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

Thank you. Welcome to our next session. I'm really happy to have the team from Sprout on: Ryan, Joe, Jason, welcome.

Maybe let's start a slightly higher -- bigger picture. And Ryan, that's -- probably a question for you. If you think about like social media and social media management, it's a relatively new category. Can you maybe talk a little bit about evolution and how does the area is evolving?

Absolutely. And it's funny to say that, Raimo, in terms of -- it's a new area. We totally agree with you. But sometimes we forget because as consumers, as individuals, we've been using social for many, many years. But for businesses, this is very new. We're very early in the adoption curve. When you think about the number, the 200 million plus businesses that are leveraging social today and single-digit percentage in terms of investing in the social media management solution, there's just so much upside. And it certainly has evolved a lot over time. If we think about it from a business perspective, the tools that we have in place today at the enterprise aren't set up to be able to manage everything that's happening within social. We're used to CRM and marketing automation, but social is something entirely different. So many different platforms, social networks that we need to think about, so many use cases, so many different APIs and that's where Sprout Social comes into play. So our customers, 30,000 of them, all shapes and sizes from SMB to enterprise rely on Sprout to connect all of their social strategy and engage across all of these social networks to communicate, to market, to sell, to service their customers through social and they do that all in the social -- in the Sprout Social platform itself.

And can I just ask a more kind of stay on that with a slightly more basic question for those that are new to the story. So what are you actually doing? And what do you need to think about it? I can -- I remember when I joined the Sprout story as a covering analyst, you do watch a couple of YouTube videos and it's like, oh, that's what you do. Okay. Like -- so maybe talk us through a little bit about like -- so what's the day-to-day life of what you need to kind of solve for?

Yes, absolutely. So if you think about our customers today, the majority of the customers or consumers that they work with are on social. And they're on social and this is the best place for them to be able to engage with them. And that might be from a marketing perspective, which tends to be one of the most common use cases. So I'm on social as a brand and I'm trying to communicate with one of my consumers. I'm sending up marketing campaigns. I'm thinking about this like I might think about our e-mail marketing or television advertising or any other search engine advertising. I'm thinking about our social networks as an opportunity to engage. But the difference being is, in this channel, actually can have a conversation, a one-to-many or a one-to-one conversation with that customer. So there's a marketing element to producing amazing content and campaigns and pushing it out through my social channels where my consumers are. When you do that, on top of that, your customers actually can engage back with you. So your customer is different than e-mail that's one-to-one communication or TV or radio where it's one-to-many and you don't get the exhaust from it. In social, you run an amazing viral campaign and you have millions potentially of comments and engagements and likes, and it creates a lot of conversation and engagement for customers. And our customers need to figure out how to manage through all of that. And oftentimes, it's not just through Facebook, it might be through Facebook or Instagram or Twitter or Pinterest or whatever the social network may be. And so there's a lot of volume that they need to manage in terms of managing that relationship with the customer. And then on top of all of that, we've talked about marketing and engagement, which might be support or customer care. There's all this data that's being created that you can really start to see some interesting insights from, which market campaigns are working and driving the most engagement, what kind of questions or concerns or comments am I getting back from customers, what kind of feedback am I getting from a product perspective? I can capture all that unstructured data in a structured format to leverage those insights to change maybe the way that I market or position myself against competitors or even build my products. So our customers are doing all of that, logging into one place into Sprout, nut they're not logging into Facebook and Instagram and Twitter and all the various social handles. They're logging into Sprout to manage all of that interaction in that data.

Yes. Okay. That makes a lot of sense. Okay. That helps. And if you think about -- so maybe a question more for Joe, like if you -- when you talk with the Board, when you see these big platforms, they are all massive and spending there is massive and is growing massive like, how do you quantify or talk about your market in terms of TAM and the growth in that market?

