SPT - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to the Sprout Social Second Quarter 2023 Earnings Call. I would now like to turn the call over to Jason Rechel, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, operator. Welcome to Sprout Social second quarter 2023 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, 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 among others, statements concerning financial business and customer trends, our expected future business, financial performance and financial condition, our expectations concerning the benefits of our acquisition of Tagger, performance against our multi-year financial framework, our market size and opportunity, our plans, objectives and expected results from our future operations, growth, products, investments, initiatives, pricing and partnerships or 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 22, 2023 as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2023 filed with the SEC on May 3, 2023 and our quarterly report on Form 10-Q for the quarter ended June 30, 2023 to be filed with the SEC as well as any future quarterly and current reports that we filed with the SEC. During the call, we will 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. 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 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 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 am 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 differentiates Sprout 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 ACVs drove ACV growth to a record 29% year-over-year as our success up-market continues to progress ahead of plan. We are pleased to see 48% year-over-year growth and customers paying us $50,000 or more in ARR and 130% year-over-year growth and customers paying us $250,000 or more in ARR. Leading indicators like RPO and cRPO each continue to materially outpace our ARR growth rate. RPO growth of 62% underscores the momentum we were seeing up-market. And Q2 RPO represented more than 63% of our total ARR up more than 2,000 basis points over the past 2 years. The 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 accelerated 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 deprioritized and removed resources from this part of our business. We are ultimately committed to high competence projections. For that reason, we have elected to remove non-core ARR 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 positioned Sprout to execute with the 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 if structurally positive impact on net dollar retention of our core customers and 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 ARR. Enterprise new business was up more than 50% year-over-year and total net new ARR from this segment also grew greater than 50% year-over-year. Multiple factors are contributing to our success and this quarter premium module attach rates were very strong. Total premium module attach rates increased by 160 basis points from Q1 2023, nearly double the uptick we saw on average in 2022. During Q2, we further accelerated our roadmap in social customer care and AI. Our product team has already delivered 16 material care related releases in 2023, including reply suggestions by AI assist. We have 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 customers. 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. Our early momentum in this area, including language detection, AI assist, enhanced sentiment and content detection and 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 Tagger. Influencer and creator marketing has quickly increased in customer demand given how critical this category has become to a brand’s awareness and brand strategy. In fact, we currently see influencer marketing in 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. We believe Sprouts brand and scale position us to pull ahead in this market. For anyone unfamiliar, influencer and creator 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. Indeed, 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 Tagger 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 and Tagger 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, approachability and scale that Sprout focuses on. And third, Tagger’s product has been recognized as industry-leading by both G2 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 Sprout several years ago, we have identified silos that exist today in influencer marketing and an opportunity for Sprout to step in and provide a unified platform for executing a comprehensive social strategy. Together, we will deliver the next generation of social insights to few business strategy execute end-to-end campaign management, faster authentic customer engagements, and deeply understand and measure the full ROI of holistic social investments. We believe our capabilities will further differentiate Sprout in our core market and will make Tagger 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 are 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 are excited to share more of our vision and financial future in Investor Day next month. I have never been more energized by our team’s momentum and alignments deliver incredible results and value to our customers, partners and stakeholders. With that, I will turn the call over to Ryan.

