Sprout Social, Inc. (SPT) Earnings Call Transcript & Summary

Wonderful. Okay. Thank you, everybody, for joining us again, Tom Roderick from Stifel here. We've got the Sprout Social management team on. We've got the full team: Justyn Howard, CEO; Joe Del Preto, CFO; Ryan Barretto, SVP of Sales; and Jason Rechel, who is Director of Investor Relations. So thank you all for joining us. Wonderful to have you virtually in Boston, though all of us sit here in Chicago. So it's fun to be virtually onboard here. Why don't I hand the session over to you for a quick intro? I'll let you guys take it as a team, but would love to take just 5 minutes to address briefly, what does Sprout Social do, who are your customers, and how do you think about the size of the total addressable market?

Great. Yes. Hey, Tom, this is Justyn Howard, the CEO here at Sprout. Starting with kind of the -- what we do in broad terms, I think where we sit is helping businesses who are coming to the understanding over the last 10 years and increasingly so recently that social is a critical communication channel, is as critical as phone and e-mail and other ways of communicating with customers and giving businesses a central platform to be able to manage all media efforts across social media. So in terms of publishing content and getting -- reaching their customers and their audiences, engaging with customers and prospects through social channels, whether that be community management, customer service, answering questions, just having dialogue with customers, understanding the performance of [ air and ] social channels, understanding the segment of consumers and what the world is seeing in real time through our listening products. But the easiest way to think about what we do is just we are the central hub for social media communications for our customers. It's been something that has -- the industry has been around for a bit over a decade, but many businesses are still grappling with how do we get a handle on social, how do we retool the same way that we had to retool when e-mail first started becoming prominent and even further back to how we had to retool when we formed the communication channel. The same is very much true for social and we're the platform they're using to manage all of that. Getting to the point of the kind of the addressable market, one of the benefits that we've had as a company for the last 10 years is that we serve all parts of the market. So we've got sizable business in the SMB, in the mid-market and the enterprise. We are serving all verticals. So any industry you can think of, we've got hundreds of thousands of customers in those areas. And the reality over the long term, you're going to see social media adoption by businesses reach penetration levels similar to those that I mentioned before on e-mail. And so while we're still relatively early in this adoption curve, and even those companies that have implemented shopping and have really just gotten started incorporating it into social across their organization and are able to lean on us to help them manage this pretty disruptive move [ inside the ] organizations. Oops, Tom [ I think has got a problem. I think he's ] muted.

Apologies. I was the one on mute that time. There we go. Okay.

No worries.

Let's go right into the kind of current business trends. And I think the question a lot of people will want to ask is what the exact impact of the pandemic has been. Let's put that aside for just a second and just talk philosophically about the dynamic for demand for social media management. In a world in which customers are kind of pinching pennies a little bit near term, you could surmise that perhaps this becomes a little bit more of a back-burner item to spend on, while at the same time, without the access to physical customers, it seems more important than ever. How are your customers kind of balancing that dynamic as the economy has gotten tighter as they've had to pinch their pennies a little bit for budgets but thinking more strategically about this longer term? How does that play out?

Tom, this is Ryan. Yes, it's really an interesting thing in that for the majority of our customers -- and one, just a reminder for everybody, we're a highly inbound model. 90% of our revenue is coming in from our inbound trials. And so during -- even during this time, those customers are coming to us with a specific need and/or problem. And what we're seeing from those customers today is that they're usually in 1 or 2 camps. One, they have realized that with this dramatic change overnight, they need to be digital first and they need to still communicate with their customers and social is the best channel for them. And so if they hadn't had investments there before, small investments, they're needing to jump into the market to make sure that they're still engaging in marketing and communicating with their customers. Or they were in this market before, the new digital was important, but with the increased demand that they're seeing from social and the increased needs that they have, they're needing a better platform to do it. And so those conversations for us have been fruitful on both fronts. We're typically, from a budget perspective, not seeing a lot of compression on specifically social for the customers that we're speaking to and engaging with. Again, they see it as a mission-critical application. Where marketers are feeling the tension, where we've seen that and it's shown up is more on the advertising side of the house, and that really isn't a world we play in, in terms of social.

