Ladies and gentlemen, welcome to the 2024 Q3 Earnings Sprout Social, Incorporated Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] As a reminder, today's call is being recorded. I will now hand today's call over to Alex Kurtz, VP of IR and Corporate Development. Please go ahead, sir.

Thank you, operator, and welcome to Sprout Social's Third Quarter 2024 Earnings Call. We will be discussing the results announced in our press release issued after the market closed today and have also released an updated Investor Presentation, which can be found on our website. With me are Sprout Social's CEO, Ryan Barretto, and CFO, Joe Del Preto. 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. All statements other than statements of historical fact are forward-looking. These include, among others, statements concerning our expected future financial performance, including our Q4 and 2024 outlook and business plans and objectives, and can be identified by words such as expect, anticipate, intend, plan, believe, seek, opportunity or will. These statements reflect our views as of today only and 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 Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2024, to be filed with the SEC, as well as our most recently filed Annual Report on Form 10-K. 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 reconciliations to the most directly comparable GAAP financial measures are included in our third quarter earnings release, which will be furnished to the SEC and is available on our website at investors.sproutsocial.com. With that, let me turn the call over to Ryan. Ryan?

Thank you, Alex, and welcome, everyone to our third quarter earnings call for fiscal 2024. We reported third quarter results with revenue of $102.6 million, representing year-over-year growth of 20%. This was also the first quarter exceeding $100 million in revenue, a meaningful and exciting milestone for Sprout. Our current remaining performance obligations which reached $220.7 million, represented a 31% year-over-year growth. I want to thank the Sprout team for their solid execution in what remains a challenging macro environment. Their hard work has allowed us to deliver these results while also building a stronger foundation for future growth as evidenced by steady improvements in gross retention, favorable competitive win rates, continued ACV expansion, ongoing momentum in our enterprise and $50,000-plus segments and an expansive pipeline despite the market conditions. Our pipeline shows strength in size, health and trajectory. The headwinds we've seen in Fiscal Year 2024 is driven by longer enterprise sales cycles and increased budget scrutiny. We are encouraged by the progress we're seeing as we build a healthier foundation for growth at Sprout. On that note, today, I'd like to spend more time sharing the initiatives we're focused on to drive growth and execute against the market opportunity ahead of us. With new leaders in place like Erika Trautman leading products and Mike Wolff leading sales, we have a more defined approach to these growth plans with incredible leaders here to drive the execution. We are focused on four key areas to drive growth. First is to Win The Enterprise, which means driving increased pipeline creation and strategic customer wins and accounts over $50,000-plus in ARR. We plan to accomplish this through a product roadmap that is increasingly aligned with the requirements of enterprise customers. And second, within GTM driving more awareness with Senior Executives and making…

Thanks, Ryan. I'll now run through our financial results and guidance. We are pleased with Q3 results given the ongoing macro challenges that continued from the first half of 2024, as we crossed the quarterly milestone of exceeding $100 million in revenue. While sales cycles remain under pressure, we are encouraged by growth retention trends, our run-rates in the Enterprise segment remain elevated, and our RPO growth rates remain steady. We also generated $9.3 million in non-GAAP free cash flow during the quarter and $23.1 million year-to-date. On to a quick summary of the quarter. Revenue for the third quarter was $102.6 million, representing 20% year-over-year growth. Subscription revenue was $101.8 million, up 20% year-over-year. Services revenue was $0.8 million, up 13% year-over-year. The number of customers contributing more than $10,000 in ARR grew 12% from a year ago. The number of customers contributing more than $50,000 in ARR grew 29% from a year ago. Q3 ACV was $13,959, up 26% year-over-year. As Ryan discussed earlier, our strategy to drive ACV growth remains focused on shifting to a higher enterprise mix and strengthen premium module attach rates such as influencer marketing and customer care. RPO totaled $311.5 million, up from $295.1 million as in Q2 and up 36% year-over-year. We expect to recognize 71% or $220.7 million of total RPO as revenue over the next 12 months, implying a cRPO growth rate of 31% year-over-year. We continue to believe that all of our leading indicators are converging towards cRPO over time. Non-GAAP operating income totaled $7.5 million, up from negative $0.6 million a year ago for a non-GAAP operating margin of 7.3%, demonstrating continued growth in our margin profile. Turning to guidance. For the fourth quarter of fiscal 2024, we expect revenue in the range of $106.3 million to $107.1…

[Operator Instructions] Your first question is from the line of Parker Lane with Stifel.

