Good day and welcome to the Sprout Social Fourth Quarter 2022 Financial Results Call. Today's call is being recorded. [Operator Instructions] Thank you. And now I'd like to turn the conference over to Jason Rechel, Vice President of Investor Relations and Corporate Development. Please go ahead..

Thank you, operator. Welcome to Sprout Social's Fourth Quarter 2022 Earnings Call. We'll be discussing the results announced in our press release issued after 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, performance against our multiyear financial framework, our market size and opportunity, our plans, objectives and expected results from our future operations, growth, products, investments, initiatives, pricing or strategies, and our guidance for the first 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, to be filed with the Securities and Exchange Commission as well as future quarterly and current reports that we file with the SEC.

During the call, we'll discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. In particular, references to profitability refer to non-GAAP operating income, non-GAAP net income and non-GAAP earnings per share.

Definitions of these non-GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures, are included in our earnings press release, which has been furnished to the SEC and is available on our website at investors.sproutsocial.com. 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. We had a remarkably strong fourth quarter, and I'm incredibly proud of our team for the results that we'll be sharing with you today. Despite a challenging environment, Sprout delivered record net new ARR in Q4 and an acceleration across our business.

Social continues to gain criticality, and our strong execution puts us in a favorable position today to guide towards profitable accelerating ARR growth in 2023. We're building a durable business that we believe will define our category, and we appreciate your support as we continue on this journey.

I'll begin today with our notable breakout in net new ARR. We believe several multiyear trends are beginning to take shape in our business, including a clear prioritization of customer investment in social, further definition of our leadership in the enterprise, very strong partnership momentum and a fantastic execution on our pricing changes.

With rapidly expanding deal sizes, we delivered 35% year-over-year growth in customers paying us $10,000 or more in ARR and 59% year-over-year growth in customers paying us $50,000 or more in ARR.

Exceptional new business strength in the enterprise and the early benefits of our pricing changes delivered meaningful acceleration in our rate of ACV growth, alongside a record quarterly non-GAAP operating profit.

Taken with better-than-expected retention, top-of-funnel quality and conversion data under our new pricing plans, and we are planning to deliver profitable and accelerating ARR growth this year. Our original thesis on social's role in business transformation has never been more relevant than it is today.

We believe strongly from the beginning that social was going to become the epicenter of the customer relationship, and we saw social with horizontal, critical to the entire enterprise, fast-moving and highly disruptive to the way that brands attract, engage, service and retain customers.

We were committed to a single code base that could deliver innovation at the speed of social, coupled with an elegant UI, to empower customer adoption and success. We maintained a stubborn focus on the core problem solve, while others became distracted.

And we were careful not to chase easy revenue at the expense of our vision or future technical debt. Now social is the preferred communication channel for consumers, and it has become critical for business success.

Across marketing, customer care, support, sales, operations, HR, business intelligence and product teams, customers rely on Sprout day in and day out to meet their objectives and succeed. Our commitment to our people and culture has also never been more important.

We believe that being a great place to work and a great place to be a customer are deeply connected. We were recently honored to be named Glassdoor's 2023 Best Places to Work list for the fourth consecutive year.

Our deliberate and methodical pace of hiring, ongoing investments in our people and culture, and commitment to our values have allowed us to aggressively pursue our objectives while building a career destination for our people to grow and thrive.

The combination of our thesis on the market and the strength of our team have prepared us for the breakout opportunity we see today and have afforded us the ability to continue our investment in our product, innovation and people in any environment. We believe Sprout is now uniquely positioned to pull away in 2023.

Entering the year, we believe our full pricing, product, go-to-market and customer strategies are aligned to the most productive parts of our market where we're already winning and we are best positioned to provide outsized value to our customers within our platform.

Another strong reinforcement of our strategy, our upmarket momentum and the success of our pricing changes is the strength we saw this quarter in our premium products. In Q4, we saw nearly 40% more new customers purchasing premium analytics than any prior quarter.

More than 2.3x more existing customers adding premium analytics than any prior quarter, and in total, across new business and expansion added more than 80% net new analytics ARR than any prior quarter. Total premium analytics ARR roughly doubled year-over-year, and our social listening module grew greater than 50% year-over-year.

Beyond the strong execution against our pricing changes, another highlight was a series of new business wins in Q4 that serve to validate our emerging leadership at the high end of the enterprise. The usability of our platform, combined with powerful sophisticated enterprise functionality, is resonating at the high end of the market more than ever.

We're also very excited to bring our recent acquisition of Repustate into this mix. Repustate will allow us to accelerate multiple dimensions of our product road map and social listening and extend AI and machine learning across our platform to social customer care, publishing, messaging and employee engagement.

We believe our meaningful investments in AI and ML will strengthen the value we deliver to our customers, and we'll unlock multiple new monetization paths from this technology over the next 12 to 18 months. Our priorities and focus for 2023 are clear.

We're going to continue to execute on our compelling product road map, continue to execute on our pricing evolution and momentum upmarket and continue to [indiscernible] our competitive advantages to make Sprout the clear category winner.

As we continue to hire across the organization and invest in the most productive parts of our business, we're excited to balance strong growth with profitability for the first time. We are fortunate to be operating from a unique position of strength, and we believe we're on the path to realize our full potential in the years to come.

With that, and for more on the success of the quarter, I'll turn the call over to Ryan..

Thanks, Justyn. I'm grateful for our customers who continue to see more value in our platform and for our teams who continue to execute. The technology industry is clearly undergoing change.

And as Justyn highlighted, the thoughtful nature of our organizational planning, combined with the durability of demand for our software, has positioned us to accelerate ARR growth through 2023.

Our competitors have spent the last 6 months distracted and pulling back on investments, which has and will continue to impact the product road map and customer support. They're struggling with structural business challenges, and we've begun to see an inflection point in migrations away from our competitors to the Sprout platform.

