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

Michael Turits, I'm senior enterprise software analyst here at KeyBanc, and we are very happy to have Sprout Social here. Immediately to my left is Joe Del Preto, CFO; and Jason Rechel, from IR. So thanks very much for coming here.

So social media -- Sprout Social, social media management. And I would -- I have down here -- Joe, would you give us an overview of social media management? But I've just been informed that it turns out Jason's the expert at this question.

Well, I think I've answered that question enough time. I want to hear how Jason would answer it. So I told him to be prepared.

I think he's okay with that. Jason, tell us about social media management [indiscernible]?

Well, I'll do my best not to give the exact answer that Joe would give here. But at a very high level, we help our customers manage their efforts on social media. So everything from the publishing of organic content to engaging the back and forth with your customers to social listening, analytics, reputation management. And we do all of those things in a single unified platform, one UI, one UX. And we believe that in doing that gives us the ability to kind of cut across use cases across an organization. So when our customers are thinking about social, they're not only thinking about how do I market to my customers on social. They're thinking about how do I use social as a form of social customer care, how do I extract data to unearth product and competitive and business intelligence. And the need for all of those things to live in one unified platform is more compelling now than ever when you think about the fact that there are dozens of social media networks with different messaging architectures, different data architectures, different workflow depending on the type of business that you are in. And so really just giving our customers the ability to manage all of those efforts in one place.

So I think -- so there's a lot in there. I think that the -- for people who are not familiar with it, one of the things they know and that they get is that, oh, if I want to understand what people are saying about me on social, I can't -- if I want to do it with one platform or another, I can't just -- it doesn't scale to keep doing that over and over, so I'll go to this one guy. So there's this like, oh, are you just a "unified inbox," or let's be really be specific. I'd love to walk through those categories a little bit more, say, yes, there's social listening, and I am funneling and all of that. But here are the different functions within the enterprise and maybe even who are the different personas or users within the enterprise that utilize social media management.

Yes. And maybe I'll kick it off and sit this one today. I think Michael, it's probably -- the best way to kind of walk through is to go back 4 or 5 years and maybe go through like the evolution a little bit of how social has kind of expanded throughout an organization.

Because it seems like it's really changed. I mean it's like we're sitting -- actually, we're having dinner last night, and you said it used to be that there was like one -- I think you said 25-year-old, but I think it's an exaggeration. I think it was a 21-year-old.

It might have been a 21-year-old.

So they usually handle these things. That was your buyer. That seems to have changed a bit.

Exactly. So if you go back 5 or 6 years ago when some businesses were just starting to get -- use it as a business utility, I think people forget that social -- as users or customers, we've been on social for 10 or 12 years now, and we think it's really simple. But from a business utility or a business platform, it's very new for a lot of these businesses. Some of them were like phone and e-mail when those came out as modes of communication. It was 15 or 20 years after e-mail came out before all these e-mail automation tools, the CRMs and all the marketing automations that we're super familiar with now, but we were using them for a very long time before those became like part of a business. And so we're kind of that same evolution as far as social goes. So if you go back 5 or 6 years ago, most of the time when businesses were getting started on social, like you said, it was an intern. It was the youngest person on the marketing team and said, okay, why don't you go out and figure out what is this social media and what does it mean for our brand. On top of that, you probably only had maybe 4 or 5 maybe networks that you really had to care about back then, maybe Twitter and Facebook and Instagram. And so the complication -- and you could probably manage depending on how advanced were a decent amount of that on natively potentially within the different networks. But -- and so that was -- we were selling directly into, for example, the social media management team within the marketing or if you went back 5, 6, 7 years ago. And you kind of fast forward that today, when we're going into these organizations now, there's a couple of things. One is there's teams of -- like the social media management team is not just one in person. It could be a team of people, right? And so -- and we're going to these organizations, and within the marketing organ, I'll give some of the other use cases. Now we're talking about they have their PR teams in there. They have their comms teams in there. They have their brand teams in there because now they're on probably 10 to 12 different networks with all varying use cases, and they have to make sure they have the right amount of resources that are managing each of these different go-to-market strategies. And then you layer in, for example, okay, I'm going to launch a new product, right? I want to understand how that product is resonating across social. And if you think about where is the #1 place you're getting feedback now. If a brand launched a new product, all their feedback is coming via social, right? People are either going to Twitter. They're going to Instagram. They're going into Pinterest. And how do I understand all of what people are saying about my product to me or about me? Then you start getting into the social listing and premium analytics. And that's bringing in, say, the product organizations into the platform. So no longer am I in the marketing org. Now all of a sudden, my product org wants to get in. And then my sales org wants to understand, okay, what are the demographics and where in the U.S. or globally, are my products resonating? So maybe where do I -- my sales team need to focus their efforts? Like what types of customers are buying these products? And where can our sales teams go? And then the last thing Jason brought up was social customer care. So now outside of, hey, now that I've -- for example, I'm selling or I've launched a brand or marketing campaign and my marketing team is managing this and all of a sudden, I'm getting all this inbound like feedback on the stuff I've sold or my brand saying, hey, I have questions about certain things. And so now all of a sudden, I've got to bring in my social customer care. So now we're outside of the marketing organization into some of these customer care functions. And so as you can see, if you go back 5, 7 years ago, the evolution of how social is impacting these businesses can vary across an organization.