Hi, guys. Thanks for taking the question, this afternoon. Ryan, up on the top, you talked about the challenging macro environment you continue to see out there. If we take these numbers in context, I'd love to get your characterization of just what things look like out there relative to 90 days ago, maybe even the start of this year? What's going particularly well for the business right now? And what are some areas that you expect to see some improvement in a potentially falling macro?

Thanks, Parker. Appreciate it. Yes, I would characterize the macro is pretty similar to what we've seen all year. And if we think about that in the way it manifests itself in our day-to-day business, it's elongated sales cycles, its procurement processes that continue to evolve on the customer side, so it is a lot of the same things that we've been seeing all year. In terms of the opportunities for us and the things that we're excited about, despite all of this, we've seen some really great progress in terms of the teams getting in front of incredible customers in the enterprise, building really healthy pipeline. Our win rates against our competitive set have continued to be in the right direction and elevated. And as we're working through this, we are seeing some good signs in terms of the opportunity in front of us.

Got it. And earlier this year, you talked about some realignments at retargeting of different sales and go-to-market resources you have. You just brought Mike on. You're now talking about alignment around enterprise. Can you just walk us through sort of the mechanics of how you anticipate the go-to-market motion changes and whether there'll be any further sort of disruptive elements in the near term as a result of some of this realignment?

Yes. Thanks, Parker. Yes, we are -- first off, we're thrilled to have Mike here. Mike has a long tenure and history of successfully running revenue organizations and can already see in his just over 60 days, he's done a great job bringing increased rigor and accountability and process to our go-to-market teams, and he's doing it while building a winning culture. So I just want to call that out, that's been great to see. I think the thing that I'd call out that's really important here is we are just really well-aligned on executing against the strategy that I outlined in the prepared remarks. And when we think about the setup and the structure of the team today, we feel really good about where we are as we are going into Q4. So no major changes to go out. Thanks Parker, next question, please.

Your next question is from the line of David Hynes with Canaccord Genuity.

Hi guys. Ryan, you alluded to this in the prepared remarks, but what are enterprise customers asking for on the social customer care side that you're not delivering today? Like what does that -- help us think about kind of the future roadmap there.

Yes. Thanks, DJ. I appreciate it. Yes, I mean, so much of what the enterprise customers are looking for are things that we're doing today. So I'd highlight -- for us, if you think about these organizations, they are high volume, and there's a lot of people that are in here. They need to get up and running really quickly on these platforms to be able to deliver for customers. Increasingly so because of the volume, they are also looking for deep workflow and security, and these are all things that we've added in. And then the AI pieces that we've been bringing in alongside of this has really helped our customers from a productivity and speed perspective.

Yes. Got it. And then can I ask just about the Salesforce opportunity as we start to near the year-end of life for Social Studio. Does it feel like there's still a chunk of customers that have yet to do anything? Like how are you thinking about that in Q4?

Yes. I appreciate it. Yes, we feel really good about it. I mean, the customers that we have seen, we've won the vast majority of those, including in Q3, it's factored into the visibility we have in the pipeline in Q4. And we are really excited about as we go into Q4 and go into next year, just the ongoing partnership we've had with Salesforce and the Service Cloud. And I think you might have seen it as well, but just even the work that we've been doing with them most recently, that was announced at Dreamforce as being one of the launch partners for Agentforce.

Yeah, perfect. Thank you guys.

Thank you. Next question please.

Your next question is from the line of Raimo Lenschow with Barclays.

Thank you. Perfect. Can I stay on that Agentforce subject a little bit, how do you fit in there in the future? How do you see yourselves playing in that kind of more generative AI world like how deep is the integration with Salesforce? How crucial are you going to be there? And I have one follow-up with you.