This migration spans all market segments and reinforces confidence that Sprout is building a category-defining company. Earlier this month, Sprout was recognized by G2's Annual Best Software Award for the seventh consecutive year. We are featured in 7 categories, including Best Global Software Companies and is a top 20 software product for enterprise.

We're the only social media management software recognized in the top enterprise software category and the only social media management software right across SMB, mid-market and enterprise. As I told the team in our 2023 kickoff, it's winning time. I'm proud that we are building a company where employees are aligned and rally around opportunity.

It's through this lens that we've executed so well on our recently implemented pricing changes and our increased focus around our most advanced customers. Work like this is why people choose to join and build their career at Sprout.

The execution from our teams is being led with an urgency to move quickly, excitement to work alongside our Idea customers and empathy in putting the customer first. I want to share pricing feedback from the field as changes went into effect during the month of December.

We had roughly 200 more customers canceled in December as compared to the prior 6-month rolling average. The smallest 100 of our customers that canceled had an average ACV of $936. And the average ACV of the 200 smallest customers that canceled in December was $1,056.

Across the entire customer base, our dollar-based net retention rate shifted materially higher than the rolling 6-month average as the initial uplift more than offset low value logo cancellation. Anecdotal feedback was even more encouraging.

Many customers have begun to use pricing increases as an opportunity to upgrade their plan, add users or add premium modules as they reprioritize their investment in social. These trends have so far resulted in better-than-expected ARR performance within a customer base. Our new business will begin with our lowest ACV customers.

In our monthly paying customer cohort, we added less than half the number of logos during December as compared to the trailing 6-month average, but added 5% more new business ARR.

And our largest 100 new business lands in the month of December averaged 63,000 ACV, more than 7x our total average ACV and more than 60x the average ACV of the smallest 100 customers to cancel. Overall, new business ACV more than doubled year-over-year. We're maintaining our era of growth at the lowest paying tier of our market with far fewer logos.

And now we're accelerating our monetization within the sweet spot of the market where our platform delivers tremendous business value. The customers we're landing today are higher quality across the board, creating NDR benefits that we believe will compound for a very long time.

Some of the larger logos are attributable to the great work we're doing with Salesforce. We announced our integration with service cloud at Dreamforce in September, and this highly differentiated integration went live in Q4.

Also during Q4, we introduced our integration with Tableau that will empower our customers to strengthen their view of the customer with social data, particularly in the enterprise. A 360-degree view of the customer now, including Sprout, has never been more important.

Last quarter, I talked about momentum coming out of Dreamforce and the record pipeline. I'm proud to report that we added 175 new logos from our partnership during Q4, bringing our 2022 total to more than 250 logos.

As we continue to bring our products closer together with differentiated and out-of-the-box integrations and to accelerate our marketing and sales playbook, we expect a very strong relationship to continue to build well into 2023. To this point, we currently have a larger pipeline than we did 90 days ago.

And we're focused on ensuring that our sales capacity matches demand.

The broader group of customers that we grew with skews up market and includes notable brands like Hormel Foods, Six Flags Entertainment, Synopsys, Visteon, Booz Allen Hamilton, Carrier, Square, Standard Insurance, The University of Michigan, Sotheby’s, The University of Kentucky, Vitamin Shoppe, Orangetheory Fitness, Q2 Holdings and Louisiana State University.

The theme from larger organizations that are selecting Sprout is that they are upgrading, which we believe is indicative of the fact that the market is moving in our direction. Now story comes from electronic design firm, Synopsys.

"We're excited to up-level our social program this quarter with Sprout," said Michael Lopes, Head of Social Media at Synopsys. It is a key component of our 2023 strategy, and we look forward to having it further our publishing, listening and reporting capabilities.

We're excited to up-level our social strategy by working with Sprout, said Lori Remis [ph], Director of Global Brand and Communications at Visteon Corp. We have a new vision for social centered on building broader brand awareness and improving talent acquisition across our global footprint that includes more than 10,000 employees.

The usability of social publishing, listening and advancing analytics from our single platform gives us the tools we need to extend Visteon's brand equity as we enable the future of digital mobility. I'm proud of the way we're delivering through an uncertain time, and nowhere on the path to unlock our full potential.

Our partnerships have strong momentum. Our pricing changes are resonating within the market. New product enhancements are delivering tremendous value to our customers. And our competitive positioning has never been stronger. We're recruiting and hiring amazing enterprise sales talent, and we're focused on the most successful tiers of our market.

We're excited for the work ahead as we continue to scale a category-defining company. And with that, I'll turn it over to Joe to run through the financials.

Joe?.

Thanks, Ryan. I'll now walk you through our fourth quarter results in detail before moving into guidance for the first quarter and full year 2023. We're pleased to deliver record net new ARR, overall growth and positive free cash flow for the eighth consecutive quarter.

We expect to outperform our medium-term financial goals in 2023 and deliver accelerating growth with non-GAAP profitability. Revenue for the fourth quarter was $69.7 million, representing 31% year-over-year growth. Subscription revenue was $69.2 million, up 31% year-over-year and nicely ahead of our plan.

However, we experienced materially greater-than-expected inflection in partnership demand and offer pre-implementation and onboarding for all 175 Social Studio customers during Q4. This resulted in a $0.8 million to $1.2 million shortfall in services revenue relative to our plan.

We've adjusted our forecast methodology and expect services revenue to be lower than 2022 levels moving forward to the possibility that will continue this playbook. ARR as in Q4 was $296.6 million, up 32% year-over-year. Enterprise new business was exceptionally strong in Q4.

We set a net new ARR record at enterprise and mid-market, while SMB and agency each accelerated in the month of December as pricing changes went into effect. We had 132 net new customers in Q4 to finish the quarter with 34,390 customers, up 8% year-over-year.

