Sprout Social Inc

NASDAQ:SPT

Earnings Call Analysis

Record Revenue and ARR Growth Outpace Expectations

For Q4, the company reported $93.6 million in revenue, a robust 34% increase from the previous year, with subscription revenue at $92.2 million, marking a 33% year-over-year rise. The total Annual Recurring Revenue (ARR) also rose to $385.2 million, a significant 30% leap compared to last year. Growth was particularly strong in the enterprise segment, as well as in offerings like premium modules and early Tagger momentum. Their non-GAAP operating income reached $1.7 million, reflecting a more efficient 1.8% margin, and they anticipate recognizing 72% of total Remaining Performance Obligations (RPO) as revenue, hinting at a 62% compounded annual growth rate over the forthcoming year. However, the overall dollar-based net retention rate slightly declined to 107% from 109% in the prior year.

Robust Revenue Growth and Customer Base Expansion

In the fourth quarter of fiscal 2023, the company achieved a revenue of $93.6 million, which is a significant 34% year-over-year increase and surpasses the established plans. This surge was driven by a considerable uptick in both subscription and services revenues, growing 33% and 175% year-over-year, respectively. The most promising highlight is the expansion in the customer base, with a 31% growth in customers contributing over $10,000 in ARR and even a higher 44% increase in those contributing more than $50,000. This demonstrates the company's strong foothold in retaining high-value customers and its strategic focus on scaling its customer base with greater annual contributions.

Annual Recurring Revenue and Contract Value Booming

The company closed the fiscal year with a total ARR of $385.2 million, a 30% jump from the previous year, buoyed by new business growth in the enterprise sector and growing adoption of premium modules. New record annual contract value (ACV) growth hit 43% year-over-year, signaling the company's ability to secure larger deals and hinting at an optimistic outlook for sustained ACV growth. This is particularly impressive considering the reduction and ultimate removal of ARR from noncore customers, which lessened the growth drag for the future.

Strengthening Profitability Indicators

The non-GAAP gross margin improved modestly to 79.3%, while operating margins saw a more significant boost with a 100 basis point year-over-year increase reaching 1.8%. This reflects the company's commitment to balancing growth investments with profitability measures. A close look at the expenses tells us that sales and marketing as well as general and administrative spend have been kept in check relative to revenue, showcasing fiscal discipline amid aggressive enterprise sales and R&D investment.

Balance Sheet and Cash Flow Dynamics

With $98.1 million in cash and deferred revenue hitting a record $141.5 million, the company exhibits a solid financial position. Remarkably, the recognized performance obligations (RPO) surged to 69% year-over-year, indicating strong future revenue recognition. However, the company faced a mild cash flow challenge, with operating cash flow turning negative compared to the previous year due to Tagger integration and seasonality in the enterprise renewal base.

Forward-Looking Guidance Suggests Continued Growth Trend

Looking ahead, the company projects the first quarter fiscal 2024 revenue will grow over 29%, with non-GAAP operating income between $0.6 million to $0.7 million. For the full year 2024, they anticipate revenue growth to approximately 28%, translating to a range of $425.3 million to $425.5 million, with a planned improvement in non-GAAP operating margin of approximately 220 basis points. Furthermore, non-GAAP net income per share is expected to be between $0.22 and $0.23.

Earnings Call Transcript 2023-Q4

[Operator]

Good day, and welcome to Sprout Social, Inc. Conference Call. [Operator Instructions] Please note that today's call is being recorded. [Operator Instructions]

I'd now like to introduce the call to Jason Rechel, Vice President of Investor Relations. You may now proceed.

[Jason Rechel, executive]

Thank you, operator. Welcome to Sprout Social's Fourth Quarter 2023 Earnings Call. We'll be discussing the results announced in our press release issued after 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 representing our views at any subsequent date. 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 31, 2023, to be filed with the SEC as well as our most recently filed 10-K and 10-Qs.

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 a reconciliation to the most directly comparable GAAP financial measures, are included in our fourth quarter earnings 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 Justyn.

[Justyn Howard, executive]

Thank you, Jason, and good afternoon, everyone. Thank you, as always, for joining us.

We are proud to deliver a fantastic fourth quarter results. We're entering 2024 with notable momentum and an expanding scope of growth opportunities. Earlier this month, we were rated as the #1 best software product by G2 across the entire software industry, adding to leadership across all of the major categories in which we compete. We believe our product leadership and outstanding execution have Sprout positioned for a breakout year as we define category leadership.

During Q4, we saw continued record new business ACVs and total ACV growth of 43% year-over-year. We added record net new organic $10,000 and $50,000 customers. And our premium product attach rate is now 30%, with premium product ARR growing greater than 50% year-over-year. We added record net new ARR, a record increase in deferred revenue and step-change increase in RPO and CRPO. New RPO or total contract value bookings was nearly 80% higher than any quarter in our history. New CRPO bookings increased nearly 3x year-over-year.

Our focused strategy is yielding powerful results. Our customers are making increasingly large and long-duration investments in social, which we believe will converge reported leading indicators upwards towards CRPO over time. We believe this will have the compounding effect of accelerating the durability and efficiency of our future growth.

Our industry is maturing and new research from Deloitte Digital says it far better than we could. Social-first brands are repositioning social media at the core of the entire brand and customer experience as a key strategic priority. Our goal is to make Sprout industry standard publishing an engagement platform and to make social listening, social advocacy, influencer marketing and sophisticated reporting core to the workflow of the world's most innovative brands.

We see massive potential to unify what should be standard social capabilities for all global businesses and to accelerate premium product attach rates and ACV growth. Exiting 2023, our premium product attach rate increased 30% and total premium module ARR is now growing greater than 50% year-over-year.

