Sprout Social, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. Sprout Social provides subscription-based social media management software; subscription revenue accounted for 99% of revenue. Results include Tagger Media from its August 2 acquisition and Repustate from its January acquisition.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $85.5 million | $65.3 million | $240.1 million | $184.2 million |
| Gross profit / margin | $65.3 million / 76% | $50.0 million / 77% | $184.8 million / 77% | $139.7 million / 76% |
| Operating loss | $24.2 million | $14.4 million | $51.1 million | $38.5 million |
| Net loss | $23.0 million | $13.9 million | $46.4 million | $38.3 million |
| Net loss per share, diluted | $0.41 | $0.25 | $0.83 | $0.70 |
| Operating cash flow | $(5.5) million | $1.0 million | $9.1 million | $7.7 million |
Revenue increased 31% in Q3 and 30% for the first nine months year over year, primarily from higher revenue among larger customers. Nine-month reported gross margin improved one percentage point; Q3 margin declined one point. Operating expenses rose 39% in Q3 and 32% for the nine months, led by sales and marketing spending, stock-based compensation, and Tagger-related costs. Stock-based compensation was $19.0 million in Q3 and $49.0 million year to date.
Management-reported non-GAAP operating results were a $0.6 million loss in Q3 versus a $1.4 million loss, and $3.0 million income for the nine months versus a $4.5 million loss. These measures exclude specified items, including stock-based compensation; the company revised definitions during 2023. Its revised nine-month free cash flow measure was $10.5 million, including an addback for acquisition-related costs; GAAP operating cash flow less capital expenditures was $7.6 million.
Liquidity, debt, and capital resources
At September 30, cash and cash equivalents were $41.1 million, marketable securities were $80.3 million, and net accounts receivable were $45.1 million. Cash, cash equivalents, and restricted cash totaled $44.0 million. Nine-month cash declined $36.0 million, principally reflecting acquisition spending.
The company had $75.0 million outstanding on a $100 million senior secured revolving facility maturing in August 2028; the Q3 interest rate was approximately 8.22%. The facility includes minimum-liquidity and recurring-revenue-growth covenants and a security interest in substantially all company assets. Sprout reported compliance at quarter-end. Management said existing cash and cash equivalents should fund operating and capital needs for at least 12 months.
Material changes, outlook, and risks
- Tagger was acquired for preliminary consideration of approximately $144 million, funded with cash and $75 million of facility borrowings. The preliminary allocation includes $113.8 million of goodwill and $27.8 million of acquired intangible assets; valuations remain subject to revision. Nine-month acquisition-related costs were $4.2 million.
- Repustate was acquired for approximately $8.4 million to strengthen social listening, customer care, and AI/NLP capabilities. Its results were not material to the reported statements.
- ARR was $359.5 million, up from $271.3 million. Customers declined to 32,383 from 34,258, while customers above $10,000 ARR increased to 8,111 from 6,111 and those above $50,000 ARR rose to 1,252 from 843. Management said the November 2022 price increase contributed to higher average revenue per customer and lower customer count.
- Management expects continued investment and net losses for the foreseeable future. No specific numerical revenue or earnings guidance is provided in this filing. It said macroeconomic conditions had not materially harmed results to date but remain uncertain.
- Key risks include retaining and expanding customers, price sensitivity, changes to third-party social network APIs and data access, macroeconomic pressures, acquisition integration, and servicing variable-rate secured debt while meeting facility covenants. The company reported no material pending legal proceedings.
Investor verification points
- Track customer retention and growth in larger-customer cohorts alongside ARR, particularly after pricing changes.
- Assess whether operating expense growth, stock-based compensation, and acquisition costs moderate as revenue scales.
- Review Tagger integration, acquired-asset valuations, goodwill, and the realized benefits of both acquisitions.
- Monitor cash generation, acquisition-related liquidity needs, debt interest costs, and headroom under facility covenants.
- Evaluate continuing access to social network APIs and any changes in provider terms, fees, or functionality.
- Compare management’s non-GAAP measures with GAAP results, noting the 2023 definition changes and the free-cash-flow acquisition-cost adjustment.