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

Okay. Welcome to our next session.

Let's start. So for Sprout, there's obviously what we see like in the market for all of software, not pretty. Sorry, for all of us. And loss of tooth and everything here this year is like it's going to be always a tough year. But from a management perspective, just in the real world, how did the year play out so far?

What I would say was throughout the year, it's gotten better every single quarter. So holistically, do we want -- you want the year to go better than it probably did? Yes. But what I would say is the momentum we've seen, like Q2 is better than Q1, Q3 was better than Q2, and Q4 is looking pretty good. So I feel like there's been more momentum this year as we move throughout the year. So I think that's a net positive. I think for us, we're seeing success. If I look at the year, we're seeing really strong success upmarket. We've talked about our 50,000 customers and how well that part of the business is doing. We've been really happy with some of the product launches and the things we've done around social customer care, the things we're doing on influencer marketing, the things we're doing around social listening. We did the NewsWhip acquisition. And so I think -- and we just did the launch of our AI. We did -- we had breaking ground, which is our big like quarterly release. We demoed our AI packs that are going to be coming here shortly in November. And so I feel like there's a lot of product momentum in the business. And so we feel like the year has gone well as it moved on. Also, I think at a high level, I think we've done a really good driving margin in the business. So I think our operating margin continues to be really strong on a year-over-year basis. So I think net-net, we feel good about how the year has progressed. Obviously, this is a much different environment than we were a couple of years ago. And so I think from that perspective, we always want to be doing better. So let me be very clear, like management feels like we could always be doing better.

And what are you seeing -- so does that -- is that driven by end demand getting more stable because at the beginning of the year, people were like tariffs, volatility, et cetera, and now it's settling down? Or what's driving -- is that -- talk to end demand a little bit.

Yes, I would say -- I think what's driving probably a stronger back half, first of all, most of -- historically over the last 3 or 4 years, we've gotten stronger in the back half. I think that's -- generally, you see budgets open up a little bit more. People tend to spend a little bit more money depending on how the year is going. I think also some of the product investments we made earlier in the year are starting to play out in the market. We've released some really good functionality around social customer care. We've done some really good things around influencer marketing. And so I think some of those things have allowed us to win some of these larger deals. And so I think part of it is just like the normal slope of the year, but also -- and I think you're going to see this over the next couple of years, I think consumer behavior is consistently shifting to Social. And I think that continues to play out throughout the year as well. That's kind of driven some of the success we've seen in the back half.

Yes. Okay. And I'm sorry for -- it sounds like a tough question, but if you look at the growth profile, and you and I have been at this conference for many years, et cetera, like the growth profile for the whole industry looks different. Can you maybe speak a little bit about where we are in that industry -- terms of evolution of the industry and where we are now? And like -- but also it does sound like you are getting more and more excited again. So like where are we going from here?

Yes. I think what you've seen in our industry over the last, let's say, 12 months is probably different than like you said a couple of years before that is you have to remember, we're still very early in this journey. Most companies that we come across don't have budget allocated to this sector, right? And so a lot of the time, we're educating customers. We're trying to build the market with our competitors. It's not like something like e-mail marketing or marketing automation or CRM that's been around for 20 years inside these companies, they have budget allocated. They already know exactly what they want to do, and they're just looking at other folks in the space. When we get those type of deals where they -- hey, they're brought into social, it's strategic to their company. They have us or one of our competitors. In those situations, we see a lot of success. But in a lot of scenarios, what's happened over the last 12 to 18 months, Raimo, as budgets has gotten a little tighter, as AI has kind of made people pause and look at their overall spend, if this isn't a category they already had invested in, it's probably not what we've seen, especially down market, not one of the top priorities because they're looking at other areas. So I think that's been one of the things from a, I would say, like a cyclical standpoint that's been different in the last 12 months versus a couple of years before that. But on the flip side, if you look at consumer behavior, like I said earlier, we feel like that's going to start to shift over the next couple of years. If you think about 50% of consumers now will check social before they buy something. 55% of consumers before they buy something are influenced by someone in influencer marketing. And so the trends of where consumer behavior is going, I mean the average consumer spends about 2.5 hours a day on Social. And so we believe like this -- eventually, these businesses that haven't had this become a priority, this will start to become a priority over the next couple of years. It's just not been the top of the list historically because, like I said, this category hasn't existed within these organizations for a very long time.

