Sprout Social - Q3 2022

Transcript

Operator (participant)

Good day, everyone. My name is Kathy, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Sprout Social Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during that time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Jason Rechel, you may begin.

Jason Rechel (VP of Investor Relations and Corporate Development)

Thank you, operator, and welcome to Sprout Social's third quarter 2022 earnings call. We'll be discussing the results announced in our press release issued after market close 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 multi-year financial framework, our market size and opportunities, our plans, objectives, and expected results for future operations, growth, products, investments, initiatives, pricing, or strategies, and our guidance for the fourth quarter of 2022 and full year 2022, 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 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 31st December 2021, filed with the Securities and Exchange Commission, as well as any 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. Definitions of these non-GAAP financial measures, along with reconciliation to the most directly comparable GAAP financial measures, are included in our earnings press release, which has been furnished to the SEC and is available on our website at investors.sproutsocial.com. With that, let me turn the call over to Justyn. Justyn?

Justyn Howard (CEO and Co-Founder)

Thank you, Jason, and good afternoon, everyone. Thank you for joining us. I know this is a busy day, and we appreciate you all being here. To get right into it, we're in the fortunate position today to raise our annual growth and margin guidance for the third time this year. The business environment has changed, and we're mindful of the risks that remain. However, we're in a position today to guide to record net new ARR in Q4, greater than 30% Q4 revenue growth, and greater than 300 basis points of year-over-year margin expansion in Q4. We believe this is a testament to the power of our model, execution of our teams, and mission criticality of our software. We also have some exciting go-forward updates to share today that we believe position Sprout to accelerate both growth and efficiency heading into 2023.

Some of the highlights from the third quarter include 40% year-over-year growth in customers spending $10,000 or more in ARR, 76% year-over-year growth in customers spending $50,000 or more in ARR, and our seventh consecutive quarter of positive free cash flow. Very strong enterprise new business growth also underscores accelerating growth momentum in billings and RPO as Sprout Social continues to cement its strategic importance to the world's largest organizations. We also have a growing pipeline in business stemming from our Salesforce partnership, including sequentially more than doubling the number of new customers joining Sprout this quarter from Salesforce and an exciting new integration with Service Cloud. Conversely, we did experience sensitivity at the low end of our market. Like many software companies, we've seen those customers most affected by an adverse business environment behave differently in Q3.

As the economy weakened, the low end of our customer base experienced slower expansion activity, and we converted these customers at a slower than typical pace. This reality ultimately capped a portion of our upside and net additions this quarter, though our overall performance remained strong. As you all know, we've been increasingly focused upmarket with our recent successes. We've also learned a great deal. The underlying shift of our resources and focus has been unfolding for several years, and we entered our annual planning period this summer compelled to sharpen our focus and priorities even further. As we now look ahead into 2023, we see an exciting opportunity to move faster in service of the fastest-growing parts of our business to fully align our team around that opportunity and to further accelerate our growth.

Over the past 12 years, we've developed a duality in our customer base with significant investment and strategic focus going toward two dramatically different audiences. At one end of the spectrum, we see approximately 80% of our current revenue and more than 90% of our new revenue growth coming from customers with an average ARR of more than 10x the rest of the customer base. These customers land with similar costs and similar sales cycles as the rest of the customer base, bearing an LTV many multiples higher and net dollar retention north of 120%. At the opposite end of the spectrum, we have a large population of customers contributing a small amount of revenue that are increasingly expensive to acquire, hard to retain, and are not mature enough yet to get the full value from Sprout.

Our ability to serve all parts of the market has worked in our favor for more than a decade. As the market, our platform, budgets, and the strategic value of social media have continued to climb, our efforts at the low end of the market have slowly produced lower quality revenue as we've become very affordable to customers that were previously priced out of our offerings. This has come at a high opportunity cost with significant budget and resources applied to an unproductive part of our business, and it's created opposing tension to the healthiest parts of our business. As a result, we've seen an underlying anchor on our growth margins and our strategic focus. We've also been disproportionately undervaluing what we deliver to our target buyers.

Said plainly, we've been under-monetizing our platform by trying to serve the low end of the market and our core customers with a pricing model that works for everyone. The last time we made meaningful pricing changes was in 2017, which predates more than 500 material new product enhancements, including the vast majority of features, workflow, networks, and integrations in Core Sprout today. As we look to realign the entry price to Sprout to match the most productive parts of our business, we've made two changes. First, effective this week, we've changed the pricing that new customers see, including meaningful price increases across all of our subscription tiers and the addition of an enterprise plan which includes our premium offerings.

Second, starting in Q4, we will begin making modest price increases for our existing customers for the first time, many of which are paying the same price they were paying a decade ago. By aligning our pricing, product, go-to-market, and customer success strategies around the most productive customers and potential customers, we believe we have the opportunity to accelerate our brand, competitive, and category leadership, as well as our growth. Importantly, this evolution in our strategy does not require us to limit our TAM or scale back growing investments in our team. We're simply fully aligning our strategy and team with the customers at the right stage in their journey and maturity with social. We're still going to lead with the same inbound product-led motion that's made us so successful.