And all these changes, are they different at the lower -- I mean you are more SMB-oriented. Your 7,000 and change in terms of your average contract value. Does -- but you have some much larger customers, too. And we'll talk about that move up market in a second. But do these changes in terms of the way people use social media within an organization vary depending on that organization size?

It varies under sophistication. So we have some really small SMB businesses that are spending a lot on social. They might be digital first. So like a lot of these D2C companies that grew up on social. So they might be small businesses that spend a lot on social. And then we might have very large enterprises that you think very mature businesses that are just trying to figure out social might be spending less. So I think what we've seen is there's a pretty -- it's not so much the size of the business. Now granted the larger mid-market enterprises where we're seeing a lot of success, obviously, there's much bigger opportunities, and we see much larger deals there. But it's more about the sophistication level, not so much the size of the organization. And that's what gets us excited is there's very few businesses that have figured out how to use social from like a strategic standpoint. And so that's why we get pretty excited about the opportunity because we're very early innings as far as adoption of platforms like Sprout across organizations.

Well, and I think -- Michael, I think sophistication matters a lot in this case, right, because when you're, as a business, beginning on your journey on social, right, you might have a generalist, a social media manager on the marketing team that owns your social strategy. And there becomes a point at which if you're really successful in building organic content and building an audience, all of a sudden, you need more content, right? The demands on your brand become larger on social. And so you have to start to pull in your content team and your brand team and probably your PR and comms teams, right? And so you've begun to grow now organically as a marketing organization with a strategic emphasis on social. And then the interesting thing about social is that a really successful brand strategy on social generates customer interest and customer conversations and customer service requests and care requests, right? And so all of a sudden, the marketing team that has built this strategy says, this isn't what I was hired for. I was not hired to service customers all day on social, and so you start to need to invest in dedicated social customer care teams, right? And that pulls in other parts of the organization, and it becomes self-fulfilling where as you grow in sophistication, you've just really organically grown with Sprout over time.

So maybe we could take a step back and as you've talked about this evolution on the customer side in terms of how they're using you, and now that's gotten more sophisticated with a small organization or large. So how has Sprout evolved its product offering over the last, I don't know, 3 or 4 years for that greater sophistication? And I don't know how we can overlay this as well, but also because you are moving up market as well. So what have been the newer offerings? You've got some premium offerings. How does that product portfolio evolve?

Yes. So basically, a couple of years ago, probably 2 or 3 years ago, Mike, we started to notice -- as you know, we're -- 90% of our revenue comes via inbound, right? Everyone starts in the product, starts the trial. We started to see more sophisticated customers up in the mid-market enterprise coming into our funnel. And then we start to realize, okay, we do have some areas that if we want to serve that upward in the market that we need to build out. So over the last 3 years, there's probably 3 or 4 things that we've done that really...

What's the range? Because I gave the 7,000 -- pretty closer, it's a little over 7,000. So what's the range?

So the range is up until -- we have a 7-figure customer. We have tons of 6-figure customers. So the range is pretty broad because we also have customers buying less than 7. So there's a long tail, obviously, in the low end, but we have bunch of customers. We think over 800 that spend over $50,000 with us. And so we have a lot of -- the range is pretty wide right now. And I think what -- that has served us well as a company because none of our competitors actually serve as [indiscernible] to enterprise. And so what's made us as successful and, I think, what gives us the opportunity to capitalize on most of the market out there is the fact that we don't focus on one area. We will serve the smallest business up in the largest business. And we do that from all one code base, no custom code, which we can give into later. But -- so we feel like that's -- that approach to market has served as well. Now to the point of one of the things we've built out over the last 3 or 4 years, there's a couple of things. One is the premium analytics and advanced listening modules that are premium modules for us has really helped us serve...

So premium, again, just while we're on it, business model is -- tell us how the pricing works and, if it's a premium model, what's different then.

Yes. So basically, we have our core platform, which is like you get core where there's like your engagement, you're publishing and some basic analytics. And that's -- we're always per user per month or per annual is how we kind of price each of our products. And then you can buy these add-on modules. You have to buy the core platform. So you can't buy, for example, to add-on modules without being a user of the core. And then the premium add-on modules, we price at like a per company level. And then on top of that, depending how many -- how much data you're pulling, how many queries you're running, the price on the premium add-on modules can keep going up. So if you're going to run social listening and run a bunch of queries, you pay more for how much -- for example, how many queries or data that you're consuming.

All right. So sorry for the [indiscernible]. You're describing one of the premium line.

Yes. So that puts social listing module. And then we have the premium analytics module, which allows you to do things like compare to your paid advertising, marketing campaign to organic marketing campaigns and understand which ones are working. And then we also have reputation reviews. So that's like, hey, Google My Business, Tripadvisor, so you can connect all those -- all your different locations, and you can manage that all in one spot. And then we have our advocacy platform that allows you internally for your teams to manage all your internal employees that can use their social media outlets to put out company information. And I think the last thing, Michael, that's really helped us move upmarket is all the partnerships and integrations we build within the ecosystem, integrations into like Microsoft and Adobe integrations in the Salesforce, integrations into Zendesk. And so we have all these -- we built out these very important strategic relationships with a lot of the players that are kind of in and around our space. And that's allowed us now to go in these larger enterprise. So now when we go in these larger enterprises, we don't have any feature sets or any [ guess ] in our feature sets. And so that's really what's driven this move into the mid-market and enterprise.

