Sprout Social (SPT)

Social media management software company Sprout (NASDAQ:SPT) reported Q1 CY2025 results topping the market’s revenue expectations, with sales up 12.9% year on year to $109.3 million. Guidance for next quarter’s revenue was better than expected at $110.8 million at the midpoint, 0.7% above analysts’ estimates. Its non-GAAP profit of $0.22 per share was 48.4% above analysts’ consensus estimates.

Company Overview

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.

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 become more valuable to their customers.

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Sprout Social’s sales grew at a solid 27% compounded annual growth rate over the last three years. Its growth beat the average software company and shows its offerings resonate with customers.

This quarter, Sprout Social reported year-on-year revenue growth of 12.9%, and its $109.3 million of revenue exceeded Wall Street’s estimates by 1.6%. Company management is currently guiding for a 11.5% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.2% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is above average for the sector and implies the market sees some success for its newer products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Sprout Social’s ARR punched in at $443 million in Q1, and over the last four quarters, its growth was solid as it averaged 15.7% year-on-year increases. This alternate topline metric grew slower than total sales, which likely means that the recurring portions of the business are growing slower than less predictable, choppier ones such as implementation fees. If this continues, the quality of its revenue base could decline.

This quarter, Sprout Social reported 9,381 enterprise customers paying more than $10,000 annually, an increase of 54 from the previous quarter. That’s a bit fewer contract wins than last quarter and quite a bit below what we’ve observed over the previous year, suggesting its sales momentum with new enterprise customers is slowing. It also implies that Sprout Social will likely need to upsell its existing large customers or move down market to accelerate its top-line growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

It’s relatively expensive for Sprout Social to acquire new customers as its CAC payback period checked in at 60.8 months this quarter. The company’s drawn-out sales cycles partly stem from its focus on enterprise clients who require some degree of customization, resulting in long onboarding periods that delay delay returns and limit customer growth.

For software companies like Sprout Social, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Sprout Social’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 77.6% gross margin over the last year. That means Sprout Social only paid its providers $22.42 for every $100 in revenue.

Sprout Social’s gross profit margin came in at 77.3% this quarter, in line with the same quarter last year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Sprout Social’s expensive cost structure has contributed to an average operating margin of negative 13.9% over the last year. Unprofitable, high-growth software companies require extra attention because they spend heaps of money to capture market share. As seen in its fast historical revenue growth, this strategy seems to have worked so far, but it’s unclear what would happen if Sprout Social reeled back its investments. Wall Street seems to be optimistic about its growth, but we have some doubts.

Over the last year, Sprout Social’s expanding sales gave it operating leverage as its margin rose by 6 percentage points. Still, it will take much more for the company to reach long-term profitability.

Sprout Social’s operating margin was negative 10.2% this quarter. The company's consistent lack of profits raise a flag.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Sprout Social has shown mediocre cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 7.8%, subpar for a software business.

Sprout Social’s free cash flow clocked in at $19.48 million in Q1, equivalent to a 17.8% margin. This result was good as its margin was 6.1 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Sprout Social’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 7.8% for the last 12 months will increase to 12.5%, giving it more flexibility for investments, share buybacks, and dividends.

Companies with more cash than debt have lower bankruptcy risk.

Sprout Social is a well-capitalized company with $101.9 million of cash and $37.46 million of debt on its balance sheet. This $64.44 million net cash position is 4.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Sprout Social’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock remained flat at $21.81 immediately after reporting.

Updated: May 22, 2025 at 10:15 PM EDT

Before deciding whether to buy Sprout Social or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Sprout Social has some positive attributes, but it isn’t one of our picks. First off, its revenue growth was strong over the last three years. And while Sprout Social’s operating margins are low compared to other software companies, its admirable gross margin indicates excellent unit economics.

Sprout Social’s price-to-sales ratio based on the next 12 months is 2.7x. This valuation multiple is fair, but we don’t have much faith in the company. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $28.92 on the company (compared to the current share price of $21.69).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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