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

All right. I think we're ready to get gone. I'm DJ Heinz, I'm Canaccord's senior software analyst. This is the 42nd year that the firms put on this event. Thank you to all the clients that continue to support it. Thank you to the corporates. We couldn't do it without you guys. So we really appreciate that. Delighted to have Sprout Social here this morning. We have CFO, Joe Del Preto, IR and Corporate Strategy, Jason Rechel. We're trying to do this is as a fireside. If there are questions in the audience, raise your hand, we'll work it in the conversation, but I think we can get right into it. So Look, I'm going to operate under the assumption that people are generally familiar with the Sprout business. So maybe just to kind of get into it, tell us what you saw in Q2. Like what's top of mind coming off of earnings? What are the kind of the big thematic drivers and then we can unpack some of the details?

Yes. So, I think a couple of things that really stood out in Q2. One is the momentum upmarket and the mid-market enterprise continues to really build a lot of steam. If you look at our 10-K and 50,000 customer momentum, we're just really starting to resonate the platform, the ability to reach some of these larger enterprise customers. And the fact that a lot of these larger customers now really want the time to value and the ease of use for enterprise-level software continues to increase. And so that was one thing we can get into those details. But that was one area that we saw like really good momentum. And I think the other area or one of the other themes is the Salesforce relationship is really starting to get a little bit of steam, excited about what we're seeing there, the partnership there, which we can get into. Those are probably the 2 main themes we've been talking to investors about maybe a couple of other...

I think the other topic of conversation with investors, particularly the last couple of weeks has just been about the emergence of the social customer care use case, right? I mean, 2 years ago, we weren't sitting here talking about social care and now the most sophisticated companies, the most sophisticated of our customers are really starting to leverage teams of people to manage customer care, specifically on social and Sprout. And that's been pretty exciting to watch as well.

Yes. Good. I have questions on all those, so we -- let's just talk about demand environment. I mean macro is obviously top of mind. I think coming into earnings, maybe there are some more reasons like hey, social discretionary. We don't know, we can't figure it out. What do you think is helping drive this resilient demand?

Yes. I think there's a couple of things for us. One is our customers, on average, spend 4 or 5 hours a day in our product. So for them, this is where they go to do their job. So it's pretty mission-critical. What we found with our customers, this isn't like a nice to have. And so you think about the alternative of not having Sprout at these organizations is now I've got my employees that are now logging back into these native networks. -- trying to share passwords. So like the whole value prop when you get rid of us, just increases, for example, the amount of expense potentially for a lot of these businesses. I think that's one thing. I think the other thing is we're 90% inbound, right? And so most of the customers coming into our funnel are coming to us already with a need or a pain point. We don't have to go out and like do this outbound sales motion during these times to convince customers who buy Sprout. -- they're already kind of in the funnel. And so from that perspective, we haven't seen that demand wane at all. And so that gives us real good indication of whether or not we're seeing kind of any macro impact. And I think the other thing is at an average ACV of around 7,500 for a lot of these organizations, we're just not a huge budget item. So if they're looking to cut costs or trying to trim back during these times. We just aren't high on that list of things that they're going to get rid of them. And you couple that with the fact that the users are in there 4 or 5 hours a day. It's just like it's just a really hard thing to kind of get rid of -- and so we haven't seen any major change in our customers' behavior.

Yes, that all makes sense. Do you think there's any, like, hey, returns on paid marketing or getting harder not as -- wasn't as cost effective as it used to be, like maybe let's invest more in our organic social presence and stuff. Is that a driver at all? Or it's -- I don't know if it drives demand to you or maybe just more use? Like how does that impact what's happening?

Yes. So usually, what we see and it usually takes a longer time to kind of materialize in our business. But we definitely -- obviously, our platform was built for the organic side. So it's always been a hedge against that paid side. But what we see in these organizations is usually it's a different set of buyers or different set of users that are managing the paid side versus the team that's building out content and brand on the organic side. And so for a lot of businesses, if they haven't focused on the organic side, they have it, it's okay. It's not an immediate transition for them to go to organic because they might not have that muscle internally. So we think over long term, as companies maybe realize, hey, maybe paid is not going to be as effective. We need to refocus on organic, but that also means they need to refocus like what types of resources those look like, like what -- how are we going to build that function out. So I do think over like a longer period of time, it could be accretive to our business, and we've seen that. But it's not something that happens overnight because most companies aren't prepared overnight to shift, right? Their strategy was so paid focused. -- running a paid ad is a lot different than building out your organic content and tragedy.

