Sprout Social (NASDAQ: SPT) is a cloud-based software company specializing in social media management tools. The company has seen significant changes recently, including leadership changes.
Despite its initial promise, Sprout Social’s stock has experienced a notable decline over the past year, with performance metrics and financial results prompting cautious scrutiny.
Recent Company Updates
Sprout Social recently announced a significant leadership change. Co-founder and current Chairman of the Board of Directors, Justyn Howard, will step down as CEO, with current President Ryan Barretto stepping into the role.
Howard has been highly regarded by employees, as evidenced by positive Glassdoor reviews, and has played a key role in creating a strong company culture. Barretto’s long-standing partnership with Howard over the past eight years is seen as a positive aspect of this transition.
During the Q1 2024 earnings call, it was announced that Sprout Social will no longer disclose specific metrics such as annual recurring revenue (ARR), shifting instead to metrics like remaining performance obligation (RPO) and contracted RPO (cRPO).
Additionally, the company will stop disclosing customer counts, emphasizing that large enterprise customers are now more valuable than numerous smaller clients. As of December 2023, Sprout Social had 31,320 customers, down from 33,861 in March 2023.
Financial Performance
In Q1 2024, Sprout Social reported revenue of approximately $97 million, a 29% increase compared to Q1 2023. The majority of this revenue came from subscription services, which contributed around $96 million, a 28% year-over-year increase.
Services revenue also grew by 112% compared to the first quarter of the previous year.
Sprout Social has successfully increased the revenue from higher-paying customers. The number of customers contributing more than $10,000 in annual recurring revenue (ARR) grew by 24% year-over-year, while those contributing more than $50,000 in ARR increased by 44%.
Despite revenue growth, the company continues to face challenges with profitability. Operating expenses have increased year-over-year, leading to a larger loss from operations and a higher net loss compared to Q1 2023. The company is not yet close to achieving GAAP profitability.
Strategy Shift and Customer Trends
The management team has emphasized a strategy shift towards securing larger enterprise customers. This focus has been cited as a reason for the significant downward adjustment in 2024 revenue guidance.
The company’s dollar-based net retention rate has also declined, from 109% in 2022 to 107% as of December 31, 2023. This decrease, coupled with the drop in customer count, reflects challenges in maintaining growth and retaining customers.
Valuation
Sprout Social currently has an overall valuation grade of “B-” on Seeking Alpha. Despite its impressive revenue growth, the company remains unprofitable, making the price-to-sales ratio a crucial metric for valuation.
The company’s forward price-to-sales ratio has dropped significantly, potentially indicating a bargain if the company can reignite growth or attract acquisition interest.
Competitive Landscape
The market for social media management platforms is highly competitive and fragmented. Sprout Social faces competition from rivals such as HubSpot, Hootsuite, and Buffer.
The company’s recent decline in customer count suggests that competitors may be gaining market share.
Sprout Social Faces Challenges
Sprout Social has experienced significant changes and challenges in recent months, including leadership transitions, strategy shifts, and a focus on larger enterprise customers.
Despite revenue growth, the company continues to struggle with profitability and customer retention. The competitive landscape remains fierce, with rivals potentially capturing market share.
As Sprout Social navigates these challenges, its future performance will be closely watched by investors and analysts.
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I’m Nathan Goldstein, a writer and political analyst focused on simplifying complex social and political issues. My writing breaks down the intricacies of today’s society and politics to make them more understandable for you. I’m committed to providing clear and well-informed insights.