CAGR will play an important role in our platform strategy, and the growth potential entering 2024 is proving to be greater than we had planned. It is increasingly clear that social media management and influencer marketing demand live together for both workflow and reporting.

We continue to execute on our differentiated value position, with inbound interest coming from a diverse set of current customers and geographies. With more than 3x current Sprout ACVs and a meaningful opportunity to further differentiate Sprout while cross-selling into our customer base, we believe Tagger is on track to achieve our $100 million ARR target.

Stepping back to our broader product strategy. Our customer-led rankings on G2 are an outcome of our aggressive product investments over the past 24 months. We've accelerated our platform investments in AI, Social Customer Care, listening, advocacy and industry-defining integrations. We believe differentiated product integrations with amazing partners like Salesforce, the product-enhancing acquisitions of Tagger and Repustate, and rapidly expanding enterprise capabilities have positioned Sprout to lead our category.

Last week's announcement of Social Customer Care by Sprout is a notable output of this innovation as we seek to establish ourselves as the clear choice for Social Customer Care. We're now delivering faster, more personalized and more complete customer support with AI-powered case management, intuitive reporting and out-of-the-box iterations with leading customer care platforms like Salesforce, Zendesk and Microsoft. Social care is the fastest-growing market in our SAM, and we believe we are well positioned to lead that market.

We delivered more than 150 material new product enhancements in total during 2023, more than 25% greater than each of the prior 3 years. And we believe our pace in innovation is only getting started. This pace of change also aligns to the pace of change in the market, which is evolving faster than ever.

We are proud to elevate our relationship with Reddit earlier this month for Tagger to lead the new creator API with Snapchat, to join Meta's Ad Tech Partner program and to currently be working as an alpha partner for Meta's Threads API. We're deepening our relationships across our partner ecosystem and are proud to be core to many other key 2024 partner priorities that will deliver utility to our shared customers. We believe our single code base, coupled with strong and dynamic partner relationships, are key competitive differentiators for Sprout and are extending our moat as we scale.

Sprout's recognition as the #1 best software product ranked by G2 highlights the incredible success our customers are having. In fact, during 2023, our customers cumulatively spent more than 6 million hours of time in Sprout and we processed over 1.5 trillion messages and actions for them. We've doubled-down on our thesis that social is maturing and is the primary communication channel between brands and their customers. The continuing maturity of the market is solidifying Sprout's the social system of record, intelligence and action. We aspire to set the bar innovation in our industry and to emerge as the market leader. The logos you'll hear Ryan talk about shortly are equal parts humbling and indicative of where we are as an organization.

We outlined our next great growth chapter last fall at Investor Day, and we're executing well as we progress toward our goal of $1 billion in annual revenue. Going into 2024, we believe we have the right team, platform and approach to realize our full potential.

And with that, I will turn the call over to Ryan.

[Ryan Barretto, executive]

Thanks, Justyn. 2023 was a year filled with great progress, milestones and success. We evolved our long-term strategy while proving that we are perfectly positioned to make the largest and most complex customers successful. I have so much gratitude for our team who operate with relentless focus, work ethic and excellent execution and deep appreciation for our customers who put their trust in us every day and are seeing the increasing value of social delivered through our platform.

Our customers' success is clearly driving our success. So I think it's fitting that I kick off by highlighting the iconic brands that we are fortunate to grow with during Q4, which included X, formerly known as Twitter; DHL International; Brown-Forman Corporation; Kenvue; PG&E Corporation; The CW Network; Archer-Daniels-Midland; U.S. Chamber of Commerce; American Honda Motor Company; Whirlpool; Avis Budget Group; Panasonic; Nationwide Children's Hospital; Sega of America; Grab Taxi; Becton Dickinson and CoStar Group.

Our most sophisticated customers are social-first organizations that rely on Sprout to drive efficiency and innovation. And our new customer, Advanced Micro Devices, is a perfect example of what this looks like. Chris Downey, Director of Social Media in AMD shared, "We are excited to enhance our social strategy with Sprout Social. We are a data-driven organization, and our goal is to empower our teams with intuitive software that can improve efficiency across the organization. With Sprout, we now have the ability to improve our publishing collaboration, streamline social customer care and make impactful decisions with sophisticated reporting capabilities."

Focus matters, and we're focused on being the social platform powering the world's most innovative brands. At the same time, customers are highlighting to us that they're seeing our competitors investing less in their teams, in their customers and in their products. This is reinforcing the strength of our strategy and our differentiation. You can see this in the usability of our platform and how leading with the product has become the primary driver in our strengthening win rates in the enterprise. Our recognition as the #1 SaaS software product in G2 is a reflection of all this.

G2 is the world's largest and most trusted software marketplace where 90 million software buyers seek out advice and where rankings are based exclusively on user reviews. Sprout was the best software product overall. This is a reflection of the differentiation of our software and the strategic value our customers derive from our platform and products.

Building from this position of product leadership, it was just over a year ago that we've dialed in our strategic focus. We've moved away from the inefficient growth anchor at the low end of our category and accelerated our momentum into the fastest-growing tiers of our TAM where the unit economics are stronger and where we believe our competitive differentiation increasingly stands out.

Digging deeper into the research from Deloitte Digital that Justyn just referenced, social-first brands are 4.7x as likely to use social platforms extensively for customer care; 3.1x as likely to manage paid and organic budgets together; 10.7x as likely to report their influencer marketing strategy is effective; and my favorite, these brands are 8x as likely to have exceeded revenue goals by 25% or more. We have to remember that all of this is driven by consumer behavior and expectations. And social-first brands are beginning to not only see measurable business results but are prioritizing social across the entire organization. And because of this, the deeper we go into the enterprise, the more we're able to unlock new greenfield growth opportunities either because legacy and often siloed technologies couldn't meet the need or because businesses are at the right point in their maturity to adopt a social-first strategy.

