying the message of brands, further create relationships between the brands, and their employees with their audiences externally. And Ryan shared a couple examples of how that's taken shape in some of our existing customers. But that is an area that we've seen increased demand. It's an area where we see an opportunity to bring our same approach toward a unified platform that brings many capabilities related to social into one place and something that you'll probably hear us talking more about over the next couple of quarters.

Yeah, got it. And then maybe on the 10,000 plus ARR customer cohort, would it be fair to say that the majority of this solid add-ons you had recently have been from enterprise customers or you're really starting to see traction in SMB and mid market customers as well that have leaned into the platform very heavily for social and have sort of eclipsed that 10,000 barrier?

Yeah, it's definitely, is a pretty healthy balance for us. Certainly, in the mid market and enterprise you're going to expect deals coming in at that rate. But we've seen the same sort of success and opportunity within our SMB and agency. And if you think about some of these organizations, especially in SMB, many of them grow up digital, right. They grow up social, it's one of their most important modes of communication with customers, it drives their marketing campaigns, and then oftentimes they're outside of the amount of their budget spent within this area. So we continue to see a success across mid market and enterprise. But we think that there's plenty of opportunity in our SMB and agency segments there as well. And they're certainly making up a good portion of those 10K adds.

Yeah. Great. Thanks again, for taking my question, a great quarter.

Thanks a lot.

And our next question from Matt VanVliet of BTIG. Sir, you may go ahead.

Yeah, thanks for taking the question, great job on the quarter guys. I guess first, on the international side, you've really started to put in some management over the last couple quarters to invest there. And Ryan, you mentioned hiring really picking up on the go-to-market side, but curious kind of where you feel like you're at in terms of the team building and their ability to be as efficient as their US counterparts right now and just kind of what, what level of growth or contribution to the overall growth are you seeing so far in the first half?

Yeah, I think we're still really early on what the opportunity is going to ultimately look like for us. We started that first office in Europe in 2019 and it's been building there. And we're starting to see some amazing productivity from that group that's just starting to mature, but it's still relatively new when you think about where we are today. And then we've gone in and added some more resources and great people in the APAC region and LATAM as well and just worked on hiring a leader for APAC and a leader for LATAM. And so we're seeing really good productivity from that entire group. We've got the benefit in that because of our inbound model, we get to see where the demand is before we make bets. And so for us, we understand where we're seeing potential opportunity within the market. And then we can go and make the right investments from a distribution perspective. So I would say that it's contributed nicely to the business right now. We think that we're pretty early in terms of what the ultimate opportunity will look like. And we're complementing that opportunity right now with distribution from both an AE perspective as well as from a localized marketing support and we'll be looking at more distribution channel opportunities in the future.

Very helpful and then as you look at the customer care opportunity longer term, obviously with Zoom writing a nice big check for 59, it's pretty clear that that area of the market is gaining a ton of spend and a ton of attention. Is that something that you're going to come out with a very fully productized type of release the social commerce or does it have to take on a very different kind of amorphous form for each customer, and maybe you're gaining more traction there than we're going to see with kind of one big press release.

Yeah. So the majority of the building blocks are there. And as we've talked about in the past, a large number of our customers are leaning on Sprout for their customer care use case. We do think that there's some roadmap opportunity, as well as some integration opportunity to beef up those capabilities, and possibly even put kind of tie bolt on it in terms of a specific offering. But the benefit that we've got there, one, we've been serving the customer care use case for a decade, the tools are there, we're exceptionally good at it. So the exercise of productizing that, adding some things that are more context specific, it's something that we've done many times before, and we're very good at. So the ability to bring a product like that, or a specific product like that to market is certainly possible and on the table. A lot of it'll just depend on our roadmap momentum toward that specific use case, and relative to some of the others that we're working on.

Great, thank you, great job on the quarter.

Thank you.

And our next question from Clarke Jeffries of Piper Sandler. Please go ahead.

Well, thanks for saying the question. Really encouraging to see ARR growth accelerate over 40%, net new ARR reach a record even for Q2 and I think, overall, if we look at it year-to-date, ARR is already at 75%, a level of - was added in 2020. So when you look at where the execution has been strong and where the pipeline and building do you think it's possible for us to see the same seasonal, first half, second half split in terms of net new ARR? Or how should we think about the back half execution?

Yeah. I think COVID has kind of probably up ended a bit of the typical seasonality that we would have seen. I think, as you've seen from us in the past, the tail end of the year has been strong. And we don't see that letting up in the back half of this year hopefully as indicated in the guidance we've provided. It probably may look slightly different just based on where we are kind of in the COVID cycle, but we're more focused on the sequential performance and just kind of the record setting performances, so not thinking so much of the comparable periods, Q2 this year versus last year, but even looking more at the sequential growth and the fact that we've been able to deliver a record quarter relative to every other quarter. Those are the kind of milestones that we're going to continue to look at and kind of measure the team by.