Yes, it's a good point. So mid-market and enterprise, we kind of led off is like one of the highlights coming out of Q2. What do you think has driven the inflection there? Is it product-driven? Is it go-to-market investment, combination of them? Like help us understand what's happening.

Yes, it's a combination of both. I think a couple of things. One is I think the product over the last couple of years, the investment we made in things like premium analytics and social listening, some of the workflows around social customer care and kind of made an investment in the product, a lot of the integrations we've built out within the platform have really kind of closed the gap up in the mid-market enterprise. There's not any functionality we don't have to win these larger deals. So I think one is on the product. So now when we go into these customers, we check all the boxes. I think the other thing is the investment we've made on the marketing and sales side. So I think historically, our marketing efforts were more broad-based. 80% of our revenue comes from organic marketing sources. We have a huge content team that's we're a thought leader in the space. And a lot of that was built out across all our customers and kind of more broad-based. But over the last probably 12 to 18 months, we've really focused more of that marketing, that product marketing towards the mid-market enterprise, right, different types of buyers towards CMOs, more executives. And then you couple that with the demand that we're seeing in the top of the funnel, so we start adding the AEs, and we start adding the sales investments. So it's a combination of the product getting us into those deals as far as like the ability to serve all those customers and then we bring that with the demand side. And so it's really been both of those things that are moving kind of in the right direction for...

Yes. Yes. Just on the sales side, I can't remember if I told you the last night but we had a company called [ Repyou ] present yesterday, and they -- it self-reported sales guys talk about quota attainment culture, all that sort of stuff. Sprout ranked #1 on all the sales metrics that they were tracking. So I thought that was an interesting, good validated point figures.

We actually know the team at Rep pretty well. We've had a few conversations with them. So it's awesome to be validated by them.

Yes. So kudos to you guys. let's talk about customer mix a little bit, too, right? As part of this enterprise shift, I think investors used to key on like net new customer adds is an important metric for you and you guys. I know you don't manage the business to that, but the mix -- with the mix shift, it's kind of changed a little bit, right? Like you hit your ARR numbers with lower customer adds. So just talk about a, generally customer mix and then b, kind of the KPIs and how we should be thinking about them.

Yes. When we think about customer mix like the logos, like internally, we don't have any internal goals or metrics around like a number of customers. So each of the sales teams and all the marketing teams are all like comped on ARR, right? And so internally, the focus is we want to make sure we're getting to the highest quality customers. And when -- the way we do that is through our inbound funnel, we score all the trials that are coming in, and we understand where the highest value ones are versus the low value. And the higher value ones are based on the dollar, like outcome of that trial, not so much, hey, we just want to add customers. And so because of that, the quality of the funnel continues to increase. And so as we get into these more mid-market enterprise, we might have less customers, but that's by choice. And so that's kind of how we manage internally. Our sales teams are on monthly quotas, right? And so every month, they're incentivized to close deals. Like I said, they're all on ARR quotas. And so internally, our focus is more on the ARR side of the business and just making sure we're getting quality customers versus just volume.

Yes. Yes. Any update on like what ARR mix looks like? I mean, I think we used to talk about is almost like a quarter, quarter, quarter, SMB, mid-market enterprise, agency. What does that look like today?

Yes. So it's definitely shifted. So mid-market enterprise are probably 65% to 70% of our business now combined pretty evenly split Enterprise is a little bit higher. The SMB business is in the mid- to high teens and the agency business is like in the mid-teens. So it's definitely shifted away from the SMB and agency more up into the mid-market.

Let's dig on some of the product stuff. I mean we talked about social customer care is an important growing category. You guys alluded to doubling down or that's my words, not yours. -- investing more in that area. Like what are you seeing in the field that's telling you like, hey, this is the right bet to make?

Yes. So I think some of the things that we see from customers, right? I mean, if you think about what social care is, right, I mean, typically, our customers will start with the marketing use case, right? And when you think about your organic social strategy, how am I going to publish content, right? And so you get a marketer, potentially teams of marketers, right, brand marketers, content marketers that are leveraging Sprout to execute your organic publishing strategy. And all of a sudden, that drives customers to your properties on social, right? It drives customer care requests and product requests and feedback and all of these things. And all of a sudden, the marketing team says, "Wait, this isn't what I was necessarily hired to do, right? I was not hired to converse with customers on social. And so the organization all of a sudden, takes a step forward and says, "All right, we need to dedicate resources to social customer care. And I think for a lot of organizations, you've started to see that shift pretty recently where a customer service department or a set of teams might be organized around phone and chat and e-mail and now all of a sudden, the more sophisticated customers have dedicated teams for social customer care. And that's really exciting. Obviously, that's a big market, right? There's a lot of headcount there, a lot of seat opportunity there. And when you think about what we've -- the way we've architected the product, right, it's really a unified platform for the marketing team, the product team, the customer service and sales teams to all live in one platform in one place so that when a tweet comes in, it gets routed to the right place when you run a marketing campaign and there is feedback or customer service requests as part of that, the marketing team can see when a customer service agent or teams have resolved an issue, et cetera. And so we've really architected the platform to play really nicely into the emergence of that use case.

