I think we're ready to kick things off. So I'm DJ Hynes. I'm the senior software analyst here at Canaccord. This is the 44th year we've done this event, and we couldn't do it without participation from the companies that bring the growth and the content, so thank you guys for being here, the investors that ask the smart questions and support the event. So we're very appreciative. We have Sprout Social for this session. We're gonna do a fireside chat for the next 25 minutes or so. If there's any questions in the audience, please raise your hand. We'd love to integrate them into the conversation. We have Joe Del Preto, who's the CFO, Jason Rechel, who runs corp dev and IR. Maybe just to kick things off, I'm gonna skip the business intro part of the conversation.
I feel like everyone's probably familiar with Sprout at this point. Let's talk a little bit about Q2, kinda what was top of mind-
Yeah
... coming out of the quarter. What have you been hearing from investors and conversations since, and then we can dig in from there?
Yeah, I think coming out of Q2, you know, some of the things we talked about that we saw really strong improvements over Q1, right? We've talked about this. Some of the areas that we felt really good about, one, you know, improvements in gross retention, like in this, you know, some of these tougher macro environments, our existing customers are renewing with us, were mission critical to them, and so really good signs that, hey, we've got a real strong customer base and we add a lot of value to those customers. You saw the momentum we're starting to see, you know, coming out of Q1, up in Q2, upmarket, right? You saw our, you know, net adds in the 10-K. We doubled the 50K net add.
So even in this tougher kinda macro environment, we're seeing signs of, of things really improving, coming out of the beginning of this year. And then the other thing we kind of pointed to is we're not seeing demand slowing down. Yes, are we seeing a little bit of pressure on, on kinda the, the deal cycle times? But we're not seeing less customers coming to our door, and, and, the demand on a year-over-year basis was up a lot. So, like, we, we were getting in front of a lot of really good customers, so we feel really good about the momentum we're seeing in the, you know, going into the back half of the year. Now, we have to execute, right?
Like, we gotta close these deals in Q3 and Q4, and we have to make sure that we're getting in front of these customers and selling the value of Sprout, but feel really good after what was not a great Q1, but really strong Q2 coming out of that. So feel good about the momentum. I don't know if there's anything else-
Yeah
... you'd add to that, Jason.
Yeah, I think beyond that, just continuing to highlight the advantages of the product, right? I think earlier this year, we were rated by G2 as having the number one product in all of software. We built on that from a ratings perspective over the course of Q2. We strengthened our competitive win rates and increasingly are winning and are the vendor of choice in the enterprise, which is an exciting thing and, you know, kind of matches the investment philosophy over the last couple of years. And then we've also continued to uplevel the executive team.
I think in Q2, you know, we ended Q2 by bringing in our new Chief Product Officer, who had managed a bunch of teams at Google, most recently had managed some of the largest products at Atlassian, and is an incredible leader to bring in on the product side. Then we just brought in Mike Wolff as our new CRO, who kinda rounds out the senior executive team that we think can get us to the next level of scale. I think those are just the other things to highlight.
Yeah. All right, we can wrap there. You guys hit all my questions, obviously. Not to open old wounds, but I wanna rewind a little bit and kinda talk about the trajectory from end of 2023 kinda to where we are today, right? It felt like, you know, maybe there were some execution missteps with pipeline build, or what have you, coming out of 2023. Just, just talk about kind of what gives you, what's changed in the business, since then, over the last, you know, six months or so? And then what gives you kinda the confidence and the optimism-
Yeah
... that you're projecting now for the second half?
Yeah, so I think if we, if we thought of where to kinda go backwards, like, the amount of momentum we had in the business in Q3 and Q4 of last year, right? We did not anticipate the way Q1 was gonna end, to your point. We kinda, you know, we were kinda surprised by how we saw deals not getting done, things not closing. Some of that was execution, but some of it, I think, with a little bit more hindsight, was a little bit more pressure on the overall industry that we didn't anticipate or didn't see coming. And so I think, from that perspective, we didn't end Q1 where we really wanted to, and that really was kind of towards the back half of the quarter.