All right, perfect. And then I know we've spent some discussion on the capacity investments, but I was wondering what are the top product led growth initiatives for the rest of the year? I can imagine hiring is certainly top of mind. But as you think about developing inbound growth, what are the top investments there for this year?

Yeah, so a lot of the areas that we're looking at there from a product like growth standpoint have to do with making the onboarding process accessibility and visibility of some of our existing, more advanced capabilities, more readily apparent to the customers who are either coming into the trial funnel, or who are existing customers. So making sure that the product is doing as good of a job as our as our go-to-market teams are in exposing those capabilities and making onboarding into those capabilities really seamless for our customers. So we're continuing to spend a lot of time there. And then also just thinking about what does the - the product plays a big role in our sales process given the amount of revenue that's driven through our trial funnel. I'm just thinking of cohesively what is that onboarding and versus experience look like? How are we optimizing that funnel? How are we adapting depending on where we're seeing that funnel developing, what sources, what regions of the world et cetera. So that's kind of a constant process of optimization. It's continuing to get more and more investment from us as well.

Got it, I appreciate the color. Thank you.

And our next question from Stan Zlotsky of Morgan Stanley. Sir, please ask your question.

Perfect. Thank you so much, guys and congratulations on the very strong quarter. From my end, I wanted to dig into the enterprise opportunity. Obviously, you're hiring season sales reps to really go after that. How high up in the enterprise do you see yourself being able to go and really compete effectively right now with the product portfolio that you have? And how aggressively are you really pursuing the enterprise opportunity more broadly.

Hi, Stan. Yeah, this is Ryan. I think there really isn't any ceiling on what we can do here. We've closed deals with Fortune 500s, Fortune 10s, with our current products and are getting great feedback from those customers. As we built out the enterprise organization and our outbound motion, we've certainly been targeting a lot of customers that we think are just a great fit for what we have to offer and have been seeing really nice success across all of our products. So I think that there's plenty of headroom for us to continue to grow. And as we're adding more folks to the team, we see really good productivity. So you can definitely expect to see more from us there. And I think as our roadmap continues to evolve, as we're aligning those customers, we'll just be able to continue to grow the footprint there as well.

Got it and then question for Joe on billings, very strong billings and I apologize if this was addressed in the prior question, but anything one time in the billings number that we need to be mindful of?

No, Stan, no, onetime items there. That's just the natural progression as we get into these more mid market enterprise deals, we're just seeing longer term and bigger size deals, but nothing onetime in there Stan.

Okay, awesome. Thanks.

And our next question from DJ Hynes of Canaccord Genuity. Please ask your question.

Hey, guys, All the Congrats, really great set of numbers here. If we try to unpack the record customer adds you're putting up and I'm sure it's a combination of both. But if you had to rank it, like does it feel like it's been more a function of top of funnel increasing right, so just a lot more shots on goal. Or is it improving conversion? And maybe there's a comment on win rates in there somewhere?

Yeah. It's a great question. I mean, I want to give some credit to our folks across success in the product organization, we've certainly seen structural improvements to our retention. And Justyn mentioned a little bit ago, just the investments we've made on onboarding, but just the innovation that's coming in the roadmap means that we're adding more value than ever to our customers. So I think there's just a huge lift there. And then we have seen really great quality coming from the top of funnel and the conversion rates have been improving as well. So from a logo prospective, felt really good across every segment about the execution and the customers that we're seeing globally. So it's definitely about that - still over weighted on the new business side, but both are really nice levers for us.

Yeah, that's helpful. And then, Ryan, I'll ask you another one. We'll be talking about Justyn, feel free to chime in. But anyway, to give us a ballpark feel for what percent of seats are in social teams, what percent are in service, and then what sits outside of those functions? Like I know, there's a huge opportunity in terms of cross functional use of social data. So just trying to think about where you are in terms of monetizing that interest.