Yes. Great point on the breakdown between engagement in publishing and advertisement, that's a good distinction. So let's kind of dive in a little bit more. And Joe, probably a good opportunity to bring you in here to kind of talk about the numbers and how you've seen the pandemic impact your business model thus far. You highlighted a little bit of a late quarter uptick in churn and contraction on your earnings call. And yet at the same time, we were into early May at that point where you noted that the recovery sort of seemed to be underway from what you had observed in middle to late April and then early May. Perhaps it would be a great opportunity to sort of update us on what you're seeing out there. And perhaps remind us again what impacts to the model you've seen from the economic slowdown in March and April.

Yes, Tom, thanks. I think what we're seeing and what we kind of talked about towards the end of April and early May is we definitely saw kind of demand pick back up, back to what we saw pre-COVID levels and in some areas even a little bit stronger. Given our sales cycle, 35 to 41 day sales cycle, what we'll see here through May and June is how is that performing, how is that converting, what is that looking like. And so far, we like the trends we're seeing. And as we mentioned earlier as well, on the expansion side and on the churn side, we saw that kind of get back within our normal ranges towards the beginning of May. And we'll probably give people more of an update as we get into Q2 earnings. But we haven't seen anything materially different than what we saw towards the end of April, early May.

Yes. And it's also probably a good opportunity to discuss just sort of how this plays out and ripples through by segment. So as you break out your SMB versus agency versus mid-market and enterprise, how does that split out for you today? And then what's been the sort of relative impact to each of those segments so far?

Yes. I think if we think about what we saw early April, end of March, we saw kind of the SMB market probably take a brunt of what we would consider just churn and cancellations, businesses that were, as you can imagine, struggling and kind of didn't -- weren't going to stay in business. But then what we saw, if we think about the mid-market and enterprise, we didn't see so much of churn or cancellations, right? We just saw maybe a little bit of slowdown in the expansion. But we saw those customers realize that Sprout Social was mission-critical. And so even though we saw some compression, we didn't see a lot of churn come from those areas. And so as we got up to the higher end of the market, it was more about maybe just the slowdown of the expansion that we talked about. Now we saw that come back towards the end of April, early May, but that's how we kind of saw those segments break out across. I don't know, Ryan, if you had anything maybe you saw on your side as it related to demand and new business.

No, I'd echo those comments. I mean again, the benefit that we have is that we are an inbound model. So while there was some compression that happened, again, because we're inbound, we've seen it recover nicely. It looks very similar in composition, both from a segment and an industry perspective, to what it was pre-COVID. So yes, a lot of what Joe said there I would just echo.

And Ryan, a really good point about being an inbound model. And Justyn, this is probably a good opportunity to let you comment on this as well. One of the things that we saw some businesses struggle with was being able to pivot to a model in which they could sell remotely or sell in a low-touch sales model. It's always really been the Sprout methodology. So tell us a little bit more about how fast you were able to sort of pivot to work from home as an organization. And then specifically on the sales side, what changes, if any, have you had to make to be able to adapt to sales reps working from home and accessing that top of the funnel to try and convert leads?

Yes. So to your point, our model has always been highly virtual, both from a new business perspective as well as the way that we implement and support our customers. So from a process perspective, there was very little change. I think certainly, there was some change in folks who had been working in the office getting set up to work remotely. I would say there's been a lot of moves after closing of the offices. We were pretty much back up to full capacity from a productivity standpoint and even seeing some improvements in some parts of the business. But from an operational perspective, this was very much the way we were doing business before. It was right in our wheelhouse and something that I think businesses and competitors who have had a different model maybe have a harder time adjusting to. When we think about where the -- our ability to adapt really came in handy, we saw small businesses disproportionately impacted in those early days. And we had an opportunity because of the way that we're organized to very quickly apply success resources, making sure that those customers have what they needed, that they were supported, that we were putting out information and educational materials on helping them adapt to change. And then conversely, a big part of the business, we had an opportunity to shift resources and make sure that we are focusing on those segments and those verticals that we saw uptick. We were able to very easily just kind of shift our focus. We've got that short sales cycle that Joe mentioned and being able to adapt and make sure that we're serving the parts of the market that maybe see increased urgency, increased demand. We can shift resources away from those that may not be in a volume cycle right now. And I think that played pretty substantially to our advantage as we saw this unfold.