Thanks, Justyn. The focus and momentum in our core business combined with the exciting new edition of Tagger have me incredibly excited about the second half of this year in 2024. I would 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 in partnership with Sprout found that Social’s importance within an organization is only growing. 80% of business leaders anticipate their company social media budget will increase over the next 3 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 in our partnership with Salesforce, which has accelerated momentum as we further capture the Social Studio opportunity and align ourselves as the 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 customer’s journey based on social data. We onboarded 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 Sprout. In total, we grew with an amazing list of customers this quarter, including PACCAR, Cintas, Klaviyo, Irving Oil, Heartland Financial, Jollibee Foods, Cedars-Sinai Medical, Arnott’s, Bobcat, Salix Pharmaceuticals, and the Federal Deposit Insurance Corporation or FDIC. We also saw and heard some incredible things from our customers this quarter. The FDIC used Sprout listening data as part of congressional testimony on the banking sector in the wake of the SVB collapse. And one of our new enterprise customers shared with us, I am thrilled by the new AI assist functionality. As far as AI content generators go, this maybe the best one I have seen so far. In a recent not-for-profit webinar, I was invited to present at, the host introduced us by saying, as the 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. In 2023, time on social media continues to scale and business leaders are tasked with not only driving engagement, but elevating their constituent experience and support to meet the bar that has been raised by the commercial sector. I have evaluated every tool in the market and Sprout has been my preferred platform for over 10 years. We know from our customer interest to 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 Tagger team and software over the past several months, knowing that we could solve multiple customer pain points together. We knew immediately that Tagger would make for an incredible fit with Sprout. The software is powerful and elegant and the team is hungry to design a category. We believe our depth and scale will allow Tagger’s product to innovate and grow at an accelerated pace and our go-to-market motion is perfectly suited to accelerate Tagger’s growth and drive even more customer success. Joe will later share that we have 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. Tagger’s ACVs are meaningfully above Sprouts and we believe we will now have the most comprehensive and competitively differentiated set of solutions in each of our markets. We believe the cross-sell opportunity for Tagger’s product is massive in orders of magnitude larger than Tagger today. We also believe our new business win rates and ACVs are set to move higher in 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 teams motivated for the future, with Tagger poised as a new strategic catalyst that we expect will deliver significant value for our customers. We have executed a similar playbook before when our acquisition of Simply Measured accelerated our value proposition and our momentum in social listening and advanced analytics, which are now foundational to our success. We have 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 awards from G2 and others last quarter, I was incredibly excited that this quarter, Sprout was recognized by great place to work as the best place to work in Chicago and is the best place to work for Millennials. Our commitment to our core values and our people continue to make Sprout an exciting career destination on our journey past our $1 billion revenue target. And with that, I will turn it over to Joe to run through the financials. Joe?

Thanks, Ryan. I will now walk you through our second quarter results in detail before moving on to 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 $0.6 million, down more than 10% year-over-year. Core ARR from existing customer spending greater than $2,000 in ARR, with 33% now represents 96% of our total ARR. Total ARR exiting Q2 was $326.1 million, up 27% year-over-year. The number of customers contributing more than $10,000 in ARR grew 27% from a year ago. The number of customers contributing more than $50,000 in ARR grew 48% from a year ago. And the number of customers contributing more than $250,000 in ARR grew more than 130% from a year ago. Q2 ACP growth was 29% year-over-year again decelerated 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 in premium module attach rates. We continue to expect that ACV growth will further accelerate through Q3, but now expect faster than previously expected ACV 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 continue to make transformative R&D investments, particularly around platform, AI and automation and social customer care. Non-GAAP general and administrative expenses for Q2 were $13.3 million or 17% of revenue, down from 20% a 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 2.4% 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 net income of $0.07 per share based on 55.5 million weighted average shares of common stock outstanding compared to a non-GAAP net loss of $1.9 million and $0.04 per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q2 with the $192.4 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. Looking at both our billed and unbilled contracts, RPO totaled approximately $206.4 million, up from $187.8 million exiting Q1, up 62% year-over-year. We expect to recognize approximately 74% or $153 million of total RPO as revenue over the next 12 months and implying a CRPO 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 meaningful from a year ago. Ongoing focus on unit economics and quality of our customer base is beginning to deliver structural improvements to our cash flow generation. Shifting to our financial expectations of the Tagger acquisition. We acquired Tagger media for a cash consideration of $140 million. We financed acquisition with cash on our balance sheet and liquidity from our newly established revolving credit facility. We believe this to be an efficient use for our balance sheet and an attractive cost of capital. We expect that Tagger will be accretive to our ARR and ACB growth rates and accretive to our gross margins. In addition, we anticipate that Tagger will be moderately dilutive to our non-GAAP operating margins in 2023. And upside to our margins in 2024 and beyond, as we aim to efficient accelerate growth inside our distribution model. We have incorporated approximately $3 million of revenue into our guidance for the remainder of 2023. Because 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 loan customer report from our forecast. By the third quarter of fiscal 2023, we expect revenue in the range of $84.1 million to $84.2 million or growth rate of 29%. We expect services revenue to decline year-over-year. We expect non-GAAP operating loss in the range of $2.8 million to $2.7 million. This accounts the timing of our one-time global employee event in Q3 this year, the timing of sales hiring in Q2, then temporal impact of the absorption of Tagger expenses. The sum of the non-GAAP operating margin was negative 3.2% at the midpoint. We expect a non-GAAP net loss per share of roughly $0.05. This assumes approximately $56.5 million weighted average basic shares of common stock outstanding. For 2023, we affect total revenue in the range of $328.6 million to $328.7 million. It is expected overall report a growth rate of 30%. We expect services revenue will be lower than 2022 levels. For the full year fiscal 2023, we have decisively modeled our lowest customer tier ARR to decline to zero as in 2023, which we believe reduce forecast risk of this business that has been strategically de-prioritized. With this change, we believe investors can more clearly assess our outperformance upmarket and expect that total ARR as in 2023, will be growing at the same pace as reported revenue. This implies that Q2 will present the lowest pace of ARR 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 forecasts of 225 basis points to 235 basis. On an organic basis, we expect to outperform our prior plan and we expect that Tagger will become a net benefit to operating margin expansion in 2024. We now expect non-GAAP net income per share of approximately$0.07, compared to our prior range of $0.07 to $0.08, and assuming approximately $56.0 million weighted average basic shares of common stock outstanding. To conclude, I’d like to preview our Investor Day next month. We believe that we will be low in ARR from our forecast allows investors to most appropriately focus where we are focused and for Sprout to continue to execute on our goals. We have introduced our new medium-term financial plan expect to exceed $1 billion in subscription revenue in 2028. We can exceed this target sooner if our mid-market and enterprise segments further accelerate, if Salesforce builds further upside, if we are successful in cross-selling Tagger to our customer base, if 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 to deliver 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. With the starting point of the next great growth chapter in Sprout’s journey, we are grateful for your support as we continue to scale the category defining social media management company. With that, Justyn, Ryan, and I are happy to take any of your questions. Operator?

