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Sprout Social (NASDAQ:SPT) Beats Expectations in Strong Q2, Upgrades Full Year Guidance


Full Report / August 03, 2021
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Social media management software company Sprout (NASDAQ:SPT) beat analyst expectations in Q2 FY2021 quarter, with revenue up 42.2% year on year to $44.6 million. Sprout Social made a GAAP loss of $5.44 million, improving on its loss of $8.3 million, in the same quarter last year.

Sprout Social (SPT) Q2 FY2021 Highlights:

  • Revenue: $44.6 million vs analyst estimates of $42.8 million (4.36% beat)
  • EPS (non-GAAP): $0 vs analyst estimates of -$0.10 ($0.10 beat)
  • Revenue guidance for Q3 2021 is $47.3 million at the midpoint, above analyst estimates of $44.5 million
  • The company lifted revenue guidance for the full year, from $176.5 million to $182.3 million at the midpoint, a 3.28% increase
  • Free cash flow of $4.06 million, up 17.8% from previous quarter
  • Customers: 29,612, up from 28,122 in previous quarter
  • Gross Margin (GAAP): 75%, in line with previous quarter

Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social 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 $31.4 million, to $44.6 million.

Sprout Social Total Revenue

And unsurprisingly, this was another great quarter for Sprout Social with revenue up an absolutely stunning 42.2% year on year. On top of that, revenue increased $3.86 million quarter on quarter, a solid improvement on the $3.47 million increase in Q1 2021, and even a sign of slight acceleration of growth.

Analysts covering the company are expecting the revenues to grow 26.5% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Sprout Social reported 29,612 customers at the end of the quarter, an increase of 1,490 on last quarter. That's about the same customer growth as what we seen last quarter and quite a bit above what we have typically seen over the last year, confirming the company is sustaining a good pace of sales.

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 75% in Q2.

Sprout Social Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. This is a good gross margin that allows companies like Sprout Social to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity. 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 Q2 Results

With market capitalisation of $4.76 billion Sprout Social is among smaller companies, but its more than $171.4 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 very optimistic revenue guidance Sprout Social provided for the next quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was still a really good quarter, that should leave shareholders feeling very positive. The company is up 1.33% on the results and currently trades at $90.5 per share.

Is Now The Time?

Sprout Social may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. We think Sprout Social is a solid business. Its revenue growth has been strong. On top of that, its efficient customer acquisition is better than many similar companies, 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 24.3. There are definitely things to like about Sprout Social and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.