This gives us a thumbs up. All right, we can get started. Last of them up, I like that idea. Thanks, everyone, for joining us today. My name is Scott Berg. I lead the enterprise software and SaaS research efforts here at Needham. 28th annual conference, that's the number showing in front of me at least. Someone just asked how long I've been here. This is my 11th conference, so I've been here long enough at least. Today with us, we have Sprout Social. We have the company CFO, Joe Del Preto. Thanks for joining us today, Joe Del Preto.
Yeah, happy to be here.
Really, appreciate it. I guess let's get started with an overview of Sprout for those that are less familiar with the company.
Yeah, I would say at the highest level, Sprout was created by the founders under this premise that somewhere to the phone and email, that social was going to be this new communication channel between brands and consumers. And they thought everything from consumer behavior to where I learn about products was all going to move to social over time. Now, at the time, it was just like Twitter and Facebook. And they didn't think that there were going to be this many networks, but they did believe that over time, this was going to be the number one place that consumers would go to learn about brands. Where would they go to complain about brands? Where do they go to learn about different services? We have folks in higher education. So what Sprout does at its core is we integrate with over three dozen networks, social networks.
We integrate into folks like Canva, Adobe Express. We integrate even like folks like Zendesk. And then on the front end, if you're one of our customers, you get access to log into one place and you can access all of those social networks from one spot. You don't have to understand, for example, the Instagram API, from the TikTok API, from the LinkedIn API. Because if you think about it, if you're natively managing all of those networks, then you have to understand how to log into every one of those networks. They all have different interfaces. They all have different ways to post messages. There's no analytics. And so what we do is we allow our consumers to manage their whole social strategy from one spot at the highest level. Social customer care, pointing analytics, all the publishing.
And we do that across 30,000 customers in 100 different countries. One approach we took that's different than our competitors, and this is a key thing, we're on a single code base. So every customer of ours, there's no custom code. And what that means, or what the benefit that's given us over the years is these social networks are constantly changing their APIs. There's new networks coming on board every single day. So anytime they make one of those changes, on our end, we make an update and all 30,000 customers get that changed the next day. There's no having to go out and deploy professional services resources. There's no need to call someone on the phone. So ultimately, that's what we're solving for, Scott Berg, is like, hey, how can you manage your social strategy?
Now, we have a bunch of other products that we can get into that do more specific things. But at the highest level, 90% of our customers are on five or more networks. If you're on five or more networks, it's really hard to manage that without a platform like Sprout Social.
Yeah. Someone that's new to the stack, new to looking at the company, I get that kind of basic question all the time. It doesn't even have to be five channels. It can be two or three. Because your pricing model is also based off of that. If you think about the number of brands and the number of channels, five brands times five channels could be 25 different kind of unique opportunities.
Yeah, we call them like profiles. You've got to have 25 social profiles out there and manage that natively.
That's going to be a mess.
It's going to be a mess.
Versus a centralized approach.
If your social strategy is at that level, the reporting analytics become really important. Because I might be running a strategy on Instagram and then I'm running one on YouTube. And I want to understand, is my Instagram strategy stronger than my YouTube strategy? And so without a platform like Sprout Social one of the big use cases for us is the reporting analytics that allows you to evaluate your different social strategies across the platforms, along with being able to run those campaigns themselves.
Sure. All right, so we're going to get into some industry questions here to start. We were just talking about the first one kind of off mic a little bit at least is there's been a lot of discussion in the last couple of years in software around the so-called death of software as AI becomes more embedded into workflows. I hope it's not the death of software because my job might be dead, but that's a whole different conversation.
You don't have other skills?
I might. You're looking for an assistant or some FP&A role? We'll see what we can do here. Sprout sits on a large base of proprietary data. The data is, I think, super interesting for a lot of reasons. But how does the data offset this view that AI death of SaaS narrative? And how does it create a durable moat for Sprout Social over time?
Yeah, I think for us, if I think of AI and its application in our field, we think it can be a huge benefit for us. And the reason for that is what you described is there's very few folks that have access to the social networks. There's only a handful of us at this stage that have integrations into these three dozen networks. And a lot of that has to do is over the last five to seven years, a lot of the social networks have downsized the number of folks they're giving access to because of privacy reasons, people misusing their data, or going out and reselling their data. And so we've got a pretty big moat around our industry as far as being able to get into it and get access to networks.
