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Edited Transcript of SPT.OQ earnings conference call or presentation 9-Nov-20 10:00pm GMT

·50 min read

Q3 2020 Sprout Social Inc Earnings Call Nov 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Sprout Social Inc earnings conference call or presentation Monday, November 9, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jason Rechel Sprout Social, Inc. - Head of IR * Joseph M. Del Preto Sprout Social, Inc. - CFO & Treasurer * Justyn Russell Howard Sprout Social, Inc. - CEO, President & Director * Ryan Paul Barretto Sprout Social, Inc. - SVP of Global Sales ================================================================================ Conference Call Participants ================================================================================ * Alex Narum Needham & Company, LLC, Research Division - Associate * Arjun Rohit Bhatia William Blair & Company L.L.C., Research Division - Analyst * Brett Anthony Knoblauch Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst * Christopher David Merwin Goldman Sachs Group, Inc., Research Division - Research Analyst * David E. Hynes Canaccord Genuity Corp., Research Division - Analyst * Matthew David VanVliet BTIG, LLC, Research Division - VP & Application Software Analyst * Raimo Lenschow Barclays Bank PLC, Research Division - MD & Analyst * Robert Cooney Oliver Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Stan Zlotsky Morgan Stanley, Research Division - VP * Thomas Michael Roderick Stifel, Nicolaus & Company, Incorporated, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Sprout Social's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your first speaker today, to Mr. Jason Rechel, Head of Investor Relations. Thank you. Please go ahead, sir. -------------------------------------------------------------------------------- Jason Rechel, Sprout Social, Inc. - Head of IR [2] -------------------------------------------------------------------------------- Thank you, operator. And welcome to Sprout Social's Third Quarter 2020 Earnings Conference Call. We will be discussing the results announced in our press release issued after the market closed today. With me are Sprout Social's CEO, Justyn Howard; CFO, Joe Del Preto; and Senior Vice President of Global Sales, 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 statements concerning financial and business trends, our expected future business and financial performance and financial condition, our guidance for the fourth quarter of 2020 and the full year 2020, and can be identified by words such as expect, anticipate, intend, plan, believe, seek or will. These statements reflect our views as of today only, should not be relied upon as representing our views at any subsequent date, and we do not undertake any duty to update these statements. Forward-looking statements address matters that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of the risks and other important factors that could affect our actual results, including potential disruption from COVID-19, please refer to our annual report on Form 10-K filed with the Securities and Exchange Commission, our quarterly report 10-Q to be filed with the SEC and our other periodic filings with the SEC. During the call, we will also discuss certain non-GAAP financial measures which are not prepared in accordance with generally accepted accounting principles. A reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in our earnings press release, which has been furnished to the SEC and is also available on our website at investors.sproutsocial.com. And with that, let me turn the call over to Justyn. -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Thank you, Jason, and good afternoon, everyone. Thank you for joining us. As difficult as things have been this year, I hope you've all been able to stay healthy and productive. On our side, Sprout Social again delivered a strong quarter across the board, setting multiple new quarterly records. We're grateful to our team for executing remarkably well, and we're excited to share that our plan for 2020 is now well ahead of our prior guidance. Our mission is straightforward. We believe social sits firmly at the center of the brand customer relationship and is rapidly becoming the most powerful channel to win, serve and connect with audiences. Our software platform is powerful, elegant and easy to deploy across businesses of all sizes. We give small businesses the ability to punch well above their weight and large enterprises the power, agility and efficiency to delight their customers at scale. We have made it increasingly easy to standardize on Sprout as the centralized system of record for social and to help our customers maximize the value of this mission-critical channel across the entirety of their organization. Digital transformation has become the top priority for brands across the globe. Social communication is fundamentally more important than at any time in our company's history. And it sits at the center of this new digital technology stack that includes social publishing, engagement, customer service, care, commerce and business intelligence. We are perfectly positioned to help our customers thrive in this new reality. This quarter, more customers than ever invested in Sprout, and we're not slowing down. I want to spend a moment upfront today on culture, which has been fundamental to our success. With all of the curves 2020 has thrown at us and the rapid pace of evolution our customers are facing, our culture has been our single most powerful advantage. We focus from the very beginning on being an incredible place to work and an incredible place to be a customer, and we simply wouldn't be here without our remarkable team. This quarter, we were honored to be named as one of Fortune's 100 Best Medium Workplaces as well as on Fortune's 25 Best Workplaces for Women list. These are a testament to the less quantifiable aspects of this business that allow us to deliver the kind of results we're talking about today. In August, we made our annual DEI report available to the public for the first time. While we know we have a great deal of work to do, we have a solid foundation in place and are proud of the equitable company we have built to date. We hold ourselves accountable to put our resources behind delivering change for traditionally underrepresented groups, and we appreciate your support in that effort. We believe the transparency of this report and growing visibility of our healthy employer brand will further strengthen our ability to attract and retain great people as we grow together in the years ahead. We have, quite simply, a breakout quarter. Some of the trends that were starting to take shape when we last spoke crystallized during the third quarter, and our teams executed with precision. We're pleased to deliver record net new customer additions, record net new ARR, record customer growth metrics and standout successes in the enterprise segment, all with improving efficiency in our financial model and while formally sunsetting the legacy Simply Measured platform. The funnel remains very strong, and our forward indicators are very healthy. Ryan and Joe will share many of the specifics with you while I outline several areas of focus to position our company for an even stronger future. There are 3 topics I'd like to discuss: upmarket momentum, integrations that bolster our social ecosystem and targeted areas of investment that we are making for 2021. Beginning with our accelerating momentum upmarket. During the third quarter, we signed the largest new ACV contract in our company's history; onboarded several Fortune 