Yes, yes, yes. And so you talked about like that pause from AI coming in. Do you see like a slightly better understanding of people around that to you already?

I think what we're seeing -- and we -- and we're doing it internally as well. It's not so much, okay, we think AI is -- there's other products that can do what you're doing in AI. We don't see that at all. It's more like, hey, if I've got another dollar to spend in my organization, I'm going to stop and I say, "Hey, is that going to go into the marketing org. Is that going to go into sales org? Or am I going to look at internally, is this something -- is that money going to go towards some kind of AI product? So I think it's more of like just this overall -- a lot of companies are just pausing or reevaluating where they're putting their dollars before they spend the next dollar. And I think that's been across all of software, especially front office software. It's where is that incremental dollar going to go. And I think right now, we're kind of in this like let's wait and see where we might put that money.

Yes, yes. Okay. Makes sense. And then you guys changed as well as an organization, like now if I look at the customers that you're signing, it's like, oh, I know them. Like you remember like a few years back, it was like very low end where it was tough. Now we're like very well-known brands are shown up on the list. Can you talk a little bit about that evolution to go more upmarket?

Yes. I think the evolution started a couple of years ago when we started to invest in the product and what some of those upmarket customers are looking for. And there's a couple of areas there. One, they want integrations. They want to be able to bring the data into other parts of their platform. So making sure, like, for example, the integrations into things like Service Cloud or other parts of a platform that are really important, whether across an organ. So bringing data across the organization. For example, we launched an integration at Canva and Adobe Express. And so these enterprise customers want to understand or they want to be able to take social data to other places within their platform. So investments in that area. Investments in Social Customer Care and workflow management and be able to triage like mass inbound messages. We talked in Q2, we signed a customer that has around 90,000 customer cases a month that come inbound. If you think about that volume on Social, if you remember on Social, when someone post a message on Facebook or Instagram or X, it doesn't say it's a Social Customer Care. It's just a post. And so what we've been able to do is take all these inbound messages in an automated fashion, weed out what support, what's spam, what's marketing feedback. And so being able to build that out for these large organizations to automatically triage these messages is another huge area that's been to allow us to go upmarket. And then I would say the things we're doing on the influencer marketing side have been -- as that catalog continues to expand, a lot of these larger organizations are understanding that they have to be working with these creators. And so a lot of the success we've seen upmarket has been driven by the product investments that we've made.

Yes. And then as part of that, there's a product aspect and then there's the organizational aspect in terms of go-to-market, et cetera. Can you -- because that has also been on a journey. Can you speak to that?

Yes. Yes. So definitely, if you look at the investments over the last couple of years on the go-to-market side, it's definitely been up in the enterprise segment, right? Almost half of our sales and marketing spend is now going into the enterprise, what we would say, sector of our business. And that's not just AEs, but think about sales enablement, solution engineers, professional services that help like demo these products and get in front of customers. And so that's definitely been a direct investment based on the inbound nature of like the demand we were seeing. So we were getting pulled into these larger deals that historically won't be pulled into. The product was starting to resonate with these larger enterprise customers. And so what we had to do is we had to follow that up with -- on the sales side, making sure we had the right level of AEs with the organization and the right support system between. And then on top of that, as we've expanded outside of like the core use case, right, we've introduced some new products either via acquisition or via our own development. When you get in these organizations and now you're selling multiproduct, you've got to have AEs that understand what's the use case I'm solving for. I don't want to go into this customer and try and sell them everything. And so you need a little bit different type of sales leader and AEs in these accounts in order to understand the dynamic there.

And then the -- it did obviously have also an implication for the low end. So -- and it's going back now a little bit that you had like disruptions there. Are we kind of fully settled? So we know the level of investment I need to do low end and I kind of have that kind of tied up and the larger -- the bigger push is probably more high end going forward?