Yes. I'll just quickly add, Tom, from a sales perspective, for us, because we've been highly transactional, because we've always been in a remote environment, whether we're at the office or not, we're selling a lot through Zoom and the phone, pretty easy transition for us. As you might imagine, we're very metric-oriented here. So we can see exactly the productivity of our teams. And we're seeing, in many cases, above the levels we saw before we headed into this environment. So we feel really good about the productivity from our team. The other piece that I think is just really important to note about our go-to-market motion and the inbound model is we know right now that's critically important where it's harder to get in touch with customers. But even outside of COVID, things like GDPR and the California Privacy Act are going to make it increasingly harder for organizations to cold call and outbound sell. So the fact that that's part of our foundation is a highly differentiated part of our go-to-market motion.

Yes. I'm glad you brought that up with respect to how customers sort of need to use this privacy as a key issue. Let's talk a little bit more about the product set here. Justyn, you highlighted publishing and engagement being 2 sort of critical core components of the social media management platform. More recently, you've launched a more formal social listening offering and a Premium Analytics offering. Can we talk about both of those and kind of customer adoption, what those have really done to ARR to the extent that you can speak to early traction on that front? I would love to hear a little bit more about social listening and Premium Analytics.

Yes, definitely. So social listening is, I think, an incredibly powerful new asset business that our customers are able to take advantage of. And what I mean by that is social data gives businesses the opportunity to understand the ways of the world in real time, whether that's around -- they're just consumer sentiment, whether it's around brand health or competitive information, whatever it is. Like, for the first time, the businesses had this opportunity to essentially have a global focus group ask really any questions they might want to ask. So we brought that product to market at the end of 2018. The last number that we shared on that, we had over $10 million in ARR for about a year or so in market with that product. And that was the first sort of additional SKU that we created where customers wanted to sort of [indiscernible] of Sprout, had an opportunity to engage with us and buy kind of our product. And following that, Premium Analytics, analytics has always been a strong suit for us. But understanding performance across social channels is incredibly important, both from organic engagement and us understanding the performance of your campaigns and things like that and also understanding how organic growth [indiscernible] opportunity to make around social, understand the data behind all of that is just really, really powerful. And so Premium Analytics for us was an opportunity to say, we've got great analytics in the core product. We have a bunch of advertiser customers who would love to dig deeper, get additional slices of data, the more expansive data set and more metrics. So we introduced that product in late 2019. And what we shared on that is that we are seeing similar kind of adoption and revenue contribution from that product to what we saw we with listening over the same period of time. So that product hasn't been in the market for long, but the trends that we're seeing are very consistent with what we saw with listening in the early days. And both of those cases, that's our first version or iteration, if you will, of those products. There's a lot of road map behind that. There's a lot of interesting things we want to build there. We've got a lot of existing customers that we think are going to benefit from those tools. And we're increasingly selling those on the initial deal as customers come in to the top of our funnel. So we think that the potential for those 2 product lines as well as others that we're thinking about is substantial, and we're seeing great traction, although it's very early days for those.

So let's circle back with just one last question around the COVID impact. And we've seen some businesses and software put the brakes on spending and the hiring freeze. We've seen others say, this is our great chance to accelerate our investment. Which side of that coin do you fall out on as a team relative to what you've seen from the impact of COVID and how you want to invest near term in the business and particularly in sales-related head count?

Sorry, can you repeat the question, Tom?

Yes, sure. Just addressing the impact of COVID again one more time to how you think about investing in the business near term and -- with respect to building out the sales team in particular. So Ryan, this might be a nice chance to talk about what you're doing on that front.