500 brands, including multiple wins from highly competitive RFPs; and delivered 42% growth in our greater than 10-K ARR customers. We have a disruptive platform, an innovative sales playbook, the right go-to-market motion and the customer success model in place to build repeatable success on these metrics. We raised the bar in every aspect of our upmarket business in the third quarter. The successful wins in large Fortune 500 RFP processes stand out for 2 reasons. The notable size of these deals and the implications on our served markets suggest that established companies are beginning to invest considerable resources behind social. This supports our thesis that social media management is becoming a foundational layer in the digital tech stack. And we competed against every competitor in our space through sophisticated technology, security and compliance evaluations. We believe we have many structural competitive advantages, and they all have begun to culminate in the success, which we expect to only expand in the coming years. Turning next to our technology integrations. We build software that is powerful, elegant and easy to use, and our integration strategy is no different. We functionally integrated with 8 new partners since we last spoke with you, which is an incredible achievement from our technology and partnership teams. These include new integrations with Microsoft Dynamics 365, Salesforce, Dropbox, Slack, a first of its kind integration with Glassdoor, an enhanced listening relationship with Reddit, a new Pro Media Video integration with Twitter and our more recent work with Facebook to integrate the new messaging API which supports Instagram messaging. Our platform allows customers to recognize maximum value from social across an organization. A variety of technology integrations across this ecosystem of new and existing partners enables our flywheel to help social further proliferate across the entire customer and brand journey. With visibility and collaboration more important across a growing number of business functions, we're establishing ourselves as the social system of record. Rich, fully integrated solutions offer a better user experience and deliver immediate value to our customers. This broadening ecosystem around our social platform also reduces friction in the enterprise deal cycles while further strengthening our customer relationships. Lastly, I want to touch on our priorities for 2021. We have aggressive investment goals that we believe position us well to capture a $50 billion and growing market opportunity. Our listening and premium analytics offerings are early, both in terms of market penetration and product road map. In 2021, we intend to continue to evolve these offerings as we further democratize the power of social data and intelligence. We are also making product investments to help bring the value of social further into our customers' organizations. We'll continue to perfect our core experiences and prioritize social customer care, commerce, engagement and additional integrations. We'll also continue to accelerate our investments behind the strong trends we've seen in our sales and marketing efforts. Looking back to March, we made rapid adjustments to our business. Our strategy and go-to-market model allowed us to do this quickly, getting back to essentially full operating capacity within days. Over the next few months, we continue to adjust and help our customers navigate rapid change with our key metrics recovering relatively quickly. Late in the second quarter and throughout the third quarter, we saw the strength of our business and competitive differentiators really taking hold and have seen exactly what we wanted to see across the business. We're an objectively stronger company than we were entering the year. And importantly, this has been driven by fundamental strength rather than situational anomalies. I want to wrap up by reiterating my gratitude to our employees, our partners and our customers. Social is being validated as a mission-critical communication channel, and our ability to win the market stands out in the new digital environment. Over the course of the past 6 to 12 months, we have seen everything that we need to see to maintain confidence that the investments that we are making and will continue to make will enable us to maximize our potential. We believe our relentless focus on world-class products and our deep commitment to our people and our customers keep us well positioned to deliver durable growth into 2021 and for many years beyond. And with that, I'd now like to turn the call over to our Senior Vice President of Global Sales, Ryan Barretto, who will walk you through some of our customer success stories this quarter. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [4] -------------------------------------------------------------------------------- Thanks, Justyn, and thanks again to everyone for joining us today. I was blown away by the performance of our team this quarter. We set new records in several key areas, and emerging trends like social listening, social care and social commerce have us well positioned to continue delivering in the period ahead. Our opportunity is large and getting larger, and our team is executing incredibly well. Customers continue to turn to Sprout with acute needs and a heightened sense of urgency to transform their organizations. In Q3, we set records across the sales, success, support and services teams. Our success and support teams, in particular, delivered new records for quarterly CSAT, and that was done with larger volumes and larger projects. The customer review site, TrustRadius, recognized us with a Tech Cares award for our outstanding support of marketing teams during this pandemic. As you know, our unique focus on customer success is a point of pride for our company and a compelling differentiator. With in-person events on hold, we shifted marketing efforts to digital, and our Sprout Summit in September was a huge success with over 9,000 registered. If you attended the event, you heard speakers emphasize the importance of brand authenticity to remain compelling; about the importance of listening to the voice of your customers; and the structural changes that occurred as marketing, customer care and commerce all went digital. During the summit, I had the pleasure of interviewing Dara Treseder, the amazing Head of Marketing at Peloton. Dara encouraged our marketing peers to really embrace the power of social media and social data as she saw these insights is critical in building product road maps and business strategy. Now turning to the sales performance. All segments of our business were very strong this quarter, but I want to call out the enterprise team, which was lights out. A sample of the brands that we grew at this quarter included Electronic Arts, Sony, Lowe's, Nikon, Cummins, Purdue University and the Manpower Group. Here are a few specific comments from some of our new customers. Dennis Michel, the SVP of Card Operations at Discover, highlighted that providing exceptional customer service is at the heart of everything they do, and they're always looking for tools to better listen and respond to customer needs. As he said, "Working with Sprout gives us the ability to better understand the voice of our customers and creates new ways for us to engage with them, leading to improved customer experiences." While restaurants have faced numerous headwinds this year, they've continued to invest heavily in social. Social provides restaurants with a direct connection to customers and fans, which has filled the void of in-person interactions. Our new customer, Taco Bell, is a