[Operator Instructions] Our first question comes from the line of Raimo Lenschow from Barclays. Please go ahead.

Hey, thank you. And could we just go one more through – one more time through like, the changes we are seeing today, so basically, you are removing the low end ARR from the ARR calculation, which kind of makes more sense with that kind of pressure ARR. How does that impact revenue or what’s driving the change in the revenue guidance? And that’s my first question. And have one follow-up.

Yes, Raimo, this is Joe. I can probably help you, model that a little simpler, I think the way we’re thinking about it is if you look at the comments I made around if you assume that ARR exiting Q4 is in line with our revenue growth, exiting in Q4. And you can imply from our guidance, that’s probably in the 28% to 29% range. So if you use that as the ARR kind of growth, right year-over-year, you can kind of back into the ARR, we plan to add in to the back half the year. And then from there, you can kind of get the revenue that flows through your model.

Yes. And then just remember, last quarter, we talked about like, the low end kind of maybe exiting you quicker than expected. And you can talk about some stabilization trends in April. How does quarter play out? And where are we on that journey?

Yes, great question. This is Justyn. So yes, I mean, the loan of 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 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’s future stabilization there, we wanted to make sure that we’re just eliminating that risk from the model, as it’s remained fairly unpredictable, both on the 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 up market, that that segment of the businesses just remained a bit more challenging.

Okay, perfect. Thank you.

Our next question comes from the line of Arjun Bhatia from William Blair. Please go ahead.

Perfect. Thank you, guys. One, maybe for Joe. I think you called out that medium term, you expect ACV growth to be faster than expected? Can you maybe just walk us through some of the drivers there? What are you seeing what’s going to get that ACV growth to be higher and accelerate through the rest of this year?

Yes, good question there. For us, I think it’s some of the momentum we’re seeing up in the – 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, and they were last quarter or the quarter before that. And so I think as we continue to move up into this mid-market and enterprise business, we can just see larger and larger ACBs. If you look at the stat on the 50,000, cohort growing over 48%, that 250,000 cohort to grow over 130% Arjun, we’re just seeing larger deals across the organizations that we’re doing business with. So it gives us a lot of confidence that that momentum up market will continue throughout the year. Yes, and I probably just also add in from a premium attach rate perspective, we’ve seen a lot of progress, they’re up 160 basis points. Now, 24% of our total customers have one of those products, but we see a lot of headroom there with the products we have previously and when we think about the fact that only 6% of them have both of those products. And then we add in something like Tagger, there’s additional growth to come 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 ACV perspective.