You can't call up TikTok tomorrow and say, hey, give me access to your API. I want to start managing a bunch of customers on it. And so if you think about it, we ingest about a billion messages a day across all these networks. And so one of the things that we kind of previewed in our November, what we call Breaking Ground or product release, is the ability to use AI across those billion messages that are coming in. And if you think about social listening, the ability to go into Sprout Social and ask it like a normal ChatGPT prompt, any question you have across these varying networks on your brand, on your competitors, on trends in your industry, we believe that through AI, we can basically supercharge that listening experience.
And so we actually think the evolution of AI for us, because we're sitting on this proprietary data, is going to be a huge advantage. So we get pretty excited about it. And you're going to see some stuff that we kind of demoed in November that's going to start coming out this month and in Q1 as it relates to social listening and the ability to use AI on that data.
New products, new pricing, something to pay attention to.
Exactly.
All right, and consumers are increasingly using social platforms as a discovery and research layer. Traditional search behavior evolves. We've all seen that in a variety of areas, right? But how structural do you believe this shift is? And what does it mean to the long-term demand for social software like Sprout Social?
Yeah, we think over the longer- term, this is a tailwind to our business. As search, as folks, as the LLMs have started to take a little bit more of the search process, the declines in Google Search, we're seeing more and more folks showing up searching on social. And so what we've seen customers come to us is like, hey, they're seeing their customers that used to put a certain search term into Google coming into the social networks and searching for the same stuff. And so we keep getting more and more inbound saying, OK, wait a second. If more and more customers are now searching for products or services on social, and I don't have a social presence, and I'm not paying attention, I might be missing out.
So it's early stage, but we do believe that this is a tailwind to an industry or an opportunity for us where we talked about this earlier. More and more consumers are going to social overall. I think this just might accelerate the fact that that's the number one place folks are going to go to search. And let's be very clear, and we have the data on this. It's already the number one place that Gen Z goes to search. And I think more and more of consumers outside of Gen Z are going to be forced into that approach.
I guess a natural follow-up question to that is, my guess is the brands and merchants you're working with understand that. But do they truly leverage that properly with your platform? My guess is there's still some opportunity there for them to use you even more.
Yeah, I think it's more. I think the folks that are invested in social and that have bought our platform are using our platform. There's definitely more opportunity. We could do a better job, especially around what we talked about earlier, social data, the social intelligence. A lot of customers are using it today for more of the traditional social media management. That's publishing, customer care, engagement, analytics. The more sophisticated customers are understanding the importance of the data and the intelligence and be able to understand consumer behavior, and they can use that to drive strategy. So I don't think we're there yet. I think the bigger opportunity for us is outside of the existing customer base, which is all the potential brands out there that haven't adopted a platform like Sprout. Is this the way to pull them in?
Hey, by the way, I know you haven't invested in this category, but look at all the data and information that you're missing out on that can help drive decision-making. So we actually think it could be a catalyst more from the new business side on top of the ability to expand with our existing customers.
Is that potential customer base not on Sprout Social or not using a social platform in general, is it large? Because I think the natural reaction would be it's 2026. If you're a reasonable sized brand, you have to have a strategy here.
No, I will tell you a large, large majority of the brands we talk to don't have a platform. They're natively managing this. If you think about it, there's over 200 million businesses on social, and us and all our competitors probably have like 5%-7% penetration into those businesses, and so most folks, although you think they would have something like Sprout Social, they just don't, and we run across that in very large enterprise brands that you'd be surprised that haven't adopted a platform like Sprout Social, so most of the opportunities we go into, we don't see a competitor. We go in the high end of the enterprise where it's more sophisticated, they're invested, we definitely see competitors. Once you get outside of that high end of the enterprise, there's not a lot of competition.
It's more, hey, by the way, have they hit the tipping point from a maturity standpoint that they need something like Sprout Social?