Yeah, really difficult to answer and difficult because organizations are really evolving right now where they may have a part of the social team that is dedicated to service versus having the actual service team. There's usually an evolution depending on how sophisticated they are when they move from sort of the center of excellence to hub-and-spoke. Many organizations are taking a different approach, or different approaches there. And so it does get pretty difficult to suss out. I will tell you that. It's certainly fair to say that the majority of the users still fall generally in the marketing while they may be handling customer service use cases or others. But that's an area where not just those specific use cases like customer service or now, maybe the folks responsible for commerce. But the additional departments and stakeholders that may be second order related to what's happening in social where they've got skin in the game and a very vested interest in keeping an eye on it and being involved in it, so yeah, difficult to quantify exactly. I would say we're moving toward definitely more seats in the specialized roles, and particularly in the mid market and enterprise, we're seeing more and more of those deals inclusive of - customer care is a good example, but even sales, other parts of the marketing work that may not have been involved before, et cetera. So it's trending in that direction for sure.

Yeah, that's helpful color. Thank you, guys and Congrats.

Thank you.

And our next question from Rob Oliver of Baird. Please ask your question.

Great. Hey, good evening, guys. Thanks for squeezing me in. A lot of talk about social commerce, so I'll add a couple on that front, just on the new commerce integration product this quarter, it seems like you guys have taken accretive approach to how you're integrating that with a suite of products and maybe to kind of drive some up sell considerations within some of your customers. So just would be curious for the early reads on that and whether customers are feeling the need to step up their plans in order to avail themselves of that. And then, since no one's asked about it yet, I feel just ask about Twitter, because we also got announced that this quarter about Twitter piloting social commerce. And clearly you guys have a very strong historic relationship with them, so just will be curious to hear about both those things. Thank you.

Yeah, sure. So all kind of work in reverse order for here, I think. Yeah, exciting news out of the Twitter team and it's something that we're looking forward to collaborating on and figuring out where we can add the most value. I think they've got a pretty compelling proposition and certainly something that we're well positioned to be materially involved with, but TBD and I think, specific dimension on that front. But exciting, right, because we've got all of the networks now are coming to the table with a little more clarity around their plans. And I think that that - the indicators are there, this is going to be a massive opportunity across the board. And what all of our roles are we're sorting that out and making those bets and building toward that roadmap now. I think that to the question around potentially the stepping up plans around the commerce capabilities, I think what we're going to see early on is mostly additional user seats, to fill those needs, because we're not monetizing it as a separate skew, and we haven't held it back to any particular plan. So the capabilities that we have today are available to any customer of Sprout. And we did that very intentionally. As those capabilities get more sophisticated, you've seen as take a different approach in the past with the feature sets that have become more robust. So that's certainly an option for us on the commerce side as well.

Great, thanks, Justyn and then Ryan, I was just going to ask one follow up for you just about kind of the nature of enterprise buying that you're seeing here because I think clearly the expansion numbers you guys are seeing in enterprise and the ARR on customer metrics are pretty staggering. And I think they speak to maybe a real new appetite here for solutions like yours within the marketing department. And since it seems like marketing is still predominantly where the land is, can you bridge - maybe touch on what you're seeing there in terms of changing and maybe that kind of bottoms up buying model and the acceptance of that within even multinational tech companies? Thanks again guys.

Yeah. I mean, I think there's a couple things that are exciting for us. One, the trial model continues to be really important. There's so many of those logos that we talked about today came in from a trial, leveraged the product before they sign the contract, prove to themselves that Sprout was a perfect fit and really allowed us to differentiate from everybody else in the market that was trying to sell on a demo. That continues to be really important and more and more, we're hearing customers set time aside to do this realizing that this is a great way for them to mitigate risk as they make a decision. So that's working really well. The other thing I would say is that even in these large organizations, you're getting access to more executive decision makers, with these companies where social has become a bigger priority for them. They are more interested in understanding the strategy and the technologies and platforms that they're going to have to support them. They want to understand the best practices within the industry. They want to understand benchmarking data. And so you're having more of them involved in the conversation deals as well, which is just provided a nice tailwind in keeping sales cycles moving quickly. So we feel like we've got a couple benefits there. And that we get people in when they're using the product the personally implemented if not the entire way before they buy and then we've got more decision makers getting involved in the process to really understand how we can help them.

Thanks again, guys.

And our next question from Scott Berg of Needham & Company. Please ask your question.

Hi, everyone, congrats on the great quarter. Thanks for taking my questions. I guess I got two to them brief. On the first one, it's kind of a serious question, although it might not sound like it. Are you guys actually investing enough right now? Given what the business metrics have been in the last two, three quarters have been fantastic, just to know if there's an opportunity to maybe accelerate the growth even faster.