Yes, we definitely have the investments figured out. I think for us, where we've seen and we talked about this a little bit earlier, like where we see the most pressure from a demand standpoint in the budget has probably been more in the lower mid-market and the SMB market, right? They're just a little bit more constrained. And so I think we have the right level of investment in that part of the market. We've made changes where we think we have more of a lower touch type of approach to that of the market. Now we think there's a huge opportunity there over the long term. But I think we've kind of rightsized the level of investment internally into that segment of the market. Now it's just a matter of like how can you continue to execute in this kind of more self-serve, low-touch kind of approach that's a lot different than, for example, the enterprise approach. So internally, we definitely have separated those motions. -- and have a better understanding of like what those customers want. They don't need all the bells and whistles sometimes -- obviously, of the enterprise customers. And so how do you make sure when you're approaching those customers from a product standpoint that you're only showing the things they actually want to do. Maybe they just want to do some publishing and light engagement and reporting. Let's not show them very complex features that they might be like, well, I don't really need that. And so like we're always trying to figure out what's the right part of the product to show those types of customers.

Yes. And maybe summarizing this part of our conversation, like -- so it does look like -- I mean, you're still gaining market share because I'm looking at your peer group as well. So you're gaining market share. Growth is lower for everyone. listening to you, it sounds more this is like a cyclical thing because there's other forces going on rather than a structural thing. Would you agree with that?

I would agree with that. I would say that, like I said, if you look at some of the stats and where consumer behavior is going. And I think right now, like a lot of companies we talked about earlier and the pressure on front office software and AI, I do think this is something that over time will shift because consumer behavior is shifting. And like that's where consumers are going to learn about products, that's where they're going to complain or promote products. I think the rise of the creator space. So we do believe there's this longer tailwind in our industry. And right now, we're still in the early stages of that. And so I do think this is not something that's more structural. I think it's more temporary.

Yes. Okay. And then shifting gear a little bit. So AI is this big new thing. How should we think about AI for your work?

Yes. We actually are pretty excited about AI because you think about it, we're one of the very few companies that have access to the social data that's out there, right? This is data that's not available to a lot of players in the space. You can't scrape the information. We integrate with over 3 dozen different networks. We ingest about 2 billion messages a day. So you think about the data that we've accumulated over the years, and then we can apply AI on top of that. And so what you're going to see from us, and we talked about this in our breaking ground release of our AI product, which is going to be Trellis, there's lots of different use cases we're looking at right now. The first one you're going to see is an AI agent around social listening. So historically, you had to go manually build these queries. And obviously, it was a lot easier in our platform than others because it wasn't custom code you had to write, but you sort of understand what you want to go look for and what you had to ask, you had to have these queries running. And if you look at the demo we did, it's pretty cool where you can just go into the social listing and go to our AI agent and just start asking your questions. It will go out and just do the work for you. And then on top of that, you can set it up where we actually proactively go out and say, "Hey, by the way, we noticed this trend over the last 6 months or 12 months". And so it's going to make the accessibility of the data information for these companies that have really struggled to understand what's going on. It's going to be a huge advantage for them. And then there's things we're doing, for example, on the -- like Social Customer Care or engagement side where we can have an AI agent automatically identify messages and understand, okay, do I need to respond to this message? Do I not? Do I need to send this to somebody else? And so basically run triage within all the messages you're getting, where before someone would have to tag those messages, we had some auto routing, but you had someone kind of monitoring that inbox. But what if you had someone doing that for you so that you could kind of streamline that. And then the other thing that we talked about is you're going to see some really cool stuff on the influencer marketing side, where we can help you in a much easier fashion, find the creators that are best match for you using AI. We can go out across all these different networks based on the parameters you put in there and very -- in a proactive way, say, "Hey, by the way, here are the folks you should work with. This is the brand fit. This is brand safety". So like we released a lot of things that a lot of businesses when they're looking for creators. They don't understand what has this creator done historically? Do I have a brand safety issue? Like, for example, if I'm selling kids' toys and this person has talked about drugs of alcohol, I probably don't want to have them online. And I can't go through and listen and watch every video they've ever done. They may have thousands of videos. And so what we're using is AI to go through all those videos and very quickly tell the customer, for example, hey, this is a good fit for your brand or this is a bad fit for your brand. And so things like that, you're going to see. Those are a couple of examples of why we get excited about what AI could do for our platform.

Like -- and I was just talking with an executive of a large company in there, and they run tests. The issue is like you run you get so much more insight from the data that you then can use. But -- so in theory, you are in a very good position then for that.