These changes properly reflect the growth and maturity of our industry and the value we're providing to our customers. Our software is more valuable than ever before. Our market is rapidly maturing as companies harness the full power and potential of social. We're seeking to maximize the value of the most productive parts of our market, which currently contribute the vast majority of our growth. By eliminating the strategic tension in our business, optimizing our monetization strategy, and pressing on our competitive advantages, we believe we're positioning Sprout to accelerate growth and accelerate efficiency on a multi-year basis. We're energized and excited to unleash our full potential into 2023 and beyond. With that, I'll turn the call over to Ryan.

Ryan Barretto (President)

Thanks, Justin. I'm incredibly grateful for our customers who continue to see more value in our platform and for our teams who continue to execute. The global business environment and technology industry are clearly undergoing change. This impacts every team differently, and in our market, our competitors are distracted, backpedaling, or both. Meanwhile, we're continuing to invest in the most productive areas of the business and are hiring incredible talent. We've been on the offensive with the most compelling and innovative product roadmap that we've ever delivered, very strong momentum from our strategic partnerships, and now new monetization and alignment around our healthiest customers. We're working relentlessly to establish Sprout as a category-defining company. This pursuit of leadership begins with great teams. During Q3, Great Place to Work and People magazine named Sprout to their top 100 companies that care list.

Repvue, which gathers feedback from thousands of verified sales professionals, ranks Sprout Social as the number 1 best public company to work for. Repvue also named Sprout on the top 20 best companies for diversity and inclusion, the 20 best companies for professional development, and the 20 best companies for culture and leadership. We have a truly special team. In our recent progress survey, our internal engagement score increased 200 basis points from last year. What was amazing to see was that 96% of our team would recommend Sprout as a great place to work. These are the type of teammates that show up every day to take amazing care of our customers. Great teams are also the foundation of product leadership, and our product teams have been on fire. During Q3, we enhanced our video management functionality with the integration of Instagram Reels.

We expanded listening to include LinkedIn comment moderation, and we expanded our global partnership with Salesforce and launched our Service Cloud integration. We also launched our more integrated employee advocacy solution, which enables brands to manage their employee-driven amplification efforts within the industry's most natively integrated suite. For a product that remains the industry's highest-rated platform across most dimensions on review sites like G2 and TrustRadius, we're continuing to raise the bar and deliver more value to our customers. Coming back to the Service Cloud integration, we've been working directly with the Salesforce Service Cloud product team since March to build Sprout natively into the Service Cloud console, offering a truly unique approach to how Salesforce CRM can now connect with social. This empowers Salesforce customers to manage all of their social customer care directly from Service Cloud without changing their workflow.

We changed the game for social customer care with a highly differentiated approach. As we continue to go deeper into social customer care, we're unlocking increasingly very large customer deployments with an intuitive, frictionless approach, and we've already seen our first customers go live in early Q4. Even prior to our integration with Service Cloud, our partnership with Salesforce built momentum in Q3 as the number of customers coming to Sprout more than doubled sequentially from Q2.

In addition, it was an honor to present at Dreamforce and an incredible opportunity to meet with many of our largest prospects and customers. Coming out of Dreamforce and on the heels of our Service Cloud integration, September represented our strongest ever month for enterprise pipeline creation, and we're excited to share our new business execution coming out of what we expect will be a strong Q4.

Staying on the topic of Salesforce as we transition to customer stories for Q3, we were fortunate enough to win the business of the largest SaaS player, and this is what they had to share about their experience. "We're working to lead our industry towards delivering on the business value of social," said Marissa Kraines, Vice President and Global Head of Social Media at Salesforce. "The intuitiveness and ease of use of the product has made for rapid adoption across our teams with a minimal onboarding time. As a result of the completeness of Sprout's product, regular new feature enhancements, and exceptional customer success efforts, we've accelerated our implementation timeline, and we feel well positioned to be industry leaders for many years to come." The broader group of brands that we grew with this quarter is a cross-section of leading franchises across all segments of the economy.

This success was clearly felt in our mid-market and enterprise segments. It is also clear in EMEA, which continues to be our fastest-growing geography. This speaks to both the magnitude of our opportunity and the critical nature of social and includes Peloton, JCPenney, Bausch + Lomb, Carrier, On Holding AG, Sunrun, Clayton Homes, Compass Group Canada, Shutterstock, Palantir, monday.com, Vineyard Vines, Duke University Health System, and the U.S. Department of Health and Human Services. While I'm proud of the way we're delivering through an uncertain time, I've never been more certain that we're on the path to unlock our full potential. Our partnerships are building momentum, our teams are up leveling, and new product enhancements are delivering tremendous incremental value to our customers.

As we align around the healthiest and most impactful areas of our business with an incredible team focused on the biggest opportunities, we believe Sprout is well positioned for success in the near and long term. We're hard at work and excited about what we're building. With that, I'll turn it over to Joe to run through the financials. Joe?

Joe Del Preto (CFO)

Thanks, Ryan. I'll now walk you through our third quarter results in detail before moving on to guidance for the fourth quarter and full year 2022. We're pleased to deliver durable growth, positive free cash flow for the seventh consecutive quarter, and to raise our expectations for the year, underscoring the mission criticality of organic social media management.

