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

Let's start. First of all, good to see you again.

Good to see you.

A lot has been going on in Sprout, if you think about it, like in terms of how you evolve as a company. Can you maybe talk a little bit like -- so the main push is, from my perspective, like to go upmarket. And there's been a good few name changes. And -- like I appreciate it from the coverage perspective because I can tell my wife like, look, they're signing these and these guys, and we're like, oh, I kind of know them, but -- which is nice compared to -- but that's not why you did it.

Right.

Can you talk a little bit about that evolution upmarket, and we start with the outcomes, but then also, I wanted to talk about the operational changes that were needed?

Yes. And maybe it's good to kind of level set on to your point, the move upmarket, what's maybe started that or spurring that. We were just talking about this in the last meeting. If you went back maybe 3 or 4 years ago, and we were starting to get pulled into the enterprise space, right? A lot of the incumbents in this space, there was a lot of frustration with some of our competitors upmarket.

I thought there was only 1, but anyway, yes.

You can remember back then, there were more than 1, right? And there's still -- there's a couple -- few -- fewer than there used to be, but there was probably 3 or 4 like you had Social Studio back then, you have Khoros, you've Sprinklr, right?

Yes. Yes. Yes.

You have multiple folks in that enterprise space. And we started to get pulled into these deals because they were frustrated. And what we realized was when we were getting pulled on those deals, we were losing them. They really liked our product, but we were missing certain feature sets. We were missing feature sets around social listening, having like large -- like workflows for large organizations. We didn't have as strong as social customer care. And so what we realized was there's this real need to kind of serve some of these enterprise customers. And so we made a decision to start investing in these areas from an R&D standpoint. And let's close the gaps and see if we can start winning some of these larger deals, right? We were winning enterprise deals, but we were probably winning them when the use cases weren't as sophisticated, right, like the lower-end use cases. If there's a purely marketing use case in the enterprise, we would -- we could win those deals against our competitors. But when it was a more complex kind of deal, we would lose those deals. And so we started to build out these feature sets and kind of closed all of those kind of gaps. And so the product now when we're getting pulled in these large RFPs, because it was built on a single code base, because there was no long implementations or heavy services, we were very disruptive and continue to be very disruptive in enterprise space right? You can get up and running our product in days, in weeks, where our competitors have a much different kind of like implementation process. And so we start winning these large accounts like you talked about. And so what that really spurring was like, okay, the product now is in a place where we can win these large enterprise deals. We now have to like go look at the go-to-market team, right? Like, hey, by the way, we need to start investing in the things that go with going upmarket, right? We need more senior AEs. We need solution engineers, right? We need a much better kind of onboarding process. And so we started to make those investments on the go-to-market side. And so over the last couple of years, those are the types of changes we made internally at Sprout, and that's why we've been able to kind of go at a much faster pace up into the enterprise.

Yes, yes. Okay. The one question I get is -- and it's -- and I think it goes -- I think the answer goes down to kind of how much work is needed on the product reengineering. But the one question I get is like, well, so you had competitors up there and Social Studio, they put the white flag up. And you think like Salesforce is leaving money on the table. It's like not like their style. Sprinklr kind of moving into CCaaS and kind of in a way, to some degree, you giving up, like you could say the market is not interesting or you could say it's just too difficult. Like can you -- like how do you think about the product that you have and bring to the table that kind of makes the difference there?

Yes. I think the difference in the approach we took is like those 2 folks you talked about, they really focused on the very, very high end of the enterprise. And they were solving back when we believe like -- when everything 2, 3, 4, 5 years ago wanted to be custom-built and customized because that's what customers like wanted in that space.

Yes.

And so I think the reason why they've struggled to go down market or kind of get outside of that top 1,000 customers is because their products were built for the very, very high enterprise. And so I think the reason why we feel really good about the way we're positioned is we can serve those very high-end customers, but there's a massive market opportunity that goes well below the Fortune 1000 or Fortune 500.

