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

Great. Good morning. Welcome to our next session. I'm really happy to have the team from Sprout Social on. I initiated coverage only a few months ago, but I'm very excited about it, and I hope I can get out of the management team why that is. Justyn and team, like, hey, good to have you on.

Maybe let's start with what was the main idea when you started Sprout Social a few years back?

Sure. Yes. Happy to be here, and thanks. So the premise initially, and this goes back to 2009 when we really started thinking hard about this idea, was that social media was going to transform, not just the way that us as individuals communicate, but really create this interesting opportunity in the way that brands and consumers communicate. And at the time, there were a handful of brands that were kind of dipping their toes in, but the technology that existed just wasn't there. Everything was aimed at consumers, and businesses needed an entirely different set of tools to really leverage the power of social and make it work for their organizations. We felt like we had a pretty clear vision of what that needed to look like and set out to start building those tools and make this something that could become as powerful as we thought it would be. Now, obviously, 10-plus years later, different situation. It's more of -- when we initially started, social was an opportunity to help companies get an edge and think more in terms of the future and how they could stand out. Whereas today, it's much more of a necessity. The use cases have broadened across an organization, and the industry has evolved a lot.

Yes. And if you think about -- I mean, it's still -- it is evolving, but it's still early days, I think. Like if I think about how I communicate with brands, et cetera, I'm slowly only getting used to it. Like how would you define the opportunity set? Like and how big can this get? Or like how important can this get?

Yes. You're exactly right. I think it's a little deceptive in that we've been using social media tools for quite some time now. Our company has been working on this for more than a decade, but we still are very early, not dissimilar to sort of the transformation we saw with web and e-mail where adoption was kind of gradual until it wasn't. And I think we're getting to the point now where organizations, there are more than 90 million active on social media. A very small percentage of those have reached the level of maturity in that journey where they become our ideal customer, and that's kind of happening rapidly right now. And I think paired with what's happening on the consumer side, to your point, we're getting used to this is the way that we work with brands and that we buy things and that we get support and all of those sorts of things. And when we think about the total opportunity here, there's the problem set that we have today, which is much larger and more broad than when we started. But another 5 or 10 years from now, what we're looking at is organizations have to entirely retool and update their processes to match the world that we're in, which is where this is -- where the consumers prefer to do these things. This is where the conversations are happening across all aspects of the business, and so there's going to be still not only the organizations that are still getting to the point where they're committed here. But then also taking that to the next level, operationalizing that across the company, it's going to be a huge retooling. And we've got a fraction of that tool set today of what businesses are ultimately going to need.

Yes, yes, yes. And how do you see that market evolving though? Like when I did the research on you guys, there were quite a few players trying to do this. None of them are new, besides you and maybe there was like a New York-based company. Like is this kind of -- is it going to be like a bigger guy, like a Salesforce taking it on? Is there going to be like a Salesforce emerging out of this space, and you could be it? Like how do you think about this kind of evolution of the space?

Yes. I think that the folks who have grown up staring at this problem and have been working on this problem are likely to stay the large players in this space. There's just a different DNA, a different set of technologies involved. I think most of the cloud players have tried at some point or another, back in 2010, '11, '12, to figure out how to get involved in what they saw as an important space, but it is a very different beast.

Yes

Yes. And so I think there will be very sizable companies. I think we'll continue to lead the charge there that come out of it, but I don't think that it's going to become part of another stack. I think social, by nature of the technology and privacy and a bunch of other things, really demands that is its own platform, its own system of record. And so if the cloud companies come back in, I think they will have to treat it as such, which is kind of counter to what they did back in the 2010, 2011 time period.

Yes, yes. And then talk about like how big could this get? Like and full disclosure, when I started looking at you, like the take you get per customer is still tiny -- like it's good to get that because it's still tiny like. But how do you define your market in terms of size? And what's the opportunity there?

