All right. Great. Welcome, everyone, to the second day in the afternoon session of the 19th Annual KeyBanc Capital Markets Emerging Technology Summit. My name is Jackson Ader, software analyst here at KeyBanc, and we are thrilled to have Ryan and Joe here from Sprout Social. So what we'll do here is just have you guys introduce yourselves really quickly and introduce the company. We'll do some Q&A. I'll ping you, the audience, maybe a couple of times, so be thinking of questions, but I'll give you a heads-up before I come so that it doesn't feel sprung on you. But yeah, please, Ryan and Joe.
Quick intros, yeah. So Joe Del Preto, CFO at Sprout Social, been here for almost six years now.
Ryan Barretto, president at Sprout, and I have been here almost eight years.
Okay. Ryan, do you mind just giving us an overview of the company?
Yeah, yeah. So we are focused within the social media management space. Our vision is to be the social media management provider that is powering the most innovative brands in the world. We have been in business for about 14 years and look after about 30,000+ customers across 100 different countries. And we do that across all parts of social. So you think about this as the marketing efforts where organizations, brands would be using us to drive their marketing campaigns and then have all the marketing tools built in: content management, approvals, content calendars, as well as social customer care. So the idea today, we know half the world's population is on social. Increasingly more, they're going to social to engage with the brands that they want to work with.
These businesses that we support, these brands that we support, need sophisticated products like Sprout to be able to manage this volume of care that's coming in. Then we have wrapped up in that all the data. You think about the data in your owned social profiles, the things that are happening on your handles, as well as the social data that exists just out there. There's trillions of data points that are available. It's unstructured data. And we're helping our customers harness that information so that they can make better sense of the data that exists and they can leverage it to really drive their business decisions: which markets they want to go in, how do they have all their products, how do they compete.
Now, if you're focused maybe a little bit in SMB and also mid-market, those don't always necessarily strike me as the data-hungry or the harnessers of the data. How do you make sure that you can allow all of the customers from very small to very large use the data in a useful way for them?
Yeah. So I think one thing that's important to note, just the business itself today is about 75% mid-market and enterprise, and then the rest of the business is SMB and agency. And one of the things you'll hear us talk about a lot is the fact that we lead with the product. So we have a free trial. And from an SMB to the largest companies in the world, we want them in the product, using the product, experiencing our technology, having a chance to interact with our people before they ever sign a contract. And so when you think about that, approachability, elegance, and intuitive product matters a ton. And so for us, that data, if you're an SMB, data's still important to you because you want to understand which marketing campaigns are working.
If I'm spending all this time creating content, I want to know what's actually getting engagement from my audience. I might also be leveraging paid. And so if I know what's working from a campaign perspective, I can start leveraging my paid dollars and make sure that they're going in the right spot. And so that's the type of thing that transfers from SMBs to enterprises. Obviously, the enterprises typically are tapping into larger data sets because they're trying to think about bigger strategies around markets that they might go into, new products that they want to create.
Yeah. Why is social its own standalone thing? Why doesn't it belong in a broader sales and marketing platform across omnichannel?
So I worked at Salesforce for about 10 years before I joined Sprout. And this kind of goes back a little bit. And between 2010 and 2012, a lot of the big cloud players actually invested in social, the first generation of social. And the thesis back then, I believe, was that these products were going to be a feature set within a CRM or marketing automation solution. But I think after all those acquisitions happened, what people quickly realized is that this was a completely different beast. It was a completely different tech stack. Most of those other—all of those other—products were really driven off of a very static email address. And we think about what it looks like for us in social. I have many different profiles across all the different social networks. The data that's coming from all of these social networks is completely different.
The use cases are completely different. And so you ended up in this situation where it was requiring a completely different set of products and tools that was separated from your marketing automation, your help desk, and your CRM. And so that was a big driver. And then in and around that time, there was a lot of investment that happened in email marketing and marketing automation. And a lot of those social products were not at the level of adoption where a lot of these cloud players were really investing. We've been in the space since 2010, and it's been our complete focus through the years. So we've been innovating, adding new networks, increasing the functionality. And so you fast-forward to where we are today, and none of those cloud players are really in the market anymore here.
