Yahoo Finance Sprout Social, Inc. (NASDAQ:SPT) Q1 2024 Earnings Call Transcript
Sprout Social, Inc. (NASDAQ:SPT) Q1 2024 Earnings Call Transcript May 2, 2024
Sprout Social, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by. My name is Dee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sprout Social First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Jason Rechel, Vice President of Investor Relations. Please go ahead.
Jason Rechel: Thank you, operator. Welcome to Sprout Social’s first quarter 2024 earnings call. We’ll be discussing the results announced in our press release issued after the market closed today, and have also released an updated investor presentation which can be found on our website. With me are; Sprout Social’s CEO, Justyn Howard; CFO, Joe Del Preto; and President, Ryan Barretto. Today’s call will contain forward-looking statements which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking. These include, among others, statements concerning our expected future financial performance and business plans and objectives, and can be identified by words such as expect, anticipate, intend, plan, believe, seek, opportunity or will.
These statements reflect our views as of today only and should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of the risks and other important factors that could affect our actual results, please refer to our annual report on Form 10-K for the fiscal year ended December 31st, 2023, filed on February 23rd, 2024, as well as any future 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 first quarter earnings press release, which has been furnished to the SEC and is available on our website at investors.sproutsocial.com. And with that, let me turn the call over to Justin. Justin?
Justyn Howard: Thank you, Jason and thank you to everyone for joining us. We always appreciate your time. I’m excited to get us started today by expanding on our news to promote Ryan Barretto to CEO, before handing things over to him. Ryan and I have had an incredible partnership over the past eight years, but it only took me a few of those years to recognize that he should and would become our CEO. Several years ago, we both agreed and committed that it didn’t matter which role either of us were in, as long as we put Sprout in the best position to win and that we were in it together. That’s why we’re so excited about the natural progression of this transition. Throughout our time together, Ryan has often had the biggest impact in the areas typically aligned with the CEO role, and I’ve often made my biggest impact when I can think deeply about our biggest opportunities, get forensic with our data and push our product strategy forward.
Over time and as we’ve grown, the role of the CEO has changed and naturally became more aligned with areas where Ryan is exceptional. The same skills and perspective that allowed me to architect our success over the past 14 years aren’t the same things required of the role today. And conversely, I’ve had far less time for the areas where I can bring exponential value to the business. Together, we’re an incredible team. Adjusting the positions we play to match where we’re heading gives us the opportunity to add significantly more value and move faster in capturing the opportunity ahead of us. In a moment, I will turn it over to Ryan to talk about how we intend to make that happen. But first, I want to say thank you and congratulations to Ryan.
As a Founder, Board Member, team member and shareholder, I am as excited as I’ve ever been about the opportunity in front of us with you leading this incredible team.
Ryan Barretto: Thank you, Justyn. I’m deeply grateful for this opportunity. It’s been an amazing honor to work alongside Justyn for the last eight years, building this team and business together. Getting the opportunity to step into the CEO role with his continued partnership and support creates an amazing foundation for me and for Sprout. I want to thank the Sprout Board of Directors for your ongoing trust, my team for putting me in this position, our shareholders for your commitment and our customers for your advocacy, and for helping us get better every day. I want to be really clear upfront on my goals and aspirations for this team. We are here to win. This will be a winner take most market and I believe Sprout is best positioned to be that winner in a growing market.
We have the number one product and software, an award winning culture, and the team most well-known for driving customer success. I’m going to be deeply focused on raising the bar on all of these competitive advantages. We intend to drive excellence at everything we do and to deliver outsized value for our employees, customers and shareholders along the way. Our team can expect me to lead from the front as we work to deliver here. Let’s start with Q1 results. We had a strong quarter on many dimensions, but ultimately didn’t meet our revenue goals. After a record back half of 2023, where the majority of our focus was deeply weighted on closing deals versus creating new pipeline, we walked into 2024 with a different business. We’re now enterprise-heavy and the linearity of our business has changed materially, which affects our revenue recognition and planning.
Our months, quarters and years are now more heavily weighted to traditional enterprise buying cycles. We underestimated the magnitude of this shift and the quickly changing dynamics in our customer mix. On top of this, we made several important strategic decisions heading into Q1, such as building new vertical sales teams, accelerating promotions in our midmarket and enterprise teams, adjusting our account coverage model and prioritizing Tagger enablement for all of our customer-facing teams. We thought we could manage these changes without disruption, but they collectively set us back. I believe each of these moves support our long-term strategy and better positions us for the future, but in the short-term there were execution headwinds that were self-induced.