Revenue for the third quarter was $65.3 million, representing 33% year-over-year growth. ARR exiting Q3 was $271.3 million, up 33% year-over-year. With the global business environment showing strain, we did see slower Q3 customer activity for both new business and expansion with our lowest touch, least sophisticated customers. Our mid-market and enterprise segments continue to outperform our expectations and are powering a disproportionate amount of our net new ARR.

Driven by healthy momentum in our enterprise business, our ramping partnerships, and previously unanticipated pricing changes, we expect a little record net new ARR in Q4. We added 638 net new customers in Q3 to finish the quarter with 34,258 customers, up 12% year-over-year. The number of customers contributing more than $10,000 in ARR reached 6,111, up 40% from a year ago. The number of customers contributing more than $50,000 in ARR reached 843, up 76% from a year ago and our strongest ever 50K net addition quarter outside of a Q4. Q3 ACV growth of 90% year-over-year was again driven primarily by larger initial deal sizes.

In discussing the remainder of the income statement, please note that unless otherwise stated, all references to our expenses, operating results, and share count are on a non-GAAP basis to exclude stock-based compensation expense and are reconciled to our GAAP results in the earnings press release that was just issued before this call. In Q3, gross profit was $50.7 million, representing a gross margin of 77.6%. This is up 220 basis points compared to gross margin of 75.4% a year ago, and again represents our highest gross margin in fiveyears. Sales and marketing expenses for Q3 were $26.2 million or 40% of revenue, up from 39% a year ago. We're fortunate to hire well throughout the quarter and continue to make meaningful investments in our future.

Research and development expenses for Q3 were $13.2 million or 20% of revenue, up from 19% a year ago. Our headcount and absolute expense growth continues to match the trajectory of transformative R&D investments. General and administrative expenses for Q3 were $12.7 million or 19% of revenue, down from 21% a year ago. We have normalized our G&A spending and expect to deliver consistent leverage as a percentage of revenue going forward. Non-GAAP operating expense loss for Q3 was $1.4 million for a negative 2.2 operating margin. We are pleased with the ongoing efficiency improvements as we scale, and we exceed our expectations this quarter due to revenue outperformance.

Non-GAAP net loss for Q3 was $1.0 million for a net loss of $0.02 per share based on 54.7 million weighted average shares of common stock outstanding, compared to a net loss of $1.8 million and $0.03 per share a year ago. Turning to the balance sheet and cash flow statement, we end Q3 with $181.9 million in cash equivalents, and marketable securities, up from $181.7 million at the end of Q2. Deferred revenue at the end of the quarter was $85.0 million, a strong sequential increase. We continue to progress nicely to our high-water mark anticipated in Q4.

Looking at both our billed and unbilled contracts, our remaining performance obligations or RPO totaled approximately $136.9 million, up from $127.6 million exiting Q2, and up 57% year-over-year. We expect to recognize approximately 81% or $110.3 million of total RPO as revenue over the next twelve months. Operating cash flow in Q3 was positive $1.0 million compared to $4.4 million a year ago. Free cash flow was positive $0.5 million for a positive 1% free cash flow margin ahead of our expectations. Shifting to formal guidance. For the fourth quarter of fiscal 2022, we expect revenue in the range of $69.8-$69.9 million, or a growth rate of 31%.

We expect non-GAAP operating loss in the range of $1.0 million-$0.9 million. This represents an anticipated operating margin of negative 1%. We expect a non-GAAP net loss per share of roughly $0.02, assuming approximately 54.8 million weighted average basic shares of common stock outstanding. For the full year fiscal 2022, we now expect total revenue in the range of $254.0 million-$254.1 million. This is an expected overall reported growth rate of greater than 35%. We're pleased to deliver our third consecutive quarter increase to 2022 annual guidance. For 2022, we now expect non-GAAP operating loss in the range of $5.5 million-$5.4 million.

This implies annual non-GAAP operating margin expansion of roughly 130 basis points, up from our prior margin expansion range of 110-120 basis points. We're pleased to forecast faster revenue growth with improved efficiency even as we continue to make growth investments for our future. We expect a non-GAAP net loss per share of roughly $0.10, assuming approximately 54.6 million weighted average basic shares of common stock outstanding.FiveShifting to the financial considerations for the focus we've outlined today. As Justyn and Ryan have discussed, we've tightened our strategic focus around the healthiest customers in our market. We believe this path will unleash our full growth potential. While we're early, I do want to lay out a framework for how we are thinking about this focus.

Our lowest tier standard plan has been increased in price by more than 2x. We've shifted pricing higher across our plans as we begin to appropriately monetize the value we deliver to our customers. We've also begun to implement price increases on existing customers for the first time. In the immediate term, we expect these changes to drive an acceleration in the rate of ACV growth. In the intermediate term, we would expect these changes to drive a step function change in ACV growth.

In the long term, we expect continued durable ACV growth as the market matures into our sweet spot. Aligned to much higher ACVs and a more sophisticated customer base, we also expect to work towards world-class NDR at or above 120% on a multi-year basis. We're also structurally improving our unit economics.

This strategy may price out those customers that are not ready to invest in Sprout and result in a smaller number of net new customer additions each quarter. By keeping prices low to cater the low end of our market, we've been anchoring our growth everywhere else, especially where our customer value proposition increases exponentially and demand is more inelastic. We expect the impact on margins will be net positive.

