Sprout Social ($SPT) Q3 2021 Earnings Recap

Sprout Social released their Q3 ’21 earnings report yesterday afternoon and to sum up in a few words: Another solid report.

Here are my notes & takeaways:

  • Revenue of $49.1 M, +45.8% YoY and +9.9% sequentially. This is the third straight quarter of accelerating revenue QoQ which has enabled Sprout to achieve 40%+ growth. Very impressive.
  • Revenue guidance was $51.3 M on the top-end which translates to 37.4% YoY and 4.5% sequentially. It wasn’t the strongest guide, in fact, their sequential growth guidance was the lowest in a year (Q4-Q3 guidance was all in the 5%+ range). This was probably the biggest thing I was disappointed with since even a 3.5% revenue beat, which is what they’re averaging, only results in 8% growth sequentially. This would translate to mid-30s growth next year in which I’d prefer if growth can stay in the 40’s for one more year.
  • They introduced a new KPI this quarter: “Customers contributing over $50,000 in ARR” which I think is helpful to see how the company is doing on the mid-market/Enterprise front. This metric grew 98% YoY which is very impressive
  • Customers contributing over $10k in ARR grew to 4,380, a 57% YoY increase, the 4th straight month of YoY accelerating growth. QoQ, they grew their > 10k customer segment by 11.3% which is in-line with previous quarters % QoQ increase. One thing to note is that from a gross customers perspective, this was definitely their largest QoQ increase in gross customer adds.
  • Gross margin increased by 100 basis points to 75.4% vs. last year, though it continues to follow a slight downward trend compared to Q1 of this year. Something to monitor, but nothing I’m too worried about.
  • Annual Contract Value (ACV) increased to $6,665 which was a 20% YoY increase, their largest increase ever. This is incredibly impressive and speaks to how scalable the business model is with pricing increases based customer seat additions and add-ons. Something they had mentioned in the earnings transcript that I thought was interesting and could be a catalyst in the future is volume-based pricing, specifically for their social commerce product:

Matt VanVliet
And when you — as you look and get a little more maturity in the social commerce platform, obviously, it’s still very early. But have you thought more about how that’s going to be priced? Or how the monetization is going to happen over time? Are you expecting it to eventually kind of morph into a bit of a volume-based model? Or how should we think about that as it scales?

Justyn Howard
Yes. So I think our — this is Justyn. Our immediate thinking is more around both the increase in seeds potentially as the feature set becomes more robust, there’s an opportunity to monetize that as an add-on. And the — additional opportunities it can bring to the top of funnel, et cetera. Those are all our immediate focus from a revenue contribution standpoint. We’re not taking volume based off the table, but it’s not part of the immediate plans.

  • Operating expenses increased pretty significantly QoQ and even YoY which explains why operating margin was slightly negative this quarter when it was positive last quarter. Nothing I’m concerned about, but Sprout is definitely investing very heavily into R&D and stock-based compensation nearly doubled YoY. Despite this, they are still showing operating leverage since despite a 15% sequential increase in operating expenses, they were still able to keep operating income basically flat QoQ.
  • The earnings call transcript seemed like Sprout is really interested in getting more adoption in their Social Commerce product (“social commerce” was mentioned 20 times). They also announced WhatsApp Business integration. I don’t know enough about the importance of this integration but it seems a lot of businesses were asking for it. Per Justyn: So it’s a combination of both customer requests and our objective to just capture as much of our customers audience as we can in introducing these integrations over time. So certainly, a highly requested feature set, something that we’re excited about — excited for our customers to be able to manage that channel alongside all the others with Sprout.

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