Okay. Got it. And then on Salesforce, it seems like there’s a pretty good quarter in Q2 in getting migrations. What do you see in the pipeline, Ryan, and how do you think the cadence of that partnership kind of progresses through this year and even into 2024?

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 across Tableau and 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, that 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’ll continue to see strong results in the second half of this year. There’s been some amazing stories we’ve seen from customers coming in where – on this combination of moving from social studio, trialing our product, seeing all of the value ads that we have in Sprout that they can immediately get benefit from. And then for customers that are Salesforce customers that were on 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 we’ll be heavily active at Dreamforce 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. And I know it’s not in the numbers and there’s a lack of certainty around modeling that, but what should we think about as a realistic timeframe for these 7,400 customers to either move off the platform or recent point of stabilization. I mean, we’re about 9 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 a stabilization in that cohort, just an absolute customer logo-terms?

Yes, Parker. So what we’ve mentioned on the call and the way we’re kind of giving our guidance, we’re actually assuming that that goes to zero by the end of the year. So we want to just kind of take that risk off the table. So from that standpoint, that’s how you can kind of think about that as it relates through the end of this year. So we’ve got that zeroing out by the end of this year from a guidance standpoint.

Understood. And then maybe on Tagger, can you give us a sense of that business model? And who exactly they’re targeting, what size of organizations they’re looking at that tend to skew more enterprise given the higher ACV is there? Or is it you relatively balanced mix of organizations are targeting?

Yes, thanks, Parker. I think – this is Ryan. So it skews very much in the system to getting customers in the enterprise. One of the reasons why it stood at so much to us is they have got customers like Estee 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 elegant, it looks and feels a lot like Sprout. And so our R&D team, who certainly bias to 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 we obviously have a certain go to market motion within the enterprise and the way that they’ve built their software and implemented customers and the way that customers get utility quickly, lines up really well to us. So they’re definitely focused in on the enterprise part of the market. And so that again, speaks to just some of the ACV 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, 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 the start would be great to just dig a little deeper on what you’re seeing in the mid to high end of the market. It looks like on one hand, the 50,000 plus ACV cohort was your strongest 2Q that you’ve seen to date. But I think it was a little bit softer once you got below 50,000 even when you back out to the very low end of the market. So I guess that’s the question in two parts. One, how would you characterize the success you’re seeing in the 50,000 plus, is that more wins in the enterprise against some of your larger competitors? Is that upsells? How should we think about that? And then two, is there anything to call out from that some 50,000 cohort that we should be aware of? Thank you.

Yeah, thanks. Thanks for the question. We’re incredibly excited about the progress that we continue to see in that 50,000 it’s up 48% in terms of representative of ARR our logos was up nearly 3x sequentially. And then the 10,000 side of things, what I’d highlight there is from an ARR perspective is pretty similar, in terms of value from Q1. From Q1 but if we looked at the ARR contribution, the 50,000 bucket was much greater then Q1, with an accelerating growth rate. So I’d just highlight that the deals were much bigger. And we were seeing a lot of deals within that bucket, then that more than made up for the reduction and logo count in the sub 50,000.

Okay, great, that’s really helpful. And then second, just to double click on Tagger 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 how you thought about that from M&A environment and balance sheet perspective? Was this just a function of you’re hearing accelerating demand for this and your customer base and wanted to be sure to build out a presence there early? Or how did you think about the sort of why now?