Yes. So the way we look at it and way we talked about in the past is you've got over 225 million businesses on the Facebook of properties, Raimo. What we do is we kind of break that down between the different segments, the SMB, mid-market and enterprise. We look at the number of businesses in each of those segments. If you just take a single-digit penetration rate in these different segments and apply our average ACVs and our customer -- and our competitor ACVs, you get to about a $44 billion TAM. And so when we look at that opportunity today in front of us and that doesn't include, if you look 4, 5 years down the road and our ACV grows, where we think that market is actually going. If we look at it today, there's just -- there's a -- when we talk to the Board about it, they want to invest for growth. They want to invest in this market as aggressive as we can because it's such a big opportunity. And what's interesting about our product that's different about versus our competitors that we built a product in a way that serves the entirety of that TAM, SMB up into enterprise. So we built this product, 30,000 customers, that over 3,000 customers in each of these segments. And we built it in a way that can serve a very few users down market, SMB all the way up into hundreds of users across global enterprises. And because of that, we get pretty excited about the opportunity. The Board gets pretty excited about the opportunity. And so we're continuing to invest right now for growth. We think there's just a lot of room to continue to grow this business for a while.

Okay. And if you think about it, like maybe, Ryan, back to you a little bit, like if I talk to other players, they always kind of keep saying me like it's really difficult to work with the likes of Facebook and stuff because they are in a wall garden, they won't let you in and you can't really interact with them. How is it -- is that a problem for you? Or is that coming up? Or how are you solving that?

We've seen it as a competitive advantage. And I even call it a moat. We've had these relationships. Now we've been in the business, laser focused in on social for a decade plus. We've created a really strong partnership and we have a really strong reputation. A lot of what Joe just touched on, the way that we built the product means that we have the ability to execute on the products that groups like Facebook and others are bringing to market. And they look at us and they see 30,000 customers. They realize that these customers are their customers, right? These are often the advertisers, the people that they're doing business with. And if we're making it easier for those brands to get utility from the social networks, reinvest in their model as well. So there's a very symbiotic relationship that exists. And we've just had a lot of proven scale and execution. A great example, Instagram DMs was one of the #1 feature request that we had this past year and when Instagram made it available in the API, they had selected a few partners to bring this to market for the beta. Most partners took 10 weeks plus to deliver this. Our product team delivered it in 4 weeks. And so we continue to just get great feedback from the team. So we see it as an advantage in the way that we're architected and the relationships that we've built with that team.

And then last question on that and then I promise to shut up is like the -- what's the situation on like this whole data -- consumer data, data, privacy, et cetera. Does that impact you guys as well? Or is that just kind of more their problem?

It doesn't really -- I mean, there's a few things that are important to note there. One, we don't participate in the ads revenue side. So the elements of targeting don't exist within the platform. We're really focused in on the organic side of the platform. We do provide customers with reporting and analytics on paid and organic. But all of our work is really focused in on the organic side of the house. So we tend to not have a lot of the headwinds that others that may be participating in the ads revenue and that targeting part of the business maybe facing with some of these challenges and changes.

Yes. And then last question on big picture and then I'll move on to more company specific. But talk a little bit about the relationship to the kind of the old marketing legacy guys. And one thing that comes often up is like, look, social is just another kind of pathway. So ultimately, it would all be subsumed under one. And like -- so can you speak to that a little bit?

Yes. So I spent 10 years at Salesforce. I was there when the Social Studio acquisition happened or what is Social Studio Radian6 back then. The players Oracle, Microsoft, Adobe, Salesforce all bought in between 2010 and 2012. And I think back then that was the thesis. This is going to be a nice little feature under our CRM. But similar to what I was recalling at the beginning of the session, this is such a different beast. It doesn't operate with the unique identifier being an e-mail. It is a very dynamic set of data. There's so many different social profiles, social platforms and use cases and APIs that the current facts that we have today, tech stacks that we have don't work in this manner. And so what -- I think all of those companies found is that if they were not investing in that tech platform that they had bought, that they pretty quickly became outdated and archaic and are not relevant today. And so almost everybody in that space has deprecated the product and moved out and have now leaned into a partner strategy. We have not seen new entrants in our space. We've seen a lot of consolidation. And we just see this as another moat for us. So our strategy is really being partnerships. We've built a lot of bidirectional integrations with the likes of Salesforce and Microsoft and Zendesk and HubSpot. And we see those companies as great partners and we're providing great value to our customers jointly.

Yes. So who is actually competitors? And like is it -- I mean, there's obviously another public company out here that is there. But is there anyone else that kind of is not under radar for people?

I think it's probably names you've heard before, HootSuite would be another one that's out there that play more in the SMB space. Khoros is another one that is a Vista owned property, the Lithium and Spredfast roll up and then there's some consolidation that happened with some other martech players that have consolidated some of the other legacy players in the space. Those are the ones that we most commonly see.