And then coming into Q2, to your point, like, what do we get excited about, the demand and the changes we're seeing in the business is, a couple of things I mentioned earlier is that we're finding that the number of customers and the size of the deals and the use cases we're solving for, those are not slowing down, right? Like, you know, the expansion of social customer care across these different businesses now is, you know, our number one use case that we're seeing added to the core kinda marketing use case. You're seeing influencer marketing starting to resonate with more and more customers. We've talked about some of the wins we've had lately, and even though that's still a fairly small business, it's our fastest-growing one.
And so I get excited about the back half because we're not seeing a slowdown in, you know, the demand. We're not seeing a slowdown in the use case expansion. We're seeing great, you know, retention of our current customer base, and so that would, that's where I have this high level of confidence.
Yeah.
To Jason's point, we're continuing to lead with the product in all these deals, which is a big differentiator in this competitive win-rate environment that we're in right now. Like, we're going into these larger customers. We've talked about this historically, and it's still, like, our number one play when we're out in front of customers, like, we get them in the product.
Yeah.
And we're talking, like, large customers. They have dozens of users in there, in the evaluation phase, you know, doing Premium Analytics and Social Listening and these more complex types of pieces of functionality, and that is really resonating with customers. And so we feel like we've got everything set up for success. Now, we you know, like I said, we've got to execute-
Yeah
... in the back half of the year.
Yeah. Let's double-click on kinda the mid-market and enterprise momentum. I mean, that's obviously become a critical part of the story, but yeah, the 50K, the 150K-plus customers continue to be strong. What's working there? Is it, is it a function of kinda company focus? Has something happened from a product perspective? Like, why, why the buy-in from the large customers?
Yeah. I think it's a couple of things. One is the R&D investment made over the last couple of years. I think we talked about this. When we go back 2 years ago, some of the things that are helping us win these larger deals that we didn't have, that our competitors did, one was what kind of like mass permissioning, you know, security, and making sure you have the right being able to roll that out to large teams, and making sure that that could be set up in a very smooth and easy way was one area. The customer care functionality that we built over the last, you know, use case, you know, case management, escalations, reporting, all those things like 2 years ago didn't exist.
Yep.
Right? And so R&D investments definitely has been one of the main drivers, and we recognized this a couple years ago, that, hey, we're getting pulled into these larger deals, and we're not checking all the boxes. So, like, if we could check all the boxes, let me tell you, we know that our product is just so much better than these, than our competitors. We just have, we can't even get into the room if we don't have certain levels of functionality in these areas. So I think one of them is just the investment in the product and the focus we've had there to make to what are we missing in these up-market type transactions. And then something that's been true, the other thing is just the maturity of social over the-
Yeah
... you know, that it continues to mature. And so, and every one of these businesses are at a different level of maturity, and we talk about this all the time. Like, we talked about the big- one of the big accounts we signed in Q1 was Sinclair Broadcast Group, large, like, six-figure deal, you know, dozens of users, and they were using, you know, Excel sheets, and they were manually doing all of their social across multiple platforms.
Yeah.
And so, like, there's this theme in social where every one of these companies is in a different stage of where they are in their maturity, and we're still very, very early. And, and as we get momentum upmarket, you're seeing this maturity in some of these companies, and some are much farther along. Like, some walk in and say, "Hey, by the way, I need, you know, 300 customer care users. We've been all over social. We've been with one of your competitors. They're falling down." They know exactly what they want.
Yeah.
So they're way farther along, and so it all depends on where they are in that curve.
Yeah, yeah. No, that makes sense. Let's talk about the cross-sell opportunity-
Mm-hmm
... and kind of where you think you are in the base, especially as the product, you know, the scope of product continues-
Yeah
... to expand. And then if we think about the growth matrix, like, how much should be driven by net new versus how much should we come from the install base growth?