Got it. How should we think about the future road map? And one of the things that interests me in particular, as you were talking about that change in the customer, is how you'll be addressing those different personas within the enterprise. So anything about the future road map you can tell us? And how does it address that?

Yes. So I think there's a couple of areas. I think we're seeing a lot of momentum in social customer care. So you can do social customer care in our core platform right now. We have a lot of workflows, and functionality allows you to handle that, natively within the core platform. But if we look out over the next 6 to 12 months and look at the things that we want to build and look at what our customers are asking for, I think there's an opportunity to potentially -- to create another module focused on social customer care for the advanced enterprise-type customers, some of the things they want to do. And at some point, very -- some under our premium analytics module and the way we built that is it doesn't make sense to keep adding that value into the core platform. It's like we're giving it away probably too much value. And so what does it look like to lob that off into a separate SKU? So I think that's an area that we're focused on. I think the other area that we're focused on -- and this is -- we've talked about this in the past, which is it's more going out 2 or 3 years as social commerce, we think, is going to be an opportunity, not in the next couple of years. But 3 to 5 years, we think there's going to be a pretty big opportunity.

You do have a product there, I think.

We have a product. We have some -- but we don't have a separate SKU for that. So we're going to keep investing in that over the long term.

Can you explain that? Obviously, people know that you can buy stuff on Facebook. So why -- how do you -- what do you actually do there? And why does that make sense, really?

Yes. So the way we look at it -- so right now, we have integrations with Shopify, Facebook Shops and WooCommerce, and those are probably the 3 major networks that are the farthest along in understanding how to actually sell products within those social channels. And not -- for example, right now when you go to most networks, when you want to buy something, you click on a link, and you go out to that company's page, and then you buy it there versus just buying it right on the network. And so if you think about it, as these brands, when you're thinking about their social commerce strategy, they don't want to think about it, like what's my face, how do I do this on Facebook versus Instagram and Pinterest because each one of those are going to have different ways to sell their products. So what we want to do similar to the value prop on the marketing side is, hey, customer, don't worry about how to sell a product on Facebook, don't worry about how to sell it on Instagram versus Pinterest versus, hey, I want to use my Shopify account. We will manage all that in the back end. So all you have to do is you keep your product catalog in Sprout, which you can do right now and keep your -- you can bring in all your Shopify information as well. And you have one place to basically say, okay, I want to sell this new product, and we'll allow you to publish that product at any network you want, and you don't have to worry about any of that stuff. And then on top of that, think about all the presale marketing that you're going to want to do on those products, which are platform already does. All the post-sale customer care that's going to come with that and then the analytics, right? Like so you think about it -- if you think about down the road, the analytics, you're going to want to understand, okay, this product is doing well on Instagram, doesn't do really well on TikTok versus Twitter. And so you're going to want to have really heavy analytics around how these products are performing on social. And so we think there's -- we're building the groundwork so that in 2, 3, 4 years from now, when we think this is a much bigger part of these social networks that we'll be ready to serve that market.

Yes. And Michael, I want to come back to the product road map question, too, and just add on to a couple of points. I think the other things that we're focused on from a product perspective right now, I just want to come back to social listening and premium analytics, right? When we introduced those capabilities, those really were V1 from a functionality standpoint. And so there's a lot more from a road map perspective that we think we can unlock in those 2 premium modules. And then in the core today, we talk about publishing, but we're building many enhanced publishing capabilities into the core platform today, which we think will start to matter increasingly so upmarket. And then within the platform, we're building on some pretty cool collaboration capabilities, right, to the earlier conversation around these now multiple teams of people within large companies. They need to be able to work together and see if I'm running a marketing campaign, I need visibility into the care agent that resolved an issue that may have popped up in response to that marketing campaign or vice versa, right? I want my marketing team to take learnings from the care team to inform what we're publishing on social. And so building an enhanced collaboration layer on top of Sprout is another pretty cool area. But I think all of this, one thing that sometimes get lost -- gets lost is that if you go back 3 years, social customer care was not a thing, right? And we weren't sitting up here talking about it. You go back 2 years, we weren't talking about social commerce. And so all of this speaks to the nascency of the market, right? And because we're still so young as an industry, there are new use cases. There are new demands on social that arise every 6, 12 months, right? And so our ability, because we've been built on a single code base, our ability to innovate as those new use cases arise is really compelling. And that's a key part of the customer value proposition as well, right, in that there's just a huge amount of trust that as these new things arise, we'll be able to address them in relatively real time.

Let's talk about for a minute, the Salesforce partnership. So salesforce.com has had a product for a bunch of years called Social Studio. It's been announced that they're sunsetting their product, and you have a relationship with them, so tell us about it.