Yes. Okay. Joe, more for you now the questions like, if you think about it, the -- and if you look at the last few quarters, growth is really, really strong. Growth is really accelerating actually. Talk a little bit about the drivers there.

Yes. I think there's a couple of things going on there. I think first, on the new business side, we've just seen an increased amount of execution from the sales team. And there's a couple of things going on there. One is given the fact that we're 90% inbound with our trial model, right? We have a lot of data and information. We can understand the quality of those trials and leads and demos. And so we've been able to more efficiently kind of get those out to the sales teams, have them work on the more higher value, more likely to close type opportunities. So because of that, we've been just a little bit more efficient on the go-to-market side. The other thing we're doing and this has probably helped us more in the mid-market enterprise as we're getting pulled more upmarket is, we started to make some changes in our marketing strategy and our content strategy. Historically, we've built a lot of our content, built out for the practitioner, how do you do things day-to-day. But what we found is as we're getting pulled into more C-level conversations, we're getting these larger enterprises with CMOS, heads of customer care. We're starting to build out more of our content that's targeted to more of that senior level person at these organizations. So because of that, we're getting into more of these conversations, more of these larger deals, and so that's kind of led to that growth. And then on the flip side, I'm selling back in our existing customer base, we've got 30,000 customers. We're at like 14.5% penetration rate on our add-on modules. And so they're just have been this concerted effort internally to go back into our existing customer base and not only sell these add-on modules, but the use case expansion. So what we're seeing is a nice combination of, hey, we're no longer just landing in the marketing organization or if we do land in the marketing organization, we're getting pulled into customer care use cases, product and sales organization want access to the data through either social listing or premium analytics. So I think the combination of growing within our existing customer base and execution on the new business side has really kind of led to the growth you've seen over the last couple of quarters.

And can you just speak to the growth and in case someone doesn't -- haven't seen the numbers? And what other factors you think about and Jason will more like the question like a further reacceleration of growth? Or like what's driving -- what's driving a certain growth rate?

Yes. Within -- like what part on the sales side is driving more of these growth rates? Yes. Yes. I think -- and we've talked about this. I think the mid-market and enterprise segments, Raimo, are our fastest growing, and that's where we're seeing the most success. That's where we're putting most of our resources. When Ryan and I look at the business month-to-month, quarter-to-quarter, we just -- we can't invest enough in no segments. And I think it's a couple of things that are going on there. One is, I think a lot of these businesses as are starting to mature, they're realizing that social, is that just solving a pain point, but now these organizations are looking at it from a more strategic standpoint. How can I -- some of these larger organizations, how can I use Sprout and how can I use the tools we provide within the platform to do more than just, for example, publishing content. How can I use this to engage my social customer care team, how can I use premiums listening to get involved in sales and product. And so I think the thing you're seeing is the mid-market and enterprise are kind of leading that charge on the growth rate. And then the other thing that we're starting to get -- that's going to be a bigger opportunity probably going forward is and we've talked about this in the past is we're seeing more and more traction on the international side, right? Historically, we haven't had a large presence outside of EMEA. We put our first team out there in 2019 and that team has grown pretty aggressively and we've seen a lot of success. But we haven't really invested a lot in the other regions like APAC and Lat Am. And so what you're starting to see from us now, you'll probably see it over the next couple of years that we're starting to invest in some of these other parts of the world and we see those as other opportunities here as growth levers.

Yes. And talk a little bit about enterprise, like it looks like the -- that's a big opportunity. Like how do you define enterprise? And it looks like a very, very big market in terms of like depending on how you want to define it as well.

Yes. So for us, internally, the way that we define that is companies over 1,000 employees within our enterprise segment. We've seen a lot of success from the low end of the enterprise up into Fortune 10, Fortune 500 customers. We -- part of that growth vector we see as an opportunity there as well as just ACV last quarter. We were up 20% from an ACV perspective. As we're getting into more of these mid-market and enterprise size accounts, we're landing bigger. We're seeing more opportunity to expand the footprint. With the customers that we already have and a lot of that's just in the use cases and user seats, but then also some of our premium add-ons. So we feel like there's a lot of opportunity. I would say that we're still pretty early in terms of driving awareness within that enterprise space itself. It's still -- when I think about the overall business, it's still the part of the business, while it's the fastest growing and largest, it's the one that we've been in for the least amount of time. So we see lots of opportunity, both from a marketing and a sales perspective to continue to penetrate there as well.