The number of customers contributing more than $10,000 in ARR reached 6,652, up 35% from a year ago. The number of customers contributing more than $50,000 in ARR reached 972, up 59% from a year ago.

Quarterly 10,000 and 50,000 net customer adds were in line with our prior quarterly high watermark, even at materially higher price points and with rapidly expanding total deal size. Q4 ACV growth of 22% year-over-year began to accelerate driven by enterprise new business momentum and the initial contribution from pricing changes.

Non-GAAP gross profit was $54.8 million, representing a non-GAAP gross margin of 78.7%. This is up 300 basis points compared to a non-GAAP gross margin of 75.7% a year ago. We continue to scale favorably into our business model and benefit from a typically low services contribution this quarter.

Non-GAAP sales and marketing expenses for Q4 were $28.6 million or 41% of revenue, up from 39% a year ago. We are fortunate to hire well throughout the quarter and continue to make meaningful investments in our future, particularly in enterprise and customer growth roles.

Non-GAAP research and development expenses for Q4 were $13.3 million or 90% of revenue, down from 20% a year ago. We've continued to make transportive R&D investments to support the future evolution of our platform. Non-GAAP general and administrative expenses for Q4 were $12.3 million or 18% of revenue, down from 21% a year ago.

We expect to deliver consistent G&A leverage as a percent of revenue moving forward. Non-GAAP operating income for Q4 was $0.6 million or a positive 0.8% non-GAAP operating margin, improvement of more than 550 basis points year-over-year.

We are pleased with the ongoing efficiency improvements as we scale, even as we prioritize growth investments in the business.

Non-GAAP net income for Q4 was $1.8 million or a net income of $0.03 per share based on 55.2 million weighted average shares of common stock outstanding compared to a non-GAAP net loss of $2.7 million and $0.05 per share a year ago. Turning to the balance sheet and cash flow.

We ended Q4 with $185.8 million in cash, cash equivalents and marketable securities from $181.9 million at the end of Q3. Deferred revenue at the end of the quarter was $96.2 million.

Looking at both our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $163.1 million, up from $136.9 million as in Q3, a record sequential increase and up 51% year-over-year. We expect to recognize approximately 75% or $122 million of total RPO's revenue over the next 12 months.

I do want to call out a typical invoicing pattern. Approximately $10 million of customer contracts were signed during Q4 but not invoiced to the customer until January. [indiscernible] in accounting rules, this $10 million was captured an RPO but not deferred revenue on our year-end balance sheet.

We estimate our normalized billings growth rate to be between 35% and 40% over both Q4 and Q1. Operating cash flow in Q4 was positive $3.0 million compared to $2.5 million a year ago. Free cash flow was positive $2.6 million or a positive 3.7% free cash flow margin ahead of our expectations.

For the full year 2022, free cash was $8.8 million or 3.5% free cash flow margin. In addition to strong efficiency, the ongoing shift to annual and multiyear contracts continues to have a positive impact on our free cash flow as we grow. In 2022, our overall dollar-based net retention rate was 109%, down from 112% in 2021.

Our dollar-based net retention rate, excluding SMB customers, was 116% in 2022 compared with 118% in 2021. Lower expansion activity in our SMB and agency segments weighed on net expansion activity, primarily amongst our lowest value customers.

However, we believe our quickly changing mix towards mid-market and enterprise, pricing changes and the strategic alignment around our most sophisticated customers put Sprout on a tangible path to improve dollar-based net retention north of 120% by 2025.

Shifting to formal guidance; for the first quarter of fiscal 2023, we expect revenue in the range of $75.0 million to $75.1 million or a growth rate of 31%. We expect services revenue to decline year-over-year. We expect non-GAAP operating loss in the range of $0.7 million to $0.5 million.

This represents an anticipated non-GAAP operating margin of negative 0.8%. We expect a non-GAAP net loss per share of roughly $0.01, assuming 55.4 million weighted average basic shares of common stock outstanding. For the full year fiscal 2023, we expect total revenue in the range of $332 million to $333 million.

This is expected overall reported growth rate of 31%. We expect services revenue will be lower than 2022 levels. For the full year fiscal 2023, we expect total ARR to grow at least 200 basis points faster than reported revenue, implying full year ARR growth of at least 33%.

We believe that year-over-year ARR growth will accelerate in 2023 and grow faster than reported revenue due to a growing mix of our enterprise and mid-market segments, tailwinds from our pricing changes and outside contribution from our partnerships. We do not intend to guide ARR each year while 2023 will be unique.

Our installed base pricing changes will layer into our financial model over the course of the year, providing a benefit to 2023 ARR and partial benefit to revenue in both 2023 and 2024. For 2023, we expect non-GAAP operating income in the range of $1.6 million to $2.0 million.

This implies annual non-GAAP operating margin improvement of 210 basis points to 220 basis points for the full year of non-GAAP profitability for the first time. We're pleased to improve our rate of non-GAAP operating margin expansion and expect to deliver durable, profitable growth on a non-GAAP basis.

We expect non-GAAP net income per share between $0.03 and $0.04, assuming approximately 56.0 million weighted average basic shares of common stock outstanding. Finally, I'll expand on Ryan's comments regarding pricing changes.

Both new business and existing customer pricing changes were communicated in early November, making the month of December the first month of effective pricing changes. As such, Q4 saw a partial and early contribution.

In the installed base, overall feedback has been receptive, understanding both the value we deliver to our customers and enhanced innovation that we have delivered since most customers began their subscriptions with us. Low return was higher than normal by approximately 200 logos in the month of December.

However, these are weighted to low-value logos and average ACVs of the 200 small logos churn was 1,056. As Ryan shared, the average ACV of the 100 small logos that canceled the month of December had an ACV of $936 compared with an average ACV of $63,000 for 100 largest new business logos in the month of December.