We'll not be shy about investing in new sales capacity behind strong enterprise demand signals. All else being equal, we expect to see improvement in our rule of forty calculations through a combination of faster revenue growth and/or stronger margins. In summary, our Q3 financial performance highlights the underlying resiliency of our business model.

Driven by a very strong enterprise new business, ramping contribution from our Salesforce partnership, and a powerful pricing evolution, we expect the momentum to strengthen through Q4. As we look forward, we remain confident in our ability to outperform our medium-term goals to deliver greater than 30% annual revenue growth and 100-300 basis points of annual operating margin improvement. Even against the backdrop of this business environment, we believe we are positioned to pull away and define category leadership in the $100 billion market opportunity ahead. With that, Justin, Ryan, and I are happy to take any of your questions. Operator.

Operator (participant)

Thank you. Again, everyone, to ask a question that is star one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster. Our first question will come from DJ Hynes of Canaccord Genuity.

DJ J Hynes (Managing Director of Equity Research)

Hey, guys. Nice to see the strong results and exciting updates as we look forward. Joe, maybe I'll start with you just on the pricing stuff. I think I heard you quantify what's happening at the low end, right? You said a 2x increase at the lowest tier. Justin said earlier that 90% year growth is coming from customers that are kinda 10x the size of the rest of the base. What's happening to pricing for that majority of customers that are contributing to growth? I'm not sure I heard you quantify it there, and that would be helpful as we think about the model going forward. Yeah.

Ryan Barretto (President)

I think if you look at the other plans that we have, like on the professional and the advanced, you're probably seeing about, you know, close to a 50%-100% increase on the initial entry price. Then, you know, when you get into the enterprise modules there, like in the higher end, CJ, that's where we don't have the pricing on the website. We think there's a lot of opportunity up there. Yeah. This is Ryan. I'll maybe just add in there. All of our plans went up in a very healthy way from 2-2.5x where they were before. We've added an enterprise plan at the top end.

Where it's a bit more of a custom build. A big driver there was that we know that those customers wanna consume a lot more of our products. In our previous pricing strategy, I think we were anchoring ourselves too low with some of the plans, and we know that those enterprise customers do prefer the opportunity to customize the plans for themselves. Our enterprise team's really excited about having the ability to bundle a bunch of our premium products together, so we expect significant increases in the ACV opportunity for them as well.

DJ J Hynes (Managing Director of Equity Research)

Yeah. That's helpful color. And just one clarification. You expect to have by the end of Q4 that rolled out to your entire customer base. Is that right?

Justyn Howard (CEO and Co-Founder)

This is Justyn. I'll clarify that the pricing for new business went live earlier this week. You can find that on the website. That is for all new customers who are coming to join Sprout starting Tuesday late in the day on Tuesday. We rolled that out. For existing customers, we are looking at a different approach there, so I just wanna make that clear. We're looking at nominal increases to existing customers' pricing that's going to roll out over the next 12 months to varying degrees depending on the agreement that they have with us, their tenure, et cetera.

DJ J Hynes (Managing Director of Equity Research)

Yeah. Okay, perfect. Just shifting gears. I'd love to ask about the Salesforce ads. You know, obviously we saw meaningful acceleration there. I think you had talked about that being more of a renewal dynamic, you know, happening at renewal. Maybe it's just timing, but a double versus Q2 feels like it might be something more. Can you just talk about what's happening with that relationship?

Ryan Barretto (President)

Happy to. We are continuing to see really great success and growth there coming off of Dreamforce. We saw one of our best pipeline months ever, specifically with the enterprise group. The Service Cloud integration that we've been working on that has been in beta, where we've got our first set of customers going live now in early Q4, is a great example of that partnership. We've continued to see a lot of progress co-selling with the Salesforce team, so having them intro us into accounts. Many of those certainly are customers that are coming off of the Social Studio product, but we're also starting to see some customers that are examples of just Salesforce customers, not necessarily using the social product, where they do need social, and Sprout's being introduced as the preferred partner.

DJ J Hynes (Managing Director of Equity Research)

Awesome. All right. Thank you, guys. Appreciate all the color.

Ryan Barretto (President)

Thank you.

Operator (participant)

Our next question will come from Arjun Bhatia of William Blair.

Arjun Bhatia (Partner, Co-head Tech Equity Research, and Software Analyst)

Perfect. Thank you guys for taking the question. I wanted to touch on, you know, some of the comments I think that you made around the Q4 pipeline and with it being expected to be the best, I think, ARR, incremental ARR quarter in history. Is that when you think about the composition of that pipeline, is that gonna be mostly existing customer expansions, or do you see quite a bit of new business in there, whether that's organic at these new pricing plans or with the Salesforce partnership? I'd just love to understand the dynamics there a little bit.

Ryan Barretto (President)

Yeah. Thanks, Arjun. Yeah. It's really a combination of both. We've continued to see really healthy new business and expansion as well, especially in our up-market customers and mid-market and enterprise. It is a combination of those, a really good balance between new business and growth. I'd weight it more to new business in Q4, just given the dynamic of the business and the ending of the year, and certainly will include some of the Salesforce pipeline that we've been creating sort of in the last couple of quarters here.

