Sprout Social, Inc. (SPT) Earnings

Management highlights

- Overall Q2 2026 Financial Performance * Total company revenue reached $123.8 million, growing 10.8% year-over-year * Non-GAAP operating margin hit 12.9%, up 370 basis points year-over-year * Non-GAAP free cash flow was $8.3 million, up ~60% year-over-year; trailing 12-month non-GAAP free cash flow totaled approximately $54 million * Current remaining performance obligations (CRPO) grew 12.4% year-over-year to $202.7 million, and total remaining performance obligations (RPO) grew 15.5% year-over-year to $400.8 million * ACV increased 14.8% year-over-year, reflecting the ongoing mix shift toward larger customers and higher-value product adoption * Ended the quarter with $119.9 million in cash and cash equivalents - AI Product Development * Expanded capabilities for Trellis, Sprout's proprietary agentic AI offering, including on-demand insights that let users query social data in plain language for fast, analyst-quality results * Launched Trellis Studio, a no-code interface for building and customizing AI skills, and introduced a paid Trellis Plus tier that launched in July 2026; all customers get a base amount of Trellis usage for free * In Q2 2026, customers with active Trellis usage had higher retention rates than non-active users across all segments, with positive early customer feedback * Extended AI capabilities within Newswhip, adding predictive scoring for Reddit to identify emerging narratives earlier, and launched an AI-powered dashboard builder that generates real-time monitoring dashboards from plain language prompts - Strategic Priorities * Core long-term strategy is focused on growing the ≥$30,000 ARR customer segment, which aligns with the company's platform breadth, product roadmap, and go-to-market investments, and delivers stronger unit economics * For the <$30,000 ARR segment, the company is building a more efficient self-serve motion powered by automation and AI; the purpose-built Essentials product moved from limited release to general availability in April 2026, with early positive demand trends, and is positioned for potential non-U.S. market expansion * Co-founder Aaron Rankin returned to the role of CTO to lead accelerated AI product and enterprise capability investment, aligning with the company's product priority * On July 15, 2026, the company implemented a 20% headcount reduction to streamline organizational layers, speed up decision-making, and reduce costs; pre-tax restructuring charges of $18-$20 million are expected, mostly recognized in Q3 2026 * A $50 million share repurchase authorization was initiated last quarter; share repurchases were restricted during Q2 due to restructuring and blackout periods, and the company plans to opportunistically repurchase shares starting in Q3 2026 - Platform Expansion & Partnerships * Added new platform integrations including Snapchat scheduling and publishing, automated tax documentation for direct creator payments via PayPal and Lamano, and consolidated TikTok ad comment management * Launched an expanded integration with Canva to bring design workflows directly into the Sprout platform

Guidance

- Q3 2026 guidance: Revenue is expected in the range of $123.3 to $124.1 million; non-GAAP operating income is expected between $17.5 and $18.3 million; non-GAAP EPS is expected between $0.29 and $0.30 - Full fiscal 2026 guidance: Revenue is expected in the range of $493 to $495.6 million; non-GAAP operating income is expected between $68.3 and $70.3 million, which is a 20% increase over the midpoint of the company's prior outlook; non-GAAP EPS is expected between $1.11 and $1.15, representing approximately 22% growth over the prior EPS outlook - The company expects to exit Q4 2026 with a non-GAAP operating margin close to 17% - The company reaffirms its target of reaching 30% under the Rule of 40 framework by the fourth quarter of fiscal 2027 - The annualized run-rate cost reduction of at least $50 million from the recent restructuring will not be fully realized until 2027 - The company expects continued headwinds from the <$30,000 ARR customer segment, and does not anticipate an improvement in the overall demand environment, which will remain consistent with the past few quarters - Starting in Q3 2026, the company will lap the acquisition of Newswhip, which will create headwinds for both revenue and RPO growth going forward - EPS guidance excludes the impact of potential share repurchases due to uncertainty around timing and volume of repurchases