Joe, do you mind if we just spend a minute on the total addressable market? Because if I wanted to play devil's advocate, I might say, "Well, if the market isn't attractive for Adobe and Salesforce to stay in it, then does that call into question the TAM that is available to you?
Yeah. So when we think about the TAM, there's over 200 million businesses on social right now. And if you think about us and all our competitors, we have single-digit penetration into that 200 million businesses across the world. And so we believe that we're early innings on where we are in the TAM, right? Every single day, we've got businesses coming to us that are on, they're using the networks themselves. They're sharing passwords. They're in Excel spreadsheets. And so we actually believe that there's a lot of upside to the market we're in, only because, and Ryan mentioned this a little bit earlier. When we were as consumers using email, it was like 10 or 15 years before all the email automation tools that came about, right? Email came out in the mid-1990s, late 1990s, right?
2010, 2012 is when all these big email automation tools and so just think about where we are. We've been using social as consumers maybe for 10-12 years, but from a business utility standpoint, we're still very early. And so there's a lot of businesses out there that still haven't matured enough. And that's why we believe that there's this massive upside in our market that we're just getting started in.
Yeah. So 200 million companies. What's the billion number? What about dollars, if you think about that?
Yeah. So the way we look at it is if we take those businesses and then we say, "Okay, how many of those are probably realistically in the more like the SAM, in the next whatever?" And it's a much smaller percent. Maybe it's 10% or 15% of those businesses are ready to kind of be in our serviceable, addressable market. And if you apply our average ACVs across our different segments - so we break that down between SMB, mid-market, and enterprise - you get about a $50 billion total SAM right now. And so huge opportunity for us. And that doesn't even assume if you look out in our ACVs have been growing pretty rapidly.
If you look four or five years down the road, that $50 billion, we believe, is actually a much larger number just given the momentum we've seen and the willingness to pay in our space.
I like the bottoms-up build to a TAM because it's like, "Hey, even I get price times volume," right? So yeah, okay, that makes sense. Last year, you guys mentioned and when we were talking about the different striations, SMB, mid-market, about 75% upmarket, that number has gone up because you've made intentional decisions about what to do kind of downmarket. Do you mind just talking through that, and then we'll get into what that means for some of the numbers?
Yeah. Yeah. Do you want me to start?
Yeah, go ahead.
So we had started to see for a while in our customer base just a clear market opportunity in the mid-market and enterprise. For the longest time, when I started eight years ago, it was probably more weighted towards 50% being SMB business. And if you think about the product-led growth, trial model, inbound-driven marketing model, that's what was coming in. Over time, we found ourselves in these opportunities where we were serving more sophisticated customers, clearly more in the mid-market and enterprise. And as we started looking at the data, it became really clear that the healthiest opportunities, the fastest-growing opportunities, and the customers where we were really building our products were more geared towards sophisticated customers tended to be more in the mid-market, enterprise. But you'll still see social-first SMBs and agencies that spend a mid-market, sometimes even an enterprise.
Then looking at that, we realized that we were investing quite a bit in teaching people how to do social. So we started to see in the low end of our business, dynamics felt very different. They were not using a lot of our data products. They were single user, single player. They were not using all of the networks that we provided support into.
So we made the strategic shift to really get focused in on the top end of the market, increased pricing to make sure that we were not leaving money on the table with those accounts that we were working with, made it much cleaner for us in terms of product roadmap and where we were going to invest, and sort of initiated those after a bunch of research and diligence in the backend towards the end of 2022 going in as we walked into 2023.
Yeah. And the other thing I would add there, not only did we notice those dynamics in that part of our customer, we also realized, though, that the accounts we were starting to win up in the enterprise space, we noticed that our competitors in that space had taken a very different approach to the enterprise part of social media management software. They were really built via a lot of acquisitions, very hard to use, 6-9-month deployments, heavy professional services. So we were starting to get more inbound because as social was evolving like we talked about earlier about the market evolving, as more and more of these large customers were getting more users in the product, and so they were no longer just having these super users.