OK. As I look at the company's financial profile over the last six years, growth has slowed as we all know it for a variety of different reasons. But the Sprout Social platform sits in the middle of how consumers jumped online during the pandemic. And brands or companies seemingly had to up their social game in a hurry to obviously market and capture what this demand is. Several companies that I cover kind of oversold during the pandemic, and they've been fighting downsell trends the last several years as customers right-size their usage, right?
Yeah.
Not uncommon in software right now. But did you all at Sprout Social face something similar at all, do you think, the last couple of three years?
No, I would say what we faced was probably a little different. We didn't see a lot of downsells. Customers that are invested in social historically has been an underinvested area. And so in a lot of the scenarios, it wasn't like it got oversold within the organization. A lot of time it was like probably undersold, and there's been more opportunity over time. What we've probably seen more post all the money being spent during COVID is probably, and we've talked about this, the more of headwind in our business has been more on the new business side and people adopting, creating budget where budget didn't exist before for a category that didn't exist internally. So not so much on the downsell, Scott. It's more that's been actually a really healthy part of our business is being able to retain and maintain our current customers.
We saw more of the pressure when budgets got tight, all of that. We saw that more on the impact on new business.
OK. With the launch of Trellis and MCP, Sprout Social is enabling customers to use social data kind of beyond dashboards. But how does that change the role your platform plays inside of enterprises over time?
Yeah, I think the role it changes is it can allow us, and this goes back to what we talked about earlier, is the social intelligence, the social data can allow us to get in front of more folks across the organization. I think it allows us to build, using that data information to drive strategy to the CMO and the CEOs, maybe the Chief Product Officer to understand, OK, hey, I just launched this product. What's the reaction to this product? What's the feedback on social? What are people saying about it? And how can I do that real time so you can adjust your, maybe it's your marketing strategy, or maybe it's your product strategy? And so I think the real unlock for us is being able to, in a more real-time basis, drive more engagement with the C-level.
Like Sprout grew up for the longest time focused on the practitioner. We have really strong loyalty. We have really strong brand awareness historically with the people in the product day to day. As we built more of our enterprise features out over the last couple of years and you've seen the success upmarket, the next stage for us is how do we get in front of more of the C- level folks and get them more engaged in the importance of social? And so I think that's where we see kind of the next level of where we need to get to from inside these organizations.
OK. Many AI products rely on generalized or public data sets. While Sprout Social sits on a high signal social and creator data, how crucial is that data advantage in building a defensible AI strategy, do you think, over time?
Yeah, I think that's the key. I think having access to the social networks data, like I said earlier, there's very few folks that have access to that data. I think that creates a really big moat for us, and the other thing is that we keep adding more data sets into that. Like Instagram, Threads launched this year. We launched Bluesky. We've launched TikTok listening, so we got an enhanced partnership with Reddit, and so the complexity of social keeps changing. It's not getting less complex, it's getting more complex. If you think about the number of networks and integrations that we work with now, and so what happens is as you get more complex for the customer, then the access to that data and that information that we sit on top of becomes more valuable, and so we think this is a huge opportunity for us.
I see companies in a lot of different areas selling their data to the platform vendors, the Gen AI platforms that are out there to help train their models. Do you ever see a scenario where these social networks might take that data and sell it to them, which might actually maybe compromise the data that you have?
No. If I'm Google and I have YouTube, do you think I'm selling my data to ChatGPT when I have Gemini? And I don't see Meta, for example, giving all their information to Google. So the way we see it is because a lot of the large social networks are creating their own competitive AI products, we don't see them waking up one day and start selling their data to their major competitors because they're trying to beat them in the market. So we don't anticipate that happening. We don't have any indication that that's something they're interested in. And they actually are very restrictive to us saying, you better not sell. So in our agreements with these social networks, we also can't sell our data to the LLMs. And nor do we want to because we're sitting on the data and we want to monetize that ourselves.
I don't see them doing that because they're very restrictive on who gets access to the social networks.
I asked that question because that was part of a bear thesis I heard recently.
Yeah, it just.
That doesn't make sense.
I just don't see Meta waking up tomorrow and saying, you know what, let's give all our data to OpenAI.
