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

Hey everybody. Thank you for joining us on day 2 of the Morgan Stanley Technology Conference. My name is Stan Zlotsky from the Morgan Stanley Software Research Team. And with me -- this morning, I have the pleasure of hosting, the Sprout Social team. We have Justyn, Joe and Ryan from the team. Gentlemen, good morning. How are you?

Good morning.

Hey, Stan.

Good morning. doing well, thanks.

Good to see you.

Great to see you guys as well. So before we begin, just very quickly, for important disclosures, please see the Morgan Stanley Research Disclosure website at www.research -- www.morganstanley.com/researchdisclosures. You think I have that memorized, given how many time to reset it, but surprising me every time. So move that out of the way, let's dive into the more interesting part of the session. So gentlemen, thanks again for joining us today, and really happy to have you at our TMT conference, officially in a fireside chat format. Unfortunately, didn't work out last year due to timing, but you were obviously here at the conference doing the one-on-ones, but it's exciting to have you in a fireside chat session.

Maybe just because you guys are a little bit more new to the public -- a little bit newer to the public markets. Can we just start off with a brief overview of what Sprout Social does? And what we bring to market from product prospect?

Yes, absolutely. So Sprout is a SaaS platform used by 26,000 plus brands globally coming from all segments, all industries. And it's a platform that these brands use to manage their social media efforts across the organization. And typically, that covers everything from engagement with their audience on these social channels, publishing content, planning their campaigns, understanding efficiency of those efforts through analytics, reputation management, advocacy, social listening, using social data to understand the trends that are driving their business and really doing all of that in a single platform, which is Sprout.

What's -- what I think has become really apparent to everybody just during the pandemic, right, how important social media interactions and the ability to manage the social media has become for companies of all sizes, right? And the important part, I think, that from our conversations with investors, is really driving home the point that you guys are not necessarily on the -- not necessarily, but you guys are not on the paid media's side of social, right? But in as much as there's -- the paid media, there's a lot of dollars flowing into it. And for all the right reasons, right? Because social is such a big secular component of where companies are doing their advertising. And because that's where the consumer has lived, right? So when you were seeing this big push into social media, what are some of the benefits that you guys are realizing beyond just the actual -- the paid media side of it? Because obviously, you don't manage the paid media dollars?

Yes, yes, yes, you're right. So the -- our focus has always been on what we'll call the organic side of social, the ability to build relationships to talk directly to your customers, to your future customers, et cetera. And so what's been really fascinating about the way that social has evolved to brands, there's the advertising component. There's the organic relation side of things and the data and all things that comes with that. But what we've seen -- and I think this was pretty pronounced in 2020. There's -- that push into social advertising is actually something that we indirectly are quite involved with, which is unlike most advertising channels, in social media, if you're effectively advertising, if you've got an effective campaign, that's generating exhaust. It's generating conversation. It's generating comments and people sharing and asking questions, all sorts of things. And that's where our platform helps our customers do, right? So they're doing the advertising, all of that, that exhaust is managed through our platform. And so that's a great tailwind for us. On the flip side, if there's a time when organizations may want to pull back the spend, then the organic side becomes even more important, right? The ability to connect with our customers, to publish content, to do those things is critical. And so in both scenarios, we've got a role to play and tremendous value-add to the customers. And so that's been really healthy for us as a business because we're seeing both the efficiency of social media advertising growing and that investment growing. That's great. That creates the scenario where we can help our brands manage all of the conversation and dialogue that comes from that. And also are building out this organic side of that relationship. And so we're kind of helping both angles.

Got it. Got it. That makes a lot of sense. And I think that all these has really -- have really come through loud and clear as we all went through 2020, and we really launched how you guys navigate 2020 so skillfully. The very interesting thing, right, when all is said and done, we're looking back to 2020, is that you guys actually finished the year pretty much at the midpoint of where you guided coming into the year. Despite there was a -- there's a little pandemic somewhere along the way there. What are some of the lessons that you took away as you manage the company through the pandemic, through that 2020 pandemic year?