Sinclair Broadcast Group is a great example of this. They were a new Q4 customer that moved from managing social natively to standardizing on Sprout. "News never stops, and social is the first place people look for information and updates," said Nickolas James, VP of Social Media at Sinclair Broadcast Group.

Without a social media management tool in place, it would be impossible for us to coordinate efforts across nearly 500 accounts. The usability of Sprout's platform creates operational efficiencies that allow our teams to focus on important work they're doing and to deliver even more impactful stories to their communities.

Unlocking more value, making our customers' lives easier and helping them get value quickly is all part of our value proposition. Memorial Hermann Health System is a great example of this dynamic. Andy Pape, Head of Content and Social Strategy shared, "Sprout allows our team to punch above our weight. The comprehensive platform provides a user experience that makes it painless to engage our audience, build our brand and manage our reputation at scale. Sprout's powerful analytics makes it easy to report on our successful outcomes and get alignment on our strategies. The user experience is intuitive, which has made our team happier and more efficient since making the switch."

We continue to focus on expanding our partner ecosystem to further build out our future flywheel. Our partnership with Salesforce continues to set an amazing precedent for future success with other partners. During Q4, we delivered another very strong performance with new logos similar to Q4 of last year, but with 40% more new ARR than Q4 2022. This is not only due to working with more complex social studio deployments as they near end of life but because of our unique integration into Salesforce, which is enabling brands to do more with social than ever before. We have a massive opportunity to execute with Salesforce in 2024. And as we've shared before, we also see an even larger opportunity in the years ahead as we work to make Sprout a standard social platform for any Salesforce customer. We believe our Social Customer Care platform, together with Salesforce Service Cloud, in particular, is the future of omnichannel care.

As we reflect back on the progress we've made over the past year, I've never been more excited by the differentiation of our platform, the strength of our team and our focused investment strategy to deliver outsized value to all social-first brands. We're excited for 2024 as we continue building a category-defining software franchise.

And with that, I'll turn it over to Joe to run through the financials. Joe?

[Joseph Del Preto, executive]

Thanks, Ryan. I'll now walk you through our fourth quarter fiscal 2023 results in detail, then moving on to guidance for the first quarter and full year 2024.

Revenue for the fourth quarter was $93.6 million, representing 34% year-over-year growth and well ahead of plan. Subscription revenue was $92.2 million, up 33% year-over-year. Services revenue was $1.4 million, up 175% year-over-year.

Total ARR exiting Q4 was $385.2 million, up 30% year-over-year and ahead of our expectations. Record new ARR was led primarily by rapid enterprise new business growth, accelerating premium module attach rates and continued early Tagger momentum. Importantly, we also entered 2024 without low-end ARR that has been unanchored on our performance. Noncore customers further declined in Q4 and now represent less than $800,000 in ARR. This business will no longer be a headwind to growth in 2024. The number of customers contributing more than $10,000 in ARR grew 31% from a year ago. The number of customers contributing more than $50,000 in ARR grew 44% from a year ago.

Q4 ACV growth was a record 43% year-over-year. Record new business deal sizes and early returns from influencer marketing each compounded ongoing healthy seat expansion and premium module attach rates. We expect rapid ACV growth similar to second half 2023 ACV growth rates to continue over the medium term driven by strength in enterprise, influencer marketing and customer care.

In Q4, non-GAAP gross profit was $74.2 million, representing a non-GAAP gross margin of 79.3%. This is up 60 basis points compared to a non-GAAP gross margin of 78.7% a year ago.

Non-GAAP sales and marketing expenses for Q4 were $39.6 million or 42% of revenue, up from 41% a year ago. We continue to hire aggressively in our enterprise sales and growth organization.

Non-GAAP research and development expenses for Q4 were $17.1 million or 18% of revenue, down from 90% a year ago. We continue to invest in our future, and our increasingly targeted investments in AI and social customer care are delivering strong returns.

Non-GAAP general and administrative expenses for Q4 were $15.8 million or 17% of revenue, down from 18% a year ago. We expect to deliver consistent G&A leverage as a percent of revenue moving forward.

Non-GAAP operating income for Q4 was $1.7 million for a 1.8% non-GAAP operating margin, an improvement of 100 basis points year-over-year. Non-GAAP net income for Q4 was $1.0 million for non-GAAP net income of $0.02 per share based on 56.1 million weighted average shares of common stock outstanding compared to a non-GAAP net income of $1.8 million and $0.03 per share a year ago.

Turning to the balance sheet and cash flow statement. We ended Q4 with $98.1 million in cash, cash equivalents and marketable securities. This is down from $121.4 million at the end of Q3 and reflects early repayment on our revolving credit facility.

Deferred revenue at the end of the quarter was $141.5 million, a record sequential increase.

Looking at both our billed and unbilled contracts, RPO totaled $275.0 million, up from $228.7 million exiting Q3 and up 69% year-over-year. We expect to recognize 72% or $198 million of total RPO as revenue over the next 12 months, implying a CPR growth rate of 62% year-over-year. The acceleration of these metrics reflects our underlying momentum in the enterprise, highlights the rapidly improving quality of our business and revenue to our highest ever quarterly total contract value bookings by nearly 80%.

The mix of our business has changed materially. We have increasingly fewer month-to-month customers, which has been a drag on reported ARR as we have shifted resources to support higher-value customers. Billings and RPO are likely to be increasingly informative leading indicators. We believe that our sustained high growth momentum into mid-market enterprise is likely to converge our reported metrics towards CRPO over the next 12 to 18 months.