We saw fewer-than-normal customer upgrade in December as compared to the prior six-month rolling average. We saw many customers expand seats or adopt incremental premium modules as a means to expand with us rather than absorbing a pure price increase.

In fact, the attach rate of customers having purchased a premium module increased by 160 basis points sequentially from Q3, roughly double the cadence over the prior 4 quarters. December net dollar retention set a monthly record. December, total new business ARR set a monthly record.

Gross and logos were lower than prior trend line, consistent with our expectation. And new business ACVs in December more than doubled on a year-over-year basis. We expect these trends to each continue.

In 2023 compared to the prior period, we expect to add a lower volume of customers that will be stickier and higher value and expect to turn a modestly higher volume of very low-value customers. The trade-up is a meaningful tailwind to ARR growth, ACVs, cash flow and NDR.

We expect new business ACV to continue to be materially higher than prior levels. In total, our customer growth in 2023 will likely be below historical trend lines, but ACV growth will further and more meaningfully accelerate from our Q4 exit rate.

In conclusion, we're very proud of the execution from our teams, which underscores the resiliency of our business model and value of our software.

Social has never been more important or more valuable to our customers, and we believe we're in a unique position to pull away from our competitive set and emerge as a category-defining company in a $100 billion market. Now we expect to deliver that growth with profitability as we continue to scale.

With that, Justyn, Ryan and I are happy to take any of your questions.

Operator?.

[Operator Instructions] We'll take our first question from Raimo Lenschow with Barclays..

Two quick ones, if I may. First of all, the customer wins you pointed out like Synopsys, Square are kind of in the group that I historically would have never kind of imagined for Sprout Social because it kind of seems higher up in the market.

Can you talk a little bit about the pipeline activity that you see in that kind of cohort, it seems like more on the higher end to where you played historically and how that's kind of evolving? And then one for Joe. Like NRR kind of ticked down both for, like, the total, but also look at slightly higher.

Can you talk a little bit about the moving pieces that are -- that we should consider there as we think about that number?.

Thanks, Raimo. This is Ryan. I'll start off on the first question around the customer wins in the large enterprise. And this is -- this has been a huge opportunity for us and something that we've seen a lot of success with, thus far, and I think it just continues to become more pronounced every quarter.

There's a few things that are really tailwinds for us here. I think one has just been the historical success from those enterprise customers. And I think we shared before one of the things that has really differentiated us is the way that we built this product. It's incredibly intuitive, but it's also incredibly sophisticated.

And in previous quarters, we've shared some amazing wins from some Fortune 500 and Fortune 10 that have been in that group. And in these accounts, they typically have large populations of users that are accessing the product. And that can be across marketing and care and sales and across the entire organization.

That usability becomes incredibly important work. You layer on top of that, that we've built these incredible products across our analytics and social listening and advocacy, and these are products that our customers want, and they want them all in one place. They don't want to buy it from multi vendors. They want it in one suite and platform.

And they love that they are getting it with the same UI and the same UX. And so that organic build that we have here with that single code base has really differentiated us.

The final piece that I'll just highlight is that our teams have done an amazing job both driving awareness in the enterprise, but also executing really well against these opportunities, going out and building pipeline with these accounts, taking great care of these customers through the evaluation process as well as when we win them and making sure that they get implemented quickly and that they're getting great user adoption.

So all those things are really contributing to the success that we're continuing to see in the enterprise. And I think it really stands out when you start to look at the 50,000 wins, which are now at 59% growth year-over-year..

And then, Raimo, on the MDR front, puts and takes, we talked about this before. Where we saw pressure throughout the year was on the SMB, low-end SMB and then low end on the agency side. If you look at our mid-market enterprise, actually, the net dollar retention on that is well above the 1 60 number we gave ex SMB because that factors in the agency.

And if we think about where the business is shifting, we think about the move up in the mid-market enterprise, we do expect upside to these numbers through in 2023.

And then we also expect, like we talked about to get to 120% overall by 2025, and early indications of what we're seeing, especially up in the mid-market, enterprise with the pricing changes with the new logos that we're landing, they're just higher quality.

And so the overall customer base, we believe, over the next couple of years is -- the quality of it is going to totally change. And so it gives us a lot of confidence as we move forward..

We'll take our next question from Arjun Bhatia with William Blair..

Congrats on the quarter. I want to start with the -- I think, Justyn, you mentioned that customers are increasingly prioritizing social. And it seems like it's coming through your enterprise numbers.

But with the net new customers that you're seeing come in, particularly maybe in December, what differences are you noticing in terms of the scope of their Sprout deployment? Are there any particular use cases or departments that are more involved, less involved than you've seen historically? Maybe just some color on that would be helpful..

Thanks, I'll start there. It's Ryan. I think all of this is part and parcel of the really focused motion that we have into sophisticated customers, which tend to skew certainly in the mid-market and enterprise. Those customers today that we're seeing come in, they're prioritizing social. They realize that it's a critical part of their business strategy.

They see it beyond marketing into things like customer service, customer care. They see it contributing to the revenue growth from a sales perspective. And they really, really want to capture the data that exist in social and leverage it to make business decisions.

So when I think about the specifics of what we're seeing with those customers today, it's usually across multiple departments. So certainly in the marketing department and customer care.

But even outside of that, they're trying to think about how they can consume that data to help them with making decisions, grabbing insights from that social data, which could contribute to which products they need to evolve or perhaps introduce which markets they want to go into, how they want to compete.

And so we're seeing this also manifest itself in multiple products. So those lands are bigger. They're coming in for the core use cases across marketing and customer care, but then they're also adding in things like our social listening and analytics. So generally, we're getting across a larger population.