Yes. From a sales perspective, I think one of the benefits that we have is that we're a highly data-driven model. And so with the inbound volume that we get, we've got good visibility into the opportunity and then the capacity that we need. So between myself and Joe, we spend a lot of time looking at the data within the market and the opportunities. And so for us, it's been -- especially during this COVID time, as we saw the compression in the SMB and agency, provided us with good opportunities and visibility to understand also that there was opportunity existing in the mid-market enterprise space. And so for us, we could shift some of the resources from a business development perspective as well as a marketing perspective upmarket to capitalize. And so we continue to look at that. And we do that on a monthly basis. But I think that for us, as we go forward here, a lot of our opportunities will continue to look the same. I think mid-market and enterprise, and we highlighted it a little bit before, hasn't had the same impact as SMB agency. So they'll continue to get outsized investments. But again, it's that predictability in the data that's been really helpful for us.

Yes. And that brings up a good sort of segue into enterprise and traction moving upstream. When -- we've seen the customer count numbers for customers greater than $10,000 per year in ARR, that number has been growing much, much quicker than the actual customer count numbers. So I think it was 58% growth last quarter. What's the opportunity as you move upstream? And probably a good one to throw right back at you, Ryan, in terms of who you're trying to displace or what the competitive situation looks like as you move upstream into the upper end of mid-market and enterprise.

Yes. We are really excited about the mid-market and enterprise opportunity. I think right now, that market is not well addressed in the sense that we have organizations there that have fairly decent-sized budgets, they have needs, and a lot of the platforms that exist there are more of what we consider the legacy software players. So it's a lot of custom code. It's organizations that have really been the amalgamation of dozens of acquisitions. So the UI and the UX is not what users expect. And so for us, we see companies like Sprinklr and what used to be known as Spredfast, which is now Khoros now as examples. Occasionally, you'll see something like Salesforce Social Studio. But in all those instances, we see a really big opportunity to disrupt with the product. And we've talked a little bit about this on the earnings call, this go-to-market motion of getting the product in our consumers' hands, getting their hands on the keyboard as being highly disruptive to how we're competing against those other companies, because that really isn't part of the go-to-market motion. And in the age of the user, where users are really driving a lot of these decisions, we think that empowering them with the product, getting them to actually experience the listening and the analytics before they even contract with us is a huge differentiator. So seeing a lot of market opportunity there. And more and more you're seeing these organizations that used to buy in a very siloed fashion, even within the enterprise, starting to make larger decisions across their departments and divisions, which we think we're well equipped for.

You've brought up an interesting point about Salesforce Social Studio. So for those in the call that can remember way back to when Salesforce bought Buddy Media and Radian6, so it's kind of a first foray into social many, many years ago that didn't really quite pan out for them, quite frankly. But would be really interested, Justyn, as we go back to your discussion on enterprise listening, to understand how that's different from some of the traditional social media listening platforms of the past. How is your offering more complex, more ready for the enterprise? Why is that gaining traction in a way that the listening platforms in the past did not?

Yes. It's an interesting question, and it might be contrary to what you would expect. But the first and one of the reasons why, in addition to social data being so powerful for brands to be able to leverage, one of the things that we were hearing in the market was that the listening tools really needed to live side-by-side with the rest of the platform. You needed to be able to leverage listening alongside your engagement and your publishing tools and the rest of your analytics. And the way that the customers need to be able to use these things together was an early driving force for us. And beyond that, what we've seen play out over time is actually that getting access to the data, this is something that was limited to only customers with very large budgets and consultants and analysts on staff who can make sense of it. One of the things that's really resonated is, while it's incredibly powerful and robust, is giving access to the people who actually need that information. So the ability for marketers or people in the product organization or other parts of the organization to be able to get in and very easily get answers to the questions that they have and be able to access that in real time versus having to wait for someone to write or program a custom query or waiting for someone to analyze the data, which is largely the condition that they were in with some of these legacy tools. Just our approach to how accessible that information has become inside the Sprout platform, I think it's been one of the key drivers for adoption and one of the reasons that we've seen so much success, on top of it being, as I mentioned, part of the same platform that they're using for the rest of their social efforts has been really important.