Yes. And what would be limits for growth? And that's more for scaling the whole organization though we like. If you think about it, at some point, if I talked about it and teams say like, look, I'm growing 30%, 40% that's a good number because I can hire at a good pace, I maintain my culture, et cetera. Do you have any philosophy of how you think about it? Because obviously your growth is now back in the 40%, even like driving as fast as possible? Like how do you think about this whole -- kind of whole setup?

Yes. So the way we kind of think about it is we're heavily data-driven because of the inbound model, right, Raimo. We have really good visibility into where the demand is coming from and where we need to make those investments. And so if you think about the fact that we have a 35 to 41 day sales cycle, we know pretty quickly whether investments are working or not working. So I can tell you the way we manage it internally is a couple of things. One is, hey, where is the demand coming from? Where do we see the investment opportunities? Let's go really hard at those opportunities and let's make sure that we're keep investing until we see those unit economics not working. And those are the areas we're going to push the harness on. And then one of the areas, for example, when we think about, when we talk internally, what are the opportunities to expand the product? What are the things that our customers are asking from us, where are the other areas where we think we can expand the product to add more to the sales bag. And so when we look at those things combined, we get pretty excited about the opportunity there. And so, as you can imagine, we're investing on the sales and marketing side based on where we're seeing demand and where we see that opportunity. And then at the same time, we're investing pretty heavily still on the R&D side because we think there's a pretty big market here. We're seeing increased opportunity to expand within our existing customer base, not just with our current products, what are the kind of add-on modules or other types of products, could we sell into these customers. And so we're constantly looking at that balance between the sales and marketing investment and then on the R&D side as well.

Yes. Thanks, Joe. Okay. Perfect. And then the -- as you think about in the SMB space, you obviously have that inbound model. In enterprise, eventually, you will have more conversations. How do you think that mix will change over time between like the more CLC motion versus the more kind of fulfillment motion. By fulfillment, what I mean, I didn't mean like just order fulfilling, but it's just inbound motion, sorry?

Yes. Well, I mean, one thing that I think is really important here is that we are doing both of those things today. So we have that inbound motion that's been a huge part of the foundation and the DNA of the organization and we've complemented that with outbound sales as well. And that's a big part of our mid-market and enterprise play today. We have outbound business development reps that are helping us prospect into accounts that we think are going to be a great fit for Sprout and our AEs are doing the same. But even in the enterprise space, we're getting inbound, right? And Joe touched on it a little bit at the beginning, but we've evolved our marketing approach to try and drive more inbound from more sophisticated customers and a higher level of executives, and we're doing that through things like promoting our listening and our analytics and our insights, which tends to hit more of that audience. So I think there's still a lot of opportunity for us to drive that inbound nature. One of the other things that we think about that's maybe different than others in the space is that we believe that the best way to evaluate and buy is to actually get your hands on the keyboard and be on the product. And so that trial motion is really effective for us even in the enterprise space where when a customer comes in, even if they don't come in through the trial, we'll make that part of the evaluation, so that they can prove out all the things that they need to prove out, really mitigate risk for themselves by being in the product. And so I think sales generally, as we move forward, is going to look different for us. But I think just the market demands from customers is going to be more aligned to that idea that I should be able to get my hands on the product and test before I sign a 6-figure contract with a vendor.

Yes. And then the -- can you talk a little bit about how the pandemic has changed things for you? I mean, it looked like, look, initially, we were all very, very nervous. And then actually now it's kind of coming together really nicely. Just kind of talk us through like what are you seeing and what -- how that impacted your business?