Operating cash flow in Q4 was negative $2.6 million compared to positive $3.0 million a year ago. Non-GAAP free cash flow was negative $0.3 million, down from a year ago. While working through the final stages of Tagger integration, accounts receivable also increased by nearly double the amount of Q4 2022, reflecting an expanding enterprise renewal base, which we believe will make our cash flow more seasonally weighted towards Q1 over time.

For the full year 2023, non-GAAP free cash flow was $10.2 million or 3.1% free cash flow margin. We expect free cash flow margin to continue to turn above our non-GAAP operating margins in 2024.

In 2023, our overall dollar-based net retention rate was 107%, down from 109% in 2022. Our dollar-based net retention rate, excluding SMB customers, was 111% in 2023 compared with 116% in 2022. Our strategic change in 2023 and the emphasis on low value, low potential customers accelerated churn in our SMB and agency segments, which was a substantial drag on reported NDR. [ Levi's ] exit sets Sprout up for very strong NDR in 2024 as we continue to shift our business towards total net retention north of 120% over our medium-term forecast horizon.

Shifting to formal guidance. For the first quarter of fiscal 2024, we expect revenue in the range of $97.2 million to $97.3 million or a growth rate of more than 29%. We expect non-GAAP operating income in the range of $0.6 million to $0.7 million. This assumes a non-GAAP operating margin of 0.7% at the midpoint. We expect a non-GAAP net income per share of between $0.00 and $0.01. This assumes 56.4 million weighted average basic shares of common stock outstanding.

For the full year 2024, we expect total revenue in the range of $425.3 million to $425.5 million, an expected overall reported growth rate of approximately 28%. For the full year 2024, we expect non-GAAP operating income in the range of $50 million to $60 million. This implies annual non-GAAP operating margin improvement of roughly 220 basis points. We expect non-GAAP net income per share between $0.22 and $0.23, assuming 57.0 million weighted average basic shares of common stock outstanding.

Over the course of 2023, we have aligned our business and our investments around the most productive and fastest-growing segments of our market. We believe we 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?

[Operator]

[Operator Instructions] Our first question comes from Raimo Lenschow from Barclays.

[Raimo Lenschow, analyst]

Congrats from me. First question is on customer momentum. You named some really interesting names that you won this quarter. Can you talk a little bit about where they are coming from? And as part of the insight, could we kind of double-click a little bit on Social Studio because we kind of probably would have expected a little bit more new logos coming from that side. But talk a little bit broadly where are you getting it from and how much Social Studio is contributing there. And then I have one follow-up for Joe.

[Ryan Barretto, executive]

Thanks, Raimo. I'll start. This is Ryan. From a pipeline perspective, where the customers are coming from, it tends to be a bunch of different areas that we're excited about. On the call, you heard a lot from some of the competitors that we typically see upmarket. So there's some swaps happening within the market. Typically, we're hearing from our customers that they're challenged with a few things, be it the most complex parts of the platform that they're trying to get access to, like Listening and Reporting, where they're finding great value in Sprout.

But you're also seeing customers moving away from using just the note tools at all, so directly X or Meta, we called this native in the past. But we've seen customers like Sinclair, a great example, where the needs for social have risen so much that they need a platform like Sprout to be able to manage through engagement with so many different customers as well as being able to manage some of the data. So it's a combination of these greenfield opportunities that we're seeing as well as takeaways and then growth, obviously, on our current accounts.

From a Salesforce Social Studio perspective, yes, I'd call out the 40% gain in ARR from those customers. We continue to see a lot of good opportunity with that Salesforce pipeline. We're very excited about the opportunity in front of us in '24. Beyond just the Social Studio, the Salesforce Service Cloud has become a really big opportunity for us within the ecosystem given the integrations we've built into the service cloud. So I think just the headline for you there is we'll continue to see some of those Social Studio swaps this year as well as more opportunity within the rest of the Salesforce ecosystem.

[Raimo Lenschow, analyst]

Okay. Perfect. And then, Joe, for you, if I think about it, like the nature of the business is changing, and with that, the numbers are changing. And you mentioned CRP was probably a better way. But we're kind of on a journey. Like, how should we think about judging you this year? And at what point do you feel comfortable kind of swapping some of the metric numbers over?

[Joseph Del Preto, executive]

Yes. So good question, Raimo. I called this out in my remarks, I think over the next 12 to 18 months is kind of that time horizon where we believe RPO, CRPO, billings will be better leading indicators for our business. And so our plan every quarter is kind of give you an update on how those are trending and what that time horizon looks like, but we think it's still out over the next couple of years.

[Operator]

Our next question comes from Arjun Bhatia from William Blair.

[Arjun Bhatia, analyst]

I'll add my kudos on a nice Q4. Maybe one for Justyn on the product side. You launched this new social care solution. It sounds very interesting. I think it's one of the areas where you've been getting good traction already. Can you just maybe expand on the incremental capabilities that are a part of the care product, how it differentiates from what you've had in market already? And then when we think about kind of the monetization lever, is this going to be a separate SKU? Or is this part of the core platform?

[Justyn Howard, executive]

Yes. Great question. Thanks. So as you mentioned, I think we've been incredibly strong in the Care use case for some time. You've heard a lot of the large wins that we've been talking about in that area, and we've also talked about us wanting to lean in and accelerate our investment there. And for us, that was recognition that this is going to continue to be a driving force for our customers and future customers. It's going to be one of the bigger opportunities that we've got over the next couple of years. And we didn't want to rely on the way that those capabilities were kind of evolving organically. We wanted to put more horsepower behind that. We wanted to reimagine what that looked like. .