great example of this. Erika Prime, who leads digital and social strategy, recognized Sprout as a huge help for them in 2020. As she said, "With the challenging year and ever-changing social landscape, we decided to double down on community management and leverage even more user-generated content. Our fans took notice, and as a result, we've received more UGC than ever before. And thanks to Sprout's tools and working with their incredible team, it's been even easier to track our growth and quickly communicate with our amazing fans." We also continued to see growth within entertainment. The Cleveland Cavs were a great example of how popular sports brands are leveraging social to engage with their fan base. The behind-the-scenes docuseries, The Road Back, has been a huge endeavor for the Cavs, and they've been able to reach an even wider audience and understand their fans' response to it by using Sprout. Brandon Jirousek, the VP of Digital for the Cavs, shared that they selected Sprout as their partner because of our industry experience with other NBA teams and because our team and technology were a great fit for the franchise's growing needs. I couldn't be more impressed or grateful for the performance of our people at Sprout. Our culture continues to stand out, and our strong employer brand is attracting incredibly talented people to our company. As I recently shared with my leadership team, we're putting all stars at every position, which means that Sprout is well positioned to build on our success from here. With that, I'll turn it over to Joe to run through the financials. Joe? -------------------------------------------------------------------------------- Joseph M. Del Preto, Sprout Social, Inc. - CFO & Treasurer [5] -------------------------------------------------------------------------------- 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 2020. Total revenue for the third quarter was $33.7 million, representing 27% year-over-year growth. Excluding the impact from legacy Simply Measured, organic revenue was up 34% year-over-year. Total ARR exiting Q3 was $141.9 million, up 30% year-over-year. Organic ARR was $140.6 million, up 35% year-over-year. We achieved record net new ARR with health in both new business and retention. We added 1,200 net new customers in Q3 to finish the quarter with 25,556 customers, up 11% year-over-year. This quarterly net adds record is a reflection of strength across all market segments. Further, we saw an improved mix of both total customers and total ARR, landing with us on annual or multiyear subscriptions, which has notably positive implications on our long-term economics and speaks to the quality of this impressive new customer cohort. I do want to reiterate that as you have seen so far this year, net adds historically can be lumpy on a quarterly basis, and we remain focused on long-term double-digit customer growth, focus on high-quality unit economics. The number of customers contributing more than $10,000 in ARR reached 2,790, up 42% from a year ago and up from 2,544 in Q2 2020. Listening and premium analytics ARR continue to grow over 100% year-over-year. We are pleased in our greater than $10,000 customers who are now a record 11% of our total customer base. But even more importantly, these larger customers are growing even larger. This was evidenced by consistent 17% annual ACV growth as we onboarded a record number of new customers. 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 and are reconciled to our GAAP results in the earnings press release that was just issued before this call. In Q3, gross profit was $25.0 million, representing a gross margin of 74.4%. This is up 180 basis points compared to gross margin of 72.6% a year ago and compares with 74.0% last quarter. Sales and marketing expenses for Q3 were $14.1 million or 42% of revenue, down from 45% a year ago. As we move into Q4, we are accelerating our pace of hiring across both our sales and marketing teams that we prepared to fully capture our opportunity in 2021. Research and development expenses for Q3 were $7.2 million or 21% of revenue, down from 24% a year ago. We are pleased to have completed the migration away from Simply Measured, which gives us the ability to efficiently deploy design and engineering resources into new opportunities. We're going to grow our R&D teams next year to pull forward a multiyear product engineering investment plan. General and administrative expenses for Q3 were $8.1 million or 24% of revenue, up from 23% a year ago. This growth was primarily a function of public company expenses and the onetime fees related to our August follow-on offering. We expect general and administrative expenses to decrease as a percentage of revenue as we scale our operations. We have, however, received an efficiency benefit from our currently distributed workforce, which I would emphasize as nonrecurring in nature as we lap these efficiencies in the future. Non-GAAP operating loss for Q3 was $4.4 million for a negative 13% operating margin. This compares with a negative 19% operating margin a year ago. We outperformed our expectations due to higher revenue, the realization of efficiencies in a distributed working environment and the timing of key hires, which occurred later in the quarter than our plan. Even as we realize efficiencies from distributed work, we accelerated the pace of hiring across the business during Q3 and continue to fully fund our long-term growth priorities. Non-GAAP net loss for Q3 was $4.4 million for a net loss of $0.09 per share based on 51.9 million weighted average shares of common stock outstanding compared to a net loss of $5 million a year ago. Turning to the balance sheet and cash flow statement. We ended Q3 with $167.3 million in cash, cash equivalents and marketable securities, up from $129.5 million from the end of Q2 2020. We received $42 million in cash from our August follow-on offering. Deferred revenue at the end of the quarter was $37.5 million. Looking both at our billed and unbilled contracts, our remaining performance obligations, or RPO, totaled approximately $53.9 million, up from $50.9 million exiting Q2 2020 and up approximately 48% year-over-year. We expect to recognize approximately 87% or $46.9 million of total RPO as revenue over the next 12 months. Operating cash flow in Q3 was negative $2.6 million compared to negative $3.3 million a year ago. Free cash flow was negative $4 million in Q3 for a negative 12% free cash flow margin compared to negative $3.4 million and a negative 13% free cash flow margin a year ago. We had previously told you to expect us to spend around $1 million in free cash flow during Q3 for the build-out of our Seattle office. We spent roughly $500,000 during Q3, and the remaining $500,000 will be spent during Q4. Moving on to guidance. For the fourth quarter of fiscal 2020, we expect total revenue in the range of $35.8 million to $35.9 million or a growth rate of 27%. We expect our organic growth rate to be mid- single-digit percentage points faster than our reported growth rate as we lap Simply Measured revenue from a year ago. We expect non-GAAP operating loss in the range of $6 million to $5.5 million. In certain areas, we are accelerating the pace of investment with the balance of R&D, people and infrastructure investment to sustain our future as well as sales and marketing to capture the opportunity immediately in front of us. Overall sales and marketing efficiency remain consistent with our medium-term expectations. And as noted earlier, $500,000 of our Seattle office expenditures were pushed from Q3 into Q4. As such, we expect our Q4 free cash flow to be roughly $1 million