Yes. There's definitely a lot of things there. I think that the first thing was just that our investment in culture was one that was critical. And you see this if you look at any of the reviews on things like Glassdoor, and you know that, that's important at all times, but in a year like 2020, it really stood out. And so I think, look, everybody forced into this new world, working remotely in situations that we were not prepared for. That's a combination of people who are working at home with kids running around in the background as well as a good portion of our demographic living with roommates and trying to figure out how to find a good workspace. But the thing that really stood out was that our team remained healthy, remained productive. And we saw that in execution and in the numbers. But it was beyond just our team, I think it was just the way that the product and go-to-market motion was built, was set up for any environment. So if I think about just our go-to-market, we are a highly inbound model the top of funnel and the traffic in the trials continue to have a great trajectory. We are a big believer in the modern way of evaluating software and buying software is to actually get in the product and get your hands on the keyboard. And so our customers were able to do that even during the situation. And we also deliver ongoing implementation and support in remote fashion. And so all of those things really came to bear this past year, which culminated in a really strong finish for 2020.

That makes a lot of sense. And Ryan, also wanted to extend my congratulations on your recent promotion.

Thank you.

Obviously, very exciting. When you think about the lessons that you guys learned through 2020. And you recently hosted your Q4 earnings call, and you showed that there was acceleration on ARR, your billings, revenue, right, all the top line growth metrics were accelerating. Is it fair to say that you think the company is in a stronger position now than you were before the pandemic?

Yes. I think that it's definitely fair to say this is an organization we have hit stride despite the things that were happening in 2020 and the way to be we had hoped to heading into the year. I'll stop short of saying that there's -- we're kind of a direct beneficiary, some of the remote technology that we've seen and things like that, where that's a very direct driver. But where it's been pronounced -- to Ryan's point around just the business model was built to work really well in all environments. And the way that we have positioned the product in the market is super effective. It feels like we have definitely accelerated -- businesses understood that social is inevitably critical to our business over some period of time. And one of the lasting benefits that we've definitely seen is that it now is critical over a shorter period of time, like businesses may not have as much time to get their act together as it relates to social and their strategy, as they might have thought. So we're going to see more businesses that are ready to make these investments that are taking social beyond just a handful of people in the marketing department and operationalizing it across more of the organization. And that's a trend that may have been 2, 3, 4 years out that we're definitely going to see pull forward.

Yes, that makes a lot of sense directionally. If we were to maybe look underneath the coverage a little bit. And one, I think, more interesting parts of the Sprout Social stories, other than just a strong based adoption, but the success that you guys have been having with your higher-priced add-ons, right? So things like your listening product, your analytics products. Can you just give us a quick update on where you are as far as the adoption of these -- the premium add-ons? And even something like a reputation product, how are you guys feeling about the adoption of that in the marketplace?

Yes. I would say we're early innings, and the team is really excited in to our customers. Up into 2 years ago, the platform was really one product. And then we added listening and analytics and reputation, and we've seen significant growth and feedback from those products. We were 100% year-over-year growth within those add-ons. And we're about a 10% attach rate today. And what I think is really exciting for us is that these products are valuable to the customers of all shapes and sizes. So you assume that it's the mid-market and enterprise, and that's absolutely true. But we have customers in SMB and agency that are also consuming these products and getting great value. So we're continuing to see the value of those products across the customer base. And I think we have a lot of upside both in landing new customers in a larger way with these add-ons as well as going back to our 26,000 customers and expanding the footprint.

And we'll dig into the -- with Joe on the net revenue retention impacts of these add-ons. But maybe just staying with this particular topic, just a very high level. How do you guys think about the decision of making something an add-on product and it paid add-on product versus just increasing functionality of the core platform versus creating a separate -- separately priced skewed for something?

We don't distinguish is the 2 super narrowly. We look for where is the opportunity with what makes sense. And to provide some more context there. When we're thinking about new capabilities that we're building, if we're building them in the core experience, then we're creating opportunities to increase win rates, we're creating opportunities for expansion into other departments and other use cases, making the product stickier and things like that. So we've got -- there's a revenue contribution regardless of -- if it's on a separate SKU. And so it becomes a product decision of, is this something that we think is broadly applicable to a large portion of our customers that we want to deliver to everyone to improve all the things I just mentioned. Or in the cases like analytics or listening where we've built up so much value in these feature sets that it makes sense to actually carve them off into separate offerings, where there's value to the people who really do value those at a much different level than they might be making an investment in the core product. And so everything that we build, we have quarterly meetings to align around. Is this something that goes in the core product? If so, which plan should it go in? And if not, do we have enough gravity around this feature set to actually treat it as a separate SKU is something that people might want to implement. So you'll continue to see both varieties from us. We love the value that both of those opportunities give us.

