Sprout Social, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results; it is an annual report, not a standalone Q4 filing. Amounts are in U.S. dollars.
Business context
Sprout Social sells subscription-based, cloud software for managing organizations’ social media engagement, publishing, analytics, listening and workflows. More than 26,000 customers across 100 countries used the platform at year-end. Subscription revenue represented 99% of FY 2020 revenue.
Financial and operating highlights
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $132.9 million | $102.7 million |
| Gross profit / gross margin | $98.0 million / 74% | $74.6 million / 73% |
| Operating loss | $32.0 million | $47.3 million |
| Net loss | $31.7 million | $46.8 million |
| Net cash used in operating activities | $11.4 million | $14.4 million |
| Free cash flow (non-GAAP) | $(15.4) million | $(15.2) million |
| Cash and cash equivalents, year-end | $114.5 million | $135.3 million |
- Revenue grew 29% year over year; management reported 36% organic growth, excluding specified legacy Simply Measured revenue. Total ARR rose 34% to $158.3 million; organic ARR was $157.2 million.
- Customers increased to 26,718 from 23,693. Dollar-based net retention was 110% in both years; excluding SMB customers, it was 117% versus 120%.
- Fourth-quarter revenue was $37.3 million and net loss was $5.9 million. Q4 gross margin was 75% and operating loss was $5.8 million.
- Year-end short-term investments were $49.4 million, in addition to cash; working capital was $135.8 million. The company had no outstanding borrowings under its $40 million SVB revolver and reported compliance with its covenants.
Changes versus prior year
- Revenue growth continued, while the gross margin improved by one percentage point. Operating and net losses narrowed substantially, partly because stock-based compensation fell to $11.1 million from $25.3 million; 2019 included IPO-related vesting expense.
- Operating cash use declined, but free cash flow remained negative. Investing cash outflow rose to $53.8 million, primarily reflecting purchases of short-term investments and Seattle office improvements.
- FY 2020 financing cash inflow included $42.1 million net proceeds from an August follow-on offering and $10.0 million from the IPO over-allotment. The company also reported $8.6 million of employee tax payments related to net settlement of stock awards.
Outlook, risks and notable items
- No formal revenue or earnings guidance is provided in this filing. Management expects continued investment and operating losses and negative operating cash flows for the foreseeable future, but believes existing cash and cash equivalents can meet operating and capital needs for at least 12 months.
- Management said COVID-19 did not materially affect FY 2020 operating or financial performance, while emphasizing uncertainty about future impacts on customer budgets, renewals, collections and sales cycles. The company recorded $2.0 million of bad-debt expense in 2020.
- Major risks include customer acquisition, retention and expansion; intense competition; dependence on third-party social-network APIs and data; cybersecurity and service availability, including reliance on AWS; and evolving privacy and data-transfer rules. The EU-U.S. Privacy Shield was invalidated in 2020; Sprout adopted standard contractual clauses for relevant EU transfers.
- Contractual obligations included $63.2 million of minimum data and services purchase commitments and $32.1 million of operating lease payments. The SVB revolver matures January 31, 2022, is secured by substantially all assets subject to exceptions, and includes covenants.
- The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; a previously identified material weakness was reported as remediated.
Important facts for investors to verify
- Whether ARR growth, customer growth and retention rates continue, particularly the 110% overall net retention rate.
- How quickly revenue growth translates into improved GAAP profitability and positive free cash flow, considering stock-based compensation and planned spending.
- Liquidity and cash conversion, including receivables and bad-debt trends, investment balances, and the timing of substantial purchase and lease commitments.
- Whether access to social-network APIs, cloud infrastructure and compliant cross-border data transfers remains reliable and economically viable.
- The terms and covenant headroom of the SVB facility, which had no balance outstanding at year-end but matures in January 2022.