better than our anticipated operating loss. We expect a non-GAAP net loss per share between $0.11 and $0.10, assuming approximately 53.1 million weighted average basic shares of common stock outstanding. As a reminder, our August follow-on offering added approximately 1.6 million shares to our fully diluted share count. For the full year of fiscal 2020, we now expect total revenue in the range of $131.4 million to $131.5 million. This is an expected overall reported growth rate of 28%, up from a prior midpoint of 26%. We now expect our 2020 organic growth rate to be approximately 35%, up from a prior estimate of 33%. For 2020, we expect non-GAAP operating loss in the range of $23.6 million to $23.1 million compared with our prior range of $27 million to $25 million. We are continuing to invest for our long-term growth while delivering multiyear profitability leverage. We expect a non-GAAP net loss per share of between $0.45 and $0.44 compared with a prior range of $0.53 and $0.49 and assuming approximately 51.8 million shares. In summary, the opportunity to help customers manage the social channel has ever been more mission critical. We are uniquely positioned to capitalize on the opportunity for multiyear growth. Our strong balance sheet and prudently managed cash flow gives a high degree of confidence to continue to make balanced investments that will enable us to achieve our full potential. With that, Justyn, Ryan and I are happy to take any of your questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) I show our first question comes from the line of Rob Oliver from Baird. -------------------------------------------------------------------------------- Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- Great. Just first one on the really strong rebound in net customer adds this quarter. Just curious what you guys saw in there. Obviously, post COVID, there was -- were some people who had put some projects on hold. Were these customers that had kind of been in the trial motion for a while with you guys? Or was this just sort of a continuation of the trends you guys called out last quarter where things were getting progressively better each month? And then I had a quick follow-up. -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [3] -------------------------------------------------------------------------------- Yes. Thanks, Rob. This is Justyn. You cut out for a moment when you're addressing the question, so I wasn't sure if you'd address that to me or to Joe. But I'll tell you, it's really consistent with what we had called out last quarter, which was after that period at the end of March and into April, where we saw some compression on the net new adds, we've really started to see it rebound pretty quickly. And it looked healthy really from the tail end of that quarter all the way through the third quarter. And so it doesn't seem to be as much of a factor, if at all, of kind of pent-up demand that's spilled over, more of just a consistent trend line from what we saw in the second half of Q2 through Q3. -------------------------------------------------------------------------------- Robert Cooney Oliver, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- All right. That's really helpful. And then, Joe, just a very quick follow-up for you on the increase in the ACV growth. Obviously, really good to see important metric. What -- aside from the fact that you guys highlighted you're moving upmarket nicely with these Fortune company wins, what are some of the components within that? Is it just larger lands? Or are you guys seeing some of the newer products such as premium analytics and listening start to kick in? -------------------------------------------------------------------------------- Joseph M. Del Preto, Sprout Social, Inc. - CFO & Treasurer [5] -------------------------------------------------------------------------------- Yes. Great question, Rob. I think what you're seeing is a combination of those. As we are landing these new customers at higher ACVs, especially when we're upmarket, they're definitely landing with 1 or 2 of these premium modules. So it's a great combination of not only getting more upmarket but adding these additional modules. And then on top of that, we saw not just on the higher end, but we saw just overall kind of strong ACV improvement across our net adds and then overall customer base. We're just seeing a lot of overall momentum in the business right now. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- I show our next question comes from the line of Stan Zlotsky from Morgan Stanley. -------------------------------------------------------------------------------- Stan Zlotsky, Morgan Stanley, Research Division - VP [7] -------------------------------------------------------------------------------- Perfect. Maybe the first one from us. Obviously, when the pandemic first started, we heard a lot of stories of people -- companies having to furlough their people or straight up fire their people. Are you -- what are you seeing within your customers? How are they doing as far as returning their own spend with you back to their pre-COVID levels? And I have a quick follow-up. -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [8] -------------------------------------------------------------------------------- Yes. Sure. Thanks, Dan. This is Justyn. I think what we've seen has been interesting. And I think this started kind of immediately, is the impacts of COVID started to take hold, which was that social hasn't really been on the chopping block in terms of the conversations that we've had with our customers. It's felt like an area that was going to be one of the last ones to really take that hit as businesses really needed to maintain that channel to be engaging with their customers and to be positioning themselves for the recovery. And so we didn't see a lot of that happen in our space. I think, certainly, as things have settled down and people have gotten into kind of the way of doing things, we've seen more engagement around longer-term thinking and larger deals and things like that. But from a resource perspective, it hasn't really felt concerning for us. -------------------------------------------------------------------------------- Stan Zlotsky, Morgan Stanley, Research Division - VP [9] -------------------------------------------------------------------------------- Got it. Got it. That's very helpful. And then as far as just -- and I apologize if this is already asked. I'm jumping between conference calls here. But can you give us an update on how your add-on products are doing and especially some of the newer ones like analytics and listening? I'd appreciate that. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [10] -------------------------------------------------------------------------------- Stan, it's Ryan Barretto. Thanks for the question. The add-on products continue to be a really strong part of our sales motion today, both from a new perspective as well as ACV growth perspective from our current customers. On the new business side, the lands especially with the sophisticated customers, which tend to be in the mid-market and enterprise but not limited as we see this in SMB and agency as well, they're coming in with needs around data. They want to understand their own data and which campaigns are working and how they're responding to customers. But they're also trying to tap into the voice of the customer and the customer that they don't have through a social listening data. So continue to see strength in both of those products. And then the reputation product has been really great for us as well. You heard it during our presentation at the beginning, the add of Glassdoor. We're seeing more and more that customers want to do all these things together, not just what you think of as traditional social, but things like review sites and brand and employer review sites as well. So all of those contributing really well to our growing ACVs. