Sprout Social, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Sprout Social provides cloud-based social media management software; subscription revenue is recognized over contract terms. The filing is unaudited.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $30.5 million | $23.4 million |
| Gross profit / margin | $22.3 million / 74% | $17.5 million / 75% |
| Operating loss | $10.9 million | $5.4 million |
| Net loss | $10.5 million | $5.2 million |
| Net loss per share, basic and diluted | $0.21 | $0.31 |
| Operating cash flow | $(4.5) million | $(3.9) million |
| Free cash flow, non-GAAP | $(4.8) million | $(4.0) million |
- Revenue grew 31% year over year; subscription revenue was $30.3 million, or 99% of total revenue. Management reported 41% organic revenue growth, excluding specified legacy Simply Measured revenue.
- Operating expenses rose 45% to $33.3 million. General and administrative expense nearly doubled to $12.1 million; the company attributed much of the increase to stock compensation, higher personnel costs and bad debt expense.
- Stock-based compensation was $3.5 million versus none reported in Q1 2019, including $1.4 million tied to the CEO’s market-capitalization-based award. Non-GAAP net loss was $7.0 million, excluding stock-based compensation.
- Customers increased to 24,083 from 21,718; customers with more than $10,000 in ARR rose to 2,404 from 1,525. Total ARR was $124.6 million versus $96.1 million, and organic ARR was $123.1 million versus $88.4 million.
Financial position and liquidity
- At March 31, cash and cash equivalents were $137.4 million; accounts receivable, net, was $12.3 million. Total assets were $198.5 million and total liabilities were $70.6 million. Accumulated deficit was $125.9 million.
- Cash increased $2.1 million during the quarter. Operating and investing activities used $4.5 million and $0.3 million, respectively; financing provided $6.9 million, including $10.0 million net proceeds from IPO over-allotment shares, partly offset by $3.1 million of employee tax payments related to equity awards.
- No principal was outstanding on the $40 million SVB revolving credit facility. The facility matures January 31, 2022; the company reported compliance with its covenants. Management said existing cash should cover operating and capital needs for at least 12 months.
- Contractual obligations included $32.7 million of operating lease payments and $73.4 million of minimum purchase commitments, principally for data and services. A new Seattle lease was recorded, adding a $5.5 million right-of-use asset and lease liability.
- Remaining performance obligations were $47.5 million at quarter-end, with 88% expected to be recognized within 12 months.
Changes, outlook and risks
- Revenue growth was driven by new customers and expansion within existing accounts. Gross margin declined one percentage point as cost of revenue grew faster than revenue.
- Management said COVID-19 had not materially affected Q1 operating or financial performance or liquidity, but its future impact was uncertain. Potential effects include reduced customer marketing budgets, slower sales cycles, cancellations, and delayed or missed payments. Bad debt expense increased partly due to consideration of COVID-19 risks.
- Management expects continued investment and operating losses and negative operating cash flow for the foreseeable future. No specific revenue or earnings guidance was provided.
- The filing reports no material pending legal proceedings or material indemnification obligations. Management stated there were no subsequent events requiring disclosure through May 7, 2020.
- Control concern: Disclosure controls and procedures were not effective at quarter-end because a previously identified material weakness in internal control over financial reporting remained unremediated. The weakness related to staffing and accounting expertise for complex and non-recurring transactions. Management said remediation efforts were ongoing and that the financial statements fairly presented the company’s financial position and results.
- Other risks include ongoing losses, competition, customer retention and expansion, reliance on third-party social network APIs and data, and the uncertain economic and market effects of COVID-19.
Most important facts for investors to verify
- Whether COVID-19 affects customer renewals, expansion, sales cycles, collections and bad debt beyond the first quarter.
- Whether revenue and ARR growth can continue while gross margin remains near 74% and operating expenses exceed revenue.
- Cash burn, the timing of any path to profitability, and the sufficiency of available cash under weaker operating conditions.
- Progress in remediating the material weakness and whether disclosure controls become effective.
- The impact of stock-based compensation, including CEO awards, on reported losses and share dilution.
- Commitments under leases and data/service purchase contracts, and compliance with the SVB facility covenants.