Although Q1 net new revenue added was less than Q1 of last year and not where we expected it to be, there was a lot of important learning, progress and momentum coming out of this process. I own this and fully expect us to be much better going forward. Our go-to-market order is now better positioned for scalable growth. Our total pipeline increased 37% year-over-year, premium module attach rates continue to rapidly increase and our gross retention is over-performing plan, each positioning Sprout for another strong annual performance. Tagger ARR meaningfully accelerated in growth and is seamlessly folding into our platform strategy and we expect that our Q1 added new ARR will be our low watermark with strong sequential growth over the year. Shifting to the go-forward.
Entering 2023, we took an important strategic step of deprioritizing the very low end and unproductive parts of our business. Coming into 2024, with that business largely cycled out, we have new clarity on where to optimize and redraw our teams and go-to-market efforts to accelerate our path to $1 billion in revenue. While we believe this is a powerful unlock for both our growth and efficiency, the benefits will not materialize overnight. We believe that redrawing our go-to-market model around the most successful cohorts is a massive unlock to our future potential. We know that our best customer cohorts are our most efficient customers to acquire. They are the most efficient expansion opportunities, and they are the least likely to cancel, each by orders of magnitude.
We will invest aggressively against these cohorts with improved economic efficiency. At the same time, we plan to de-invest in the parts of the market where these attributes don’t exist. Even if this results in walking away from immediate revenue. We’re already beginning to realize the benefits to gross retention from our 2023 model changes being nicely ahead of Q1 plan here, and we believe that by prioritizing the market cohorts where we can predict future economic potential and get surgical with where we will allocate our time, we can scale a durable, efficient upmarket land-and-expand motion. We believe the results will be higher future NDR and improved efficiency across the entire organization. As we all know with compounding SaaS models, our Q1 performance does flow through the year from a revenue perspective.
With the downward pressure from Q1 revenue flowing through, the changing linearity of the business and the need to create space as we execute on our go-to-market changes, I needed to tighten up our forecast to ensure we deliver on our commitments. The underlying reality is that our business today is orders of magnitude different from the business you knew at the time of our IPO. Once a completely inbound, highly transactional model, we’re now enterprise-heavy and are constructed that way from products to customer success. Because of this, we should be measured on different metrics that properly align to this current state. As I transition into the CEO role, I want to ensure that we move forward with this in mind. We’ve told you that ARR growth should have a similar trajectory to revenue growth, while metrics like RPO and cRPO are more appropriate indicators of performance trends for our business.
As such, we’ll no longer be disclosing ARR on a go-forward basis, an approach that is consistent with enterprise SaaS companies in our peer set, including our direct competitors. We’ve been consistently sharing for four years that we don’t measure our success in total logos or total customer count, and our sales team are not measured or compensated on these metrics. We’re now at a point where a single large enterprise customer is worth more than hundreds of smaller customers. With enterprise being the priority, total logo count is not a key performance indicator of our current business. As such, we’ll no longer be disclosing total customer count. Further, with the goal of transparency, we had previously disclosed logo numbers and contributions from our partner channel.
However, we recognize that this has actually served as more of a distraction than a helpful data point, so we won’t be continuing that practice. The idea that all of our growth comes from temporal partner contributions is unfounded, so I want to ensure that everyone has the same understanding and more clarity into the actual data. Salesforce partner revenue, including both Social Studio and non-Social Studio business, accounted for slightly less than 15% of our new business in 2023 and less in 2022. This amounts to a roughly 3% contribution to our total 2023 revenue growth, which I believe is significantly less than many may have previously assumed. We value our partnership with Salesforce and other key partners and we see a strong opportunity for future growth that powers through a 3% potential headwind in 2025, especially given all the opportunities we are creating within our ecosystem.
We have a tremendous opportunity in front of us and I’m excited about the innovation and change that we are driving the business to deliver on our goals. We’re aligning ourselves with the best and fastest growing cohorts of our market, which you can see in our 44% large customer growth, 41% ACV growth and ongoing rapid growth in RPO and cRPO. We expect we’re going to see both accelerating new business, accelerating expansion momentum and improving efficiency over a multiyear period of time as we build on our product leadership, world-class culture and history of over delivering for our customers every day. I’m excited to bring Justyn and our Founders’ original vision to life as Sprout defines how businesses can operationalize social.
And with that, I’ll turn it over to Joe. Joe?