They're more sophisticated users with deeper demands. And Again, they want to see all these solutions in one place because I think it's really important given the horizontal nature of social that their team has equal access to the technology and the data..

Arjun, this is Justyn. One thing I'll add there is just I think zooming out a bit, what we're seeing is just a rise in the front end of the maturity curve, right? We've got customers who have been investing in social for a varying amount of time. We've got organizations that are at different stages in terms of their investment, their sophistication.

And their maturity was social. And so we're seeing more and more companies come into the funnel with more sophisticated demands. They've proven use cases within their organizations. They're looking to operationalize social in ways that has just continuously climbed year-over-year for the last several years as that maturity climbs.

And so we're seeing more of those. We're seeing them at a higher -- certainly a higher size, but just a higher level of maturity involvement across the organization overall. And I think that, that's going to be a trend that we're going to continue to see because we're still very early, I believe, broadly in social adoption within these organizations..

That is helpful. And then another one -- I want to touch on Salesforce. It seems like you got some pretty good traction there in Q4. But I think you pointed out the Social Studio customers, but obviously, the opportunity in Salesforce is much larger, right, beyond the core Social Studio customers.

Can you talk a little bit about what you're seeing in the rest of the Salesforce space, maybe those core service customers that weren't using Social Studio before.

How are you thinking about penetrating that base? And where are we in that process today?.

Yes. I'd say we're really early in that process today. We're incredibly excited about the partnership that we have and how it's continued to develop and mature. As you mentioned, the service cloud piece, that service cloud integration went live in Q4, alongside of Tableau, which went live in Q4.

And we added those to the integrations that already exist with the sales cloud and with Slack. And so that's really all contributing to Sprout being the best choice for any customer that's really invested in Salesforce CRM. And so all of that has really helped.

I think the other piece is from a go-to-market perspective, we're seeing tremendous support from the Salesforce sales teams in the field, getting in front of the customers. So many of the logos that we spoke about were joint sales where we had a chance to go in with that Salesforce AE and partner with that customer.

And from a service cloud perspective, even the customers that are not on Social Studio that are moving over that are great service cloud users, they're thinking about social data. They're thinking about that 360-degree view of the customer and how social data taps into that.

And Sprout has clearly become the best option for those companies to be able to integrate these platforms together and to leverage that data to make better decisions for their customer base. So it's a great, great partnership across the product and go-to-market teams. And again, I'd say we're early.

We think we have a tremendous opportunity here in partnering with Salesforce for years to come, not just against the Social Studio opportunity, but the entire customer base..

We'll take our next question from Elizabeth Porter with Morgan Stanley..

I just wanted to understand some of the composition of the record high net new ARR a little bit more.

I know you hit on some of the drivers, but was there any outsized contribution from either kind of the new customers landing at higher prices, existing at higher renewals or just closing of more of those Salesforce deals following momentum out of Dreamforce? And I'm just trying to get a better sense for how durable the net new ARR added in Q4, and what drivers could moderate or even accelerate into 2023?.

Thanks, Elizabeth. It's Ryan. I'll start off there. I think from a durable nature, one of the things that we're really proud of is just the consistency of execution across our teams. And so we certainly have seen the new business plans as well as our current customer base increase in size, which you can see in the 10,000 and 50,000.

But I think what else is really important here is that there isn't a dramatic concentration in one single account or a couple of accounts that skewed this whole number in one direction. There's a lot of consistency in terms of just the increase in average ACVs across all of these customers.

I think I'd probably go back to something I commented on just a few minutes ago just in terms of the composition is we're seeing these sophisticated customers coming in with needs that are more than what might have been the core use case a few years ago, right? They're thinking about this across marketing, customer care.

They're thinking about the value of social data as it relates to our analytics product and our social listening product. So the main points are that we're seeing it across many customers, which you can see in the volume in the 10,000 and 50,000. And we're seeing it across our core use cases as well as the add-ons.

So that, for us, just reinstates the confidence we have and the durability of this..

Yes. The only thing I'll call out, Liz, with you now is like on the pure number itself, Q4 is always going to be -- and consistently has been a high watermark net new ARR quarter. So I think that is consistent with what we've seen in the last couple of years.

All those factors are definitely going to lead into 2023, but just calling out that we definitely see outsized kind of momentum, especially upmarket in Q4 outside versus the rest of the year..

Yes. Got that. And then just a follow-up on the margins. Great to see the 210 plus bps of margin expansion. I know in line -- largely in line with the initial target for 100 to 300 that you provided before the pricing change.

So just wanted to understand now that there's a pricing change, would there otherwise be some sort of upside to profitability? And are you offsetting that with accelerating investments elsewhere in the business?.

Yes. So that's a great question, Liz. I think right now, obviously, just being 60 days into the pricing changes. We want to make sure we get a little bit more information before we start kind of adjusting our investments.

But to the extent that we continue to see the success we saw towards the end of Q4 and into Q1, and we start outperforming due to the pricing changes, I do think that's a more efficient set of revenue that we're going to acquire. And then at that point, we kind of look at do we reset the model, do we look at investments.

Outside of making incremental investments, we would expect to outperform the margin guidance we gave, assuming we outperformed the revenue number because of the pricing changes. But obviously, we want to make sure that there's not other opportunities to invest in the business before we make those types of decisions..

We'll take our next question from Parker Lane with Stifel..

This is Matthew Kikkert on for Parker.

To start off, when you're looking at the top line growth outlook for 2023, how much of that growth would you attribute to those pricing changes that you announced last year?.

Yes. So Matt, we're probably not calling those out specifically, what's the impact of the pricing change? I think when we think about the guidance that we gave coming into this year, we contemplated all of that.

We contemplated, hey, what's the momentum we're seeing in Salesforce, what's the momentum we're seeing in pricing changes on existing customers, what is the new pricing on the website? So I think all of that was factored into the guidance we gave.