Yes, this is Justyn, I can speak to the kind of why now and how we’re thinking strategically about this. So you’ve heard me start talking about this space probably as early as beginning of last year late the prior year. This is a part of the market and part of the category that we know is 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 that’s been on an upward trend for some time now. When we think about the timing on this, we were mostly focused on finding the right partner here. Finding the right team, the right product, didn’t have specific designs around the win. But it certainly 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 follow the demand trends that we’re seeing around this space, it’s also reached a level of maturity, where CMOs are starting to take it seriously. as you heard around kind of the increased investments there. But also gives us an immediate opportunity to create a category winner here, increase the competitive win rates in our own business in the core products, and really stand out from a 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 in from a team and customer perspective, the folks on our team had been paying a lot of attention to the space Justyn’s been talking about this space for a while, we’ve been developing a point of view around the space for a while, and the Tagger team, and product just really stood out. And when we started to bring some of the rest of our team in the go to market or as well as R&D together to take a look at Tagger, the excitement was off the charts in terms of the fit for us and the opportunity. And to Justyn’s point in our enterprise, over half of the opportunities we have talking about influencers, so we saw just a great fit there, we saw the opportunity to differentiate. And I remember when I think about real time my team’s sending me texts right now, even in the hour plus since this news is dropped, we’ve had over 40 inbound 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 or they’ve been asking us for it and asking us to get in this space. So, all those things are really lined up to this massive opportunity that we’re excited about.

Okay, really helpful. Thanks, Justyn. Thanks, Ryan.

Our next question comes from the line of Matthew VanVliet from BTIG. Please go ahead.

Yes. Good afternoon. Thanks for taking the question. Right, 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 and pricing or anything like that? So, whether it’s contribution, dollar retention or anything like that, what’s sort of baked into the plan this year? And maybe more importantly as you look towards next year, how much of a lift can you get at existing customers from a product like this?

Yes. I will 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 would be 2024 focused on just the combining of our efforts here from a win rate perspective, both in our core business as well as the deals that would have just been tagger on its own, we see opportunities from an ACV perspective. The same success, we have 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. But I will maybe let Joe going to do a little bit more of the modeling forecasting.

Yes. So, Matt, I think right now, what we talked about is we have got $3 million with the revenue and the guidance for this year. And we are not assuming right now any kind of cross-sell and 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 points I think it’s important to note here, one of your questions, which is, the ACVs of these deals are significantly higher than our average ACVs. And so when we think about going into next year and the upside that we have in our business, I think this contributes to our move up into the mid-market and enterprise. The ACV growth that we are seeing, so I think this all kind of fits into the model from that aspect.

Yes. And this is just quickly add to the question you asked about NDR, I think obviously, a little bit early to be thinking about modeling that. But we know that anytime we have got additional functions and 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 both product sets, as we are able to start to execute on that on that cross-sell and combined selling motion.

Alright. And then Joe I wanted to follow-up just to make sure we are kind of calculating this all out correctly. But if you are adding $3 million from – in the rest of the year’s guide, then it looks like you took kind of the guidance range down called $7.5 million at the midpoint. If we if we try to calculate out what the lowest end cohort is that 4% of ARR, it looks like the rest of the business, you are actually lowering the second half contribution a little bit. So, can you just tie these together in terms of how much revenue you are taking out of the guide for that low end customer group going to zero? And then what the remaining delta is in terms of the forward guide?

Yes. So, I think the way to think about it is about, we are taking out that kind of that that sub 2K bucket down that low value bucket down to zero by the end of the year. And so what – and we are not lowering any other part of the guidance of the model. And then the other data point that is 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 ARR. If you think about the exiting year end ARR with 28% year-over-year growth rate, you can kind of get what we think we are going to add to the business and then back into the revenue overall revenue contribution factoring in the $3 million from Tagger.

Okay. Great. Thank you.

Our next question comes from the line of DJ Hynes from Canaccord Genuity. Please go ahead.

Hi guys. Ryan, I will start with you. It may be early, but I would 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 NRR going forward and what you are seeing with those Social Studio customers as they get acquainted to the Sprout product.

Yes. Thanks DJ. I mean I think we are pretty early on that journey. But generally, I would 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. I think the things that I get excited about more from a qualitative perspective is typically when they are coming in, in the enterprise, there might be in one part of the business, right, it might be one business unit or might be one use case. And then we have 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 our chairs, if I think about just the Social Studio product and what it offered, you usually see customers in one or two places, one that they are doing, the marketing publishing side of it, or they might be doing the customer care, we know that we have got a lot of benefit to expand beyond that into the analytics side and into the advocacy side and 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 are still pretty early in the journey.