Arjun Bhatia (Partner, Co-head Tech Equity Research, and Software Analyst)

Okay. Got it. If we just take a step back, and if I just think, you know, higher level about what's happening in the, you know, in the market and the macro, where are customers just in terms of prioritizing their social investments today on the, on the organic side, particularly where you play? Is that increasing relative to last quarter, the quarter before? Are you seeing it taper off a little bit just as, you know, folks are a little bit more cost-conscious or, you know, is there enough of a secular tailwind that you're not seeing as big of an impact from macro relative to, you know, other areas of the market?

Ryan Barretto (President)

Yeah. I mean, I think there's a couple different examples of what we're seeing in the market here, as Justyn mentioned in the prepared remarks. You know, in the lower end of the market, I think that's where you're gonna see the most compression from a new business perspective, and then a little bit from an expansion perspective. As you go up market, we're continuing to see really, really healthy demand, and that flows through when you look at just the 10-K and 10-Q and our pipeline creation and success in our mid-market and enterprise. Those customers continue to have the same needs, if not more. They're continuing to need social as a primary channel to market.

In times like this, I think there's also an opportunity to continue to look at the organic as a massive opportunity when you may be cutting paid spend. From a customer care engagement perspective, where we have a lot of our roadmap dedicated, customers are increasingly coming in wanting to ensure that they've got a better answer for how they're solving for customers on social. Really good demand up-market, and the low end of the market is where most of the compression's coming, but it's been offset by what we've been doing with our larger customers.

Arjun Bhatia (Partner, Co-head Tech Equity Research, and Software Analyst)

Okay, got it. That's very helpful. Thank you for taking the questions.

Joe Del Preto (CFO)

Thank you.

Operator (participant)

Next, we'll go to Raimo Lenschow of Barclays.

Raimo Lenschow (Managing Director)

Hey, thank you. I just wanted to go back to the pricing a little bit. Obviously, you must have done all the math around price elasticity, et cetera. If you think about it and if we just to kind of prepare us as well for our modeling, like what should we think in terms of assumptions? Obviously you might have lower customers, but you might, like, get more churn as well. But then you get higher pricing from the guys that's staying with you. Is there any way you can help us how to think about how this will play out? Or should we just wait until it kind of hits?

Joe Del Preto (CFO)

Yeah, Raimo, I think the way we're thinking about, and we've talked about this before, you know, we really haven't focused on, you know, the number of customers that are coming in. So the way we've been talking about this price increase and what we think on the website is I think it's just gonna drive higher ACVs going forward. Obviously, the price they're coming in is just gonna be much higher for our current customers. So if you think about how do you model this out, I think it's very consistent of what we've talked about over the last three years, which is we're optimizing for the ARR per customer. So as you continue to look at, you know, what our ARR growth is and then what our ACV growth is.

I just think you're gonna see, as you can imagine going forward, and I talked about this a little bit in my prepared remarks, you're just gonna see a much faster ACV growth in the near term. Then probably over the next, you know, in the intermediate term, you're gonna see a probably a step function change in our ACV growth. That's how I would think about it from a modeling standpoint.

Raimo Lenschow (Managing Director)

Yeah. Okay, perfect. Second question for me is like, I mean, it's the correct step, and it's good to see. Obviously you do it in a time when the market is a little bit volatile and macro is a little bit volatile. What drove that decision to make that call now versus, do it earlier or wait a little bit longer?

Justyn Howard (CEO and Co-Founder)

Yeah. This is Justyn Howard, Raimo Lenschow. Appreciate the question. This is something that's been brewing for a while, right? You know, we talked in the prepared remarks about how our entry price, having not changed in a long time, was really over time kind of changing the dynamic of the long tail at the low end of the market for us. Those customers behave very differently, have different needs. This was something that we saw as both limiting in the sense that we weren't monetizing the core part of our customer base the way that we felt like there was certainly appetite for and relative to the value that we were giving our customers. Also just in terms of attention and resources and opportunity cost.

This is something that we felt like that was maybe a bit overdue, something that's been brewing for a while. What was important to us to make the right decisions that the data tells us are the right decisions, to really align around the part of the customer base that we can best serve, and the one that is contributing most to the success of the business, obviously. You know, another factor for some of the specific timing, making sure that we were able to get as much data and have this as fully baked as possible as we head into 2023, as we figure out what the priorities and roadmap and planning look like.

We wanted to make sure that we didn't carry this decision with us into 2023. The time was right. The delta between those two groups of customers was big enough that we felt like we just really wanted to take action here and set ourselves on the right foot, heading into the next year.

Raimo Lenschow (Managing Director)

Okay, perfect. Thank you. Good luck.

Operator (participant)

Our next question will come from Parker Lane of Stifel.

Parker Lane (Director of Equity Research)

Yeah. Hi, guys. Thanks for taking the question. Curious, in light of the more uncertain macro, are you seeing any meaningful change in the number of channels that customers are looking to support and/or the size of social media management teams inside of the customer base you're serving? Thanks.

Justyn Howard (CEO and Co-Founder)

Yeah. If I'm understanding the question, this is a question I'll answer. Come back on and correct me if I had it wrong. We're not seeing a change in terms of the number of networks and profiles that our customers are looking to serve and the communities that they're looking to support. If anything, with the addition of TikTok over the last couple of quarters, I think we've seen that tick up a bit. There's nothing in the macro that really changes that dynamic from our perspective. I think the same goes with social teams, right?