Yes, 100%. And then along those same lines, when it comes to the data and some of the things we're doing on the AI front, and we haven't talked about it, but the NewsWhip acquisition we did. It's like a real-time version of what's going on across social media and traditional media, which we can get into. But we also think like the data available via NewsWhip is another area that we're super excited about.

And maybe talk to that a little bit, like maybe not everyone in the audience is like fully up to speak, like so why is that deal so important?

Yes. So what NewsWhip had built, which was really interesting and cool in the market. They have some really large clients can go to the website and see the types of clients they work with, very large Fortune 500 companies. What they built was -- the ability to look and understand the crossover before across traditional media, websites, blogs, newspaper, like local newspaper articles and social. So for example, what you've seen in media these days is if something is bubbling up on Reddit, all of a sudden, you might see it in a local like article in a newspaper then it blows up or vice versa. There's a big article locally in some, for example, some small city and then all of a sudden, it's blowing up on social. What NewsWhip built was this real time. I'm saying like minutes and hours ability to look at both of those things together and alert customers, for example, within organizations say, "Hey, by the way, this thing over here, and it has this predictive analytics that it does, which tells you like this thing is going to be a big problem in a couple of hours or this is going to die out pretty quickly based on like, they have all this data on historically how have news articles and social media articles trended over time, so they can let you know this is a problem or not a problem." And so what we built -- what they've recently come out with and what we've come out with is this AI agent that does that for you in an automated fashion that is constantly looking across these things and alerting you and telling you, for example, this is something you should worry about or not. And so what we found is that this has been really critical for a lot of organizations. Think about PR, think about crisis management, like there's a lot of things here that customers really want to know about instantly. A great example is like one of the customers we talked about that we landed in Q3 was the Royal family. So they bought the product because they want to know real time what's going on, articles coming out about us. Do we need to be monitoring this real time. And so they, for example, signed up with our NewsWhip product that could -- and it's not -- it's a little different than social listening. Social listening is more deep long research. What's happened over the last 6, 12, 18 months. I ran a campaign a year ago, I ran another campaign today, is this better or worse? NewsWhip is like real time. It's like literally minutes of what's happening in the market with your brand, so you can understand if there's something you need to deal with. And sometimes they use it not just for crisis management, but for like supply chain management. Like, for example, we have some large manufacturing companies that use it to understand are there issues bubbling up in my plant? Are there issues like bubbling up in like my supply chain because there's like issues with weather or there's issues with like different situations. And so they might not just -- they might use it just to run their like general day-to-day business, not so much crisis management as well.

Yes, yes, yes. Like question though, though, like from a product perspective, you as the CFO, you kind of probably think a little bit more like us in terms of, okay, how do I monetize it? How do I have to think about this product as a tool?

As a tool, yes. So the way we think about it, a couple of things when it comes to monetization, one of the reasons we did the deal to begin with was they had very little distribution. So they had like 5 AEs. They were -- they're based out of Dublin. They had spent -- they had really invested in the product over the years and not really in distribution, but a really awesome product that a lot people didn't know about because they didn't have a lot of distribution. So when I thought -- when we looked at this deal, one of the huge opportunities we saw from a monetization standpoint is able to put that into our sales force, which has got hundred -- a couple of hundred AEs that can now sell this across varying platforms. And so from that standpoint, we got really excited. Their ACV is around, on average, 3x higher than ours. And so from that perspective, we thought it was a huge opportunity to like really find another level to monetize that product that didn't exist prior to us buying them.

Yes, yes. So did you give any -- so how should we think -- I mean, if they only had 5 AEs, the numbers were probably small like you bought them. How big do you think this will be? Like I mean, if I'm listening to you, it's almost I could cross-sell it to every single of my customer.

Yes, it's like everything else. So you've got to go out there and educate the market. You've got to make sure they understand what the product does. I'm trying to say like we believe this is a product that over the next 3 or 4 years can be a real like value add within our AEs, but it's going to take some time to make sure that the market understands what we're doing and educating people in the market. So it's not like something that overnight, I don't think that everyone is going to start buying it. I think we have to do a good job educating the market.