Good for you guys because you have all of it then. People got to come to you for it. So, OK. Let's switch to influencer marketing just a little bit. With how fast influencer marketing is kind of growing and how it's become a core part of the Sprout Social platform, how does that influencer data and workflows fit into the broader kind of product vision and data going forward? Because I still think it's a category you've owned for a couple of years, but a lot of investors still aren't that familiar with it.
Yeah, I mean, we believe it's obviously a lot of that. If you think about the creator content, where it shows up, it shows up on all the social networks, and so the overlap to what our core business strategy is, which is helping brands manage the varying types of content on social, it was like a really key part of our overall strategy. If you think about most organizations when it comes to social, they'll have their organic social strategy, they'll have their paid social strategy, and then they'll have their influencer marketing strategy. Usually like the three areas that they're focused on when it comes to social, and on the creator side, that was the number one request we were getting inbound from our customers saying, hey, by the way, we would love for you to get into the space. We think there's like a huge opportunity here.
We would love to be doing some of this, and so what that has allowed us to do, and it's still very early, a lot of brands though still outsource a lot of that to the agencies. It's like trying to curate influencers is the biggest challenge they have, and that's what our product solves for, so what our product does that's different than the other products in the market is the discoverability, so if you're a brand and you want to have 300 creators, because most brands now understand that the real value in creators is like the micro influencers or the smaller creators. It's not the large, huge brand because that ROI is not very good. It's how do I reach the local golf pro that has a following or the local gym instructor?
If you're Nike, and you're trying to curate a couple hundred influencers, how are you going to find those? So what our product does and the software we build allows you to go in there if you're Nike, for example, put in your parameters and search across all these networks and find the creators. It tells you, it brings up all their videos. It tells you here's what the average cost to hire this creator is. It tells you what interactions that they had. The other thing we released in the last three to six months that's been really intriguing for our customers is this brand safety concept, which is I'm a brand and I'm looking for a creator, but I want to make sure they haven't historically said anything or talked about anything that's not. I'm selling kids toys and they talk about cigarettes.
I don't want that creator, or they've repped one of the big things is I want to make sure I don't hire a creator that's repped one of my competitors, and so we built this functionality that can go out when you type in these different creators and it can match. You put in the parameters and it says, hey, this is a really good fit. Based on the parameters you put and the things you do and don't want them to be talking about, this would be a good fit, and these ones are not a good fit, and so we released that lately because one of the biggest fears brands have is they hire a creator and then realize like three years ago they did some video that gets them in a lot of trouble.
There's probably as much brand destruction there as there is brand creation.
Exactly, and so there's been a big hesitation for some of these brands to get into influencer marketing because of that. This helps solve that fear that they might have had historically, and that just rolled out recently, and so we're pretty excited about what that can do to drive adoption.
OK. Now, I know when you all purchased Tagger Media, which got you into this space. Justyn Howard talked about what, at the time, I thought were some aggressive ARR targets around that solution. How has that end market demand trended relative to these assumptions? And as you kind of look back at that initial viewpoint, what was maybe not correct?
What I would say is overall we're very happy with the way it's going, and so I do think the trajectory of that business is on par with what we thought. Actually, what we've noticed is, and I'll give you a couple of the negatives. On the positive side, we've noticed that there's verticals that we did not anticipate would be adopting something like Sprout Social. Like for example, we have hospitals that use it for fundraising within the organization at the hospital to drive local awareness for cancer or whatever. So whoever thought, you think about brands and retail being, but we have real estate companies that use it for launching new buildings or they're going to open a new facility and they want to drive tenants, and they'll use local creators to help drive volume and traffic.
And so we found these other verticals that you wouldn't historically, like grocery chains are a big one, the big vertical for us that we didn't anticipate being. So on the positive side, I think the verticals we've been able to get into is outside of the original thesis. I think on what we knew some of this. I think on what we underestimated was the maturity of these brands to be able to manage this. It's still very early in a lot of these brands. They don't know what they want to do. They come to us sometimes and say, "hey, we want to have an influencer strategy." We're like, "OK, what's your strategy?" "Well, we want the platform," like, "OK, but you have to have a strategy." We'll help you execute the strategy, but we're not in the business of driving your actual strategy.
What we found is a lot of folks are still trying to figure out and build out a team that can actually manage it. That's probably the one thing that is probably still earlier and not as evolved as you would think.