The size of the team is, in large part a function of, the number of channels to manage, the size of the audience, volume of messaging and publishing, et cetera. That hasn't changed materially, at least not in any of the data that we have. That coupled with the fact that we're bringing in additional use cases, additional departments, et cetera, keeps that on an upward trajectory. I think to Ryan's earlier point to some of the prepared remarks, I think at the lower end of the market in less sophisticated teams, they may not ramp up as quickly as they would have in the past. Once they're kind of entrenched and committed to social strategically, we're not seeing any changes there.

Parker Lane (Director of Equity Research)

Got it. Appreciate that. There's a lot of stuff in the news obviously about TikTok and Twitter. Curious to hear from some of your top customers how they're thinking about the prioritization of spend across each of those channels through the remainder of 2022 and into 2023?

Justyn Howard (CEO and Co-Founder)

Yeah. We're probably not gonna have the best perspective on the spend side, just given that we're not involved in the advertising conversations. That's just not part of the ecosystem that we play in. I can tell you anecdotally from our customers, I don't think that the prioritization has changed much. I think we've seen a change over the last two years, particularly as they think about the mix between Meta, Twitter, TikTok, et cetera. From the events in the last quarter or so, I don't think that they're thinking about or they haven't expressed a material shift in that. I think in both of those cases, they're kind of waiting to understand what happens, right?

Those are two very different situations that don't really have any kind of outcome at this point. I think there are some conversations happening in the background, but I don't know that we've seen any of it come through in the spend yet.

Parker Lane (Director of Equity Research)

Understood. Thanks again for taking the questions. Congrats on the quarter.

Justyn Howard (CEO and Co-Founder)

Yeah, thank you.

Operator (participant)

Next, we will go to Matthew VanVliet of BTIG.

Matthew VanVliet (Application Software Analyst)

Hey, good afternoon, guys. Thanks for taking the questions. I guess first, maybe Joe or Ryan, you could help us out on kind of what your build up in thinking that the net dollar retention remains very strong and sort of industry-leading, as you mentioned. Just how much price are you including in that number of 120+, given that you sort of mentioned that nominal price increases will be rolling out over time through the existing customer base. Any expectations of what churn might look like, especially at the low end of the market, factoring in that number, and then ultimately kinda what the upsell, cross-sell comes in, if you could just either stack rank those or give us a little more color. Thanks.

Joe Del Preto (CFO)

Yeah, Matt, just to clarify the comments, I think when we were talking about the 120% NDR, we believe that that's kinda like the progression that we'll get to by, you know, our midterm model of 2025. The reason we have conviction around that is we look at our current customer base, and we look at the, you know, the higher mid-market enterprise customers, and we look at the NDR in those customers that we're really starting to focus on, the ones that Justyn talked about that are, you know, 10x the low end of the market. They're already, you know, close to that 120 or above that 120. So that's why we think we can get the overall customer base to that level by, you know, 2025.

From that perspective, you know, we feel really confident based on our current existing customer base, even before we kinda put these prices, you know, these price increases. We do think that's gonna be a combination to get to that point. The combination of, you know, the cross-sell, our ability to upgrade our current customer base, and also the fact that we know historically that the largest customers that come in are our fastest-growing. We think about the fact that we're gonna be focusing on these higher quality customers, and we know historically those are our fastest-growing. We believe that over time, that'll just shift the overall quality of our customer base and thus bring in what we believe is that, you know, 120% NDR, you know, in 2025.

Matthew VanVliet (Application Software Analyst)

Okay. Helpful. Then, as you look at social commerce, it seems like there's a lot of kinda early excitement in the broader market, but maybe getting to a point where that's a higher mix of e-commerce sales or retail sales, however you wanna think about that, is just taking more time. Curious, you know, are you still seeing a lot of interest from your customers trying to be kinda poised and ready for when that takes off a little more? Or is there pushback from how the social networks are gonna allow that to happen? Just any update around how you guys are thinking about social commerce and sort of how that maybe is gonna evolve into a pricing or a separate SKU potentially.

Justyn Howard (CEO and Co-Founder)

Yeah. Yeah, this is Justyn. I think in terms of the first part of the question, you know, interest and excitement from the market around this opportunity, I certainly don't think that has slowed down. I think the characterization that you made is right. I think businesses are eager, excited, and ready to gear up for those conversations, but largely needing to get a better understanding of where the networks are taking these opportunities, what they're really gonna look like as they shake out. You know, we've seen a lot of success.

We've talked about the work that we've done in the social commerce space, still an area that we're very excited about, still an area that we think has a lot of long-term potential, but I've always thought of it as a long-term bet and one that's gonna take a little while, still to get fleshed out for us to be able to size it and things like that. I think we continue to build against that roadmap. I think we've got a nice collection of capabilities within our platform around that to support our customers. We're not quite at the level where we would typically wanna see before we would break that into a different SKU.

There's some interdependency on some of the work that the networks are doing and that we'll be doing in conjunction with them that'll influence timing on if we bring an offering or a SKU like that to market and when we do that.