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question comes from the line of Matt VanVliet from BTIG. -------------------------------------------------------------------------------- Matthew David VanVliet, BTIG, LLC, Research Division - VP & Application Software Analyst [12] -------------------------------------------------------------------------------- I wanted to dig in maybe just a little bit more on what you're seeing, especially from expansion deals. It seemed like coming out of summit that social is becoming much more of a key component of the overall marketing strategy and no longer just kind of its own entity. But curious how you're doing, especially kind of expanding seats along with upselling, but just kind of what that trend has looked like. As more and more commerce has moved on to digital platforms and you're losing that sort of in-person engagement, how companies are approaching that. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [13] -------------------------------------------------------------------------------- Thanks, Matt. This is Ryan. Yes. I mean we've seen a lot of strength within this area, and it certainly evolved over time as the market has matured. When I started at Sprout 4 years ago, you'd typically be selling to the social media manager. And today, that's evolved into a team of social media managers. It's evolved into not just social media but across the entire marketing department, where you see people from PR and comms and brand and content. And with the addition of our premium analytics and listening, we are getting exposure to other parts of the business, which might range from social customer care to our analysts that are looking for data to make business decisions on. So the expansion has moved beyond just the typical user. And more and more, our customers are realizing that this data that exists through social has a ton of potential for them in making business decisions, right, understanding which markets they could be going into, getting a better handle on how their products are being perceived within the marketplace, identifying what their competitors are doing and helping them differentiate in their go-to-market motion. So all those things have really contributed to the success with the expansion. And for us, if we think about our go-to-market strategy, we really added on to the product suite over the last 24 months with listening and analytics and reputation. So really good progress on all of those fronts and continuing to see really good strength from our growth teams. -------------------------------------------------------------------------------- Matthew David VanVliet, BTIG, LLC, Research Division - VP & Application Software Analyst [14] -------------------------------------------------------------------------------- And a follow-up, Joe, you mentioned that you're a little behind in terms of hiring in the quarter. Just wanted to get a little clarification. Did you exit the quarter pretty much on plan and we should expect a relatively full run rate in the fourth quarter? Or did you -- did some of those hirings spill over into October and even the last couple of weeks? -------------------------------------------------------------------------------- Joseph M. Del Preto, Sprout Social, Inc. - CFO & Treasurer [15] -------------------------------------------------------------------------------- Yes. We had -- once we saw the momentum coming out of Q2 and in early Q3, we really wanted to increase the investment in the sales and marketing hiring side. And so we didn't get all those hirings in Q3. We had a pretty aggressive plan. So some of that will spill into Q4, and we're definitely going to continue to invest in that area, especially heading into 2021. And so given the momentum in that business, you can expect us to keep investing in that area, Matt. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- Our next question comes from the line of Chris Merwin from Goldman Sachs. -------------------------------------------------------------------------------- Christopher David Merwin, Goldman Sachs Group, Inc., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Okay. You talked about strength in the enterprise segment this quarter, and you called out, I think, your largest one ever. And I was wondering if you could talk a bit more about that deal. What did it include in terms of modules? Did it include users outside of the marketing department? Just trying to think through how this large deal could foreshadow some future large wins in the enterprise segment. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [18] -------------------------------------------------------------------------------- Thanks for the question, Chris. This is Ryan. Yes, that large deal included a few things. So it included users from a variety of different departments. Similar to the question before with Matt, it's not just the marketing department that we're touching today. We're touching places like social customer care. Oftentimes, it's getting into other departments that are leveraging the data, both from an analytics and social listening perspective. So in this circumstance, we're talking about dozens of users, premium add-ons, including analytics and listening as well. -------------------------------------------------------------------------------- Christopher David Merwin, Goldman Sachs Group, Inc., Research Division - Research Analyst [19] -------------------------------------------------------------------------------- Okay. Great. And just a follow-up about the integrations. You called out a number of new ones this quarter, Dynamics, Zendesk, HubSpot. How should we think about the impact of these integrations to the platform? Does this help with data sharing with these other systems? And maybe that contributes to the analytics product? Or does it help with larger customers who maybe have some of these systems and require them to become a customer? Just want to -- just curious how we should think about the integration as being a tailwind, I guess, to new logo growth or retention? -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [20] -------------------------------------------------------------------------------- Yes. This is Justyn. So really, what we're seeing here is similar to some of the conversations we've already had. Social is really expanding quickly across the organization, expanding well beyond the marketing department. And where we find ourselves and where our customers find themselves is that it is critical that they've got a centralized system of record for social media management. There are a lot of existing processes that simply can't be replicated in other systems of record. And so this primarily allows us to both bring data in and expose data out into some of those other platforms where some of those workflows are taking place. And from a tailwinds perspective, this gives us the opportunity to start to think about some of those additional use cases, start to get into some more of those sophisticated use cases outside of the marketing organization and really just help our customers solve more of their problems than we've been able to do in the past. And that's been a recipe for success for us thus far, and we think it's going to be even more so. And not only that, but certainly, the more that we're able to help them kind of evolve a lot of their processes at social is upending most of the business. That's an opportunity for us to create a pretty sticky and expanding relationship with those customers. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- I show our next question comes from the line of Raimo Lenschow from Barclays. -------------------------------------------------------------------------------- Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [22] -------------------------------------------------------------------------------- Thanks for fitting me in. You talked about the strength in kind of more of the larger customers. Can you just -- and Chris just asked about the largest deal in the quarter. Can you talk a little bit about what's driving it? Historically, you've -- there are other players that were kind of more playing up in the upper part of the market with more handholding, et cetera. Is the -- I'm just trying to understand what's driving the strength now. Is -- do you think the customer base is kind of understanding your automated offering better? Is it the strength of the add-on modules that are driving it? Just talk to that a little bit, and then I had a follow-up. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [23] -------------------------------------------------------------------------------- Yes. Raimo, this is Ryan. There's definitely a few things in play here. One, the additional products that we've added to the platform over the last 24 months in listening and analytics and reputation are perfectly suited for these sophisticated customers. They want to do all of these things in one space with one vendor, and we fit the bill for them. So that's definitely a big driver for us. And the value of that is not just that you check the box, but that it's easy to use, it's powerful, and it's scalable. And that's certainly what we're hearing from our customer base. There's an element, too, of educating the marketplace. And our brand is certainly doing very well within enterprise. Related to this, and we've mentioned this on a few other calls, but the power of the trial is just a huge differentiator for us, and it's very disruptive for the upmarket competitors. We believe in try before you buy. We believe that's the modern way of evaluating and buying software. And we're getting these enterprise customers to leverage the product before they sign a contract. And conversely, when they go back to the other competitors that they're looking at, most of them are only set up to do demos. And in this remote environment that we're living in today, and I think we're all feeling like we'll at least be in a hybrid state in the future, that means that we have a big competitive advantage in getting customers to get into the product, experience Sprout, experience not just the technology but our people. And that's just been highly disruptive for the competitive set. -------------------------------------------------------------------------------- Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [24] -------------------------------------------------------------------------------- Okay. Perfect. And then I had a follow-up for Joe. As you kind of now -- we're kind of in the planning stages for next year, and I don't want guidance from you, but like how do we think about like this new world that we are living in with kind of less travel, which kind of saves you money, but on the other hand, kind of in theory, it frees up for more kind of lead generation -- different types of lead generation activities, et cetera. Like how -- where are you guys coming out between like showing kind of leverage faster versus kind of using the opportunity to kind of maybe kind of use different channels to kind of speed up the momentum that you have? -------------------------------------------------------------------------------- Joseph M. Del Preto, Sprout Social, Inc. - CFO & Treasurer [25] -------------------------------------------------------------------------------- Yes. Thanks, Raimo. I think without obviously giving guidance for next year, I think what you'll see from us, as you've seen historically, is when we see things working and our sales and marketing investments are returning the kind of unit economics that they have, we're going to continue to invest in those areas. But at the same token, you've seen for several years now year-over-year improvement in our operating margins. And so I think you can expect a similar trend. You'll continue to see us invest in this business, especially for growth. But at the same token, you can also assume that we will be driving margins down going forward, and we'll be constantly making that decision and balancing those 2 things going forward. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- I show our next question comes from the line of David Hynes from Canaccord. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [27] -------------------------------------------------------------------------------- Congrats on the strong results. Obviously, really high quality wins, right? I think we talked a lot about the large deals. I want to ask a question on the quantity, right? 1,200 net adds is really impressive. So I'm curious, is it being driven by material improvement in conversion rates on the trial activity? Or are you just seeing explosion in kind of top of the funnel trial activity? -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [28] -------------------------------------------------------------------------------- Yes. Thanks for the question. This is Justyn. I think it's a handful of things. And I think it's a handful of things that have been true coming into this year and certainly in the early part of this year, saw some headwinds in March and April. But the net adds were not that much of an anomaly for us. Absent COVID, you would have seen, I think, the contrast between Q2 and Q3 net adds would not have been as dramatic as it is. But it's a function of the top of the funnel. It's a function of the sales team just doing a fantastic job converting. And it's a function of the logo retention and the improvements that we've seen there and really having a compelling value statement, as Ryan mentioned before, in every part of the market, SMB up through enterprise. And it's just consistency across the organization that we've seen in the last 3, 4 months with all of those things operating as we hoped that they would be and expected them to be coming into the year. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [29] -------------------------------------------------------------------------------- Yes. Yes. Makes sense. And then maybe one for Ryan on kind of the new products and the cross-sell/upsell opportunity. I guess I'm curious, if you kind of had to rank the 3, right, listening, reputation and analytics kind of against your internal expectations, which has done the best and which has maybe taken a little bit longer than you would have expected? -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [30] -------------------------------------------------------------------------------- Yes. I would say listening continues to be the one that we are seeing just over-delivery from. And I think it's a couple of things there. One, from an enterprise perspective, so many of those customers that are showing up have that expectation. But traditionally, those solutions have been incredibly hard to use. And the marketers that actually want the data can't usually get it. They're usually reliant on a consultant from the vendor that they bought from or somebody who's highly technical inside the organization. And so the fact that we can actually help them