Yes. Yes. Yes.

And so I think that was the big difference between our company and some of the -- and the Sprinklr and Social Studios of the world is the product was not built to go down market. It just wasn't. And when I mean down market, I mean not even the lower enterprise. They were very built for the very high-end enterprise. So I think that's the big difference in the way we look at the market and the way they looked at the market.

And then the -- on that note, like the I kind of -- I don't know if it's a fair comparison, stay with me for a second like the -- like it might be a little bit of the Medallia, Qualtrics market, where you had like the high end and they were white glove service customizing the heck out of you, but then the customers got better and kind of like, I want to do this. I don't need white glove service, I want to get my hands dirty, et cetera. It feels a little bit similar here in this space that people are now realizing what social is, how you kind of benefit from social and they want to do it themselves. Is that kind of a fair analogy?

You're exactly right. If you went back 5 to 10 years and when the more heavy enterprise solutions were built, they were built for a very small team of very -- like power users, right? Like in very complex software and only a handful of folks would be managing this. You fast forward today and you think about the folks that we are now selling into the marketers or social customer care, the -- like they don't want super complex hard -- like the users on the other end, it needs to be easy to use for them, right? They need to get up and running right away. They have multiple users now that want to get on where you're talking about onboarding dozens of users, sometimes hundreds of users. And so that old approach of building like a heavy custom software, to your point, doesn't work when you're trying to deploy it across hundreds of folks that are not the most sophisticated users when it comes to software. And that's where I think the market has evolved. And I think that was -- if you go back to the early days of Sprout, that was one of the core tenets of the way the founder started the business. They both -- the 2 main co-founders, they came from heavy enterprise software backgrounds, and they didn't want to build software that way. They wanted to make sure that they built this in a way that was always going to be easy to use for the -- they wanted to build for the end user. They didn't know how that was going to evolve over time, but they knew that, that was going to be very core to the way they build the product. That's always been like at the center of the way we build our product.

So the -- so that all makes sense. Now like let's talk a little bit about go-to-market evolution. So now we're going more upmarket. And I mean, I have to say like I've seen it over my years. It's also tough for you guys because you've been selling very differently with like a lot of inside sales, a lot of trial and good luck to you. And now it's different. Like can you talk a little bit about that evolution and your learning? And where are you on that journey?

Yes. I think we're still early. It's definitely an evolution, right? You go from a very heavy inbound trial-led motion, right? And now you have to do more like you need more BDRs, you need more outbound motion. And so we've definitely learned a lot, but I actually feel like we're in a pretty good spot. We've closed a lot of deals over the last 12 to 24 months as we've talked about. But we can always give you -- like I don't think anyone thinks that they've solved the enterprise like sales, like process, right?

Yes. Yes. Yes.

We could always be getting better in that front. I think with Mike coming in our new CRO in September, I think he's brought a lot of experience from Salesforce on how to build like an enterprise-grade team, what type of rigor, what type of rituals, like the organizational structure you need in order to execute in that kind of enterprise environment. So I feel like we're in a much better spot than we were a year ago. But still, I would say, early innings as far as like where are we in the overall like move up market. There's still a lot of things that we want to be doing.

Yes. And then like how does it then start kind of translating the numbers? Because that was a little bit of frustration that investors had, like it's a great story, we all believe it. Like, where do I see it in the numbers?

Yes. So we've talked about this, like we've seen really strong behavior from our existing customer base. So if I think about like where are we and like when is it going to start showing up in the numbers? We've talked about really continued strength in our gross retention. We're seeing really good -- like our existing customers behaving really well. We feel really good about that. Where we kind of see the pressure, what you're talking about, we see a little bit more pressure on the new business side, right? We've definitely been hit with some of the more macro pressures around longer sales cycle, decisions like going through multiple reviews where they didn't before. What I will tell you, though, is when decisions are getting made, like we're winning a majority of the deals. So we feel really good because our win rates are really high. We also haven't seen like the overall demand fall off. We've seen it more just get pushed out. So what encourages me is I do think when the market starts to get a little bit stronger in this area, we're well positioned. We have the best product in the market. We have really high win rates. We do have really strong top-of-funnel demand. It's just a matter of like buying decisions getting made. And that's when I think you're going to start seeing it show up in the numbers.