And how do you think about from a growth perspective as an organization, you have like your core solution, but then you bought a company to get you into influencer marketing. We now uses it. Like one way you could say is you just keep adding products and the sales guys keep selling it, but that's -- I don't think that's kind of long term a good strategy. Like how do you bring that all together?

Yes, I think you're right. I think historically, you know we haven't historically done a lot of acquisitions. We've built a lot of things from scratch. And so over the last couple of years, what we've done is can we find really good technology that would take us a couple of years to build ourselves that has very -- that hasn't really gone to market very hard with it. And can we quickly -- have they built it in a way that the way we build products, which means is it scalable? It's not heavy custom code. It's something that can be available throughout like our customer base. So if you look at all the things that we have acquired, they're built in a very similar way of Sprout. And is there a very good overlap with what we're doing? Are they focused in some way on social? Because like at core, Sprout wants to solve the social -- like we want to be the #1 place to go for everything social. And so that's -- those are the kind of the premise we use when we've acquired these companies. And so we found some really good technology here. At the same time, we are building out a lot of our own kind of feature sets intern like I talked about. We built a lot of integrations into other platforms. We're building out our Social Customer Care. So we're doing a bunch of different things. So I don't think we're going to be largely acquisitive going forward, to your point. And these aren't huge products that like, in my mind, if you can't build on top of these products and do distribution, they actually don't help fuel your growth. I'm trying to say, but I do think our customers are continually asked to do more in Sprout. They're like -- and that was the main reason we bought the influencer marketing company we did is because our customers were coming to us saying, "Hey, by the way, we're starting to get into this area. We do everything else in Sprout. We would love for you to be -- like we would do this if you had a product. And so a lot of the times, the things we're getting into is feedback from our customers. And internally, we have to decide, hey, how long would it take to build that thing? Or do we think there's a really good product to market that makes sense to acquire. And so that's always been kind of our thesis behind whether we build something or buy something.

And going back to my question, like how do you monetize it is like some companies take like a kind of a SKU kind of approach of I'll give you more and each SKU has a little bit more of the capabilities. Like how are you thinking about that?

Yes. So the way we think about it is every product is a little bit different depending on the use case. For example, influencer marketing, the way we're starting to price that product is more about how much money are you putting through the creator space and how many creators you want to use, right? For example, if you're going to have 1,000 creators and spend $20 million through our platform, you're going to -- you're willing and will pay a lot more than someone that maybe wants 10 creators and they're willing to put $1 million to the platform. And so for that product, for example, it's more of like what's the amount of volume you want to do to the product. Very similar on the NewsWhip side, it's about like what's the breadth of the product you want to use. It's not so much about the user-based pricing. It's more about like what's the value you're getting out of the product. And then you have our core platform that historically has been more user-based, but social listening is a little bit different because that's based on how many queries you want to run, what's the consumption you want to do. And so I think the way we're thinking about it is it doesn't have to be one price fits all. Like we don't need to have one pricing model for everything we do. I think what we're learning in the market is the market is evolving pretty quickly in the space. And so what we're trying to do is let's tie the customer -- what's the customer value they're getting out of our product and help drive the pricing versus trying to just make everyone fit into the same square like, hey, historically, everyone has to be a per user type of product, well, it doesn't always have to be per user. I think what we're finding in this environment is you've got to be a little bit flexible with your pricing strategy, especially as things are moving as quickly as they are. And so I think what you'll see from us is you're going to see different type of pricing models depending on what's the product they want to buy and what's the use case they're using it for.

Yes. So it's evolving.

It's evolving. Yes. And so -- and we've always taken that approach is like let's not just be stuck in one way to price the product because I think it can vary.

Yes. Now going back to our world, like you said at the very beginning, things are feeling a little bit better. How do we measure you? Like -- and that's been a debate we had for a few years. Like from your perspective now, if you look at the progress and where you're growing, what do I look at?

Yes. I think what you're going to see more from us is we sort of talked about this on our last call, Raimo. I think the there's 2 parts of our business right now. There's the 50,000 customer cohort that we talked about, like that's almost 50% of our business, and that's growing in the high 20s. And so I think that's going to be -- continue to be a data point that we give people to understand, okay, here is the part of our business that's doing very well. It's becoming a larger part of our business. And so I think that's a good leading indicator of like is this business moving in the right direction or not. And then we have the customers.