Yes. I mean, we all, I think, saw the metrics to different extents, but March and April 2020, where we saw a lot of that, the challenge on the top of the funnel. We talked a lot about that in the Q2 and Q3. We came out of it pretty quickly. And the metrics got back to what we were used to seeing historically in our business and they've stayed really consistent. Joe touched on it before, but the predictability in our business is a huge competitive advantage when you're driving through any inbound trial led model. You've got a lot of data to really understand what's happening in the business and how you should be performing. So that's felt really good for us. The predictability in those numbers have stayed pretty close to what we expected that to be. And we've seen great execution from the team. I think, generally, if you think about the market, the pandemic has been helpful from the standpoint that brands are thinking differently today just about their digital strategy and the importance of it today. But certainly, in a post normal world, where a lot of what we do digitally will remain the same, I think it's been different for us than it has been from some other companies where there was this sort of huge COVID push and a total change in the business model and things may change over time. We just haven't seen that same amount. In fact, I think a big part of it is, we're early in the adoption curve. There's so much white space already that exists. So even with people thinking more about digital, there's still a lot to go in terms of awareness, education and adoption in our market.

Yes. Okay. And then changing gear a little bit at the Analyst Day, you talked about social commerce, I can't speak to that. And the -- talk a little bit about the opportunity there a little bit, like that sounds really exciting, probably a little bit on the earlier side, but like what does it mean for you?

Yes. We're really excited about it. I mean, the first thing that I'd say is, even before this term social commerce came into play, when it was just e-commerce and we were helping these types of companies already because a lot of what they are doing from a marketing perspective, they're doing on social. A lot of the feedback that they're getting from customers was coming in through social, a lot of the support issues were coming in through social. So we are doing this for a lot of brands already. And now with the ability to actually make it easier for customers to purchase directly through social, to make it easier for brands to engage with their customers through social that's the opportunity that we see in front of us. And so the part 1 for us is really making sure that we can be part of the awareness and the education and the adoption. We want brands to basically come to Sprout, similar to how they're running the rest of the social strategy and say, regardless of what social network I'm running social commerce through, regardless of the e-commerce platform that I have chosen, I can work with Sprout. And so that's our goal. We started off with Facebook and Shopify as the first integration. You'll see more from us within this vein. And then as we continue to see the opportunity there, we'll think about ways to drive even more depth to the product and more value to our customers. And that might include things like -- it will include things like analytics and data and reporting to help you really understand what's working well and then other integration points. So we see it as a long-term, really exciting and interesting part of our business model, but it's still really nascent today. Even if you listen to the earnings calls from the social networks, many of them are still thinking through what the product will look like within their social platforms. Many of them haven't really even gone fully to market on -- for products yet. There's a lot of alphas and betas that are happening. So we're early days, but I think it just reinforces the gravity around social and the fact that more and more businesses will be finding ways to support their customers within this channel.

Yes. Okay. Perfect. And then, Joe, I realize I botched your name all session here. So I apologize. You mentioned earlier, Joe, the international as a big opportunity. The -- can you talk a little bit towards that? Like, as a German, I have to say like the content name is probably here or not here, I'm not there. The company is probably a little bit behind social adoption, et cetera, like what is it -- how does it speak for your opportunity there?

Yes. I think, Raimo, that's what gets us excited as each of these regions and countries are at different places along the maturity curve, right? Some of them are way more mature and those are the customers that we've probably been engaging it in over the last, let's say, 12 to 24 months. The luxury, like I mentioned, the inbound funnels, we can see where that demand is coming from and what markets and what opportunities are maturing faster than others. And based on that, for example, we've seen some upticks in APAC over the last 6 to 12 months. And so we hired our first APAC GM last quarter. We're starting to see some of that pick up in parts of Lat Am, and so we're now in the process of hiring a GM in Lat Am. And so it varies by country, the use cases vary by country, but it's still the same playbook we've used in North America, which is 90% is inbound. We see where the demand is coming from and then from there, we'll start to deploy resources. And then on top of that, the thing we're doing to kind of generate increased demand in some of these regions is, we historically haven't put a lot of our marketing content in the local languages. We haven't -- we continue to increase the number of languages our platform is available in. And so as we start to localize some of our marketing content, as we get our platform into more local languages that's going to also increase the top of the funnel on the opportunity in a lot of these different countries.

Yes. I mean, that sounds really exciting. And it sounds very metrics driven. It's not like some kind of going out and spending money?

You're exactly right. It's something that we can see the demand ahead of time and we could see the return and we can understand where we need to double down or maybe where we need to pull back.

Yes. Okay. Perfect. See, my time is up, but this was a great session and thanks for joining us again, really exciting story. Good to see you again and happy holidays if I don't see you before.

Happy holidays as well. Thank you.

Thank you.