Is that lack of maturity partially related to maybe a lack of understanding of how to monetize kind of leveraging those influencers? Because I know it's all part of this, I don't know, kind of nebulous viewpoint that someone can help you sell the product, but some brands still don't know how to actually kind of find them and get down, maybe actually drive, how are they being useful in driving product sales?
I think it's also, I think it's some of that, but it's also like how close, what's the connection to the brand? Is this influencer really rep our brand correctly? You're trying to decide what's our identity that we want in the creator marketplace, and is this creator going to represent us correctly? It's like a lot of this, they got to understand what kind of strategy do you have and what types of influencers are you looking for is probably the biggest question. Because if you don't know that, it's really hard to search for a creator if you don't know the parameters in which what you're looking for. That's probably the bigger thing is what type of creators do you want to have? What's your target demographic? Or who are you trying to reach with this product or this service?
It's like those types of questions they got to answer.
OK. All right, moving on to go-to-market a little bit. Q3 was a strong quarter for you all in the above $200,000 deal size activity. Overall, the business is kind of bifurcated almost between your larger customer segment and the smaller one in terms of where the real growth activity is. I guess what's changed in the enterprise customer conversations that's enabling Sprout Social to move further up-market at a great level of success, but also report more durable growth there?
Yeah, I think the success in that bucket that you described, there's definitely been solid go-to-market investments. But I think the bigger driver of the success we've seen is the product investments we've been making over the last 18 months. If I think of the investments in social customer care and handling large volumes of transactions, I think about the investments we made and having workflows across various parts of our product, having multiple people in there. Some of the things we've done on the inbox, in the Smart Inbox around filtering out spam messages. So I think a lot of the product investments has probably been the bigger driver of the success we're seeing up in the enterprise.
Now we've coupled that with better enablement on the go-to-market side, better education on which use cases are we solving for, having more internal use cases of success stories that we can talk to the customers about, along with some of the integrations I talked about earlier. We keep building out integrations to the other platforms, which the enterprise customers find a lot of value in, and so I think those types of things have probably driven more of the success than, for example, it hasn't been all go-to-market. The go-to-market has done a great job executing, but the product's been the driver.
As you look at those larger customers relative to smaller customers, do they fundamentally use the product different or maybe the use cases? The two broad categories are maybe marketing versus customer care. Didn't know if there's a huge use case difference between them?
There's definitely a use case. There's definitely a different use case when you get in that $50K plus. What you're talking in that scenario is you're talking with, you're probably talking dozens, hundreds of users using every aspect of the platform, engagement, publishing. They're using reporting analytics. They probably have one or two of our add-on modules. When you get to the lower end of the market, they might come in with only one or two use cases. Maybe they're just really strong publishing and they're really strong on the video type platforms. Maybe they're really strong with, they want really good reporting analytics. And so I do think, Scott Berg, they definitely use the platform differently. There's definitely a different level of maturity and sophistication in that $50,000+ bucket versus the folks that might be spending less than $50,000.
Influencer marketing that we're just talking about appears to be acting both as a monetization driver of your existing customers, but you're starting to land with it. At least I'm hearing more that you're landing with it. Has that been intentional? I mean, nothing's really accidental. Sometimes new customers can find you. But how intentional is that? And can you maybe lean into that even more this year?
It's definitely intentional. One thing it's allowed us to do is to get into some of the customers that maybe vended with one of our competitors in the traditional social media management side, and maybe the contract's not up for two or three years. And now all of a sudden, we can go in with influencer marketing, which they don't have. None of our competitors have that product. And we can say, hey, by the way, I know you're with XYZ competitor for everything else. Well, why don't you look at influencer marketing? And then we can get a foot in the door. And then maybe when that contract comes up in a couple of years with the rest of that business, it gives us an in. And so it's definitely been like a Trojan horse for us into some of these larger accounts.
OK. Probably two more questions from me, then happy to take any Q&A from the audience just because we're starting to run out of time. Let's talk about financials. I have the CFO here. I have to ask you a financial question or two. Test your knowledge, I guess. Yeah, let's talk about the third quarter earnings. You delivered the best operating margins in the company's history, 11.9% non-GAAP margins while still investing for growth. But how do we think about kind of that growth versus margin lever going forward relative to the company's current profile?