get into the data for them to be able to run their own listening reports is incredibly powerful. And the fact that listening sits alongside publishing, it means that the insights that they find, they can immediately use within the product. So that's certainly one piece. I think on the other side, I would say probably reputation, and reputation only because it's one of those areas that we're continuing to add to. So we've got some really great stuff in there today with TripAdvisor and Google My Business, and we've added Glassdoor. I think for us, we'll continue to contribute to that. And as we continue to contribute to that product, I think it's going to be very dangerous. But overall, I would just say, we're pretty excited about all of those things, and our growth teams are doing really well selling all those products to our current customers as well as landing new customers with more than 1 product. -------------------------------------------------------------------------------- David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [31] -------------------------------------------------------------------------------- Yes. Yes. Makes sense. It's a bit of an unfair question. It's like asking to choose your favorite child, right? So I appreciate the color. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [32] -------------------------------------------------------------------------------- I'd never say that one out loud. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- Our next question comes from the line of Arjun Bhatia from William Blair. -------------------------------------------------------------------------------- Arjun Rohit Bhatia, William Blair & Company L.L.C., Research Division - Analyst [34] -------------------------------------------------------------------------------- You talked about some of the sales investments you're making. I would just love to maybe dig in on some of the granularity on where you're making those investments on the sales and marketing side. Is it expansion? Is it new customers, SMB, mid-market? Would just love to hear some of those details. -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [35] -------------------------------------------------------------------------------- Yes. Arjun, it's Ryan. Thanks for the question. There's a few different areas. Maybe from the marketing side, I'll start. We continue to invest a lot in content. If you do any searches out there about social, you're likely going to run into some amazing Sprout content, whether it be the Sprout Social Index or detail that we've been providing around insights that have happened during COVID. Whatever it may be, we've built content that's fantastic for the practitioner or the executive, and that content is working, right? We've got this really impressive inbound engine that's driving a tremendous amount of trials and leads, and we want people on the product. So that inbound engine continues to be something that we are investing in through content. And we've really increased the throughput on the amount of content that we're delivering. From a sales perspective, the area that I'd highlight -- there's a bunch of different areas, but the one that stands out is just within our enterprise team. We mentioned, I think it was coming out of the first quarter, we saw a huge opportunity in enterprise. We shifted some of our resources both from a marketing perspective and an outbound prospecting perspective to focusing on enterprise. We got out of the gates really fast with hiring our enterprise reps. And we are just continuing to see the dividends pay off there. There's lots of opportunity in the marketplace. The reps within that team are executing incredibly well. And we feel good about all the segments. And all of our teams did really well this quarter, but those would be the 2 that I'd highlight. -------------------------------------------------------------------------------- Arjun Rohit Bhatia, William Blair & Company L.L.C., Research Division - Analyst [36] -------------------------------------------------------------------------------- Perfect. That's very helpful color. And then maybe one for Joe. I just wanted to touch on gross margins a little bit. I know there was a few moving pieces. It seems like Simply Measured has rolled off. At the same time, I think you said you've added maybe 8 new integrations. Is there any impact from those on gross margin that we should factor in? And then from the Simply Measured piece, are we at a more kind of steady gross margin rate now when we think about future years? -------------------------------------------------------------------------------- Joseph M. Del Preto, Sprout Social, Inc. - CFO & Treasurer [37] -------------------------------------------------------------------------------- Yes. Good question, Arjun. I think what you can assume with the integrations and then with the Simply Measured impact is you'll continue to see, over the next couple of quarters, a modest improvement on margin. So I don't think that we're at a steady state. I definitely think you'll see improvement, but I don't think it's going to be anything significant from those 2 things. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Our next question comes from the line of Tom Roderick from Stifel. -------------------------------------------------------------------------------- Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39] -------------------------------------------------------------------------------- Great to hear from you. Let me throw the first one here to both Ryan and Justyn, and you guys can tackle it collectively, I guess. But I think, Ryan, you had some comments on the call just regarding -- feeling that there's a heightened sense of market urgency out there. And we've seen some tremendous monetization efforts on social platforms that are sort of nontraditional platforms, if I think about Snapchat and Pinterest more recently, Twitter on the monetization side still doing very well. So a little bit of an odd point in time where the advertising efforts are coming in very strong. But as that happens, I'm wondering if that sort of drives a little extra demand for social media management platform, for the need for something like a spread to manage multiple platforms. And just broadly, I'd love to hear you talk a little bit more about what it is you're seeing in the market that's driving that heightened sense of urgency. -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [40] -------------------------------------------------------------------------------- Yes. So this is Justyn. I'll start. I think -- and this has been true dating back to when we got started, every year, there's more and more places that our customers need to be present and engaged and be keeping an eye on and be keeping -- and communicating with our customers. And to that extent, the fact that there are some breakout successes around the edges of kind of the big players in social definitely compounds in a pretty exponential way the need for centralized management. I think that's something -- when you look at our ACV growth historically and how consistent that's been a driving force there, there's more networks to manage. There's some multiple number of additional profiles. There's more people involved, and we're starting to see more departments and more use cases involved. And so that is a pretty powerful ingredient. I think that the demand is -- and I think we've all felt this over a couple of quarters now, but there is just this big shift. And there were a lot of folks who felt like this might be coming further into the future or that they have more time to think about