Segment performance

Sprout Social splits its business into two customer segments based on annual recurring revenue (ARR): 1. **Customers with ≥$30,000 ARR**: This segment accounted for 61% of approximated subscription revenue in the trailing 12 months ended June 30, 2026, up from 41% two years prior. The company added 51 net new customers in this segment during Q2 2026, and 388 net new customers over the trailing 12 months. This segment has stronger unit economics, higher retention, higher average ACV, and higher attach rates for premium products including Influencer Marketing and Newswhip compared to the smaller customer segment. It is growing at 20% year-over-year, outpacing overall company growth. 2. **Customers with <$30,000 ARR**: This segment represented 39% of approximated subscription revenue in the trailing 12 months ended June 30, 2026, down from 59% in the trailing 12 months ended June 30, 2022. The company expects continued slight deceleration and mild negative growth for this segment in 2026, with a target to stabilize growth in 2027.

Risks & headwinds

- Forward-looking statements about future financial and operational performance are inherently uncertain, and actual results could differ materially due to a range of risk factors, as detailed in the company's SEC filings including the 2025 10-K and upcoming Q2 2026 10-Q - The company expects continued pressure and deceleration in the <$30,000 ARR customer segment, which acts as an ongoing headwind to overall revenue growth - The macro demand environment for enterprise software remains uncertain, and the company does not expect any meaningful improvement in demand conditions in the near term - The 20% headcount reduction requires significant change management, and successful execution through the transition over the remainder of 2026 is critical to meeting operational and financial targets - AI product development and monetization are still in early stages, and there is uncertainty around how quickly customer adoption and paid tier conversion will progress, and whether Trellis will deliver expected long-term revenue and margin benefits

Analyst Q&A

• Q: What have early indications shown for Trellis, and how does it support growth of the ≥$30,000 ARR segment? Also, does the implied low Q4 2026 top-line growth guidance reflect continued pressure on the <$30,000 ARR segment? /

  A: Early trends for Trellis are encouraging, with healthy monthly active user growth and higher retention for active Trellis users across all segments. Customer feedback has been very positive on the value of faster AI-powered insights. For the Q4 guidance, the conservative outlook reflects multiple factors: the ongoing transition from restructuring, no expected improvement in the macro demand environment, lapping the Newswhip acquisition, and continued pressure on the sub-$30K ARR segment, while the ≥$30K segment remains strong.

• Q: Are you already seeing customers upgrade to the paid Trellis Plus tier, and what are customers building with Trellis Studio? /

  A: It is still very early, as Trellis Plus only launched a few weeks before the call, but the company is already seeing customers move up to the paid tier. Early customer feedback is very strong: Trellis helps understaffed social teams process large volumes of social data much faster, increasing efficiency and improving the quality of social execution. The company will share more detailed metrics on adoption and conversion after Q3.

• Q: Where was the 20% headcount reduction concentrated across the organization, and what was the strategic goal? /

  A: The cuts affected multiple areas of the organization, and the decision was primarily focused on removing unnecessary organizational layers, streamlining decision-making, and aligning investment with the company's highest-productivity business areas, to create a stronger, more focused company long-term. The company acknowledges the difficulty of the decision and is grateful for the contributions of departing employees.

• Q: What is the long-term impact of Trellis on business value, and where will you add incremental headcount after the restructuring? /

  A: Trellis will add value across multiple areas: it improves competitive positioning and win rates for new business, creates an upsell opportunity from the free base tier to paid Trellis Plus, and improves customer retention by making the platform more valuable. Right now the company has appropriate go-to-market capacity focused on its core priorities, and will share more details on future incremental investment areas as the restructuring completes and more visibility into opportunities is gained.

• Q: Why did gross retention and renewal rates improve in Q2, and how will the new Essentials product impact financials? /

  A: Improved retention came from both the ongoing mix shift to larger higher-retention customers and broad-based renewal rate improvements across both the sub-$30K and above-$30K customer cohorts, driven by ongoing product innovation and stronger customer engagement from go-to-market and customer success teams. Essentials just launched to general availability in April, so it is still early with positive initial demand. The company expects the product to reduce churn and open new customer markets, but it is not expected to stabilize sub-$30K segment growth until 2027, and that expectation is already reflected in current guidance.