When we talked about this fall, we'd like to come into the year giving guidance at a really high confidence level. And so to the extent that these things continue from what we saw late last year, we feel pretty good about the guidance, but not something that we specifically would call like x percent coming from price changes.

That's not something historically that we've done..

Got it. And then changing pace a little bit.

As you look across the base, what share of your customers would you say fully embrace TikTok as a social channel? And how big of a differentiator is your support for that channel in social media?.

Yes. Great question. This is Justyn. So I think that we're still -- and we've seen similar kind of adoption curves with other networks in the past. I think we're still pretty early. Certainly, there's a lot of energy and excitement about TikTok.

I think the number of organizations that have embraced it the same way that they've embraced some of the other social networks is -- we're still on the early side there. I think our functionality is category leading.

I think we've got a lot of momentum with our initial release that we talked about a few quarters ago, releasing TikTok functionality across the entire platform in one go. We've seen great adoption there. We've got a road map of things that we want to continue to build.

We're also seeing a lot of really exciting things from that team in terms of the capabilities that they're turning on as they make more investment in their partners, their APIs, et cetera. So feeling great about that. I think that we've got -- I wouldn't want to handicap what the adoption curve looks like.

I think it's faster than most efforts that we've seen historically, but I'd still put us relatively early from a how do we operationalize this across the organization beyond kind of the initial use cases. So we'll see that develop. I think probably a lot of movement there in 2023..

We'll take our next question from Michael Turits with KeyBanc..

I just -- this may have been asked before, I'm not sure, but maybe you could talk about some of these things in terms of forward-looking indicators that give you the most confidence a solid quarter, but obviously a tough environment and a very good guide.

So level of confidence in that guide and what are the things that give you the most confidence there?.

Yes. Michael, good question. So I think for us, there's a couple of things. One is if we look at -- first of all, Ryan talked about as we think about the momentum we're seeing with the price changes on existing customers, let's start there. We've seen very little pushback. The only areas that pushback are on the really low end of the market.

And so overall, we feel really good about our strategy to roll out those price increases across 2023 because we just haven't seen a lot of churn from that. Then you layer in what we saw on the new pricing on the website so far.

I know it's early 60 days in what we talked about, we doubled our new business ACV doubled in December from -- on a year-over-year basis. We like the momentum that we're seeing in the mid-market enterprise. We talked about the attach -- the increase in the premium attach rates.

And so we're just seeing a lot of momentum in what we consider the healthiest part of our business.

And then you layer in the success that we're seeing with the Salesforce relationship, and we still think -- like Ryan said, I think we're really early and that opportunity, not only with the Salesforce Studio customers, but the customers across all of the Salesforce kind of ecosystem with the service cloud integration.

So there's a couple of things there. Now obviously, we're early in the year, and we see a lot of momentum right now, but those are kind of the key things, Michael, that we're seeing that kind of give us confidence going into 2023..

Thanks, Joe. I give a second 1 or a follow-up.

There's not necessarily quantitative question, which is ACV 8,000-ish, 9,000 rounded, it's not that I want us tell where that's going to go long term, but how do you think about that long term in terms of your opportunity, whether you give the order of magnitude or just telling you where you're addressing the market? But obviously, that's one of the places you look at the model and see like, hey, this could be something really different..

Yes. So -- this is Justyn. A couple of things that I think are really powerful as we think about where ACVs go, where deal sizes and just our customer investments go long term as we're adding more value. Really come from the past for us.

So when we look at average deal sizes several years back and the consistent trend line that we've seen since day 1 of those continuing decline, when we look at the dollar value of our top decile five years ago, being smaller than our average customer size is today, when we see numbers like we talked about earlier of the top 100 customers, and the average is there, there's no scenario where -- that we contemplate where we don't continue to see consistent growth in the ACV.

Some of that is due to our execution. Some of that is due to just the continued investment and where we are in the maturity curve that I mentioned earlier and the value of social to these businesses.

So if we were to extrapolate some of what's happened in the past, when we look at our top decile versus our average and how that's grown into -- one has grown into the other, we think that there's a lot of headroom in where these things go.

And the other thing I'll point to is just if we look at the growth, 10,000 and 50,000 and what the trajectory of that has looked like, and certainly, many customers eclipsing that by a good deal. That trend line for us is very reliable. And as we mentioned in the prepared remarks, something that we think accelerates in 2023..

We'll take our next question from Matt VanVliet with BTIG. And hearing no response, move on to Clarke Jeffries with Piper Sandler..

First question is you've established a pretty impressive cadence here in Social Studio conversions, 25, 50 and 75, but still very early there, single-digit percentage of the few thousand potential customers.

Do you have a sense on what that -- those numbers look like in 2023? Or maybe give us a sense on how much larger the pipeline of active conversations are compared to that 250?.

Yes. Happy to. Thanks, Clark. This is Ryan here. We continue to see quite a bit of momentum. I think in the prepared remarks there, we just shared that the pipeline heading into this year is bigger than it had been ending the year. So we're continuing to see really good momentum in the conversations that we're having with the Social Studio customers.

There's still a decent amount of time left on the process for Social Studio. So we think that those will happen over time. But we're certainly working in partnership here with Salesforce and the Salesforce account teams to get in front of these accounts. So we feel really good about the momentum heading into this year.

We think that there's plenty of upside. We're going to continue to look for additional product opportunities to add even more value to Social Studio customers, but also Salesforce customers in general.

So we haven't really broken out that number specifically, but I would say that the pipeline looks really healthy, and the opportunity continues to look really good for us for this year and the year after..

Great. And then just a question maybe for Joe. Maybe just to round out this whole conversation around the focus upmarket and the cancellations in the low end.

Was the gross additions number on a logo basis in the sort of cohort below 10,000 consistent with prior quarters and really they don't only change here or cancellations?.