Thanks, Raimo. Yes. I appreciate the question. Yes, I mean we're really excited. We are -- the only channel here that is providing the access to the social data going in. And so this builds on top of the work that we'd already been doing with them within the Service Cloud, as you all know, we're natively built in there into that console, which has really helped us. And now with the addition of Agentforce, which is coming, it means that, that data is enriching those CRM records and going to be really empowering the Agentforce which is going to help all of those customers that are leveraging that to ensure that they're always answering no matter what channel, with the most relevant information to help customers.

Yes. Okay. Perfect. And then you mentioned RPO, cRPO is becoming more important. Is there anything -- like if I think about, like, for example, what we will do obviously, is calculate a bookings number of the cRPO, that ticked down a little bit, it is tougher comp. Is that kind of the right way you want us to look at the business going forward? Or any puts and takes we should think about the numbers that we saw this quarter and the past? Thank you.

Yes, Raimo, I think the key here is just to continue to focus on the overall cRPO number and how that number continues to grow. And so if you think about the 31% on the cRPO side that we delivered in the quarter, I think that's the right number to focus on. And as we talked about, as we move forward, that will continue to be a good leading indicator of future growth over the next 18 to 24 months.

Thank you. Next question please.

Your next question is from the line of Arjun Bhatia with William Blair & Company.

Thank you for taking the question. Ryan, maybe to start off with you. It sounds like this is not new, obviously but expanding Sprout into multiple departments across your customer base seems like a big part of the growth strategy here. Can you just talk a little bit about how the product side fits into this? Meaning if you are trying to get into care but also maybe into the product organization, into other departments, how much does the product need to evolve and change to cater to use cases that those departments might need inside your customers, and where are you in that kind of journey today?

Thanks, Arjun. Yes, I mean, we are already there today. I think so many of the logos that we've talked about today and in previous quarters, are these multiuse case across many departments from marketing to care to support across the organization. And so for us, we are there today, from a product perspective, we're continuing to go deeper. In the prepared remarks, I gave a bunch of highlights on the elements of the products that we are going deeper in within all of these departments. But we're seeing great success here today, especially in the enterprises going across departments.

Okay. Got it. And then Joe I wanted to come back to -- you made some comments just on the restructuring in the R&D org and what that might mean for leverage and margin expansion next year. Can you just clarify, are you planning to reallocate those roles into other areas and reinvest those dollars? Or is there something kind of structurally changing in the R&D? Or just help us understand that a little more, please.

Yes, Arjun, the way we are thinking about it is we are going to reinvest those resources in other parts of the R&D org, and so it's just kind of a realignment, reallocation of the team. And so don't expect a lot of leverage in 2025 based on that.

Yes. And Arjun, sorry just maybe build on top of that. I think one piece to just highlight. These decisions, as you might imagine, are incredibly hard especially when they impact really great people on your team that have made major contributions to the organization. So I just wanted to acknowledge that piece. And I think to Joe's point, part of what's really important here is, as R&D organizations scale and go through different evolutions, you at times have to make adjustments to resource allocations and org structure. We saw a huge opportunity to do this in the spirit of being able to capture the opportunity in front of us. So we feel really good about the future that we are moving towards here.

Thanks Arjun. Next question please.

Your next question is from the line of Adam Hotchkiss with Goldman Sachs.

Great. Thanks so much for taking the questions. I guess to start, Ryan, any update on how premium attach rates are progressing. Just any more color on Tagger or individual products, how they're performing as discretionary budgets feel like they're still under pressure?

Yes. Thanks for the question. We continue to be really excited about the things that we've been seeing with Tagger. I can tell you as I'm spending time with customers, it's one of the major topics that especially marketing executives want to dig into. There's a massive opportunity here in terms of thinking about the way that they leverage influencer. We're still so early within this category. So there's this opportunity for us both to drive awareness and education and then we have this incredible product behind it. And as I think about just the success we've seen and look at the customer wins in Q3, what jumps off the page, is our wins across so many industries. We have customers in airlines and sports teams, financial services, not for profit, cybersecurity. So just seeing really good progress with Tagger and a bunch of our modules.