And when you say high 20s, that's revenue.

Yes, percent of -- like the revenue growth. Yes, revenue in the high 20s...

Revenue growth.

For that cohort, it's almost 50% of our business. And then you have the sub-50,000 cohort that's growing low single digits, right? And so that's still going to be an important part of our business going forward. And the key there is going to be how do you stabilize that part of the business? How do you figure out how to serve that part of the business? How do you make sure that they're getting all the value out of the product. We talked about that a little bit earlier. And so I think for us, right now, where we're at, because if you look at it holistically, it looks like the business is doing okay, but not as good, but it's really -- there's 2 things happening in our business. And I think what we're going to try to do a better job going forward is kind of explaining those dynamics and why one thing is working really well, why this thing is okay, but could be doing better. And so I think you're going to see more from us that kind of breaks those things out and helps you understand what's really going on behind the scenes.

Yes. Okay. Yes, I'm looking forward to that. Yes. Yes. Okay. The last couple of minutes, profitability. So talk a little bit there. We've seen good improvements there. Is that like you using AI? What are the initiatives?

Not yet. I mean we definitely are doing some things on the AI front internally. I think there's like probably 3 areas there that you're going to see us focus on. And this is not probably uncommon for a lot of companies. One, I think there's a huge opportunity on the engineering side and the ability to ship more product move things along quicker. I think there's an area on -- we've got some things going on, on the support side. I think we can get way more efficient with some of the tools that are out there. And then I think you can see things on like the sales enablement side, right? I think a lot of the sales processes, the early sales processes, I think you're going to see benefit. But that historically has not been what's been driving our margin. I think that's what you're going to see us, how we use AI going forward and how that can help going forward. Historically, what we see over the last couple of years, we've been able to drive decent margin over R&D. A lot of that has to do with when we did the influencer marketing acquisition a couple of years ago, that whole R&D team was based in Poland. And historically, all of our engineers have been in the U.S. And so we've started over the last couple of years to not only use that for the influencer marketing product, but we started moving more and hiring more folks in low-cost locations, which has really allowed us to, for example, get a little bit more leverage off of R&D. And then you've also seen it on the sales and marketing side, as we move more upmarket, we've seen better unit economics, you see more leverage in the model. I think that's probably the biggest opportunity going forward. I do think you can see us as we expand, as our ACVs grow, as we do more of these multiproduct deals, I do think you can see leverage off of the sales and marketing line. I think there's a big opportunity there over the next 5 years. I think that's where a lot of the leverage will come from. And then obviously, you get your probably standard scale off of G&A as you see other organization.

Yes, yes. So how -- if you -- because we are at this time of the year, if you think about budgeting, and I don't want numbers, but like is that -- the starting point is my margins need to go up and to be stable? Or how do you think about and.

They have to go up. I mean I think our internal philosophy is like every year, every year since I've been there, we've drive incremental operating margin in the business year-over-year. And I don't see us changing course. I feel like it's really important. And I don't think we have to, to be successful. I think we can continue to drive the investments in growth that we need to do without sacrificing margin. So you definitely will see margin improvement going forward. I don't see us ever going backwards on that front. So we've kind of talked about that and committed to that and not just externally, but internally as well, that's kind of like the management team is really focused on making sure that we're driving incremental margin in the business.

Yes. And then we have 1 minute left, so I have one quick question. Capital allocation. So we had like small acquisitions, in theory, your share price is kind of at a level where it kind of makes sense to kind of look at that as well. Like how do you think about that allocation?

I think right now, given that we have positive free cash flow, as you know, we never went out and did a big like debt raise. We never did a big like convert. So it's not like we have tons and tons of cash on the balance sheet to do anything like, for example, like I don't see us doing any major investing into the organization as it relates to that because we want to keep a certain amount of cash on the balance sheet. So you might see us do some small acquisitions over the next couple of years, but nothing major just given the cash balance that we have. And I don't see us going out and doing some huge debt round in order to do something at this stage. I think we're going to be pretty cautious in the way we spend our money.

Yes, yes. Okay. That's a good closing statement.

Perfect. All right. Thank you so much. I appreciate it.

Thank you. Good to see you.