And so what that looks like from a product perspective, reimagining what case management looks like, incorporating AI into those capabilities, building more robust routing and automation around larger care teams. And it is a combination of things that we have released over the last couple of quarters, things that were existing in our product but built and reoriented from what was historically something that was kind of you're doing customer care in social to something that was care-first capabilities and organized and architected that way for the customers that were ready to make that part of their charter and make that part of the way that they work operationally.

And we know that it's still a small portion of the market at this point that has fully adopted, embraced and kind of operationalized, Social as a Care channel in the way that we're building for, but we fully expect that down the road and in the coming years, that's going to be more and more. And we wanted to build ahead and be ready for that. So it's a combination of a lot of things that our customers have enjoyed, a lot of new things that we've been building and a lot of things that we have planned on our road map moving forward.

From a monetization perspective, we're still thinking through exactly how that looks. The biggest monetization lever around care is, obviously, those tend to be very large deployments from a seat perspective. They tend to be on our more expensive plans over longer durations, et cetera. So we feel really good about how that's being monetized indirectly. How that looks from a packaging perspective is something that we'll continue to evolve our thinking on.

[Arjun Bhatia, analyst]

Okay. Perfect. That's very helpful. And then maybe one for Joe. The net retention rate for large customers, I think it was 111% to end the year. I was wondering if you could just walk through some of the puts and takes on that because I think the commentary that we're hearing, that your premium module attach rates are increasing. I would have expected that maybe to show up in that net retention rate but perhaps some of the business transition that's having an impact there. Can you maybe just walk us through, now that you're a year out from the transition, how we should expect that to trend in 2024, especially as you continue to move upmarket here?

[Joseph Del Preto, executive]

Yes, for sure. So Arjun, one thing to call out there, that number is ex SMB, and so it includes our agency business. And especially on the low-end agency side, we had a lot of non-core customers. So if you think about the ARR that we turned in 2023 related to the non-core, there was a chunk of that, that was in the agency, especially on the smaller side of the agency business, that's dragging that number down. If you actually look at the net dollar retention up in the mid-market enterprise, you actually saw really consistent, if not better, net dollar retention in 2023 versus 2022. And so now that we're moving past that non-core kind part of our customer base, in our mind, you're going to see this number that's going to be more majority mid-market enterprise going forward. You'll see acceleration in that net dollar retention as we go into 2024 and beyond. We just have a much healthier kind of starting point. And so we feel really good about how that number will trend.

[Operator]

Our next question comes from DJ Hynes from Canaccord Genuity.

[David Hynes, analyst]

Congrats on the G2 award, that's pretty impressive. Ryan, I want to build on the topic that came up in your answer to Raimo's question around the broader sales force ecosystem opportunity. So we've heard lots about your efforts to get more deeply integrated from a product perspective, right, whether that's Service Cloud or Marketing Cloud. I'd love to get more color on the go-to-market strategy and that opportunity. So I guess there's kind of two questions there. One, like how aware are Service Cloud customers of the changes that are coming to their integrated social support when Social Studio reaches end-of-life? And then two, what's the go-to-market strategy to get in front of those folks? Is it happening in tandem with the Salesforce rep? Or is it entirely dependent on direct outreach from Sprout?

[Ryan Barretto, executive]

Yes. Thanks, DJ. In terms of awareness, especially for Social Studio customers, I think there's decent awareness. There's still opportunity within the marketplace. We've been working very closely with that Salesforce team for the last couple of years to get in front of those customers, be it hand-to-hand combat with the AEs and the SEs on accounts. You've seen us at most of the shows that Salesforce does, including the big ones like Connections and Dreamforce, where we've often had keynote speaking opportunities. And then we've just been doing a lot of marketing to them. I still think that there's just a lot of opportunity there given just how big that Salesforce ecosystem is. So even things like the recent customer care launch that we've had here, I think it's another great opportunity for us to continue highlighting the best place to do omnichannel care where Salesforce is in combination with Sprout. So I think it's good today. There's still opportunities for us that we're pressing on as we move forward.

To the second part of the question, the go-to-market, the majority of the deals that we're in is some combination of a partnership approach to how we're presenting those customers. So sometimes, they'll actually highlight it to us through a flat channel that we have. Sometimes we'll be in the market and we'll identify the opportunity and go back and connect with the Salesforce account team, and they've been excellent in partnering with us there. And then oftentimes, we're going in together and presenting that omnichannel solution between Service Cloud and Sprout. So I think it's a good combination of partnership that we have. And even if they don't bring it to us directly, the #1 play for us is to actually go back to that Salesforce team and bring them into the account.

[David Hynes, analyst]

Yes. Okay. And this may be for you as well, Ryan, but I'm curious just on doors unlocked that comes with the deemphasis of the F&B business. Like how material has that been? How are those folks being kind of repurposed or utilized inside the organization? Is there any like quantifiable way to think about incremental capacity that's now available for what, I guess, I would call your focus efforts?

[Ryan Barretto, executive]

Yes. I mean a lot of that transition was happening through '23. I think it hits in a few different spots, right? It hits in the way in which you are building capacity from an AE perspective. So for us, if I think about that, like there's more investment happening in the mid-market and enterprise, and we're able to do that because of the emphasis that we have there. So just from an AE capacity perspective, that helps. From a marketing perspective, you give a lot more focus to the marketing team on the places that we really want to drive inbound pipeline and opportunity, even the marketing strategies upmarket in the mid-market and enterprise and the approaches we could take. So we would be more focused on the dollars that we spend and what we're hoping to get out of it.

