Sprout Social, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Sprout Social sells subscription software for managing social media activity; subscriptions generated 99% of revenue. Results are unaudited and presented under U.S. GAAP.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $61.4 million | $44.7 million | $118.9 million | $85.5 million |
| Revenue growth | 37% | — | 39% | — |
| Gross profit / margin | $46.3 million / 75% | $33.5 million / 75% | $89.7 million / 75% | $64.4 million / 75% |
| Operating loss | $(14.5) million | $(5.3) million | $(24.1) million | $(11.5) million |
| Net loss | $(14.6) million | $(5.4) million | $(24.4) million | $(11.8) million |
| Net loss per share | $(0.27) | $(0.10) | $(0.45) | $(0.22) |
| Operating cash flow | $1.3 million | $4.4 million | $6.7 million | $8.0 million |
| Free cash flow (non-GAAP) | $0.7 million | $4.1 million | $5.8 million | $7.5 million |
At June 30, cash and cash equivalents were $68.6 million and marketable securities were $113.1 million. Current assets were $223.8 million versus current liabilities of $114.0 million. The company reported no outstanding debt; its $40 million revolving credit facility expired January 31, 2022. Six-month investing cash outflow was $44.7 million, primarily reflecting net purchases of marketable securities.
Changes and operating trends
- Revenue growth was attributed to customer additions and expansion in existing accounts. Customers increased 14% year over year to 33,620; ARR was $256.1 million, up from $189.1 million.
- Customers contributing over $10,000 ARR rose 47% to 5,800; those above $50,000 ARR increased 88% to 755.
- Operating expenses rose faster than revenue: Q2 research and development increased 71%, sales and marketing 53%, and general and administrative 51%. Management cited headcount growth, investment in sales capacity and product development, and higher stock-based compensation.
- Stock-based compensation was $12.7 million in Q2 and $21.1 million in the first half, compared with $5.4 million and $9.4 million, respectively, in 2021. GAAP losses widened; management’s non-GAAP measures exclude stock-based compensation and should be considered alongside GAAP results.
Outlook, risks and contingencies
Management expects to continue investing in the business and to incur operating losses for the foreseeable future. It stated existing cash and cash equivalents should be sufficient for operating and capital needs for at least 12 months; no numeric revenue or earnings guidance was provided in the filing.
Near-term contractual obligations included $27.7 million of operating lease payments, of which $4.5 million was expected within 12 months, and $33.1 million of purchase commitments, of which $30.7 million was expected within 12 months. The company reported no material pending legal proceedings or material indemnification obligations.
Risks highlighted include customer acquisition and retention, customer expansion, competition, access to third-party social network APIs and data, privacy and security requirements, attracting and retaining employees, and uncertain macroeconomic conditions, including COVID-19 and the Russia-Ukraine conflict. Management said COVID-19 had not materially adversely affected results to date, but future effects remained uncertain. Marketable securities carry interest-rate and principal-recovery risks; some cash balances may exceed FDIC insurance limits. The company also recorded foreign-exchange transaction losses.
Investor verification points
- Track whether customer and ARR growth translate into improving GAAP operating margins and profitability, given rising operating costs and stock-based compensation.
- Review cash generation against deferred commission spending, investment purchases, lease payments and purchase commitments.
- Verify ongoing liquidity and financing needs after expiration of the SVB credit facility.
- Assess customer concentration and expansion trends, third-party platform/API dependence, and the effect of macroeconomic or regulatory changes.
- Compare non-GAAP performance measures with GAAP results and review the company’s assumptions about future losses and cash sufficiency.