What about if you guys just learned that that's how it is up there? Like, I mean, like -- I mean, you say macro, is it macro plus like you kind of realizing up there, it just takes longer or you just need to be on top of more people or...

No. I mean I think -- like if I look at the size of the deals and like the demand, like, yes, are deals taking longer? Of course, as you move more up enterprise. But when we won enough deals and know like what it really should be at this point, it's not like we have zero idea of like how long these deals should take in a normal buying environment. And so I think we have enough of that to at least understand how those cycles should work. And so I think it is more of like the pressure of getting these decisions made than it is like not understanding like how long these deals...

And from you as a CFO, because at the end of the day, you have to present the numbers to us. And if something goes wrong, it's like you're the poor guy that gets blamed. Like how do we think about the tools that you have or the things that you need to do? Because in the -- there were different metrics that you needed to track as a CFO in the inbound trial model versus now. Now it's about pipeline coverage and pipeline evolution, closure rates and all that sort of stuff. Talk a little bit about like the evolution there.

Yes. So that's definitely been an evolution for us and an evolution between us and the RevOps team. I think one of the things that gets me excited about Mike coming in is the cadence around monthly and quarterly like meetups, like we have monthly and quarterly meetings with each of the different sales leaders within the sales organization to understand, to your point, all the dynamics around, all the way pipeline down at conversion, all the way down to what's the investment we're making from a cost perspective? What are the payback periods, right? What's -- how are these business operating, what's working and what's not? And so I think that has evolved over time. And so I think that's the part for me, bringing in someone like Mike that I can now partner with on that to help drive, for example, like, hey, Mike, here's what we're seeing in your -- here's what we're seeing in the mid-market business. What are you doing here? What are you -- is this temporary? Is this longer term? And so I think now having came in here, having someone to work with on this will provide a lot more -- for me, provides a lot more comfort in our ability to kind of go out there and use the data to execute on the business.

And do you see it already in the -- the classic software LTV to CAC and that sort of stuff. Do you see that changing for you already? Or is it too early?

So we've seen that change over the last, I would say, 12 to 24 months as we moved up to more mid-market and enterprise, like the LTV to CAC on those deals is just so much stronger than the down market. It already started -- like that was part of the -- we use that data to make the decision we made about 1.5 years ago to kind of move away from the low end of the market, was all based on the unit economics of the business, knowing that these larger accounts are much better for Sprout, higher quality. So like that was the thesis for why we moved upmarket or why we kind of focused on that part of the market right now. And so that still holds true today, like those customers are just much better customers for us.

Yes, yes. Okay. And then obviously, if you move upmarket, that kind of creates a dynamic somewhere else, which is down market, in terms of like what's going on there. So last year, we had that, okay, well, I'm going to give you a lot less support and no support on the really kind of entry level. But then there's also that kind of risk that you kind of over empty kind of the level down market. Like where are you on that kind of market? How do you call that actually? Like is it low....

It was still SMB. So what I would say is when we made the pricing changes about 1.5 years ago, the SMBs that are now coming in at the price points that they're coming in at, like those are for us fairly good customers to bring in, right? So for me, it's more about we want to make sure when we made those changes, yes, did we kind of force some customers out of the business that were paying us way less than they should? Yes. But the new customers coming in, we those -- just to be clear, now the customers we're bringing in on the SMB and the lower end of the agency, if they're willing to pay what our minimum price is now, we feel good about that. They're still not as good as the enterprise customers, but the unit economics now for those types of customers is much better at the price points they're coming in at. And so I don't think you -- Raimo, you're ever going to see us get out of that end of the market because you can come across some really sophisticated, really strong SMB lower-end agency customers. The problem before was that they weren't paying us like -- it didn't make sense for what they were paying us for the product and the value we were giving them. Now on the new pricing, we feel like, hey, even at the minimum price, we feel like that's -- like the unit economics work at that part of the market.