how to evolve and what their organizations and their marketing and customer engagement efforts needed to look like 5, 10 years from now. And the reality is that it's upon us. They've got to get it figured out. And I think we're far enough into -- we've been working on this problem for 10 years. And it's sometimes easy to lose sight, but there's a lot of organizations that are just kind of getting started or just tackling the basics where they're hitting that next level of investment, that next level of prioritization for social, which is going to look very different. And I think that's another big driver for us. -------------------------------------------------------------------------------- Thomas Michael Roderick, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [41] -------------------------------------------------------------------------------- Yes. That's really, really helpful commentary. That's great. And Joe, follow-on just on the financial side. Appreciate that the metrics are really accelerating in the right direction. So I look at ARR accelerating; your total revenue growth -- organic revenue growth accelerating. Can you just unpack the metrics underneath that, just a little bit more with respect to what you saw on customer or dollar churn, net dollar retention, understanding you don't necessarily want to give those out every single quarter? But directionally, particularly on the churn side, it was really important to hear that last quarter, that, that was coming back. Where are you at -- what do you see on that front now? -------------------------------------------------------------------------------- Joseph M. Del Preto, Sprout Social, Inc. - CFO & Treasurer [42] -------------------------------------------------------------------------------- Yes. Great question, Tom. What -- obviously, we don't give that data out on a quarterly basis, but we'll give it out at the end of the year. But I think what we're seeing -- and it kind of is a reflection of what Ryan said earlier about our net add maybe with Justyn. Net adds is a combination of not only the record number we saw, not only strength at the top of the funnel in new business but also overall strength in our existing customer base and able to retain those existing customers. And so we're seeing a lot of momentum on that front. The customers that are coming in are coming at much larger dollar values. And those customers historically have been our biggest growers, our highest retention. On top of that, in my remarks, I talked about how we had the annual contracts and longer-term contracts are becoming over 50% of our new deals coming in. And so as we look forward into the coming years, we just think we're building an overall kind of stronger customer base. And because of that, we just feel like we have upside going forward on overall retention of this business. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- I show our next question comes from the line of Scott Berg from Needham & Company. -------------------------------------------------------------------------------- Alex Narum, Needham & Company, LLC, Research Division - Associate [44] -------------------------------------------------------------------------------- Sorry about that. This is Alex on for Scott. On the platform usage side, what are you seeing in terms of usage or engagement stats now there were a few quarters into COVID compared to what you're seeing pre COVID? -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [45] -------------------------------------------------------------------------------- Yes. This is Justyn. I'll take a stab at that. I think we've seen sort of consumer behavior and usage patterns similar with what the networks themselves reported. I think one of the things that's been interesting is kind of a secondary story line. In addition to the increased volume, it's just the types of things that consumers are doing on the networks and what that engagement amounts to. And what I mean by that is it is -- and this has also been consistent for several years. It is much more likely today than it was 9 months ago or 3 years ago, that those users are engaging with brands, engaging with brand content, reaching out, sharing opinions on products, et cetera. So it's not just the volume, and I think the networks have done a good job kind of sharing what that dynamic has looked like. But it's the types of conversations and the amount of engagement happening for the brands that's really different. And it's something that we think, particularly as -- we faced an environment where for the last probably year or 2, a lot of the discourse on the networks has changed and has -- there's been a lot of focus on political commentary, et cetera. If that starts to subside, I think you're going to see even more of that organic communication. And that's going to be something that's very powerful kind of dynamic shift, not only for the brands but potentially for advertisers as well. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- I show our last question comes from the line of Brett Knoblauch from Berenberg Capital Markets. -------------------------------------------------------------------------------- Brett Anthony Knoblauch, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [47] -------------------------------------------------------------------------------- I was just curious if you could try to update on what you're seeing internationally and how those dynamics are similar or progressing relative to maybe the domestic markets? -------------------------------------------------------------------------------- Ryan Paul Barretto, Sprout Social, Inc. - SVP of Global Sales [48] -------------------------------------------------------------------------------- Brett, this is Ryan. We feel really good about the international markets. As you may remember, we opened up our first international office in EMEA, specifically in Dublin in 2019. We've seen that team execute incredibly well there. It certainly helps having a team on the ground, building relationships locally, doing some local marketing. So progress has been really good there. We see the same thing across APAC, ANZ and the Latin America market as well. So our top of funnel has been really healthy there, and we feel really good about the conversion rates and the customer adds within those markets. We know many of those markets, especially in EMEA, they have started to shut down again. But so far, we feel really good about just the progress that we've seen from that team and continue to see that as we ended the quarter. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- This concludes the Q&A session. At this time, I'd like to turn the call back over to Mr. Justyn Howard, CEO and Co-Founder, for closing remarks. -------------------------------------------------------------------------------- Justyn Russell Howard, Sprout Social, Inc. - CEO, President & Director [50] -------------------------------------------------------------------------------- Yes. Great. Thank you so much. And thanks again, everyone, for your time. We enjoy spending some time with you this afternoon. We'll be doing a bit more of that in the coming months, attending a handful of events and just always appreciate the engagement and the questions. I want to close just with a thanks again to our employees and our customers and our partners. The work that's been done in this organization over the last couple of quarters in the face of a lot of curveballs has just been remarkable to watch, and we're so grateful. And we look forward to catching up with all of you again soon. Thanks. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.