Yes. So I mean there's a couple of different factors that go into the math and how we think about this. The first is that we're still so early. We've got 25,000-plus customers globally. There are 90 million active in social media, and we're still in the very early days, as you mentioned. So that's going to continue to grow. We've also seen our ACVs grow. I think over the last 5 or 6 years, it's up 6x. That continues to climb. We're seeing organizations add new departments and use cases, more seats, and it's just got this natural kind of growth curve to it. And then we're adding additional products, additional offerings. And so the way that we think about it generally is, if you look back 4 or 5 years ago, our top decile of customers were spending about what our average customer spends today. And we think that, that trend is going to continue. And we see in our largest deals, those are organizations who have hit that level of maturity where they're taking it across the organization and into new departments. We think that's going to be the kind of the base case a few years from now.

Yes, yes. Do you have examples? Like what are they spending with you versus what the average is spending?

Yes. Ryan, I don't know if there's a couple of examples you might want to point to there.

Yes. Without getting into specific company names, what I would share is that, as we think about the evolution of the growth of these customers, when you look at the average across 25,000 plus, certainly it looks smaller. But every year, it's continued to increase quite significantly. When we look at the top echelon of customers, you're seeing these sophisticated customers spending in the 6 figures for ACV and getting into the 7 figures for TCV. And so to Justyn's point, it's been sort of twofold in that we've had this social maturity and adoption, and our product set has gone deeper on the core elements of social when we think about publishing on the marketing side or engagement in the customer care and sales side. Two, things like social listening and more advanced analytics. And so we're seeing a lot more of these sophisticated mid-market enterprise companies starting in the high 5 figures, 6 figures, which, as you can see from our business, is a huge part of our growth levers as we move forward.

Yes. And then you mentioned already like the expansion of the product set. Talk a little bit about that. Like what's the core starting point for a customer to kind of do? And then what are the add-on features? And you mentioned social listening and analytics. I guess like -- so talk about the product set but also what it does in terms of monetization.

Yes. I'm happy to start there. So from -- if we were to generalize, most of the use cases historically started from the marketing perspective, right? I'm thinking about social as another channel to engage with my customer base. I'm thinking about having world-class publishing tools, a way of creating marketing campaigns, being able to schedule them and push them across all of my social networks. That's certainly evolved, and that started with the marketing department. But even there, what used to be just a social media person is now teams of social media managers, and it goes into PR and comms, into content, into brand. It's really been pervasive across the marketing organization. That's evolved also, as we've seen from consumer behavior, into things like customer experience, customer care, customer support. Where today, we're not picking up the 1-800 phone number. We're not e-mailing at; we're tweeting at you. We're going to your Facebook page. And so all these brands have been forced, really, to engage with their customers on these channels. You have more customers now, and we see many of our customers coming in from a customer care perspective. Discover was a company we talked about in Q3. Their main use case was social customer care. And then on top of that now, with all the data that exists, you've kind of got 2 sets of data, right? You've got the data that you know in terms of your own interaction from a marketing perspective across your social channels or your engagement with your customers who are tweeting at you or talking to you on your Facebook or Instagram pages. And you're trying to understand a little bit more about the campaigns and how they're working, what the sentiment looks like. As well as how quickly your agents or your salespeople are responding to customers on social, your internal data, when you think about our premier -- our premium analytics offering. But then you've got this huge corpus of data that you don't have, and it's the true voice of the customer that sits outside of your 4 walls. And these people are on social, half the world's population, and they're sharing their views and their opinions. And you have a chance to actually tap into that insight to leverage that data and make business decisions. And that's our social listening product. So if we think about the evolution: started in marketing, it's expanded to customer care and to customer experience, and there's very much in the data realm today of how can I use this social data to move my business forward.

Yes. And if you think about the -- and it's back to Justyn. Like when you talked about like the evolution of the space, and we're only like now learning more and more what could happen next, like how do you think like -- obviously, you need to think about the expansion as well and the expansion of the market and the opportunity, like where could this go? Like what are the kind of aspects that you think without kind of front-running products here on my fireside, but like where do you think this could go?