Is part of that also that because you got pulled from the upmarket, the product that so much more feature-rich and more powerful that then like for an entry level, it was just like they were not -- you couldn't charge for that product at the entry level. And so it was just -- it didn't make any sense anymore.

So we talked about this before. I think one of the things that we did not do a great job over the years was on the packaging side. I think when we released a lot of our feature sets, we would put them in all our plan. And so to your point, the low-end plan had -- was so rich -- feature-rich that a customer would come in on that and they would -- the low-end customer for the price point we're offering, they would never have to upgrade or do anything because we -- like we didn't do a really good job saying, okay, and we do -- we're much better at this now. This was something we fixed over the last couple of years. But for the longest time, there were so many -- there wasn't a big disparity between the lowest plan and the highest plan from the feature standpoint. And so because of that, we felt like we were just giving away way too much value in that market.

Yes. Okay. I'm asking this question to everyone that I have here on stage and there's quite a few, like -- so GenAI. So how do you think about GenAI for your space?

Yes. So -- we actually are pretty excited about it for a couple of reasons. One, there's very few companies like Sprout that have access to the social media management data. So if you think about the impact that GenAI could have on social media, we think we're -- there's already this big moat around our industry for the folks that have access to these APIs from the 3 dozen networks that we have access to. So we -- the ability for us to apply GenAI across social media management, I think, is already going to give us a big leg up on most companies outside of the social media management space.

And how should we think about it like content creation? Like how do you...

There's 2 or 3 things right now that we have rolled out. One is on the content creation side. Like, for example, what we can do is with Gen AI, we can go back and look at all your previous post, the tone you used and what type of engagement you've got, and we can auto create these posts for you that say, hey, by the way, it's written in your voice, it's written in your tone. It's written in a way that we know resonates the most with your customers because we can go back and look at everything. And so here's like suggested message that we think will work based on like whatever prompts you put in there. And you can go in there and tweak it and then you can use it. And then on top of that, we've had this for a while, then we could also tell you based on all the data that we have across the networks and your own post, what's the best time to post that message on what network. Hey, by the way, you should not post this at Instagram at 8:00 in the morning. You should post this at LinkedIn. Like, we could help you determine when and where to post your message because most folks, when they're thinking about their marketing campaigns, the thing about the campaign like holistically, not like I need to have a separate -- Instagram campaign separate from a Facebook. In general, it's like, hey, I've got this marketing campaign and I want to run it across these networks and each one of those networks has a different kind of engagement. So that's one area. The other area is on the social listening side where what we're starting to provide customers is suggested queries or suggested things that they should be digging into based on using. So we'll use AI and we'll prompt it to go across, for example, whatever we believe is most relevant for that customer and tell them, hey, by the way, maybe you should go run this query on this issue or this thing that's going on and by the way, like you should dig into this. Because one of the biggest questions we get on the social listening side is customers are very impressed with the -- how much functionality it has, but sometimes they're not as familiar with like what should I ask, right? Like what do I -- what should I be asking?

Yes. That's a problem...

You're trying to say. So like helping them understand that is really important. And then the other part of that is it goes into the other part that we're really focused on right now is on the care side. So not only can we take, for example, hey, by the way, we've noticed this issue popping up on social listening, but now we're going to automatically take that and give your care team a heads up. Oh, by the way, we noticed there was a fire at one of your stores. You might get a bunch of inbound messages care team. And so now we can automatically, for example, take a listening, something we learned on the listening side and inform the customer care team. And then on the customer care team, what we're doing is a way to automatically route and escalate messages if they're coming in at like massive volumes. Oh, by the way, we've noticed there's been 200 messages with the same type of issue. There might be something brewing here that you need to add. Maybe there was a product defect or maybe something happened, there was an accident at one of your plants, you need to deal with this. And so we're using the AI on the care side to help them be way more efficient with the way they're routing messages and how they're dealing with issues. And maybe, by the way, there's a big issue blowing up on social that we've identified to these care. And now we're going to automatically notify the marketing team. Hey, by the way, you might want to get a marketing message out because we've noticed like this big issue on the care side.