No. We've talked about this before. As we got into the pricing changes on the website, Clark, towards the end of November and December, we talked about this for -- we're going to land way more mid-market enterprise customers. So overall, we're going to see less net new even gross because we're just not bringing in that low-end SMB.

We bring a lot of those customers in on the low price point plan. You're definitely going to see less gross new logos as well given the pricing changes on the website. But that's by design.

I mean the ARR that we're generating from those customers is dwarfing the number of customers in the ARR we would have gotten from that low end of the market, so that was a conscious change, and we feel really good about that trade-off that we've been seeing so far..

And I'll maybe add to that and just use this as an opportunity to kind of continue the conversation we've been having for the last couple of years, which is around the focus on the revenue from the new customer adds and may like the cleanest way to illustrate this.

If you look back early 2021 when we had some of the high watermark quarters from a net adds perspective versus Q4 where we added roughly twice as much revenue from a substantially smaller net adds number.

And this is consistent with where we want to make sure that we were pointing all of you that the revenue yield, particularly with the price changes and the move to the mid-market enterprise, is going to be the focus for us, continue to be the focus for us since you're going to see that continue to play out.

We'll start to have more visibility to establish baselines, but the net ARR, especially as we're contemplating those much smaller customers cycling out to the business over time, is going to be the thing we want to continue to focus on..

We'll take our next question from DJ Hynes with Canaccord Genuity..

One for Ryan to start and then a follow-up for you, Joe.

So Ryan, does the light touch trial-led go-to-market model resonate as well at the high end of the market? Or do you need any refinement there as you focus more on the enterprise? And maybe that bridges into a conversation around kind of how you plan to invest in the sales org in '23?.

Yes. DJ, it is the same motion, and we are incredibly excited about that trial motion, especially in the enterprise, because it is incredibly differentiated. Most enterprise solutions, certainly in our space, but I think in many software categories, don't lead with a product in the enterprise.

They usually lead with really heavily customized demos and really long sales cycle times and heavy services and that's the opposite of the way that we approach the market. And we've seen great excitement and progress in having these conversations with customers.

Even when we get RFPs from enterprise customers, we certainly fill those out for them, but we make it incredibly important for them to actually get their hands on the keyboard and get into the product, to get into the trial to prove that Sprout is going to fit them perfectly for what they need before they sign a contract.

So it's actually been, I'd call it, a secret weapon for us in the enterprise. It's something that we try and have every customer engage with the product because we're so proud of the product itself, and we know that it works really well for our enterprise customers.

And then in terms of investment from a capacity perspective, we've been adding to a variety of our teams certainly outsized investment going into our mid-market and enterprise teams and the teams that are supporting them across solution engineering and outbound BDRs and customer success as well, but that continues -- the mid-market and enterprise continue to be the largest part of our business and fastest-growing..

Yes. Perfect. Good to hear.

Joe, and the follow-up for you is just with the focus on the enterprise, what's your expectation for the mix of business that will come in with annual billing terms versus month-to-month?.

Yes. So DJ, we expect that to continue to be heavily weighted towards annual. I think historically, our overall customer base is probably more closer to -- like we've talked about this on an annual paying side probably more 60-40. But I can tell you right now, the new business coming in is substantially higher than that ratio.

And so I do think you'll continue to see that kind of trend line continue through 2023, 2024. We've got a long way to go to make that mix. I'd love to get that mix to 85%, 90% annual versus month-to-month.

And I think we can get there over time, but you're definitely going to see -- the new business coming in on an ARR basis is definitely more heavily weighted towards the annual..

So does that mean we should see more cash operating leverage than non-GAAP operating margin leverage?.

Yes. So what we've talked about is, yes, we expect -- and we talked about this, we're very consistent. We expect a couple of hundred basis points of improvement over operating margin for free cash flow. Free cash flow should be a couple of hundred basis points operating leverage DJ. So we expect that trend to continue. ..

We'll take our next question from Matt VanVliet with BTIG..

Hopefully, it's working this time.

Can you hear me all right?.

You're there. We can hear you Matt..

All right. Sorry about that. I had to switch phones. Okay. So I guess when looking at the Salesforce partnership, a couple of clarifying questions. I know you kind of touched on a little bit of this earlier, but curious how much of the sort of 250-plus customers you signed this year were, in fact, Social Studio customers.

So should we think about most of what's come in so far as being that first component of the partnership and the more recent part has expanded beyond that.

And then also within that, on the average ACV that you're getting from those Salesforce partnerships, customers, understanding it's very early, but are they consistently in sort of the 10,000 or even the 50,000 bucket? Any kind of directionality on the size of the customers that you're getting would also be helpful..

Yes. Happy to answer both of those, Matt. Yes, in terms of the logos coming over, a majority of them are the Social Studio customers, not Service Cloud. And we launched that integration. We talked about it at Dreamforce in Q3, but it didn't go live until Q4.

So just really recently and so for us, we see tremendous opportunity with the rest of the Service Cloud customers that might not be Social Studio customers today, but certainly, the value of what we do is going to be incredibly important for them as they think about the 3 60 customer record.

So we see a lot of upside, but what you're seeing right now is really the Social Studio customers. There's some overlap, but I would say it's small in comparison to what was just core Social Studio for us. And then from an ACV perspective, you're spot on. Those customers generally fit within that 10,000 and 50,000.

So they're a perfect fit for our area of focus and where we're already supporting customers today. So we're really excited about how they just generally fit into our strategy..

Okay. Great. And then when you look at the international markets, I know you've kind of had some additional investments, especially in Europe of late. But curious on what you're seeing trends there. Is the macro seemingly impacting some of those customers to a greater extent? The war in Ukraine is sort of more top of mind and right in front of them.