Yes. And that makes a lot of sense. And when -- when you talk to customers, right? And you talk to them about your product and the direction of your product. What are some of the other pain points that you often hear from customers that you kind of said, "Hey, that would be cool if we did that." Obviously, we don't expect to unveil your entire product road map on today's call unless you really want to. But just what are some of these pain points that you hear about?

Yes. I don't know if we go deep in the road map, but I'll give you some stuff that I hear often. I mean, I think one of the main things that we continue to hear relates to the listening product. And I think for so long, listening solutions have been gated, both from a price standpoint as well as a technology standpoint to only the largest companies in the world. And so we are hearing and seeing and now able to offer value to customers that realize that there's these trillions of data points that exist on social today that they could be tapping into to make business decisions, right? Information around what their competitors are doing, getting a better understanding of the markets that they want to be going into or how their product may need to evolve. And so that's one of those items today that we see. It's not just the technology that we're bringing to these customers, but also the strategy behind it. That's one. The second thing I'd highlight, we're doing a lot of this for customers today. You heard us talk about it in our previous earnings call, but customer care and customer support, more and more customers today are not e-mailing you at your help at. They're not calling your 1-800. They're tweeting at your going to your Facebook page. And so we're seeing the need to make sure that our customers are well equipped to respond at the speed of social through Sprout Social and engaging with their customers. Those are a couple of things that we've certainly seen. I don't know, if Justyn, do you want to add anything else that stands out?

Yes. I mean, one of the fascinating and really large opportunities that we see is the concept that we've talked about in the past of just social is becoming more important to more uses and more parts of the organization. And so a lot of the opportunity that we see is all the ingredients are there, but now we have a PR and comms team that wants to use Sprout. We have a customer service team that wants to use Sprout as a sales team, et cetera. And so a lot of how that opportunity is thinking about what lens do we need to apply to that experience where we've got the tool that everyone can work together in and these different departments and use cases can work together in. But where can we tailor that experience specific to that need and to that use case. And so you see a lot of that social care is -- one that Ryan mentioned, we see that in PR and comms, advocacy and reputation, et cetera. There is no shortage of things that our customers are saying, "Hey, we've always done this, this way, but social is becoming a much bigger, if not the biggest part of that workflow, how can you help us kind of bring that -- capture that workflow in the Sprout platform?" So we spent a lot of time thinking about that.

And those new use cases that Justyn, you just mentioned, I mean, we heard about them in the Q4 call, and that, that was really those really surprised me in a good way, right? So you mean like the use case like the Investor Relations, the comms, right? Would those use cases -- was that something that you guys were working on with customers and really trying to see what kind of product fit there would be for those functions? Or was it more of an organic kind of emergence where customers came to you and said, "Hey, we need more seats and the reason we need more seats because our Investor Relations or our comms team, they now want to start using the product?"

Yes. I mean a lot of it, I'd put in that organic bucket, right? These organizations are just becoming more mature. They're thinking about social differently, and they're able to see those opportunities. So with 26,000-plus customers, we do get a lot of signal around where those needs might be trending. It might only be a handful of customers at first. But we can start to explore that use case and issue with PR and comms or even IR, the reality that we're in is anything that's happening, it's going to be on social first. That is the early state, what do we need to do to help foster that in this case? And how are some of our customers who may be using that, even though we didn't position it that way, they're kind of using it that way, what can we learn and help our other customers take advantage of that.

And just wanted to I go back to what Ryan said a couple of minutes ago, which is around the listening product. And the listing product specifically is a fascinating one because people who have been studying the space, listening is nothing new, right? As Ryan had mentioned, it's been around for a very, very long time, as a feature. But obviously, it's not -- it hasn't been accessible to everybody because of technological limitations and price limitations, but what's really happened in the last several years that's allowed this listening product to be available at scale to a much broader set of customers which is where you guys are seeing a lot of the traction?