Yes. And then I mean how -- in a way, then we obviously, the next big question is Salesforce, Agentforce, et cetera. A lot of that will be call center care, but social will kind of be a big role in there. And you said on the data, as I said, how is that relationship evolving?

Yes. So I think if you saw it at Dreamforce when Mark did his keynote at Agentforce, the only social player on his slide was Sprout Social. So we will be the social media provider of Agentforce out there. So if you're going to roll out one of their AI agents to do care, for example, and you're going to do this on social, that's going to be powered by Sprout. And so we're pretty excited about the opportunity there. It's going to roll out either later this month or early next year. And so we think it's a pretty big opportunity for us as it relates to the Agentforce rollout.

Yes. Okay. And is there a way -- that's a part -- like how do you monetize that? Sorry, I don't like...

Yes, no, no, that's a good question. So they would -- very similar like the Service Cloud relationship, they would sign a separate contract with Sprout.

And I think you had [ Tagger ] access.

It's like -- basically like we want to enable social care or the social data in the Agentforce. Like, we want to turn that on, for example. We want to add social to the Agentforce.

Yes, yes. Yes. Okay. So that's like an API call and then you kind of...

Yes. So we have a direct like integration into Agentforce in order to do that.

Yes. So if I listen to you, then it's all coming together nicely. It's now a tough question. So how do I think about the implications on growth then? And obviously, macro is terrible, hopefully, macro gets better. But how do you think about that kind of dynamic for you guys?

Yes. So for us, all those things we've talked about, agents, like -- these are all very right early innings type things, right? So I do think these are really strong -- if I think over the next couple of years and where we're headed and the things we're building for. I think for us, we get pretty excited about the market opportunity, not just with stuff like Agentforce and some of the AI stuff, but we do believe that we're going to be solving more problems, like more problems are moving to social. A lot of things we talked about, they all have this social interaction. And so we do think from a growth perspective that over the next couple of years, there's a lot of things that we get excited about. Now granted, if I'm just looking at near term and we talk about, like you said, like we still got to deal with the macro. But if I step back and say, okay, 2, 3, 4, 5 years from now, we feel really good about like how we're positioned. I think we have the best product in the market. You look at our win rates that we're having, the fact that we're solving a lot of different use cases now than we were a couple of years ago, we feel pretty good about the way the product is positioned.

So -- and if you think about like, obviously, your growth slowed and people were upset about it.

We were upset about it.

Fair. Fair. The -- is it -- if you think about it, so is that predominantly in a way like some of the stuff was learning, but was it predominantly macro then? So if macro gets better, we kind of should all feel better. How do you feel about that growth dynamic?

I think we've talked about this. Like if we look at the behavior from our existing customer base, we feel really good about that. So I do think the pressure we've seen this year has been on the new business side and has been macro related, right? And we've talked about that. So we believe that there's a lot of upside to the business, to the extent that, that changes going forward. We feel good that we're in a pretty good spot.

Okay. And then last question on selling Tagger. Kind of really interesting kind of deal. A very new market in a way where we were all, okay, for me as a slightly older person, it's like is that kind of really real? What are you seeing there?