Yes. Makes sense. And then Justyn, maybe a follow-up for you, it would be great to hear a bit more about what you are doing with Repustate 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 have released today, the things that we have gotten in play, etcetera, are interesting and are going to add a ton of value. But once we get to kind of the next generation and the next bits of our roadmap, where we are really able to start tying in things like understanding the trends that are coming in through listening, applying that back to the content that’s resonating best with your audience, tying that there again to influencers that may be helpful in driving the messages that you want to drive etcetera, 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 and to frankly, develop their action plan for that the outcomes that they want to drive as one example. That’s where it starts to get really interesting to me. And that’s where I have got a lot of confidence in the team that we have. And our product team’s ability to take something that may look fairly simple or pedestrian on the surface and turn it into something that creates a ton of value for our customers. And it’s differentiated in the market. That’s the part here that I am most excited about. We are 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 social listening is a pretty interesting endeavor and that you are consuming and trying to draw meaning from massive amounts of data. Often nuanced, meaning and often multiple meanings, there is not a single thread, there is not a single kind of analysis or a single bit that’s going to be useful to the organization, there is many. And as we start to deploy the large language models and the things that we are building around listening to unlock all of that for our customers, and then again, turn it back around on to their strategy, that’s going to be a game changer, in my opinion.

Yes. I might just add on that last point that Justyn made, which I think is really, really powerful, is that I think that Sprout is just so uniquely positioned to help here because of the way that we have built this product, how approachable and elegant it has been for folks that have never leveraged listening. So, you think about all of those things that Justyn mentioned, and all of a sudden, we can take folks who are new to listening and really a supercharged their ability to get at that data and make it actionable. And so I think that that one piece with the work that we are going to do there just allows us to have a much bigger market to go after because of the way that we have built this product.

Yes. Helpful color. Thank you, guys.

Our next question comes from a line of Scott Berg from Needham & Company. Please go ahead.

Hi, everyone. Thanks for taking my questions here. Joe, I wanted to just ask a couple of things on the Tagger guidance here together. I guess first of all, is there any purchase accounting impact on their revenues, don’t know what standards you have adopted this year and the transition around that. And then secondly, what’s the linearity of that $3 million looks like?

Yes. So, on your first question, Scott, there is not going to be any purchase accounting adjustments or impact to the revenue number or 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 you are 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 will 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.

Got it. Helpful. And then from – a follow-up question, I guess just more strategically what this product is. I know a part of the rationale was on the differentiation side of the house. So, I guess as you think about other vendors out there that are selling the traditional social media product that you all have for a long time, it looks like you are probably the only vendor that really have – will have this functionality. But I guess in that question, how 50% of your RFPs have this and do you see this typically being selected in the sales cycle, or is the sales cycle maybe different than what you would usually see for your social media solutions? Thank you.

Yes. Thanks for your question, Scott. Yes, so I would say, you are right, just on the stat in terms of half of the deals in the enterprise, and we are seeing this being a requirement. From a competitive perspective, as we did diligence on the market really looked at it, there really wasn’t much relevance from what we could see in our direct competitive set. It seem to be a lot of folks that just were competing directly against Tagger. And Tagger just stood out for us in terms of just their technology, and the solution and their approach to the market. And all of the things I mentioned before in terms of fit. And so we see this as a really great competitive advantage in our core business, as we move forward as well. And some of that’s been referenced just in the last hour with all the inbound leads that we are seeing from these accounts. And then from a sales cycle perspective, the other piece that was just exciting for us is, as we spent time with the go to market team, their sales cycles aren’t quite as rapid as ours, with our trial model, but they are fast for enterprise. And we believe that from what we have seen, and how we are running the rest of our cycles, that they can attach nicely in the work that we are doing without elongating our core business. So, that was also part of the thesis for us on this as we are doing that cross-sell that we can, we can really tie these things together as we are going to market.

Yes. And I made it quickly out on the inbound demand, and what we are 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 that 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 have got an alternative for those customers that we are really excited about.

Excellent. Thank you for taking the questions.

Our next question comes from the line of Michael Turits from KeyBanc. Please go ahead.

Hi, this is Michael Vidovic on for Michael Turits. Thanks for taking my question. So, just on the pricing changes you made last year, just want to get sort of an update and if you are able to kind of achieve that 10% uplift on existing logos that you talked about last year. And that was just playing as you expected it to play out?

