Sprout Social (SPT)

Social media management platform Sprout Social (NASDAQ:SPT) reported Q4 CY2025 results exceeding the market’s revenue expectations, with sales up 12.9% year on year to $120.9 million. On the other hand, next quarter’s revenue guidance of $120.3 million was less impressive, coming in 0.8% below analysts’ estimates. Its non-GAAP profit of $0.20 per share was 26.3% above analysts’ consensus estimates.

Company Overview

Born from the recognition that businesses needed a centralized way to handle their growing social media presence, Sprout Social (NASDAQ:SPT) provides a comprehensive software platform that helps businesses manage, analyze, and optimize their presence across various social media networks.

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.

Sprout Social competes primarily with other social media management platforms including Hootsuite, Khoros, and Sprinklr, along with various point solutions that address specific aspects of social media management.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Sprout Social’s 28% annualized revenue growth over the last five years was impressive. Its growth beat the average software company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within software, a half-decade historical view may miss recent innovations or disruptive industry trends. Sprout Social’s annualized revenue growth of 17.1% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Sprout Social reported year-on-year revenue growth of 12.9%, and its $120.9 million of revenue exceeded Wall Street’s estimates by 1.8%. Company management is currently guiding for a 10.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 10.3% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Sprout Social’s billings came in at $153.9 million in Q4, and over the last four quarters, its growth was underwhelming as it averaged 8.7% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

It’s relatively expensive for Sprout Social to acquire new customers as its CAC payback period checked in at 59.4 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 $22.44 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Sprout Social has seen gross margins improve by 0.4 percentage points over the last 2 year, which is slightly better than average for software.

This quarter, Sprout Social’s gross profit margin was 77.6%, 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.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Sprout Social’s expensive cost structure has contributed to an average operating margin of negative 9.5% 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 think it will face some obstacles, and we tend to agree.

Over the last two years, Sprout Social’s expanding sales gave it operating leverage as its margin rose by 5.4 percentage points. Still, it will take much more for the company to reach long-term profitability.

In Q4, Sprout Social generated a negative 9% operating margin.

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 weak cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8.8%, subpar for a software business.

Sprout Social’s free cash flow clocked in at $10.88 million in Q4, equivalent to a 9% margin. This result was good as its margin was 6 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 trump fluctuations.

Over the next year, analysts predict Sprout Social’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 8.8% for the last 12 months will increase to 10.3%, it options for capital deployment (investments, share buybacks, etc.).

It was great to see Sprout Social’s full-year EPS guidance top analysts’ expectations. We were also glad its billings outperformed Wall Street’s estimates. On the other hand, its EPS guidance for next quarter missed and its full-year revenue guidance fell short of Wall Street’s estimates. Overall, this was a mixed quarter. The stock remained flat at $7.13 immediately after reporting.

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Sprout Social, you should also grasp the company’s longer-term business quality and valuation.

Sprout Social’s business quality ultimately falls short of our standards. Although its revenue growth was strong over the last five years, it’s expected to deteriorate over the next 12 months and its operating margins reveal poor profitability compared to other software companies. And while the company’s gross margin suggests it can generate sustainable profits, the downside is its expanding operating margin shows it’s becoming more efficient at building and selling its software.

Sprout Social’s price-to-sales ratio based on the next 12 months is 0.8x. While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $15.67 on the company (compared to the current share price of $7.13).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.