And then from a customer perspective, that's one of the biggest opportunities for us as well. If you're not handholding really small customers that may not truly understand social who, by the way, end up taking up as much resources oftentimes as the enterprise, you're able to redeploy your resources to focus in on those more social-first sophisticated customers. So we're seeing it across the board. And I think the best way to just think about it is the redeployment of our resources towards those sophisticated customers in the core.

[Operator]

Our next question comes from Parker Lane from Stifel.

[J. Lane, analyst]

Joe, I was wondering, with the addition of Tagger, if you could break down the components of ACV growth that you saw in the fourth quarter and what you're anticipating for 2024. I think you mentioned that you expected that to grow at similar rates to what you saw in the second half of the year. So any visibility there would be great.

[Joseph Del Preto, executive]

Yes. So if I think about the ACV growth in Q4, I think I would stack rank it. We had record new business. ACV is probably the leading indicator followed by like the acceleration that we saw in the premium module attach rates, and then the Tagger piece. Like Tagger still in Q4, although we saw some nice deals, wasn't a significant driver in the quarter overall. And so I would put that probably at the bottom of the list as what we saw what was driving the ACVs in Q4. And then Parker, going into next year, what I was talking about is like we expect to see very similar ACV growth in the first couple of quarters of 2024 that you saw in the back half of 2023. And then we expect that in the back half of 2024 to start to decline but still be higher than the historical kind of ACV growth that you saw from us. And so that's kind of how we see it playing out next year.

[J. Lane, analyst]

Got it. Very helpful. And then, Justyn, I know you guys expanded your relationship with Reddit earlier this month in an announcement. Can you just talk about the relative importance of that channel to your customer base today and future customers? And what sort of differences do you see in the quality of data that comes out of that channel from others?

[Justyn Howard, executive]

Yes, it's a great question. I think Reddit is really unique in the sense that there's a lot of long-form kind of in-depth and multi-threaded conversation happening around brands, around products, around market sentiment, et cetera. And with the channels that our customers have typically relied on for listening, engagement, et cetera, we tend to get kind of the short-form reactions, the messages that lack context, et cetera. And for us to be able to bring both from a listening perspective now and more, in the future, Reddit data into the fold, particularly in some industries, larger brands, where there's a lot of conversation happening there, that just unlocks a whole new level of insight, a whole new level of understanding in the customer voice, et cetera. So that's a phenomenal addition for us, and we're really glad to be working at a higher level with them and deepening that relationship.

[Operator]

Our next question comes from Adam Hotchkiss from Goldman Sachs.

[Adam Hotchkiss, analyst]

I guess I wanted to follow up on the go-to-market side to start. How are you guys thinking about the partner opportunity here beyond Salesforce, especially now that you're building your brand upmarket and moving quicker into the enterprise and mid-market space? Do you guys see an opportunity to more significantly build out practices with larger partners to accelerate the push here?

[Ryan Barretto, executive]

Yes. Thanks, Adam. We do, and we have been. We've certainly been highlighting the Salesforce one given the opportunity to really take care of a ton of customers together, but we've historically had a lot of partners within the ecosystem. The way we've always thought about it is what are the things that we can do to best serve our customers. When we think about the rest of their tech stack and the things that are in the background of the way that they do work, what are the things that we need to integrate into to make sure that our workflows are connecting to the workflows that they have internally, that the data is flowing to the right places and that they're more easily able to do their work.

So you've seen us do things within marketing automation with the likes of Marketo, same with HubSpot. We've got integrations into things like Canva. We've got integrations into other BI tools to allow people to be able to leverage the data and make better holistic business decisions. So we'll continue to look into that opportunity. We've got a bunch today that are actually turned on for our customers and getting great value, but there'll certainly be more as we think about how to solve for these customers and their tech stacks.

[Adam Hotchkiss, analyst]

Okay. That's really helpful. And then just one for Joe on the bigger picture. I think in the past, you've effectively guided us to 25% or so organic compound annual growth to get to your 2028 subscription revenue target. So I'm just curious how you're thinking about the 27.5% or so you've got into next year within the context of that expectation given Tagger will obviously be a bit of a tailwind. How are you contemplating things like macro and some of these other things as offset to some of those benefits?

[Joseph Del Preto, executive]

Yes. So I think, Adam, every time we give guidance, we give it with all those things in consideration, and we don't historically haven't broken out those pieces, but we also give it with a high level of confidence. And to your point earlier, the fact that it's a 25% compounded growth rate, we talked about this, it's a little bit higher in the earlier years like now and then that rate will decline as we get closer to that $1 billion. And so no update on, for example, any change in how we see that playing out to the $1 billion.

[Operator]

Our next question comes from Nicholas Zangler with Stephens Inc.

[Nicholas Zangler, analyst]

Congrats on the quarter. I'm curious if you could provide any details on whether the go-to-market strategy has been modified at Tagger or if there's been any change to the monetization strategy, the expected ACR contribution? Or alternatively, are there changes being contemplated now that you've become a little bit more familiar as you've integrated?

[Ryan Barretto, executive]

Yes. Thanks, Nicholas. From a go-to-market perspective, I mean part of it for us, as we've been integrating the teams and getting up to speed, is being really cross-training all of the folks on our team from an AE and solution engineering and a customer success perspective so that we're fully up to speed with all of the things in influencer marketing. So the beginning parts of this journey have been really having that Tagger team do a lot of enablement for our team, joining a lot of calls for us. And that's continued into this year. What we're seeing right now from our team, which has been really exciting is how quickly our internal team is picking up, just understanding influencer marketing and being able to present the solution and do great discovery and present the value of the influencer product. So I think we're starting to see some really good economies of scale in just having those teams working together. And we're seeing a lot of opportunity within our installed base as well as new logos to be able to present influencer marketing as an opportunity.

