metamorworks
The following segment was excerpted from this fund letter.
Sprout Social, Inc. (NASDAQ:SPT)
Sprout Social, Inc. provides cloud-based social media management software. Sprout’s industry-leading platform empowers businesses of all sizes to leverage social media–Facebook (META), Twitter (TWTR), Instagram, LinkedIn, Pinterest (PINS), and TikTok–for marketing, customer care, public relations, business intelligence, and collecting product feedback, among other use cases.
Brands are increasingly going directly to consumers as more products are purchased online and through social platforms, and recent developments around first party/IDFA are likely to augment this trend. Sprout is the solution to consolidate and centralize the complexity of social channels into an elegant, integrated platform that can be leveraged across an organization. Sprout continues to differentiate its platform through its clean user interface, easy onboarding process, and single code base.
The company serves 32,000 customers across 100 countries, and 90% of the leads are inbound with a 30-day free trial, which highlights the value of the product. Recent account wins include IBM Watson, Department of Labor, and Kraft Heinz (KHC). Sprout’s home-grown, single-code base enables the company to innovate and deliver feature enhancements to all customers at once, a distinct advantage versus others with customized codes, heavy professional services requirements, and long sales cycles.
Sprout customers typically spend four to five hours a day on the platform with an annual contract value of just around $7,000. Further, Sprout’s deep, integrated network relationships are hard to replicate, and provide the customer ease of use of the product without having to switch modules. The recent TikTok integration highlights the company’s speed to market and leadership in the space. Salesforce, Inc. (CRM) recently decided to sunset its product and exit the market (following Adobe and Oracle), choosing Sprout as its preferred partner.
Salesforce’s decision is a validation of the company’s platform development efforts and domain expertise and provides an installed base of 4,000 large customers for Sprout to convert over the coming years (end of life for Salesforce’s product is 2024).
We are attracted to Sprout’s recurring SaaS model, which is 99% subscription, cash rich balance sheet, and strong returns on growth investments. The company has grown its customers at a 15% CAGR over the past two years, with growth of 36% total annual recurring revenue, seeing the value of those customers increase as Sprout moves up market and layers on premium products.
We believe the business can maintain over 30% per year growth in the coming years, while scaling its operating margins to over 20% and even higher FCF margins over time. We believe the social media management opportunity is underpenetrated today, and the shifting landscape of social media will present new channels and challenges for platforms for Sprout to address, providing a significant runway for customer acquisition and wallet share growth.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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