If you went back like five, seven years ago, a lot of the enterprise companies that were using the softwares in our space, they were built for a very small group of users because social wasn't that prolific across the org. We fast-forward five, six, seven years now, and what happened was they were getting much more people into the software. The incumbents in the space, their softwares weren't built for all these users. They were very hard to use. So we realized it was really not only were we getting pulled into these deals, but we realized that that end of the market was ripe for disruption, right? Because even in those larger deals, Jackson, we lead with the product, like Ryan was saying. We're in these large enterprise deals putting dozens of users into the trial, doing all the things they can't do on our competitors.
Once we started seeing that momentum, we realized that there was a real opportunity to kind of capitalize on that end of the market.
Yeah. What does that mean then in terms of the velocity of the sales cycle of market? Is it not close to that six to nine months that you would see for some of the other competitors? I mean, a free trial, how long do you let it last? How long do they run it concurrently with what they're trying to do?
Yeah. So the trial is 30 days. And so even in the mid-market and enterprise, there's great velocity in our business. We'll close mid-market and enterprise deals within 30 days within the trial. Not all of them look like that, but for us, it's kept the sales cycle very different from most enterprise companies.
It's kind of nice because you don't have to go out and hire a totally new persona who's then going to try and sell something upmarket, or you got to go out and now all of a sudden, it's like, "We got to find people that know how to sell ServiceNow," right? The motion from a go-to-market perspective is kind of the same. Although I guess I probably shouldn't be the one saying that. Is that true?
Well, no, I think you're right. I think when we're looking at and I know Ryan would normally cover this, but when we're looking for enterprise-level AEs, we want AEs that are used to getting into the product, right? If you're an AE that, to your point, that's used to selling on PowerPoint, long sales cycle, doesn't want the customer to actually touch the product, that's not a good fit for us. We want AEs that are going to close multiple deals a month, even up in the enterprise, right? And so we're definitely looking for a different type of sales rep when it comes to enterprise kind of sale.
Okay. We didn't really touch on what that meant for the numbers, like the growth rates. How did the reallocation of resources away from the SMB actually impact your numbers in 2023? And then what should we be thinking about it in terms of?
Yeah, yeah. So the way to think about it is we talked about this. We had about $25-$30 million of ARR coming into 2023 in this low-end, low sophistication where we kind of moved resources, changed pricing. And then we talked about, by the end of 2023, that being less than $800K. So you can kind of see that headwind that came into the business. And then if you take that kind of low-end business that turned out and then you subtract out, for example, the Tagger business that we acquired, the core Sprout, so the part of the business that we're really focused, that was growing mid-30% range in 2023. And so that's kind of what that's the type of business we're carrying into next year.
And so if we're really good now that we've kind of got that headwind out of the way going into 2024, that the business has a lot of momentum right now.
Shouldn't there be a margin tailwind as well since you were spending so much money on supporting these folks downmarket and now you don't have to anymore? What's that for 2024 look like?
Yeah. So we've talked about over the next through 2028 in our five-year plan getting to a 20%-plus operating margin, and that's about a 400 basis points CAGR every year improvement, a little bit less now and a little bit more as you get closer to $1 billion. And so I think what you can expect is something between 200 and 400 over the next couple of years as we kind of move up into the mid-market enterprise. Now, to the extent that we're overperforming on revenue, we'll definitely drive more margin in the business, but that's kind of the way we see it playing out.
Okay. So it's not okay. So it's not one of those situations where if you're overperforming on revenue, you're going to let that kind of float to the bottom line rather than say, "All right, let's go and hire a bunch more people.
If we see the opportunity like we have historically, we'll definitely reinvest, but we're not going to put all that money back into the business. We understand the importance of driving leverage in the business, and so we'll make sure we're balancing that in a way that's kind of doing both.
Can we get an update on the partnership with Salesforce and just give us a little bit of context on what the strategic decisions they made in social and why that's such an important topic for you now?
Yeah. Going back a few years, we used to compete with them head-to-head with a product called Social Studio, which was part of the acquisitions we were kind of talking about earlier in between 2010-2012. It became very clear to us what we were seeing in the marketplace is that they were not investing as much in that product anymore. It wasn't a huge part of the Marketing Cloud. There was not really any go-to-market resources on there. When we started to realize that in the data, we had a chance to engage with them, and they went out and vetted the marketplace to determine who would be the right type of partner for them. They came back and identified Sprout.