From a monetization perspective, nothing that I'd really call out in terms of major changes there. Their model is very similar to ours in terms of just thinking about the per user seat approach to how we're doing things. But we'll continue to pay attention and make sure that we feel like it's fully optimized for the opportunity in front of us. But I think the main headline for you, the main goal from a go-to-market perspective, is to make sure that all of our team from AEs to SCs to CSMs have a great handle on influencer marketing and are able to present it to our customers. And this is really going back to the thesis of why Tagger made so much sense for us, which was these customers today want all this managed by one organization, and they want us to be thinking holistically about their social strategy, including influencer marketing.

[Nicholas Zangler, analyst]

Got it. And then one other question here. Ending the year, a competitor of yours recently noted what they call a heightened level of down-sell in the fourth quarter, and they talked about customers renewing at lower seat counts. Obviously, there's been plenty of layoffs across tech and various industries as of late. I'm curious if Sprout has seen any sort of notable pressure here as well or if that was just isolated.

[Justyn Howard, executive]

Yes. Thanks for the question. This is Justyn. From our perspective, it is something that seems to be isolated there and maybe unrelated to kind of the broader industry trends. But what we're seeing, and we talked about some of the deals that we did in Q4, we talked about how the size and duration of contracts continues to climb, the seat counts continue to climb, we're just not feeling that. We think that as we continue to do a good job in the parts of the market that we've always been successful in and upmarket into the large enterprise logos that we've been talking about the last couple of quarters, we see this as a growing opportunity and one that is probably as healthy as it's ever been both in terms of pipeline and our outlook, right? And I think that the confidence that we have in where we're guiding the revenue for the year is indicative of that. I think that we see Tagger's upside, we see continued acceleration with the care use cases as upside and a bunch of other things, so that does not reflect our experience or outlook on the market.

[Operator]

Our next question comes from Elizabeth Porter from Morgan Stanley.

[Matthew Saltzman, analyst]

This is Matt Saltzman on for Elizabeth tonight. So you highlighted Tagger's ACVs are 3 to 4x larger than the Sprout average. I'm just curious, when you look into cross-selling Tagger across the existing installed base, where does that incremental budget come from? I guess to ask another way, are MarTech budgets expanding to absorb the new influencer category? Or is this coming at the expense of other areas of the marketing budget?

[Ryan Barretto, executive]

Thanks, Matt. The thing that I'd highlight that we're seeing right now is, as those customers think about this, oftentimes, they're thinking about it in the context of how they're thinking about the rest of their paid spend. And so for us, historically, most of the work being done in Sprout from an execution standpoint has been organic-based. We obviously have great analytics between organic and paid, and we can help customers figure out where to really optimize their spend and what's really working. .

As it relates to the influencer marketing, oftentimes, what you're seeing from these customers is they're thinking about ways to get a better return on investment from their from their marketing spend and their paid spend. And so often, they'll be carving out from there. We've also seen customers already in the market building budget for influencer marketing today and attempting things. And the exciting part for us about that is this market feels very similar to the early days of social media management in that they're still testing and learning and they're looking to us for not just the technology, but also the best practices within the industry.

And so that return on paid spend, I think the industry stats right now is, for every dollar invested in influencer marketing, it's about a $4 return. And so they're finding these opportunities to really dig in, and our platform actually shows them really clearly which creators are driving the most opportunity in earned media value, what opportunities across the social networks are places that they want to invest, what are their competitors doing. So the biggest thing I'd highlight here is it's this combination of we're either getting it from other spend categories or they had a spend category, and we're able to actually help them get a better return using Tagger.

[Operator]

Our next question comes from Matthew VanVliet from BTIG.

[Matthew VanVliet, analyst]

Wonder if you could help us with either the revenue contribution or maybe ARR contribution of Tagger in the quarter and then ultimately, kind of what's baked into growth rates for '24 coming from Tagger.

[Joseph Del Preto, executive]

Yes. So Matt, I'll take that one. A couple of things here. We didn't explicitly call out the Tagger contribution in Q4. I think what we talked about coming out of the acquisition that you can kind of model out, $3 million over the final 5 months of the year. And we talked about we were a little ahead of that in Q3, and we slightly outperformed that in Q4. So that'll kind of give you the cadence of the revenue contribution that we had in the quarter. And then ARR, we talked about it was a small contribution. It's not a huge number, like I said, just given that we're just ramping up the team.

If we think about 2024, as of now, the entire sales team is now trained up on Tagger. And so it's now in the bag, and Ryan talked about this, and they're going to sell just like premium analytics or social listening. And so it's not like we have a separate target for Tagger. It's just going to be part of the overall kind of go-to-market motion. And so because of that, we're not specifically kind of calling out what's the Tagger number because we're not managing that as like a separate product as we get into 2024.

[Matthew VanVliet, analyst]

Okay. Very helpful. And then as you look at kind of where ultimately you think the premium products attach rate can go to, whether it's by '28, the $1 billion mark, or even just over the next couple of years. How much more attach rate is out there? What does the pipeline look like relative to sort of the core subscription growth rate?

[Ryan Barretto, executive]

Thanks, Matt. Yes, I don't know that we categorize the direction of those numbers, but I'll give you the high level and how we're thinking about it. Today, about 30% of our customers have attached one of the modules and about 7% have two products. And I would say that we have a lot of upside within this entire market, especially as we start thinking about the opportunities that exist even with adding something like Tagger in the influencer side on top of the opportunities that exists across our entire base. We're seeing better attach rates certainly from a new business perspective as we've been more focused in on these social-first sophisticated customers in the mid-market and the enterprise. And as more of our base looks like that, I think that they are great targets for all of these premium modules. And as those customers continue to mature, the opportunity for us to expand the footprint across all of our products, I think, gets greater. So the trajectory is really good, and we see a lot of opportunity in front of us with all the products.