Yes. And do you think there are like additional modules that you'll be able to offer around social customer care? Or is it more -- we get the seat count expansion, we get probably social listening pulled into it. Like how does it translate into what it means for your business?

Yes. So we've said potentially over the next 6, 12 months, there could be enough functionality in the platform where we start to carve that out for a specific care use case or care module. And this is pretty consistent with the way the product has evolved historically. If you think about the way we brought premium analytics to market a couple of years ago, we'd always had analytics in the core product and then all of a sudden, we started to feel like we were putting more value into the product than we were monetizing. And so we carved out a separate premium analytics SKU. And I think when you look at all the work we've done with respect to the specific care use case to this point, when you think about message routing and automation and SLAs, there's functionality now that's in there that may be more optimized for a dedicated agent or customer care representative. So we'll certainly evaluate what that path looks like over the next 6, 12 months?

Yes. The premium add-ons, just remind folks like what that does to ASPs, how material it is to the business? And the traction you're seeing, is it more at land? Like are we landing with more functionality? Or are you having luck going back into the basin selling the sum?

Yes. So it's -- the data point on your first question is, so when we land a customer and they have at least one of the premium add-on modules, the ACVs of those deals are about 6x a deal that doesn't have it. And that's a combination of not just the value of the add-on, but also the additional users that brings because you have to be a core user of Sprout to get access to the add-ons. So usually, it also brings a decent number of user seats with it, which is really exciting. And so from that perspective, we think that the opportunity there is really a combination of -- to your second question, it's probably pretty slip between new business customers coming in and saying, "Hey, I want the whole I want one of those add-ons versus right now, the existing customer base. The bigger opportunity we think right now is in the existing customer base with 33,000 customers. And the thing is we've seen SMB up and through enterprises adopt these premium add-on modules. We've seen really sophisticated SMB businesses that really run their business on social that are using premium analytics and social listing because it's key to their strategy, right? It's really hard for them, sometimes to compete in the world of Google Search and being like on the paid side. So the way they've really built their brand is around social organically. And so these additional modules really help them. So we think that right now, it's probably split between new customers and existing as far as where we're adding it, but we think there's a much bigger opportunity, at least in our existing customer base to grow that.

Yes. Yes, makes sense. One more product, and then I want to talk about Salesforce. -- lots of optimism around social commerce as well. Talk about where you guys are participating in that, what the future opportunities might look like, that sort of stuff?

Yes. So our social commerce offering we introduced in June of last year with initial integrations into Shopify and Facebook Shops. We've since added WooCommerce to the platform. And when you think about social commerce, really, we want to give our customers a single platform to manage and execute their social commerce strategy, right? And so when you think about what that means, right, it's how do I best optimize, how do I best sell a product or set of products on social media across whatever networks matter most to me, right? And so by integrating into Facebook Shop, Shopify, you can now manage things like your product catalog, inventory inside of Sprout, have real-time visibility into those things and then be able to execute on your marketing campaigns, all of your presale motion to drive volume, drive traffic and ultimately, customers to purchase your products on social. All of that presale motion are already the things that we do and are really great at on social, right, marketing campaigns and publishing. And when we think about everything post sale, right, from a customer service perspective, Presumably, if I buy a product on Instagram, I'm going to come to your brand on Instagram with a product question or return or logistics question. And so all of that post-sale customer engagement already happens in Sprout, and we think we're perfectly suited to help customers with that. And then when you wrap analytics around that, right, ultimately, you don't care whether you sell a product on Instagram or Pinterest, -- you just want to sell as many products as efficiently as possible. And so our analytics engine would help you optimize for that experience. And so the one thing that we don't necessarily want to do right now is -- play a role in the actual transaction. And so we're kind of agnostic to how that transaction processes occurs. We just want to help you manage all of the things around that and be agnostic to whether your Facebook is managing the transaction locally or whether it's on Shopify or wherever. And so that will certainly evolve. And as all of the networks evolve their social commerce strategy over the next 12, 24, 36 months. we think we're really well suited to help play a big role there.