Great. I want to take a question from the webcast audience. And a reminder, if you're out there, feel free to drop a question into the Wall Street Webcasting platform here. But the question here for you all is, can you elaborate on your barriers to entry from the slides in your Investor Relations deck? Do you own any of the data that you track for your customers? What are the barriers to exit or to switch for your customers?

Yes. So I'll kind of work backwards there. I think from a switching cost perspective, certainly as social has become more critical across the organization, as there's more people involved, there's more workflow structure setup and permissions and historical data, that all becomes incredibly important. Also, when a customer signs up with us, we begin tracking all their social information from that point forward. In many cases, we do that retroactively as well. And we start building this corpus of data around their social efforts that really can't be replicated, right? The ability to go back and recreate that would be very challenging to do. But on top of that, the social data itself is part of the equation. But all of the workflows, the approval processes, the scheduled content, the campaigns, the historical data, the analytics, the insights that you can draw from all of that is all very specific to Sprout. And so that's not to suggest that a company couldn't start over. They certainly could, if that was their choice. But all of that proprietary sort of value that's built up over the life of their relationship with Sprout goes away at that point. And I think for organizations that are invested, they've got multiple users, maybe multiple departments in the platform, that becomes a pretty big detractor from needing to go elsewhere. Now that's all hinging on the fact that we continue to deliver for our customers, right? If we're continuing to innovate and build and do the things that we're doing to keep our customers as happy as they are, then we hope that never becomes a question.

It probably begs the question, Justyn, in terms of -- I know you get it a lot in thinking about some pure-play competitors in social as opposed to -- Ryan mentioned Salesforce just briefly, why don't we see more out of the big marketing software platform vendors like Salesforce and Adobe with respect to servicing this market today? What's your thoughts on what's keeping them at bay and where their interest level might reside in the future?

Yes. Yes. So I think early on, you mentioned the acquisitions back in 2010, 2011. We saw Salesforce and Adobe and Oracle, et cetera, all really recognized pretty early that social was going to be a very critical channel. But really the way that that's played out from my perspective is social is an entirely different animal than all of the other business systems that we're used to, right? If you think about those companies that I just mentioned, everything that they build revolves around e-mail as the common identifier, right? That's how records are organized. That's how all of the information is tied together, et cetera. And social is a very different beast in that we're not only talking about something that doesn't conform to that model, but it's also distributed across dozens of different social networks. So you've got Instagram and Facebook and Twitter and LinkedIn and all of the other networks that consumers are on. They all have their own data models. They all have their own APIs. They all have their own formats and protocols, et cetera. And managing all of that at the scale of hundreds of millions, if not billions, of messages a day was just a very different beast. And those companies, we believe, kind of got into the space thinking that, as many people did at the time, that social was just going to be something that was part of or a small kind of add-on to CRM or Helpdesk or whatever it may be. But the reality is it is a very distinct system of record. It is a platform that has to be part of the stack for a business that wants to be competitive at this point. And they've got to have an answer to that, and that's something that for the reasons I mentioned, we just -- they haven't been able to crack that nut.

Yes. And we just got another sort of timely question from the webcast here from the audience. And the question is, how do you think a company in your space wins over the long term? Is it largely road map and feature-driven, speed of innovation, market penetration across segments? What do you think are the most important factors for winning over the next several years?

You just took all the answers. But I do think that one of the most, I think, underrated and important factors here is going to be speed of innovation, right? You've got an industry that's moving incredibly fast, consumer behavior that's changing incredibly fast, APIs that are changing, regulation that's changing, et cetera. You have to be able to adapt very quickly to continue to meet the needs of customers. And that's something that, both because of our single code base and our ability to innovate very quickly as well as just the culture that we've built and the product first and making sure that we're building the top-quality products for our customers, has really come to play in a big way. Like our ability to respond and adapt has been very unique in the space. Certainly, market penetration, sales and marketing efforts, those are going to be important. I think the inbound model and just taking a modern approach to selling software, I think, is important. I don't think that the traditional enterprise model really works well in this category. And that's something that we've kind of bucked the trend on since the beginning. So all of those things, I think, add up to a pretty compelling opportunity for us to be able to hone in.