Yeah, so I think we're still. There's just a lot of room within our existing customer base in, in probably three or four areas, and we've talked about this. You know, number one, Social Customer Care for a lot of our customers is, like, very early stages.
Yep.
And so, you know, if we think about the opportunity across our customer base, it's a pretty big one when it comes to the number of customers that eventually will fall into that, in that bucket. I think of things like Premium Analytics, which is still like, yes, we have really good penetration with our existing customer, but as you—what's interesting is, as you add these other pieces of functionality, whether it's Social Listening or you add customer care, all of a sudden, you need all the reporting that goes with it. So a lot of the times, what happens is, when you add these incremental users or you add these new departments or these geos, when we expand within customers, that usually drives these incremental modules, and so I think there's also a big opportunity on that front. And then, I think we're—we've talked about this.
We're very early in the Tagger, you know, use case across our customer base. And I think a lot of people... And we had the same assumption in the early days when we acquired them, was this was gonna be a very, like, maybe it's not for everybody in, you know, all of our customers. Like, hey, there's different industries or segments that maybe it doesn't-
Sure
... make sense. But then you think of customers like Kroger or NETGEAR or Cummins who have added Tagger, which, like-
You wouldn't have expected.
Never expected.
Yeah.
And so we're finding that the portion of our customer base that probably could buy something like Influencer Marketing is much larger than we originally thought. And then on top of that, the size of those deals are materially larger than our average customer. And so we think there's just a lot of potential within our existing customer base. And then I think, to your question about the longer term and how much comes from existing customers versus growth, I think, you know, historically, about a third of our growth has come from existing customer and expansion, and then two-thirds of it's come from new business. I think as you can imagine, over time, that will, you know, that will shift over the next five years.
It's still gonna be driven by new business for, you know, for a while, just given the market we're in.
Yep
... and the opportunity. So, you know, it's not gonna shift overnight. Its new business will still be the leading, like, driver of growth-
Sure
... for a while, and then I think over time, you'll see, like, the natural shift where, you know, the larger you get, it's more of it's gonna come from the existing customer base.
Yep, makes perfect sense. Two pieces of that I wanna dig in on, the social customer care, and then we can talk about Tagger as well. But let's start with social customer care. Just obviously, you have social listening, which is kind of foundational to the effort, right? You need to hear what people are saying about you. But from a product perspective, what have you guys done on social customer care? What still needs to happen, whether that's innovation, integrations, to kinda drive that effort forward?
Yeah, so that's an area that's constantly... Like, our customers are constantly coming to us with, like: "Hey, we'd like to do more of this." And a lot of it has to do with the volume of messages you're getting, and so some of the things we're doing is, like, okay, these customers have large volumes of inbound messages. How can we automate or use AI, for example, and we're already doing this, to say, "Okay, these are the really important messages. Like, these need to go to these reps right away-
Yep
... or these are not very important. They can go to somewhere else," or, "Guess what? We just saw an influx," and this is where listening, this kinda integrates with listening a little bit. Like, hey, by the way, on the listening side, we've noticed XYZ issue coming up, right? "Hey, by the way, we launched a new product, and through social listening, we've noticed there's an issue," and so, "Hey, let's alert customer care.
Mm.
Like, you can do that right now. You can say, "Okay, I ran this listening query. I've noticed an issue," and now I can go and say, "Hey, by the way, there's this issue out there. We, you know, we gotta either be prepared or you're gonna see a bunch of inbound messages, and here's how we should respond-
Yep
... 'cause it's already been vetted," because we kinda got like, listening gets you out ahead of these things, and so you're that, those are the types of things we're starting to build into the product, is how can you take some of these different, you know, aspects of our product and help them inform and get more efficient in some of these other areas?
Yeah.