Yes. I think that the interest and the understanding across brands on the power of all of that data has definitely grown over time. But I do think that what we're offering in the ability for the typical customer to be able to get in and access this stuff easily and get the answers that they need to make business decisions is something that we've uniquely brought to market. We built it in a way that allows it to scale. We've priced it at a way that because of the product decisions that we've made that we've been able to make it accessible to a much larger population of people. And to Ryan's earlier point, when we think about the success that we've seen with listening specifically, but this applies to premium analytics and others, so if you look at that customer list, it is all shapes and sizes, and that's something unique, right? It -- prior to us introducing this product, that really required a large budget, it required internal analysts and probably programmers to really get the value out of it. So most of the market was priced out. But we've taken a different approach. And I think that's something our partners were really excited about, too, is we've got an opportunity to democratize all this information. Arguably, the smaller companies stand to benefit, they need to help in understanding of the market more than anyone. They don't have access to market research and focus groups and things like that. So it's been really exciting for us.

The other thing I'll just quickly add to that is it's the usability, the accessibility, it's also doing it in one place. And so most of the players that existed were siloed technologies. And what we've learned from our customers, especially these marketers that are in the platform, when they uncover trends within social in listening, they want to move alongside of their publishing strategy and start to take advantage of it. This past year, we had a customer that was in travel and hospitality, they leverage the listening solution to figure out that their customer base had stopped buying because they are afraid that with COVID, they wouldn't get their money back. They took those insights and could immediately move over to the publishing and start to market their COVID insurance that they had that customers didn't know about. And so we're seeing more and more of these use cases where they need to live together, and that's how our product team has built it.

So that's certainly a very powerful example and something that the value that Sprout delivers to customers is certainly resonating. And I think the way that -- the way that, that really resonated is really in Q4, you guys picked up over 1,100 net new customers, which is almost as much as you had through all of 2019. And may be -- maybe we can get Joe involved in the discussion as well. But how are you thinking about the pace of new customer acquisition going forward?

Yes, Stan, it's a great question. If you look at Q3 and Q4, we definitely saw that pick up in net new adds. But going into the year, we mentioned this earlier. If we were to look at the year pre COVID that's kind of where we expected to be. We saw a lot of momentum coming into 2020 COVID aside, and that kind of picked up in the back half of the year. And going forward, you'll still see us focus on adding new customers. But for us, it's always been about the value we're getting from those customers and the ACVs that we're getting. And so we like to see a couple more data points. We like to see how we get into 2021 before we kind of call it a real trend in the business, but we definitely like the way it's pacing right now.

And specifically, right, in Q4, where we saw a really meaningful inflection isn't the customers paying more than 10,000 of ARR, right? The 359 that crossed that threshold in Q4. Is there something unique that's really happening? Was there certain maybe catch up where these customers are always going to push above that threshold through the first half of the year, but that was kind of delayed by COVID? Or was there something that really different that you guys did in the back half of the year to really set up that inflection in large customer momentum in Q4?

Yes. There's -- I wouldn't say it was a catch-up necessarily in Q4. I think there's a few things that are happening in the business which are contributing. One, the business has continued to expand and grow within the mid-market and enterprise. So you're going to have some of that seasonality that exists with larger customers on their budget cycles. So we saw some of that. A lot of this ties to the conversations from earlier, which is we've seen this maturity happening within social today where the use cases are proliferating across an organization. And then we've got the these additional products and users available for these customers. So we're seeing larger lands and we are seeing larger opportunities to expand our footprint within our customer base. So all those things are happening. The thing that I'd highlight as well is we see that there's more opportunity, not just in the mid-market and enterprise. That 10,000 number includes SMBs and agencies. And Justyn highlighted it before, but so many of these small businesses view social as an opportunity to punch above their weight, right? Many fee of them are growing up digital. They're growing up social. They see this as the conduit on how they compete. And so we see lots of opportunity across the board, especially as our product set continues to grow and evolve and customers mature.

Within the customer and just the growth momentum you guys are seeing, I think one of the more interesting areas is international, right? It's still a relatively small part of the business, but it's -- we're very fast growing, and you opened your first international office in 2019. I would presume it was a little bit challenging, navigating through COVID and managing international there. But how are you thinking about your international avenues for growth as we head into 2021? What are your some -- what are some of your top priorities for that segment of the business?