Yes. It's -- so there's a lot of room still in that scenario that we talked about, where most organizations are still at the point where they have gotten a handle on social. They've got their presence. They've got some teams dedicated to it, but they've not begun to take advantage of a lot of the things that Ryan talked about. And so there's a ton of opportunity still. We're very early, not in -- not only in the number of companies that have adopted the platforms, but the number of companies that have then taken that next step. So that's a huge opportunity. We're going to stay very committed to that. But then you look at things like the social listening and the opportunities that, that provides, the reputation offering that we added to the platform last year, we start to see opportunities where social has become a dominant part of other use cases within the stack. You can think about things like PR and comms, the work that businesses and brands are doing to identify the people that are shaping their market and influencers. There's a whole additional set of tools that are going to need to be built, some of which we're working on today, some of which we'll explore in the future. Social commerce is obviously going to be a big step change for the industry in general. We've got a role to play there. There's just so many places that this is going to balloon into because social has really lived up to the idea that we had initially, which is this isn't just a marketing channel. This isn't just a place to put out content and reach eyeballs. This is a peer to phone. This is a peer to e-mail. This is a peer to web. This is a place where business is going to happen, and so the set of tools has to be much more expansive, and we're still super early in that.

Yes, yes, yes. And then another aspect I wanted to talk with you about is like talk about like the customers you're targeting at the moment -- like at the moment, there's a lot of SMB. But then there's above you, there's kind of quite a bit of enterprise. And talk a little bit about how you -- because you did SMB, you had to automate a lot more and how that may be kind of play out kind of in the enterprise in the long run. I'm just thinking -- I think I remember the first time we talked, I asked you, is this like Qualtrics versus Medallia a little bit where you have to because of the larger numbers of customers kind of automate. But then if you think about it in the long run, that automation is actually the way forward.

Yes, yes. It's a really important point, I think. When we started, we didn't have a specific part of the market in mind. We said we know what needs to be built. We want to build great software. And really from the early days, we had enterprise businesses. We had SMB. We had the whole spectrum. And today, while the mid-market enterprise is certainly the largest part of our business, the fastest growing, the most sophisticated, what's been really valuable in the way that we've approached how we build and sell is that, as social is now spreading beyond just the 1 or 2 people who are really good at it in the early days, to a much larger group of people, that ease of use, that ease of deployment, the ability to get up and running without a lot of change management, without a lot of training and those sorts of things has been really powerful. Because these teams, these large enterprises now are taking these tools across the organization to people in customer care or customer experience to people more broadly in the marketing department, people in sales. So that focus that we had early on about self-service, we've got a highly inbound revenue engine, all the things that we did to really optimize that, are a huge advantage now as we're further up in the market and growing very nicely there. Because the people at the end of the day who need to use the tools are able to do it in a way that they just can't with platforms that were built with more of the traditional enterprise mindset.

Yes, yes, yes. Okay, okay. Makes sense. Then if I look -- let's talk a little bit about the numbers. If I look at the growth I'm seeing out of them, it looks like it's very healthy. How do you -- and the question that you always get, like if you're a small software company that goes against a very big emerging market, like how quickly you need to run? Like how do you -- talk me through about like kind of growing faster, growing slower, like growing what you're growing at? Like what are the kind of the factors that you're considering there?

Yes, yes. So for us, when we think about the balance between making the investments in growth and the bottom line, we're fortunate in that they haven't been in conflict in that we're able to make the investments we want. We have a super efficient model that allows us to see very quickly if things are working or not. We don't need to wait quarters or years to figure out if the investments are paying off. We've got this really fast feedback loop. And so we're able to invest aggressively any time we see an opportunity, whether it's a new offering that we bring to market, one channel or things like that. We can go after those aggressively, yet we're still driving leverage in the business, right? We're still improving the margins but without ever feeling like we're slowing down on the opportunity to grow. So the bias that you're going to see from us is going to continue to be on the growth side, but we've got an opportunity also to continue to drive leverage with that growth plan fully funded, which is a nice position to be in.

And I want to get Joe in a little bit. Your -- like maybe remind us of the growth, but then you have like a weird set because your organic growth is higher than your reported growth. So that's kind of weird, yes.