So those are a couple of examples of how, to your point, how does listening and then how do you—what are the things they're looking for on the care front? And then always—
... like how do you have larger teams? Like, it's, right, like, as you're getting these much larger teams into the product, always making sure that we're upgrading our permissioning and our routing. You know what I'm trying to say? Yeah. You know, when you have 50 people in there, it's a lot different than you have 10, and sometimes we have, like, we have over 1,000 customer... We have a, you know, a couple of clients that have thousands of customer care agents - Yeah - in the product. And so, like, that just requires a lot more on that front as well. So always upgrading that piece.
And DJ, I don't think we'd be doing that answer justice without answering it with AI. Yeah.
One of the things that we did over the course of the last 24 months was re-platform our entire tech stack with a common AI layer. So historically, we had solved for use case-specific AI applications, so, you know, you could leverage all of your data that exists on social, all of your historical post performance and audience data, for example, to inform the best time to post on TikTok or the best time to post on Instagram. And we had had AI-specific applications in care and in listening, et cetera, but we've now re-platformed, where the sentiment classifications, for example, from listening or message-based sentiment classifications from listening or reporting, are built into your, your customer care inbox, which helps route and prioritize messages based on level of urgency, based on-
perhaps whether it's a positive or negative message, perhaps based on whether it's a VIP customer or a first-time customer. And all of these things can inform, not just your approach to response times and the type of person that you want to be handling a message, but also then suggested responses, which help accelerate response times, accelerate agent-level productivity. And then there's all sorts of, you know, reporting enhancements that AI allows you to deliver, both on an individual agent perspective, as well as on a team or a brand-level basis. And so those things have made the social customer care platform just you know, infinitely more valuable to our customers over the last 12 months. Yeah. Maybe while you're hot, Jason, we can keep you going on Tagger.
So you, you talked a little bit about kind of the industry dynamics and the demand trends you're seeing for, you know, influencer marketing. Maybe talk about what makes Tagger the platform unique. Yep, and, and why that's positioned for, you know, strong growth. Yep. One of the things that Joe and I were talking about last night, I don't know how many golfers there are in the room, but at the TOUR Championship for the PGA TOUR later this year, they just announced that the day before the TOUR Championship, they're gonna play the inaugural Creator Classic, where the PGA TOUR is taking the 20 most influential golf creators to play an actual live golf tournament. Ideally, we're gonna see who's an actual, real golfer or not.
But it just goes to highlight how integral creators are now becoming to brand strategy, to culture. Like, these are the things that shape and move culture. And I think that's just as true for Cummins and NETGEAR, which Joe referenced, as it is the PGA TOUR, as it is the Olympics, as it is everything, you know, from a brand and marketing perspective. And the thing that Tagger was best at, and we talked to every company in the space, the thing that Tagger was better at than anybody in the space was discovery, right? And if you think about historically, the approach that a lot of early adopters of creators took, a lot of, you know, the mega brands took, was the idea of a macro-influencer, right? So let's go get Snoop to promote the Olympics.
Let's find LeBron James to run a post for my tequila, because they have massive audiences, and we, we know the eyeballs and the traffic and the engagement that that can deliver. But the ROI of macro-influencers is actually really poor, and so the, the long tail of creators is infinitely greater ROI and, and allows you to tap into the type of audience that you as a brand want to get in front of, right? So if you're Nike and you're launching a new brand of yoga pants, let's say, or maybe Lululemon is launching a new brand of yoga pants, rather than find the three macro creators, let's go find 100,000 local people who maybe they run a local fitness franchise, maybe they run a local women's or men's sports group or, or community group, right?
Those people have an audience that matches the people who are gonna buy your yoga pants, and those people, when they post on social about yoga pants, they get incredible engagement. There's a level of authenticity that exists there that doesn't exist with LeBron James. Tagger allows you to discover who those people are, to tap into who those people are, to enable you to work with the best creators that are gonna deliver you the best audience insights, put your brand in front of the audience that you most want to put them in front of, and therefore, get you infinitely greater ROI on the amount of dollars that you're allocating to those folks. And so that was the most differentiated piece.