Yeah. No, it's a fair question and one that we take seriously as well. I think one of the things that we're hyper focused on and where Joe and Ryan, and really most of the executive team are thinking about on a constant basis is just where should we be ramping up investments. And you've heard us talk before about - we've got great visibility into where the opportunities are, particularly given the volume of the inbound funnel, the free trial model, where we can understand what demand is going to look like in other markets, et cetera. And so I think we've done a good job there. But certainly something that we're always pressure testing with ourselves is just where are we going to make increased investments. And a theme from us that you've heard from us, hopefully over the last couple quarters is we're continuing to apply pressure. So the pressure that we're applying to pull in those investments now is more than the pressure that we talked about a quarter ago and we want to make sure that we're fully capitalizing on these opportunities. We're always going to be thoughtful, right, that's been the way that we've operated as a company, but not hesitate when we find those opportunities to make sure that we're applying enough pressure. So as Joe said, kind of in the prepared remarks, we've got a lot planned there. We're accelerating hiring. We're accelerating the investment in key parts of the org. You'll continue to see us doing that. But we share your question. It's one that we're asking every time we get together, and continually finding new ways and new places that we're excited about growing that investment.

Awesome and I guess from a follow up perspective is, if you look at your customers using the platforms today in the different ways, are there any like I don't know usage, data or metrics that you can share for us maybe how much more engaged some customers are in using the platform today than maybe I don't know 12 or 18 months ago and trying to see if there's any influence that the pandemic is having outside of just the customer growth on the business?

Yeah. From a metrics perspective, not anything that we've shared or made available externally, but what I will say directionally is that one consistent theme that we're seeing and we've talked about this dating back to what we started to see at the tail end of Q2 last year, which was this realization by organizations that social is the future, this is investment that they cannot kick the can on. And what that means is that we're starting to see more and more - it's taken us some time to maybe figure out how to operationalize that internally. But more and more where additional use cases, additional departments, additional seats are being involved. And so when we think about the number of people involved in the organization, the amount of spend per customer, all those kind of apparent within the metrics that we do share and those are the ones that I would point to is we're just seeing greater involvement across the organization, additional departments additional use cases and more and more need for the premium offerings that we brought to market.

Great, thanks for taking my questions.

[Operator Instructions] And our next question from Michael Turits of KeyBanc. Please ask your question.

Hi, this is actually Rich following on for Michael. Thanks for taking the question and congrats on another strong quarter. So in some of our conversations with the channel, we're hearing some indications of a - some softness as we move into the summer in SMB and mid market for front office software, relative to the really strong post-COVID demand that we saw in 2H of last year and 1H of this year, as people started to kind of return to office and take some vacation time. So that doesn't seem to be the case for Sprout. And just wanted to see if you could provide some color what you guys are seeing from a Jan perspective in 3Q so far and kind of how you expect this to trend for the remainder of the year.

Yeah, it's a good question Rich. I have not really seen that. I can certainly understand what certain people now - some having the opportunity to get back out and take some vacations we'll see some of that hasn't shown up yet in our funnel. We feel pretty confident about the trend lines that we're seeing. Our quality has actually been really great. And the execution from the team has been really great. And we're seeing it across all segments in our SMB teams and our mid market teams have continued to perform. We continue to have the benefit from that inbound model where we know where to invest time. And we're not necessarily chasing deals or accounts, because so much of our revenue comes in from an inbound perspective. And that's where we dedicate a good portion of our energy. So I'm sure that there will be some seasonality versus the market. But we haven't seen any of those trend lines today.

Yeah, and I'll just quickly add, I think anecdotally here is an observer on some of the other categories, where we saw some of that influx as COVID settled down a little bit tended to be I think the parts of the market that had a longer trough, right. When we talked about in Q2 and then into Q3 of last year, the interruption to the funnel into the revenue pipeline and performance really was fairly short. And so I think, just from a trend line perspective, I think we've kind of been one of the counter examples throughout COVID and that seems to be - continues to be the case.

Got it, thank you for that and then just one follow up, you guys have continued to have success moving up market. And you see that in the ACV growth. And I think last referenced, you guys said some of your larger customers were in the mid to high six figures in terms of ACVs. Just wanted to get an update on that and see if we've kind of crossed over into that seven figure ACV range yet and color on that would be helpful.

Yeah, our answer at this point will be similar to the one we gave last time. We're seeing a lot of momentum in the 10K plus and up into the six figure deals. We don't have any new high watermarks to share at the moment, but the gravity around those large deals are definitely picking up and something we're excited about.

Thank you.

And speaker's that would be our question for this call. I'll turn the call over to Mr. Justyn Howard for closing.

Yeah. Great. Well, thanks everyone for the questions. I know we're over time now. So I'll keep this quick. Just thank you. Thanks for the continued support. And certainly always thank you to the team for continuing to do a phenomenal job. We're going to get back to work. Thanks.

This concludes today's conference call. Thank you all for participating. You may now disconnect.