Yes. That's a great point, Raimo. And I think a couple of points there. That's related to the acquisition we did in late 2017, a company called Simply Measured. We acquired that business for basically their technology talent. They had some really good engineers that were working on stuff related to listening, and we kind of were able to take those engineers and point them at our listening product. But as a result of that acquisition, they had a product in market that was not really of interest of ours. And so we immediately stopped selling that product to new customers. And then subsequently, we're shutting down that and deprecating that product. And because of that, we had a set of revenue that we made a conscious decision at the point that we weren't going to support anymore, and so that's been trailing off. And because of that, our total growth rate is a little bit lower than our organic growth rate. And the last point I'll make on that, Raimo, is, on a go-forward basis, that's going to become pretty immaterial. That revenue that's remaining is actually less than 1% now. And then as we go into 2021, you probably won't see us break that out on a go-forward basis. It's just that we're lapping some of the prior years on that.

Yes. Remind maybe for those investors that are not too close, like what's the growth rate that we're talking about now?

Yes. So if we look at what it was for this year, organically, it was -- if you look at our guidance for Q4, it's probably going to add up in that mid-30% ranges, right, in the mid-30s on the organic side. And then on the total side, it's kind of in the high 20s as we exit 2020.

Yes, yes, yes. Okay. Just maybe next question, and maybe, Joe, we start with you. Like in the -- we have COVID. You have like lots of customers, and there will be an impact in terms of spending. Like what did you -- what was the expectations when COVID started? Were you like, oh, my God, like what's going to happen now? And how has it played out?

Yes. So I'll kick it off there. So I think when it first started when we -- and we talked about it a little bit in a couple of our earnings releases, Raimo. But when it first started in March and April, we saw some elevated churn from the SMB agency space through March and April and a little bit into May. But then when we talked about this, exiting Q2, when we got into June, we actually saw it kind of get back within our normal ranges. And we actually -- I think we talked about at the time that June was our best net dollar retention month that we had seen. And so if we look at where we were exiting Q2 and going into Q3, we've just seen a lot of momentum in the business. And so we feel like we saw that impact early in COVID but have since recovered and even done better. And the other thing I'll add, and then I'll let Ryan or Justyn chime in, is we believe that the customers that we added through that period, if you think about the fact that we're able to get back to normal business by June, we feel like we just have an overall more kind of quality customer base, just given the fact that we're able to add so many customers, for example, in Q3 during this time.

Yes, yes, yes. Sorry, go ahead.

I was just going to say, to Joe's point there, I think it was a forcing function through the summer of any businesses that we're in a tough spot to begin with. And we've got the benefit that we're an inbound model, and 90% plus of our revenue comes through trials. So all these customers that are coming in are investing in social. It's a core component of their growth strategy right now. So to Joe's point, we feel really great about the composition going forward and what we've seen from an NDR perspective as well as we ended Q3.

Yes. And then maybe last question before I let you go. Like how is that -- like a lot of people talk about like digital transformation project or people realizing they need to change. Are you seeing that as well? Because like social will be one of these new paths to interact for business with consumers, and they haven't really done that much there yet. Do you see that increased urgency in your conversations or -- and out in the field?

Yes. I think, in general, I think it was a wake-up call for organizations that felt like they had more time. I think there were a lot of organizations that said we're going to figure out social. We're going to -- we know we need to be there to be competitive. We know we need to do these things, but we've got some time to do it. And I think what we saw in this pull-forward and the environment that many businesses have found themselves in over the last 9 months was, okay, we've got to get this figured out now. And so I don't know that it's changed necessarily the opinion on what they need to do. But it's said our time is kind of running out here. We need to be able to figure this out because, in some ways, for some industries, in particular, this is our only opportunity. And when we come out of this, those patterns are going to continue. Those behaviors are going to continue. More commerce will have moved online. Like these things are going to be with us, so we've got to be ready for it. And I think that's kind of where we are in the cycle right now.

Yes. Okay. That's actually a very good closing statement. The -- team, I'll -- I'm happy that you kind of joined us here. I hope we could get some of the excitement over to our investor group as well. Thanks for joining at the conference. And hey, good luck to you, and stay safe.

Yes, yes. Enjoy the rest of your day. Thanks.

Yes, yes, yes. Thank you. Okay.