And then they also built, you know, the full platform that allows for once you find the creators you want to work with, how do you execute campaigns with them? How do you run billings and payments? How do you measure their effectiveness and success at both the individual level, the content level, and then the brand level? And all those things have proven to be really powerful across kind of the spectrum of the platform. Yeah.
Yeah. I want to talk about the Salesforce opportunity a little bit, and obviously, there's kind of two sides of it, right? Yep. There's the near-term Social Studio migration opportunity. Yep, that product ends of life at the end of this year, right? So kind of expectations for pipeline tied to Social Studio, and then, and then maybe go into, like, the bigger ecosystem opportunity and what you're seeing there.
Yeah, so Social Studio end of life is November of this year, and we've got a decent number of deals in the pipeline right now that we have visibility into, and we don't have full visibility. And we talked about this, we landed a really large deal in Q2, and the customer we were talking to-
... did not even know Social Studio was going away until February.
That's amazing.
Like, had no idea.
Yeah.
And so we're still running into customers, even this late, that are not aware that the product is going away. And so we don't know exactly what that momentum's gonna look like in Q3 and Q4, because I do think there's a decent number of these customers that are unaware. The visibility we do have out of the Social Studio, we feel really good about, like, these are - we're winning all these deals, these larger - and they're larger deals, they're pretty, pretty big. And so we do feel good about the pipeline we have right now and the visibility we have. But I do think there, you know, we'll see, but we think there's a, could be a decent number of these customers that come to our door at the last minute because they're not aware.
Yeah. Or maybe even bleeding into early next year, like...?
Well, you know, Salesforce has been pretty, one thing they have been consistent with is, like, they're turning the lights off in November.
Yep.
Now, we'll see if they change that, but that's what they've said, and they haven't backed off of that.
Yep.
Now, if they have a bunch of customers that in November that claim they didn't know, we'll see. But, you know, we're anticipating them not going past November.
Yep.
And then on the non-Social Studio side, and we've talked about this before, but that's where I think the much larger opportunity is, with the integrations and the rest of the Salesforce ecosystem, whether that's Service Cloud, whether that's in their data products, things like Tableau. We're getting a lot of momentum on that front too. Like, people want to bring in social, you know, their social data into other aspects of their system. And so Service Cloud is obviously the one that's probably has the most momentum, but we're seeing more momentum on the data side. I think a lot more customers are trying to figure out: How do I get my social data into other parts of my CRM? And so we're really excited about the opportunity on that front.
I also think, you know, we've spent a lot of time. We're speaking at... You know, we have a big presentation at Dreamforce again. Ryan Barretto, our incoming CEO, a couple weeks ago, you know, did a one-on-one with the head of product of Service Cloud, you know, at Salesforce.
Mm-hmm.
We're at the Connections event. What we're trying to do is we're trying to get out in front of, like, all the Salesforce AEs and their customers, so they understand that this is a, you know, a solution or the combination of Service Cloud and Sprout is something they should be selling to their customers.
Yep.
And so we're on this huge kind of marketing campaign type of approach. And then, and I think another benefit is from that perspective is, you know, bringing in, you know, Mike Wolff, our new Chief Revenue Officer. He ran the partner program at Salesforce for years-
Yep
... and so definitely understands the dynamics of: How do you go to market with a partner? What are the other ways to kinda get across the Salesforce ecosystem? And so I think he'll bring a lot of value in, in that regards to how do we get ourselves across-
Yep
all of Salesforce. Not just their AEs, but, like, their partners.
Sure.
Right? And so we think there's a big opportunity there with some of their partners that they have out there in the market.