Yes. And one more follow-up question from the audience on a similar topic. But -- as social evolves and changes and kind of addressing some of the API limitations inherent with all of software, how do you think about evolving with additional functionality? And specifically, the question focuses on PR monitoring, reviews, e-mail integrations. And I might even just add another sort of side angle to that, which is how do you adapt to new popular social platforms like TikTok that pop up out of nowhere?

Yes, yes. So that's something that's always been a pretty important part of our road map is adapting to these changes. And one of our values here is celebrating change. I think it's important not only to know the change is happening, but to be excited by it. And our ability to adapt quickly puts us in a really great position there. But a lot of it, when you think about the 23,000-plus customers that we've got around the world, the amount of information and input coming from them, the additional problems that they're talking to us about that they would love to solve, reputation was a great example of this. Last year, our customers were telling us they wanted to handle reputational reviews in the same platform. They wanted us specifically to solve that problem for them. So over the period of a couple of quarters, we brought that to market. Adding additional networks as they become -- come to prominence, we're in a great position in that, given our scale. The networks, once they've reached the level of sophistication where they're able to invest in APIs and those sorts of things, we're a partner that they very much want involved. And so we love all of the kind of evolution that we see happening, because we know that we're really well equipped to handle it and that it likely is an advantage for us.

Great. Joe, let me bring you back in for a couple of financial questions here. So Simply Measured was an acquisition that Sprout made a few years ago. It'd be a good opportunity to take just a second and remind us what you got from Simply Measured. But also it's created the sort of inverse impact to "organic growth." So how do you want investors to think about organic growth going forward as you lap and sort of largely remove some of the legacy impact of Simply Measured?

Yes. I'll hit the why we did it real quick, and then I'll kind of get into the financial piece, Tom. So the acquisition that we did was they had some really good technologists and had some really strong kind of background in what kind of led our listening and analytics product. So we wanted the people and some of the way they approached the back-end part of those products. And you can kind of see parts of that in our products that we came to market with in the last 18 months. As far as the impact on the financials and net organic revenue side, if you look as of March 31, I think the Simply ARR was about 1% of our business as of March 31. And so as we go through the rest of 2020, you'll see most of that diminish. And as we get into 2021, I don't think we're really going to be talking about organic and inorganic as 2 separate things. I think they'd kind of converge at that point. And so I think by the end of this year, you'll see most of that come together as far as the growth rates.

Yes. Great. And then, Joe, just with respect to pathway to profitability and how you think about leveraging the model, how does that play out? What are your sort of mid- and longer-term targets for profitability? And what are the key levers for driving that margin leverage into the model?

Yes. I think there's a couple of things there. One is, as far as what we've talked about that path to profitability and being free cash flow positive, what we shared on the road show necessarily hasn't changed. We're still looking at that towards the end of 2021 is what we kind of told people. And I think the drivers there are a couple of areas. One is we continue to see really strong leverage over R&D. If you look historically, the fact that we have a single code base, the way we build technology has really led us to be able to kind of scale this business in a much more efficient manner. For example, in 2019, Tom, we -- I think we had 140 product releases. We brought 2 new products to market and still drove almost 500 basis points in leverage on R&D. And so you'll continue to see us drive leverage in that based on how the platform was designed. And then the other couple of areas. One is on the G&A side, as we continue to scale this business, we had a decent amount of cost to ramp up to become a public company, and you'll continue to see leverage over the G&A line as we build this business. And then on the margin side, the ease of use for our product, the single code base, the way we kind of go to market really allows the support and infrastructure cost to really scale nicely with this business. So you'll see a steady increase in our margins, just given the way that our software is used. And so I think that will continue to be an advantage for us. As we move forward, we don't require all the support. We don't require all these professional services and handholding. And so because of that, you'll see our margins go nicely over time.

Outstanding. I think we should let everyone move to their next session. So I think I'll stop it there, Justyn, Joe, Ryan, Jason, thank you. Fantastic discussion. Really appreciate you joining us. And thank you for everybody on the call for joining us as well. Great session. Have a great day.

Awesome. Thank you.

Thank you.