Joe Del Preto: Thanks, Ryan. I’ll now run through our financial results and guidance. Revenue for the fourth quarter was $96.8 million, representing 29% year-over-year growth. Subscription revenue was $95.8 million, up 28% year-over-year. Services revenue was $1.0 million, up 112% year-over-year. Despite underestimating the impact of the strategic changes Ryan outlined earlier, we continue to deliver top quartile growth in SaaS. The number of customers contributing more than $10,000 in ARR grew 24% from a year ago. The number of customers contributing more than $50,000 in ARR grew 44% from a year ago. ARR growth approximated subscription revenue growth in Q1, which underperformed our plan for the reasons Ryan outlined. We have materially fewer net customer losses compared with the back half of 2023, consistent with the early benefits from our model change.
You should think about Q1 ARR be even smaller as a percentage of the full year compared with prior periods. And you should continue to think about the rate of growth of total customer base improving throughout 2024. Q1 ACV was $12,892, up 41% year-over-year. As we lapped our first full quarter of new business pricing, new business ACV again grew double-digits year-over-year, and we expect strong ACV growth to continue over the medium-term driven by rapidly shifting enterprise mix, strengthening premium module attach rates, influencer marketing and customer care. In Q1, non-GAAP gross profit was $76.0 million, representing a non-GAAP gross margin of 78.5%, up 30 basis points from a year ago. Non-GAAP sales and marketing expenses for Q1 were $37.2 million or 38% of revenue, down from 40% a year ago.
We continue to hire aggressively in our enterprise sales and growth organizations. As our customer base has shifted away from SMB and into enterprise, we have changed our accounting for deferred commission amortization from three years to five years. This is consistent with our peers in enterprise software. This accounting change resulted in a $4.4 million reduction in Q1 sales and marketing expenses, we expect an operating income and benefit in all future periods. This accounting change has no impact on cash flow and will mean that our non-GAAP operating margins and non-GAAP free cash flow margins are likely to be increasingly correlated moving forward. Non GAAP research and development expenses for Q1 were $18.3 million or 19% of revenue, roughly flat from a year ago.
We continue to invest in our future and are increasingly targeted investments in AI and social customer care and are delivering strong returns. Non GAAP general and administrative expenses for Q1 were $14.5 million or 15% of revenue, down from 17% a year ago. We expect to deliver consistent G&A leverage as a percent of revenue moving forward. Non-GAAP operating income for Q1 was $6.0 million or a 6.2% non-GAAP operating margin. Non GAAP net income for Q1 was $5.7 million for non GAAP net income of $0.10 per share, based on $56.3 million weighted average of common stock outstanding compared to non-GAAP net income of $3.4 million and $0.06 per share a year ago. Turning to the balance sheet and cash flow statement, we ended Q1 with $95.2 million in cash, cash equivalents and marketable securities.
This is down from $98.1 million at the end of Q4. Deferred revenue at the end of the quarter was $147.1 million. Looking at both our billed and unbilled contracts, RPO totaled $290.0 million, up from $275.0 million exiting Q4, and up 54% year-over-year. We expect to recognize 73% or $210.6 million of total RPO as revenue over the next 12 months, implying a cRPO growth rate of 48% year-over-year. We continue to believe that all our leading indicators are converging towards cRPO over time. Operating cash flow in Q1 was a record $11.2 million, up from $8.3 million a year ago. Non-GAAP free cash flow was a record $11.3 million, up from $7.9 million a year ago. Shifting to formal guidance. For the second quarter of fiscal 2024, we expect revenue in the range of $98.5 million to $98.6 million or growth rate of more than 24%.
We expect non-GAAP operating income in the range of $4.6 million to $5.0 million. There serves as a non-GAAP operating margin of 4.9% at the midpoint and includes an estimated benefit of our deferred commission accounting change. We expect a non-GAAP net income per share between $0.07 and $0.08. This assumes 56.6 million weighted average basic shares of common stock outstanding. For the full year 2024, we are reducing total revenue to the range of $405.0 million to $406.0 million. This assumes a greater than 20% organic Sprout revenue growth and accelerated Tagger subscription revenue growth and incorporates each of the changes Ryan outlined. For the full year 2024, we are raising non-GAAP operating income to the range of $28 million to $29 million.
This divides annual non-GAAP operating margin improvement of roughly 560 basis points. Excluding the accounting change, we are reiterating our prior non-GAAP operating income guidance, which now implies year-over-year non-GAAP operating margin improvement of 240 basis points. We expect non-GAAP net income per share between $0.45 and $0.46, assuming 57.0 million weighted average basic shares of common stock outstanding. We believe we’ve transformed our business model to position us to deliver increasingly durable and increasingly efficient growth. With that, Justyn, Ryan and I are happy to take any of your questions. Operator?
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