Yes. The international opportunity continues to be a leverage point for us as we move forward. To your point, Stan, we invested in 2019 in an office in EMEA, specifically in Dublin. And I will say, actually, one of the benefits besides the productivity and revenue from that group is they went into shutdowns earlier. So we've learned a lot from that team in the way that they embrace their people, the changes that they made that we were able to leverage here in North America. So that was a huge benefit for us. As we move forward, we continue to see a lot of opportunity to build out the capacity in these markets. We're in EMEA today. We'll be making some investments in APAC and LATAM, both from a direct and indirect nature. And then on top of just capacity in AES, it's also local marketing. So a lot of our success to date has been a generalist strategy really driven out of North America. And so we started to make some investments in localization and local marketers to make sure that we're taking advantage of the opportunity that exists in those local markets. So you'll see some of that from us over the next few years.

Got it. Got it. Maybe switching gears slightly. What we started discussion this morning, right, is just the growing importance of social to how companies manage their online presence and how they manage their interactions with customers across so many different types of functions. And presumably, you guys are not the only ones who are seeing -- having that aha moment and seeing the light. What have you been seeing as far as that competition, right? The emergence of new vendors and trying to disrupt from the bottom or maybe some of the more upmarket participants trying to pivot their positioning and just go much more aggressively, either you or just the broader market opportunity?

Yes. We feel really good about our competitive positioning. We've continued to see increased win rates and revenue in competitive situations. One thing you highlighted, Stan, which is actually really interesting and a very unique dynamic is we haven't seen new entrants in our space in probably the last 4 to 5 years. And one of the reasons is the barriers to get into the market are incredibly high, right? You have to figure out how to build relationships, and that's both the business relationship as well as the technical relationship with all these social platforms. We've been in this world for a decade-plus not just building the business relationships, but setting up our product team to be able to innovate off of this one code base so that we are moving at the speed of social, which is highly differentiated. So we haven't seen a lot of new things in the space from an enterprise market perspective, I think, one of the biggest things to highlight is, especially during COVID, when you're engaging with brands, they have a real need right now and speed matters, getting up and running and getting value matters. And so us leading with this trial model, this product-led growth, getting customers in the product basically using the product before they ever sign a contract with us or make a commitment to us has being a huge differentiator. And no one else in our space and the enterprise is set up to compete in that way. And so my enterprise team, #1 play is get the customer in the product, get them exposed to working and listening and analytics, and that's been highly disruptive.

Got it. Got it well, let's -- I know we're coming up towards the end of the session. Maybe just one more question, and let's try to get Joe involved again. On net revenue retention, that particular metric had a very strong inflection as we ended 2020, and you guys talked about there's a potential for that to accelerate as we move forward. And obviously, we discussed a little bit earlier, the momentum that you're seeing as far as seat additions within existing customers as well as traction with products like listening, reputation, premium analytics. When -- Joe, when you think about net revenue retention, how high can it go? And what kind of time frame should we be thinking about as to that uptick that acceleration in that we could see net revenue retention?

Yes. I think for us, Stan, we think it's just going to be a gradual increase over years to come. And a couple of reasons of that is we've seen the best net dollar retention in our biggest customer. So like if you just look at the mid-market and enterprise, that's where we see the highest retention rates. And as our business moves more into that space, I think you're just going to see more momentum in that number. And the other thing is, there's a couple of things -- one is the use case that we talked about expansion across the business, especially as we get into mid-market and enterprise, we're just starting to see those trends. And so we just think there's just a lot of potential probably in the core platform across these different organizations. And on top of that, we only have round a 10% attach rate right now. And so like Ryan mentioned earlier, we're just really early innings even with these add-on products. So I think about the potential within 26,000 customers, I think, about this use case expansion. I think you're just going to see a nice steady growth for years to come right now.

Perfect. Well, I think that's a great place for us to stop, Justyn, Ryan and Joe. Gentlemen, thank you so much for your time this morning, and I hope you have a great rest of the conference and a great rest of your day.

Yes. Thanks so much.

Thanks, Stan.

Thanks.

Thanks everybody.