Got it. Got it. That's helpful. And then just to touch back on the R&D reorg question. Any more color you can give us on the types of roles or areas within R&D that were eliminated and maybe what those reallocation priorities specifically are in relation to?

Yes. I think probably the best way to frame it is that for us, the resources are going to go into a lot of the themes that I highlighted in the prepared remarks in terms of the product areas. Thank you. Next question please.

Your next question is from the line of Elizabeth Porter with Morgan Stanley.

Great. Thank you so much. I wanted to follow up on Tagger and the opportunity to expand kind of in your customer base. So just an update on kind of where are we today as it looks like for your customer base adopting Tagger, where could that be over the next year or so as you ramp the go-to-market process? Could Tagger be attached to any of your customers? Or is there some bifurcation to consider on who the target customer would be?

Yes. Thanks, Elizabeth. We are still early days. I think it's only been just a year since they've been a part of the organization. We're still early also just when I think about where we are in the journey of this market opportunity. We see a lot of opportunity across our customer base. It's certainly not going to be everybody. But I think just even thinking about some of the verticals I just shared, we've had success in, we see a lot of the serviceable addressable market in the customer base that we have today.

Got it. And then I want to follow up on Raimo's question. Just looking at the new business side, the RPO based bookings kind of being 11%, and billings, 12%. Just help us unpack a little bit more, what drives the view that metrics should be converging up towards that mid-30s? Is it we just are going to have an unlock of new deals coming in Q4? Or do we have to wait until comps start to get a little bit better next year? Just if you can help me understand kind of the dynamics there, that would be helpful.

Yes, Elizabeth, I think the way to think about it, we've talked about this. If you look at the cRPO number and how that's going to converge on the revenue growth rate that we've talked about, really that has to do with the mix of our customers that we still have, a series of month-to-month customers, we have annual customers and have multi-year customers. So I think as we move more upmarket and more of our customer base becomes annual and multi-year, that will drive that convergence between cRPO and revenue growth. And so it's more about the mix of the length of the contracts within our customer base.

All right. Thank you Elizabeth. Next question please.

Your next question is from the line of Brett Knoblauch with Cantor Fitzgerald.

Hi, this is Thomas on for Brett. Thank you for taking my question. I guess something that stuck out to me during the election was the immense use of influencers and influencer marketing as a way to win over younger crowd and voters. I guess, as you're going to the RFP process with customers, how much has Tagger's influencer marketing had an effect on win rates? And then as we think of the premium module attach rates, how much of that is coming from Tagger versus Listening or your other premium products?

Yes. Thanks for the question, Thomas. Yes, I would say we are pretty early days again on the influencer side as it relates to RFPs. Occasionally, you'll see them in there. I see it as one of those things where our team has just done a really nice job introducing influencer and highlighting this as an important part of any social strategy. So we do see it as something that helps us with the win rates, but I don't know that I would call it at as a major theme in RFPs today.

Awesome. Thanks. And then just one more, if I may. It appears that the smaller customer segment, the $10,000 ARR has seen more deceleration relative to the larger customer segment that continues to show some strong growth. I guess, could you provide some insight whether this trend is driven by a realignment of the Salesforce or if you are observing higher churn rates? Just anything to provide color there would be helpful.

Yes. Thanks for the question. The biggest thing that I'd highlight here is just our focus on the sophisticated customers. We are seeing a lot of progress here, which you can see in the $50,000. If you think about our platform today and our premium modules and the use cases that we solve for, I think there is just been a lot of opportunity in those larger customers where we've seen some really healthy penetration.

All right. Thank you. Next question please.

Your next question is from the line of Brian Schwartz from Oppenheimer.

Yeah, hi. Thanks for taking my questions, this afternoon. Ryan, I wanted to ask you a question about the pipeline compensation. You did get some qualitative commentary in your introductory comments. But are you seeing any changes in the duration of the deals that are filling up in the pipeline?