And anything from kind of an ACV perspective that you're seeing there? Are you getting as much uplift or is that sort of yet to come as the price increases roll through over -- across the pond?.

Yes. From an international perspective, we continue to be really excited about the opportunity and really excited about the execution that we're seeing from the team, especially in EMEA. EMEA continues to be the fastest-growing part of our business.

Certainly, there's things that are happening in the macro in those markets, but our team in Europe has just been executing incredibly well. We've seen really good ACV uplifts from that group as well, both from our current customer and a new business perspective. We see a lot of headroom in terms of the total addressable market in EMEA.

And then certainly, when we think about the rest of the world as well where we have smaller investments, but we'll continue to invest over time. There's a tremendous amount of TAM that we haven't got to yet that we're excited about. So we feel really good about the trends that we're seeing.

It's operating very similarly to North America today and performing well with some upside..

[Operator Instructions] We'll take our next question from Brett Knoblauch with Cantor Fitzgerald..

Just want to make sure I heard you correctly.

Did you say total churn in December was 200 customers? Or was that just a reference point for the average ACV of the smallest 200 customers? And then off the back of that, I guess what percentage of your customer base have you rolled out the price increases to? And do you expect kind of similar levels of churn throughout the year? Or is there a quarter or 2 where there's a bigger renewal cycle and you would expect kind of bigger churn?.

Yes. So what we talked about was that -- we had, on average, the December -- we had 200 logo churn higher in December than we had over the trailing average. So that wasn't the total low return. That was just the increase we saw in December. And then we talked about the average ACV of the smallest 200 is about $1,000 of the logos that churn.

And so overall, we're not super worried about that churn. That's really low end of the market, and that's what we kind of expected. Actually, it was probably -- we had less turnover from an ARR standpoint. As you know, Brett, we're not really focused so much on the logo churn at Sprout.

We're more focused on the ARR growth and retaining our highest quality customers. That remained really strong. I think we talked about it on the call we had our highest NDR in December on the revenue side. So feel really good about the momentum there. As far as the price increases, we've talked about this before.

They kind of come evenly through, like, December of this year through -- of last year through December of next year, so it was probably evenly over 12 months. And like we talked about this earlier, we saw -- from an ARR standpoint, we saw very low pushback and very low churn.

We might have saw a higher logo churn, but on an ARR standpoint, we didn't get a lot of pushback overall, and we don't anticipate a lot of pushback going forward, either just based on the customers we've already talked to. So no real impact. We don't believe materially on our ARR.

But you might see, like we talked about, a little bit of impact on our lower churn..

We'll take our next question from Andrew DeGasperi from Berenberg Capital Markets..

This is Stephanie on for Andrew.

I'm wondering on when you move up market and gain these more sophisticated customers, if you see -- how we should think about potential product investments or R&D investments going forward?.

Yes. Great question. Thank you. This is Justyn. So I think generally, you've seen from us over the last probably 3 and 4 years our product road map, R&D investments, the way that we've organized the product team and the products that we've been putting out in the market.

sort of we're ahead of the progress that we've seen in the mid-market and enterprise. I think in anticipation of that, right, as our customers were getting more sophisticated as we're being pulled higher up into the market.

So we've been building against those problems and really focused -- our road map has been biased for the sophisticated in the mid-market enterprise for quite some time. So you should expect that to continue certainly.

But it's also true that as we see larger deals, more sophisticated customers across large organizations that we are being -- we're exploring how we can be a better platform for those customers with a more intense lens.

And so figuring out how we can be building the tools that the largest of our customers need to be successful, that comes in the way of areas like collaboration across the team, compliance, etcetera.

You're going to see more investment and a lot of the things with the large organizations and the larger enterprise need maybe biased more in 2023 than you've seen from us historically. But the short answer is we've been building for that space for quite some time. You're not going to see material strategic shifts in the R&D focus and investment.

You're going to see incremental -- continued investments to meet the needs of our largest customers..

We'll take our final question from Patrick Schultz with Baird..

Just on the recently announced Repustate acquisition, I believe you noted that the financial impact should be immaterial to near-term financial goals, but could you just talk a little bit more about the rationale behind the acquisition? And how does advanced technology such as machine learning, AI, et cetera, better positions Sprout competitively over the longer term and potentially drive some operating leverage?.

Yes. Sure. So yes, that team -- the technology behind it are -- that organization is one that we've been familiar with for some time and the fact that they've been building.

I think thinking about how we're able to leverage that near term in things like our listening products and our customer care tools and the engagement side and even into things like publishing and other areas of application, I think, are going to be -- accelerate road map in ways in areas that we wanted to get to very quickly in 2023.

I think we mentioned in the prepared remarks also we see some opportunities to increase monetization in some areas with that addition, specifically applying and layering their technologies on top of what we have today.

What's even more interesting, though, I think, is with the area that, that team has been focused on for as long as they have and thinking about how AI, ML and some of the related technologies can advance our customers' pursuits in social, make them more effective and give them greater reach, greater horsepower in their social efforts is where we start to get really excited.

So thinking about not only how we can layer their technologies, their existing technologies as well as ones that they've been working on, but also embedding that team across our platform to start thinking about new ways and innovative ways that we can start to leverage things like generative AI and machine learning into other parts of the platform, I think that's where we start to think about out into 2024 and beyond where we're going to see a lot of really exciting opportunity, leveraging, again, some of the things that team has built, but more specifically, their expertise and the things that they've been focused on and applying that to our R&D work..

And that concludes the presentation for today. I'd like to turn the call back over to Justyn Howard for any additional or closing remarks. Justyn Howard Great. Thank you so much. Yes. I'll make a closing brief. Just appreciate everyone's time today. We'll look forward to spending time with everyone in the coming days and weeks. And have a wonderful day.

Thank you all..

Thank you. That does conclude today's presentation. Thank you for your participation and you may now disconnect..