So it's our fastest-growing product. I mean it's off a smaller base, but like it's overperformed our expectations. And what we're finding within organizations is the ability for organizations to like take some of their direct paid spend and spend it, the return on influencer marketing versus their traditional paid media spend is like, I forget the data, it's dramatically better. I think it's 5 to 8x more efficient to run an influencer marketing campaign than it is like just a straight like paid advertising campaign. And so we do believe that like we are early innings to your point. A lot of brands and businesses haven't figured out like exactly how to execute against this. But the ones that have, they're spending a lot of money in this area, and they're willing to spend, for example, a product like Tagger to manage that amount of spend. We see like the ACVs of the deals are very large. If someone is going to spend $10 million to $20 million on an influencer marketing campaign, they're going to spend hundreds of thousands of dollars on the software. Like it's peanuts compared to the value that they're putting through there.

Yes. Yes. Yes.

And so we get pretty excited. I will say it's early, right? Like there's a lot of things we still want to build out in that product. It's still a very immature market. A lot of customers, we get in front of them and they want to do something in this space. They don't know how to do it, right? So like -- and so we're spending more time with some of the agencies because I think they're helping out a lot in the early innings, very similar to like the way Sprout was 7, 8 years ago. Agency is still a big part of our regular social media management business, but it's a much smaller part than it was a while ago because a lot of folks have brought that in-house over time and moved away from the agencies. I think we're in a very similar stage right now where I do think agencies are a little bit more helpful for these customers. And so we believe it's going to be a big part of the next 5 years as far as where people are putting their money.

Yes. Okay. Last couple of minutes, shifting gear a little bit. Obviously, if growth slows down, you want to see more profitability. Can you talk a little bit about the action you've taken there? And how do you think about that going forward, actually?

Yes. So we talk about this a lot internally. And we've been very consistent with the year-over-year operating leverage we've driven in the business, like we continue to drive margin in this business year-over-year. I don't see that slowing down. If you look at Q3, I think we drove over 200 basis points of margin improvement just on a quarter-over-quarter basis. And we guided to a really strong Q4 from a margin standpoint. So I think what you're going to continue to see is balance that. If we're not -- to your point, if growth is not where we want it to be, then we're going to drive more margin in the business. I think we've always been pretty -- I think we have really good guardrails around the business. We've never gotten over our skis. We've been cash flow positive for a very long time. If you look at our free cash flow this year versus last year, it's going to be almost double by the end of the year than it was in 2023. And so we feel really good about the progress we're making on the margin front.

Yes. Okay. And then last question for me is like how do we think about then capital return -- capital structure, more capital structure, like what do you want to do?

Yes, that's interesting. We've got plenty of cash for like what we're doing right now. And so I think we've always -- when we talk about this with the Board, it's always like unless there's some kind of big transformative thing you want to do, we haven't historically been -- let's not just have cash to have it on the balance sheet unless we have a use for that cash.

Yes. Yes. Yes.

And so I don't see any like major capital changes unless we were going to have a shift in strategy around like what to do with capital if we thought we wanted to be way more aggressive on the M&A front, then you could see a change. But historically, we haven't done a lot of deals. And so I don't see -- unless that were to shift, I think we'd probably stay where we are now because I know a lot of companies have done these big cash raises and it just sits on the balance sheet, like we've never been -- like that hasn't been super interesting for our Board.

And then from thinking about M&A as well, is there -- look, I mean, you had some interesting acquisitions, but they were not like I don't want to kind of talk them out, but [ they were ] gamechangers here. They were just...

There's not like large revenue business is acquired.

I mean like does it even make sense in here? Like how do you think about that? I mean, unless someone up higher comes up with some crazy idea.

Yes. I think there's some adjacent spaces that we've talked about that could be interesting. If we -- like we saw enough momentum from our customers that say, hey, by the way, we're doing more and more of this thing in social. Maybe it's reviews and reputation, maybe it's PR. If there's adjacent spaces where our customers -- we get a lot of feedback with almost 30,000 customers telling us like, hey, by the way, we're doing more -- more and more of this is moving to social, then maybe there's something larger there that we would look at, but there's nothing right now that's -- large that's super attractive in our space.

Yes. Okay. Perfect. That's actually also a very good closing statement. Good to see you again. Thank you.

Yes. Good to see you again. Thank you so much.

I really enjoyed our chat. Thank you.