Yes. Michael, this is Joe. Right now, we are feeling really good about the price lifts for the existing customers that have rolled out it throughout the year. And I think it ranges anywhere from like, we have talked about, low-middle single digits to low-middle double digits. I think in a lot of the larger deals on the enterprise side, we talked about this in last quarter do it. 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 are seeing overall is not necessarily an impact directly related to price uplift, but basically seeing our ability to expand in these larger accounts is bringing really interesting conversations to the table. And so we feel like overall that the pricing changes we have made especially up-market have been really beneficial to Sprout.

Right. And if I just squeeze a quick one in here, just baked into your guidance like it’s one of your expectations sometimes like the demand environment? Is it just the same as you clearly saw in 2Q, 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 are 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, the low value customers. I think what the strategic changes we made on the pricing side, we definitely anticipated a little bit lower new business on that front. But I think overall, from a demand standpoint, especially up in the mid market, enterprise, it’s never been stronger, right. We have talked about the 50%, uplift – 50% year-over-year increase in the enterprise business. We are talking about the ACV growth. So, I think we are really happy with what the demand we are seeing in the part of the business we are 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 ‘28. I wanted to ask, how significant is Tagger in that number, or maybe another way of saying it is, 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 in our – we talked about this a little bit in our prepared remarks. There is definitely Tagger organic business, standalone business in that projection. I think it’s a little early for us to kind of predict how much of Tagger cross-sell into the Sprout will go to that number. We think that’s more upside. We will talk a little bit more at Investor Day. But for now, it basically assumes kind of the organic side of the Tagger business with upside with the Sprout cross-sell.

Alright. Perfect. And then Joe, reaching that 20% free cash flow margin by ‘28, I think that averages out to be maybe at the high end of what EBIT expansion you are targeting. So, just how linear will free cash flow improvement be? Would you expect this to be more back end weighted in terms of the improvement up to 20%? Any kind of color on the path there 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 the way that our business has shifted up into the mid market enterprise. We have talked about this, but the unit economics of that business are much stronger, the size of those deals, and the length of those contracts are longer. And so there is a lot of upside on the free cash flow side. So, we feel like that’s 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 expect that to be pretty even.

Alright. Thank you very much.

Our final question comes from the line of Elizabeth Porter from Morgan Stanley. Please go ahead.

Great. Thanks so much. To get on Tagger, is there any sort of overlap with the customer base, we should think about currently. I am understanding, you aren’t assuming any cross-sell and 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?

Yes. Thanks. With 30,000 plus customers, there has certainly been some overlap. But I would categorize it as one where we think we have a lot of upside for both. So, upside for both landing, net new customers for both organizations, as well as being able to cross-sell from Spourt core to Tagger, and vice versa, going to Tagger customers and being able to sell core Sprout. So, we see quite a bit of opportunity on both sides of that. And then as you might imagine, with the overlap, that there was some opportunities for us to just go back to our customer base and get feedback from some of our customers that are leveraging the product which made us even more confident about the fit with Tagger and Sprout.

Got it. And then hoping to get some color just higher level NRR trends that you guys may be seeing more recently. Across the software space, we are seeing more optimization of spend. You are also kind of benefiting from the mix to hire deeper wallet customers. So, any commentary on just how some of those positive or negative factors may be impacting your current NRR, 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 into the mid market enterprise and Ryan talked about that, the attach rates, 160 basis point improvement. And the growth we are seeing now, we are really confident that the NRR we are seeing in that part of the market is really strong and actually improving. And obviously, that’s offset probably by we have talked about in the last couple of quarters is that, the turn on the low end of the market, obviously, will impact our overall NRR. But we are overall happy about the progress we are making up-market, knowing that we made the strategic change that was going to kind of put pressure on the low end of the market that’s impacted NRR as well.

Got it. Thank you.

I would now like to turn the call over to Justyn Howard for closing remarks.

Alright. Yes. 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 are certainly very excited about all of the positive momentum that we are seeing in the parts of the business that we are focused on and being able to see the benefits of a lot of the strategic changes that we are making. So, we are excited to be able to continue to add clarity there. And look forward to doing more of that. Just as a reminder, September 27th, Investor Day, we will look forward to talking more about the future, what we have planned, and giving you some more visibility into how we are 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 look forward to seeing you all there. Thanks everyone for your time today.