[Operator]

Our next question comes from Clarke Jeffries from Piper Sandler.

[Clarke Jeffries, analyst]

Joe, I was wondering if you could help maybe with some precision around the ARR movement in the non-core segment. Helpful that it was $800,000 at the end of the quarter, but wondering if you could help with maybe was it a double-digit million move in ARR during the quarter? Or was organic ARR growth above a certain threshold, say, 30% or not? Any kind of precision there would be helpful. And then one follow-up.

[Joseph Del Preto, executive]

Yes. So Clarke, what we talked about coming out of Q3 is that there was about $10 million left of that non-core ARR. And by the end of the quarter, it is now down to less than $800,000, so that can give you the sense of the churn that we saw there. And if you kind of layer that into the success we saw in the quarter, you can just show it just really reflects the strength that we've seen in the mid-market and enterprise business. So for us, we overperformed in the quarter once you back out that kind of low-end churn, and so we felt really good about the momentum in the business.

[Clarke Jeffries, analyst]

Perfect. And then just a follow-up. What are your expectations for the progression of operating expenses through the year or any way you could help us with maybe a margin exit rate in Q4? Obviously, kind of putting the pieces in place to get to the '28 targets, it would seem that you're going to start to see a lot more leverage on operating expenses going forward. Maybe a rank order of how you expect the growth of those OpEx items through the year or any kind of exit rate would also be very helpful.

[Joseph Del Preto, executive]

Yes. So Clarke, the way to think about it is, for the year right now, our guidance is about 220 basis points of improvement in operating margin in the business. And I think similar to what you saw in 2023, throughout the year, we overperformed that number. And so as long as we keep executing, we believe there's a lot of upside to that. And then the way that kind of plays out through the year, you'll definitely see, for example, lower operating margin in the beginning of the year as we kind of been very aggressively hiring on the go-to-market side. If you just look at the demand we're seeing, the size of the deals we're seeing, we will definitely drive lower operating margin in the first couple of quarters. And then you'll see us get scale over that. As those folks ramp, as they start to get to full capacity, you'll see more operating leverage in the back half of the year.

[Operator]

Our next question comes from Rob Oliver from Baird.

[Robert Oliver, analyst]

My first one is on Service Cloud. There's rightfully been a lot of focus on Social Studio, but the Service Cloud opportunity is an exciting one. I just wanted to get a sense from you guys about how you're thinking about expectations for 2024 for Service Cloud, how that look from a kind of linearity perspective, and certainly, I would expect it to be Q4 heavy, but how you guys are thinking about that as a contribution.

[Ryan Barretto, executive]

Yes. Thanks, Rob. We continue to be really excited about it. We believe that there is more opportunity in '24 than even last year with the Salesforce ecosystem, specifically the Service Cloud opportunity itself. We're continuing to build against the care opportunity that we have connected to the product that integrates into the Service Cloud console. I think it will take a very similar shape to what we had in '23, certainly in the back half of the year being stronger, especially with the typical buying cycles within mid-market and enterprise. But I think the main thing for you to take away is that we continue to see a really good pipeline on it, and we feel really good about just the value that customers are getting from it. We believe that this is the best place, if you want to do omnichannel and you're on Salesforce as a CRM.

[Robert Oliver, analyst]

Got it. That's helpful. And then, Joe, just a follow-up to the last question, just on sales head count. It sounds like almost all the salespeople or Sprout salespeople and Tagger is going to be ported into the bag Sprout completely. That said, you said you're hiring a lot of salespeople. So how can we expect that ramp this year? Are you entering this year with a higher degree of immature salespeople that won't meet quota? How should we think about that efficiency gain for the sales force throughout this year?

[Joseph Del Preto, executive]

Yes, good question, Rob. So we've been hiring over the last couple of months going into this year, like I said, pretty aggressively on the go-to-market side. And so obviously, those folks need to ramp. So we're definitely not at full capacity when you think about the reps and the way they ramp throughout the year, in the first couple of quarters of the year. And then what you'll see is you'll see those folks be at more full capacity by the end of the year, Rob.

[Operator]

Our next question comes from Brett from Cantor Fitzgerald.

[Brett Knoblauch, analyst]

I just want to touch on, I think, something you said in the prepared remarks. I think you said non-core customers will no longer act as a headwind to growth. I'm curious what that means from a customer count perspective. Have we reached the bottom in terms of customer declines? And should we start to expect customer growth to return?

[Joseph Del Preto, executive]

Yes, Brett, this is Joe. The year-over-year growth rate of our total customer base will likely still decline and probably trough in Q1. And then we're likely to see an improving trend in the total customer base over the course of 2024. And then I think you would expect to see accelerating total customer base growth into '25. That's kind of how we're seeing it play out.

[Operator]

We don't have any pending questions as of the moment. I'd now like to hand back over to Justyn for closing remarks.

[Justyn Howard, executive]

All right. Thank you. Thank you all for your questions. We appreciate the opportunity to share kind of this continued evolution with you, the excitement that we've got around a lot of the indicators, at the growth of the business, the exciting things that we're working on. We look forward to talking to you more about all of those in the coming weeks and months.

I want to thank our team. I want to thank all of our customers. And we look forward to talking to you all soon.

[Operator]

Thank you so much for attending today's session. We hope you have a wonderful day.