Joe Del Preto (CFO)

The other thing I'll quickly maybe just add there, and it's not exactly social commerce, Matt, in the way you asked the question, but even if the transactions aren't happening directly on the social networking sites, our customers are still thinking about revenue and revenue growth, and social is a channel to get there. Whenever they're doing that, they're driving their marketing campaigns through Sprout. The feedback that's coming from those marketing campaigns are happening through our inbox and in customer care through Sprout. The data that they're gathering on the effectiveness of those marketing campaigns and the pipeline that they're generating is also coming through Sprout as well. I think that's another piece that even if we're not in the transaction yet for all the platforms, they're still warming up towards that, and we're participating in those conversations with them.

Matthew VanVliet (Application Software Analyst)

All right. Very helpful. Thank you.

Joe Del Preto (CFO)

Thank you.

Operator (participant)

Now we will go to Michael Turits of KeyBank.

Michael Turits (Managing Director and Senior Analyst)

Hey, this is Michael Vidovic and Michael Turits, and thanks for taking my question. As part of that refocusing on the enterprise customer mix, are you looking to make any changes around the go-to-market or the sales motion, either with more outbound sales hires or enterprise-focused sales individuals? Just any changes outside of pricing that you're looking to do would be helpful. Thanks.

Joe Del Preto (CFO)

Yeah. Thanks, Michael. We're already doing a lot of those things today, so it's probably just continuing to invest there. If I think about just the teams themselves, we have some great enterprise leadership and sellers that are already in the marketplace today that are closing a lot of these accounts or growing these accounts that we've spoken about. We're continuing to invest on those teams. We see a tremendous opportunity in front of us from a marketing perspective. You'll see a lot of our focus and investment going into marketing to those large sophisticated customers, you know, in forms of things like account-based marketing. We also have continued to grow our outbound BDR teams that are building pipeline within those accounts.

I also underlined, even though we're doing all those traditional enterprise strategies, we also still leverage the product like we always have. Our customers continue to come in and trial the product. It continues to be a major differentiator for us, even in the enterprise, and it's one of our number one plays, is get their hands on the keyboard. For us, we love that in the enterprise. Massive differentiator, and we'll continue to be working on that as well.

Michael Turits (Managing Director and Senior Analyst)

Got it. Thank you.

Joe Del Preto (CFO)

Thank you.

Operator (participant)

Now we will go to Brett Knoblauch of Cantor Fitzgerald.

Brett Knoblauch (Managing Director)

Hi, guys. Thanks for taking my question. Hope you guys are all doing well. In regards to your Q4 being a record net new AR quarter, I think your previous record was, you know, just shy under $20 million. How much of a record are we expecting? And then going forward, should we expect kind of net new AR in 2023 to be kind of return to your growth cadence? I guess so far year to date this year, you guys are about flat in terms of what you added in net new AR versus last year.

Joe Del Preto (CFO)

Yeah. Brett, I'll take that one. I think, you know, just to clarify, I think we talked about as well a record Q4 ARR. We're not gonna give much more guidance past that. As it relates to 2023, we're probably not in a position to talk about what our guidance will look like or what net ARR will look like in 2023. We'll probably do that in our February when we release, you know, year-end and give guidance for next year.

Brett Knoblauch (Managing Director)

Understood. Looking at your kind of a medium-term framework, can you just help break down what you guys were assuming the mix would be between customer growth and ACV growth, and maybe within ACV, how much of that was due to pricing or just, you know, or seat expansion, which I guess was most of the mix versus now between customer growth, seat expansion, and now pricing?

Justyn Howard (CEO and Co-Founder)

Yeah. I can start us off there. This is Justin. I think probably the best way to characterize how we're thinking about that is the price increases for existing customers are very nominal relative to what you're seeing in the increases on the new business side. As we think about the framework, the growing ACVs, the growing expansion, the vast majority of that relates to getting closer to alignment on pricing in the new business, winning more deals, particularly in the midmarket enterprise, doing a better job with the expansion of our existing customers, and not a material amount coming from the changes themselves. I think that was the framing of the question, but let me know if I didn't get that right.

Brett Knoblauch (Managing Director)

Yeah. No, I think you got it. I guess maybe just same question asked differently. If I look at, you know, the number of customers added this quarter, is that a decent run rate in terms of net adds on the quarter on a go-forward basis given maybe this deprioritization of, you know, down-market?

Joe Del Preto (CFO)

Yeah. We talked about this a little bit earlier in the call. I think as far as the number of customers that we're gonna add, that's not something we're focused on internally. I think the best way to think about it, Brett, is to focus on the ARR that we're getting from those customers and the ACV growth. I think what you can expect is an acceleration in our ACVs. If you think about, you know, the ARR that we talked about a record, you know, Q4 in ARR, you can kinda get to what that customer count might look like. It's not, you know, I think it, you know, it's not something that we historically have guided to. It's not a number that we focus on internally. For us, it's more about the ARR and the ACV growth.

Brett Knoblauch (Managing Director)

Understood. I appreciate it. Thank you, guys.

Operator (participant)

Now we will go to Fiona Hynes of Morgan Stanley.

