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Sprout Social (NASDAQ:SPT) Posts Better-Than-Expected Sales In Q3, Next Quarter Sales Guidance Is Optimistic


Full Report / November 02, 2021
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Social media management software company Sprout (NASDAQ:SPT) reported Q3 FY2021 results topping analyst expectations, with revenue up 45.8% year on year to $49 million. Guidance for next quarter's revenue was surprisingly good, being $51.2 million at the midpoint, 3.38% above what analysts were expecting. Sprout Social made a GAAP loss of $6.99 million, improving on its loss of $6.99 million, in the same quarter last year.

Sprout Social (SPT) Q3 FY2021 Highlights:

  • Revenue: $49 million vs analyst estimates of $47.3 million (3.62% beat)
  • EPS (non-GAAP): -$0.03 vs analyst estimates of -$0.08 ($0.05 beat)
  • Revenue guidance for Q4 2021 is $51.2 million at the midpoint, above analyst estimates of $49.5 million
  • Free cash flow of $4.16 million, roughly flat from previous quarter
  • Customers: 30,705, up from 29,612 in previous quarter
  • Gross Margin (GAAP): 74.8%, up from 73.9% same quarter last year

Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ:SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.

Howard, who never attended college, was inspired to create Sprout because, in his position as an enterprise software salesman, he could see that companies were not taking full advantage of social media, in part because it wasn’t easy to manage multiple social media accounts.

Like most social media management platforms, Sprout Social allows companies to measure engagement, sort and schedule posts. However, the real value to larger companies is in their Analytics and Listening products, which allow companies to derive insights for product development, measure customer sentiment, monitor competitor traction and improve paid advertising return on investment.

Whether or not companies market their products through social media, all businesses need to meet customers where they are; and increasingly, that is social media. As more and more people use a greater number of social media platforms, social media management software like Sprout Social, become more valuable to their customers.

Sprout Social competes with companies such as Hootsuite, Sprinklr (NYSE:CXM), and Salesforce Social Studio.

Sales Growth

As you can see below, Sprout Social's revenue growth has been very strong over the last year, growing from quarterly revenue of $33.6 million, to $49 million.

Sprout Social Total Revenue

And unsurprisingly, this was another great quarter for Sprout Social with revenue up an absolutely stunning 45.8% year on year. On top of that, revenue increased $4.4 million quarter on quarter, a solid improvement on the $3.86 million increase in Q2 2021, and even a sign of slight re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 29.6% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Sprout Social reported 30,705 customers at the end of the quarter, an increase of 1,093 on last quarter. That is a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

Sprout Social Customers

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Sprout Social's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 74.8% in Q3.

Sprout Social Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. This is around the average of what we typically see in SaaS businesses, but it is good to see that the gross margin is staying stable which indicates that Sprout Social is doing a good job controlling costs and is not under a pressure from competition to lower prices.

Key Takeaways from Sprout Social's Q3 Results

With a market capitalization of $6.94 billion Sprout Social is among smaller companies, but its more than $175 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were impressed by the exceptional revenue growth Sprout Social delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. On the other hand, it was unfortunate to see the slowdown in customer growth. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 3.09% on the results and currently trades at $125 per share.

Is Now The Time?

When considering Sprout Social, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Sprout Social is a good business. Its revenue growth has been strong. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its strong gross margins suggest it can operate profitably and sustainably.

The market is certainly expecting long term growth from Sprout Social given its price to sales ratio based on the next twelve months is 29.4. There are definitely things to like about Sprout Social and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the tech stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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