Yes. Thanks for the question. Yes, I sort of alluded to this in the prepared remarks, but certainly, from a sales cycle perspective, it is elongating in this market today. We felt really good about the types of companies that we are getting in front of, the quality of those customers, the ACV opportunities behind them and then just the engagement with them, but it is taking longer to close those deals in this market today.

Okay. And then the follow-up I have for Joe is just a question on the composition of the bookings mix in the quarter. I'm just wondering if that was similar with historical trends, you're kind of two-thirds coming from new logos and the one-thirds coming from expansion. Thanks.

Yes. Good question. Brian. Not a major change in our historical mix as it relates to the new business coming in. So no major change to call out there.

Thank you.

Great. Thank you. Next question please.

Your next question is from the line of Jackson Ader with KeyBanc Capital Markets.

Good evening guys. Thanks for taking our questions. Joe, on cRPO, if that's -- if we take that as the right way to think about growth kind of going forward, then what should we expect for that metric's growth as we kind of look ahead? Are the magnitudes of the slowdown in the last few quarters the right way to think about -- the magnitude of the slowdown going forward? Or should there be some major departure?

Yes. So Jackson, we don't -- right now, we're not guiding the cRPO. I think as we move forward and as we kind of get more of the annual multiyear deals and as it starts to converge on revenue, I think we'll be in a better place to provide forward-looking on cRPO. But right now, we're actually not providing any guidance on cRPO.

Okay. Okay. Got it. Then on expenses in the fourth quarter. So outside of the re-org, which in R&D, which I think I understand, what -- we've got a bunch of new wonderful leaders in place. And so I would assume that means that people are looking to make some investments. And so we've talked about R&D, but what about maybe some sales investments that are being contemplated now with Mike on board. Understood that it's only been 60 days. But still, there are plans being made, I'm sure.

Yes. Thanks, Jackson. I'll go ahead here. I wouldn't highlight any changes here. I think we feel really good about the structure that we have today and the investment strategy that we have as we move forward. So nothing to call out. right.

Okay, thank you.

All right. Thank you for the question. Next question please.

[Operator Instructions] Your next question is from the line of Rob Morelli with Needham & Company.

Yeah, hi guys. Thanks for taking my question. Congrats on the quarter. You continue to sound optimistic surrounding Service Cloud opportunity. As focus shifts away from Social Studio at it approaches sunset, do you anticipate any go-to-market changes necessary to sort of really capture this opportunity? Or is the playbook for the partnership fairly similar to what's in place with Social studio? Thanks.

Yes. Thanks, Rob. Yes, it's the exact same. And the reason it is the exact same is we've been really focused in on the Service Cloud opportunity, really some since we built the integration out about 1.5 years ago. You saw more investment from us as we were one of the launch partners there for Agentforce. But when I think about the go-to-market motion on it and our partnership motion, it's the same as we end out the year and go into next year. So feeling really good about the progress and the alignment with them.

Got it. Helpful. And then -- sorry, running a little late here, but apologies if this was already asked. But compared to what you guys saw in the first half of '24, did you notice any shift in sales cycles in 3Q versus the prior two quarters, any shortening or change in customer budgets?

Yes. We highlighted that the macro feels very similar. And in terms of sales cycles, we're seeing the same things. Our win rates continue to be elevated. We've been creating a lot of healthy pipeline, sales cycles are just elongated.

Got it, thanks for the color.

At this time, there are no further audio questions. I will now hand today's call back over to the presenters for any closing remarks.

Great. Thanks very much. And I just want to say that thank you all for joining us today and for the thoughtful questions. I want to end by just thanking our incredible team here at Sprout for their dedication and hard work, which really drives everything that we're achieving. We're incredibly excited about the road ahead and confident in the strategy that we outlined today to really deliver meaningful value to our customers and shareholders, and we really appreciate your support. So thanks for joining us. Take care, and we’ll talk soon.

This concludes today's call. Thank you for joining. You may now disconnect your lines.