From what we heard from them, it was sort of a combination of the way that the product was built, felt very aligned to the way Salesforce thought about it, the way that we were taking care of customers and the success our customers were seeing. Then the coverage within the marketplace just felt like it was pretty aligned to them. That was, I think, the end of 2021 going into 2022 when they announced to customers that they would be sunsetting November of 2024. We've been working in the background with their teams. We've been getting locked into accounts that are Social Studio. Within that time too, we actually just realized there was a much greater opportunity beyond just replacing Social Studio to build deeper integrations into the rest of the Salesforce tech stack.
So over the last year and a half, two years, we've built into Sales Cloud, into Marketing Cloud, into Tableau and Slack and Datorama, and probably the most notable is into the Service Cloud. And so that one went live in Q4 of 2022, so started to work with customers really going into 2023. And that one's really important because what it allows customers to do is to have full omnichannel support. So if you think about it today, the Service Cloud had all the other channels but not social. And we know, just based on consumer behavior, more and more of the engagement's actually happening on social. And so if you don't have that connected to your Service Cloud and to your CRM records, you don't have the full 360. And so that's been an area that we've been spending a lot of time.
That's part of if you've listened in to any of our calls, that's the opportunity that we see over the next number of years. There's 200,000 customers at Salesforce that fit perfectly in our ideal customer profile, and we just see so much opportunity there for us to be able to serve those customers.
Yeah. Okay. Couple more questions just on this topic, but I will come to the audience soon before we move on. So if you do have questions, be thinking of them now. So announced at the end of 2022, kind of full year 2023, now we're into 2024, getting relatively close to the sunset here this fall. How much new business did it drive to you guys either from conversions, and then how many of those people were maybe net new to Sprout and also people that are new to Salesforce and new to Sprout, right? There's kind of a bunch of different channels that drives business for you from the partnership.
Yeah. So I would say a majority right now that we've landed over the last probably year and a half, two years are probably they were either on Social Studio or they were using Service Cloud, right? We've started to see recently, to your point, some of these net new like, "Hey, by the way, we're going into deals." There's been a couple of opportunities where we've won where Salesforce might have already been in the deal trying to sell, and they realized, "Hey, by the way, if we can't win this without a social solution," and they pull us in, and vice versa. We've been in deals where like, "Hey, we're trying to sell into a group.
We're trying to land, for example, social customer care part of the business. And they're like, "Well, you're not solving for this, and we bring Salesforce." And so I still think, Jackson, a majority of the deals are still either, "Hey, there's Social Studio," or there's a Service Cloud. The customer's already using one of those things, but we're starting to see more momentum around, okay, co-selling into deals and ripping and replacing some of the larger incumbent kind of omnichannel providers out there.
Okay. What do we think's going to happen in November? Do we have what should be our base case assumption? What are you guys thinking? What are customers saying? I know you've said that some of the larger customers are kind of hanging on to the very end. So what's the expectation when we reach the cliff?
Yeah. I mean, I think that there's going to be just natural milestones through the end of November because there's renewals happening for all these customers as we move forward. So I don't know that there's going to be as sharp a cliff for those customers because we've got visibility into the pipeline that we're working on where we for the customers that we're in front of, we know what their anniversary dates are. And at the same time, we've been building pipeline across the rest of the Salesforce ecosystem, whether they're a Social Studio customer or not.
Okay. All right. Before we move on, does anybody have any questions at the moment from the audience? Are you trying to? If you have any? Sure. I'll repeat it for the audio.
Yeah. When you're talking to customers, what are the key ROI points that you make to get them to buy the product?
Questions around ROI from customers and getting them over the hump to buy the product.