Michael Turits (Managing Director and Senior Analyst)

Hi, everyone. Thank you for taking the question. I'm Fiona Hynes from Elizabeth Porter's team. Wanted to follow up on the line of questioning on the 2025 framework. Previously, you had talked to a 30% revenue year-over-year growth rate. Is that still a reasonable way to think about it, or is it more of like a 30% CAGR basis expecting a near-term acceleration from the pricing increases? Somewhat relatedly, how are you factoring in the risk of any macro impact to that? Is there any risk that, you know, some of the softening in the economy takes us below that original framework? Thank you.

Joe Del Preto (CFO)

Yeah, no, we don't see any change. Just to be clear, it's not a CAGR. It's thirty percent every year, you know, between now and 2025, and we don't think either the macroeconomic conditions or any of the other things we've talked about recently, whether it's the price increases, have a material impact on that. We actually feel really good about where the business is going. We've talked about, you know, some of the highlights and the momentum we're seeing, what we consider, like, our core customer base. At this point, we don't see us getting off of that plan right now. Something I talked about in my prepared remarks as well, is we feel really confident about our ability to continue to hit the 30%, you know, every year through 2025.

Operator (participant)

Got it. Thank you.

Now we'll take the next question from Rob Oliver from Baird.

Rob Oliver (Managing Director and Software Research Analyst)

Great. Thank you guys for taking my question. This one's for Justyn or for Ryan. You know, you guys talked a little bit about the macro and stuff, and I kind of wanted to ask because it's a question we've been getting specifically about Twitter. You know, obviously historically a very important relationship for you guys and, you know, recognizing that you guys are, you know, agnostic, I think, and indeed adding value across a whole host of social media platforms, you know, which is the value you deliver. But there's just a lot of practical things going on there right now. I mean, you know, half the staff being let go, potential change in the business model, and, you know, some advertisers walking away at least temporarily. Just curious what you guys are hearing.

I don't think you guys have posted anything on your blogs yet, just how customers should be thinking about that. You guys are always real active about that. We follow that. Just curious to hear your thoughts and any implications, potentially from that. Then I just had a quick follow-up for Joe. Thanks.

Joe Del Preto (CFO)

Justyn, I think you're on mute.

Justyn Howard (CEO and Co-Founder)

Cool. Now I'm not. Yeah, thanks for the question. I'll get us started here. I mean, I think obviously we're a couple of days in to the leadership changes there, and I'm gonna be really thoughtful and patient about forming kind of longer-term views here. I think you know, obviously there's a desire to make some changes and make them fast. Most of the ones that we're hearing about being you know, related to monetizing the blue check, I think is fairly benign in this context. Some of the other things that they may like look to do, I don't think we have a lot of information on.

We haven't seen, from our customers' perspective in terms of the organic work that they're doing on social, the importance of connecting with their audience, et cetera, we haven't seen anything bubbling up there that really changes the value proposition for them in the near term. You know, I think that advertising is one area that may be a little shakier at the moment, but again, just not an area that we play in. You know, for us, and where we want to continue to provide our support, and to build alongside Twitter is anything that they're doing to increase the trust and safety and vibrance and growth of that community, we think is going to be positive.

We just don't know enough about which of the ideas being floated are gonna be priorities, exactly how those are gonna shake out, et cetera. We may have more to say. Certainly we'll guide our customers the best we can, as the approaches and some of the different models that they've been talking about come to life for our customers. A lot of it obviously related to the consumer and the advertising side.

Rob Oliver (Managing Director and Software Research Analyst)

Got it. Okay. Yep. That's really helpful. Appreciate that. It's early. I'd appreciate that. Then, Joe, one for you. I think this was partially answered with the comments on the last question, but it sounds as if the majority of these price increases are gonna be on new customers, not existing customers. So just, I guess, from your thought perspective, any additional churn that you would expect or think about as you know think about maybe Q4 as these some of these renewals start to roll in into next year? Is it too minimal relative to the value you're adding for you guys to anticipate any additional churn on that price increase? Thank you.

Joe Del Preto (CFO)

Yeah. Rob, thanks for the question. You know, if we think about the fact that we talked about doing a record net ARR in Q4, we factored in any potential churn with the price increases. Like Justyn said, the way we're rolling out the price increases for existing customers is just gonna be more methodical over the next 12, you know, 12 months or so. I don't think there's any, like, major impact in any one quarter right now from what we can see in our plan to roll these out. Like, it's not gonna be to every single customer. It's gonna, you know, depend on tenure, you know, the price point they're at and so on.

We don't see any major churn impact in Q4, and that was all factored into our commentary around it being, you know, a record Q4 on a net ARR basis.

Rob Oliver (Managing Director and Software Research Analyst)

Got it. Helpful. Thank you guys very much. Appreciate it.

Joe Del Preto (CFO)

Yep.

Operator (participant)

With that does conclude today's question and answer session. I would like to turn things back to Justyn Howard for any additional or closing comments.

Justyn Howard (CEO and Co-Founder)

Yeah, just a quick thank you before I let you all get back to your day and all the other things going on. We are appreciative to the team as always, all of our supporters, investors. We'll be out chatting with you all over the next couple of weeks. Looking forward to that. We will catch up with you all soon. Thanks again for your time today.

Operator (participant)

With that, everyone, that does conclude today's conference call. We'd like to thank you again for your participation. You may now disconnect.