Yeah. Yeah. Maybe we can hit on a couple numbers questions in the last, you know, four or five minutes. Or, or maybe actually before I do that, I'll pause and, and see if there's anything in the audience that people would like to address. All right, we'll do the numbers. The fun stuff. So you've kind of aligned investors to think about RPO, CRPO as a leading indicator of growth, right? We've stopped disclosing customer count, stopped talking about ARR. I think the message you gave was, you know, revenue growth should start to kind of approach CRPO growth over time, right? For now, it feels like it's CRPO growth is coming down to meet revenue growth, right, and not necessarily vice versa.
So how should we think about kind of the connectivity between those two lines, like where they meet and, and how things trend from here?
Yeah, so you know, if we think about it from, they converge at some point, right? Like, obviously, we, CRPO growing in the high 30s is probably not the long-term growth rate, you know, that we would, that we would say we're headed towards. But we think it's, you know, obviously, it's, it's higher than where we are, you know, exiting this year. And so I think what you're gonna see is, for us, it's a good indicator of... If you think of CRPO, it's a, it's a representation of, like, our annual customers, right? And the problem why it's not a great indicator is because we have still this 20%-25% of this month-to-month business.
So if you think of our mid-market enterprise, where we've been focusing our resources, it's a real good indicator of, like, the strength you're seeing in that part of our business, which is, over time, gonna be a majority of our business. So for us, that's why we like that metric longer term, is that it's, although it's not perfect right now, it is a good insight into where the business is headed and how those customers are behaving.
Yep.
And those customers are behaving very well, and we're very excited about that part of the business. So I think that's how we're kind of positioning it now. And then I think as you get into, you know, throughout 2025, by the, you know, probably mid to end of 2025, it'll probably be a really good metric by the end of next year.
Yeah. Okay, okay. You have some long-term financial targets out there, right? We issued them out on Analyst Day last December?
Last September.
Last September.
Mm-hmm.
$1 billion in revenue, low-20s cash flow margins in 2028. Now, look, obviously, the environment has changed quite a bit since you guys issued those, so maybe the goalposts aren't perfect, but they're out there. To get there, it kind of implies mid-20s growth, 25%+ growth. You know, probably, what? 13 points of margin expansion, something like that. Does that feel like the right growth rate for this business over time, and kind of what's the confidence level that we get back there?
Yeah. So maybe kind of walk through the framework, and then Joe can talk confidence level. So I, I'll start with margins, and if you just look at our implied guidance for 2024, you know, we'll exit this year close to a 10% non-GAAP operating margin. Free cash flow margin should be pretty closely correlated to non-GAAP operating margins at this point, and so we feel like we're making pretty good progress on the margin front. And as we think about incremental margins moving into 2025, 2026, we're tracking right where we wanna be, if not ahead of where we wanna be from a margin perspective. And on revenue, you know, obviously, new business underperformed our expectations Q1 and Q2 of this year, and so moderately behind where we would've wanted to be, you know, dating back a year ago.
But as we think philosophically about the investments that we're putting in place, the team that we're architecting, the way that we're planning on executing and planning to plan for the future of the company, that framework is still very much the framework that we're planning to execute against. And so, you know, executing from a little bit behind at this moment, but hopefully we can improve upon that moving forward here.
Maybe just as a parting thought in the last 30 seconds we have here, what do you want investors to kind of leave the room with today? What's the message? Why is Sprout a good investment here?
Yeah, I think the message—like, the two things that we've talked about the most is, like, our current customers. Like, we are mission critical. They are not—like—they're renewing, they're sticking with us, they're not... You know, even under this tougher macro, they're not getting rid of Sprout—like—number one. And then number two, like I said earlier, like, the demand in the—in our product has not slowed down. Now, we've got to execute, but the demand is there.
Yeah, yeah. Well, it sounds like we're hopefully setting up for better results-
Yeah
... in the second half, and if that plays out, the stock will follow suit. So, thank you guys very much-
Yep
... Joe and Jason, for doing this. We appreciate the support.