Yeah. So one thing that I think's really interesting and important to note here, for a lot of these customers, it's a mission-critical product for them. So there's not as much ROI as there might be in other categories. For example, customer care. If your customers are reaching out to you on social, a very public place, and you're not responding to them, major, major damage to your brand opens you up to competitive threats. It creates a lot of problems from an NPS or CSAT perspective. So for a lot of the customers that we're spending time with, it's mission-critical they need to be in. But they're looking at those things to the risk to the business if they're not involved there. We certainly see this with public companies as well, very, very concerned about managing brand and customer sentiment.
From a marketing perspective, they're looking at the return on investment on their campaigns. So if they don't have a product like Sprout that's able to coalesce all of their efforts, they're putting all of these campaigns out in the market, and they're not sure what's really working. When you have the return on investment from Sprout in your analytics, you can actually see what's working organically, but then you can take that, and you can determine where you're going to best use your dollars from a paid perspective. So they see a lot of return on investment as well in terms of optimizing their spend from a paid perspective. Those tend to be the two big areas where people are digging into ROI to make sure that they feel like there's a good return.
Oh, sure. Go ahead.
When I think about your business, right, I kind of think of you guys as an orchestration layer on kind of the outbound side to the channels for campaigns and whatnot. Then I think of the social care aspect you're talking about. That kind of feels like a little bit of a CCaaS area, right? So something we haven't brought up yet. We're 22 minutes in. Is generative AI, what generative AI could do to maybe reduce the need for CCaaS agents or all these things like that, a concern for your business, a tailwind for your business? Is it a maybe you guys are just not a big enough line item relative to what people spend on some of those platforms, so it's not a concern at all?
Yeah. Questions around, is AI a possible threat for your care business?
Yeah. We've viewed it as an opportunity. So there's a few dynamics that are important here. Number one, typically, social teams are understaffed as it is today, and there's more volume that they can manage. So if you look at the response times, typically, from care agents today on social, it's actually far worse than it needs to be based on customer expectations. Customers expect you to respond faster and more intelligently on social, and there's a higher cost if you make the mistake because of how public it is. So there's an element already that they're understaffed. The second thing that I would say is that we're actually seeing more investment within this area because they're not these massive departments that have been here for a very long time where you're figuring out how to optimize.
You're actually ending up investing in here because it's become an area where you need to pay more attention. And then what we've also just seen as a big opportunity, and we have an AI Assist product that is in our care functionality, is that at the end of the day, we still believe that a human is really important to actually execute, especially when you're talking about it from a public perspective. And so we are helping route those cases much quicker to the right groups, right? We can quickly see priority if you're a VIP buyer getting it to the right team. We can make sure that the SLA happens quicker. We also are helping them get the right answers faster through our AI Assist.
Our agents are actually able to manage more of the volume than they were before, but that human is still really important in terms of execution from a brand and an NPS perspective.
So with a couple of minutes left here, so you said the normalized growth ending the year above 30%, right, coming out. If I adjust a little bit for Tagger, growth rate next year more like mid-20s%, big slowdown, why? What are some of the main drivers as to why we ended the year in the mid-30s% and what we should think about for 2024 growth?
Yeah. I think, Jackson, one, I think you know this. When we gave out the guidance, we wanted to make sure we left ourselves enough room to overperform, right? For example, in our guidance for next year, we don't have any upside baked into for the Tagger acquisition. We just enabled a team in January, so there's not a lot of upside in that number. Number two is we don't know on the Salesforce side. We try not to build in a lot of the Social Studio stuff because we don't know how those deals are going to fall. And so the way I would lay it out is we think there's based on the way we guide it next year, we actually think there's opportunity to exceed that. And so that's the only thing that I would call out going into that.
I don't think there's anything else to call out as far as the business performance itself. It's just more about the way we wanted to kind of approach the year.
Really quickly, should we think about the spend just for social media marketing and management as more, less, or in line in terms of its sensitivity to the overall macro environment as maybe marketing spend?
We have not seen it move and change like some of the other areas. I think part of it goes back to the answer of for so many of these companies, social's become mission-critical for how they do business. It's probably one of the most important channels from a marketing perspective. From a care perspective, they have no choice.
Yeah. All right. Okay. Great. We are out of time. This was great. Thank you, Ryan.
Yeah. Thanks, Jackson.
Yeah. Thanks, everybody. All right.
Good stuff.
Thank you.