Yeah, what I would say is we're definitely focused on growth. We still think that that is, we're in an industry or in a category that has opportunity. So we don't want to be saying, hey, we have no more growth. We have a lot of growth opportunities. At the same time, and this has been going on for six or seven years now since we've been public, we're going to drive margin every year. So we believe that, hey, it doesn't have to be one or the other. I think we can still invest in the business and invest in things we need to do, but also grow margin. So I think you're going to continue to see us balance those two things. Scott Berg, I don't think you're going to see us over-index one into the other.
I don't think you're going to say, OK, we're going to go all in on growth and take margins backwards. At the same time, I don't think you're going to see us say, OK, we're going to cut into the bone. We're going to drive all this margin and kind of give up on growth. I think you're going to continue to see us balance that dynamic.
Around the growth question, if I look at the income statement in the last couple of years, growth has stabilized after decelerating for, we'll call it three years now, roughly, organically at least speaking. Is this the kind of, and you're not getting for 2026, obviously, in your quiet period today, but how should investors think about kind of the growth algorithm going forward? Are we kind of stable in the slow double-digit areas? Do you have opportunities of improvement? Or would there be some items that might decelerate that number further that maybe folks haven't contemplated properly?
Yeah, I mean, I think without getting into 2026, I think the way we think about it is you've got these two dynamics in the business that we kind of talked about. We've got this $50,000 cohort that we talked about that's growing in the high 20% range on a trailing 12-month basis. In that business, we're seeing a lot of success. And then you've got the sub-$50,000 business that's growing a lot less. And so I think part of the growth algorithm as it relates to, hey, how do you re-accelerate growth? Number one is that $50,000 customer base that's above $50,000. That needs to be a larger part of our business. We've talked about this. That's probably in the low 40% of our total revenue. As that becomes a larger part of our business, that's generally going to be.
Natural mix could pull it up.
Natural mix can pull it up. The other factor in that is the sub-$50,000 business, we believe, can grow faster over time as well, and so I think if you think about the investments we've made over the last couple of years, they definitely have been focused on growing that above $50,000 cohort of customers. I think what you're going to see from us over the next year or so is what are the things we can be doing from a product standpoint on the sub-$50,000? Because I do think there's an opportunity there where that business can re-accelerate, and if that business re-accelerates, then the overall kind of growth trajectory of the business changes, so I think we've done a really good job optimizing for the above $50,000, and now we've got to make sure that we're kind of balancing that with what we're doing on the sub-$50,000.
With that, happy to turn it over and see if there's any questions from the audience.
Where do fake AI influencers fit in, if at all?
Yeah. Yeah, so in our platform and the way that it works, it can pretty much identify, for example, real influencers from fake AI. That's part of the whole discoverability on whether these influencers are fake or not fake to the platform.
What if they proliferate? Is it a positive or negative?
I think it's noise, and I think the benefit of our, so we believe, and this has been similar to, I talked about this earlier, the spam filters that we built on the normal social media. There's all this spam on social, so one of the huge value props is if you use Sprout Social, we can, through AI and automation, weed out all the spam, so the only thing you see when you log into Sprout Social is the messages you care about, so the same thing is if there's more, it'll be interesting. If there's more fake influencers, then potentially the need for something like our platform to weed those out could be more valuable. We haven't seen a huge amount of that going on right now. We have seen it on the normal social side where there's a lot of spam on social messages.
Spam filters for us is a huge, I mean, it sounds really simple, but it's a huge thing that customers care about. Especially our large customers that are dealing with thousands, hundreds of thousands of messages that come into their inbox every day. They don't want to see those.
Do they want a fake influencer where they've made up a new person that has the perfect person?
No, no. We're not seeing anyone wanting an AI influencer. We're definitely not seeing that. Because I think there's a big risk there to brand loyalty if the consumer figures out, oh, wait a second, you're using fake influencers. We have not seen that as a need.
Any other questions? Well, with that, we will give everyone an extra two or three minutes to fight the elevators.
Perfect.
Thank you.