Sprout Social, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Sprout Social provides a cloud-based social media management platform, earning nearly all revenue from subscriptions. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the same periods in 2022.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $79.3 million | $61.4 million | $154.5 million | $118.9 million |
| Gross profit / margin | $61.1 million / 77% | $46.3 million / 75% | $119.4 million / 77% | $89.7 million / 75% |
| Operating loss | $14.9 million | $14.5 million | $26.9 million | $24.1 million |
| Net loss | $13.1 million | $14.6 million | $23.3 million | $24.4 million |
| Net loss per share, diluted | $0.24 | $0.27 | $0.42 | $0.45 |
| Operating cash flow | $6.3 million | $1.3 million | $14.6 million | $6.7 million |
| Free cash flow, company-defined non-GAAP | $6.0 million | $0.7 million | $13.9 million | $5.8 million |
At June 30, cash and cash equivalents were $74.4 million, restricted cash was $2.8 million, and marketable securities totaled $118.1 million. Accounts receivable was $42.3 million. Total current assets were $259.3 million versus current liabilities of $157.7 million. Deferred revenue was $116.7 million in total. The balance sheet reported no borrowings; subsequent borrowing is described below.
Material changes and operating trends
- Q2 revenue rose 29% year over year; subscription revenue rose 30%. For the first half, revenue grew 30%, with subscriptions representing 99% of sales.
- Gross margin improved to 77% from 75% in both the quarter and first half. Operating expenses increased 25% in Q2 and 28% in the first half, led by sales and marketing and research and development spending.
- GAAP net loss narrowed, but operating loss increased in the first half. Interest income rose substantially, to $2.1 million in Q2 and $4.2 million for the first half, primarily due to higher interest rates and investment balances.
- Cash from operations improved year over year. First-half investing cash outflow was $17.4 million, including $6.4 million net cash paid for the Repustate acquisition and net purchases of marketable securities. Cash, cash equivalents and restricted cash declined $2.7 million during the first half.
- Customer count decreased to 33,159 from 33,620 year over year, while ARR increased to $326.1 million from $256.1 million. Customers above $10,000 ARR rose 27% to 7,391; those above $50,000 ARR rose 48% to 1,119. Management cited the November 2022 price increase and greater focus on higher-value customers; the increase contributed to higher average revenue per customer and a lower total customer count.
- Stock-based compensation was $16.4 million in Q2 and $30.0 million in the first half, versus $12.7 million and $21.1 million, respectively, in 2022. The company’s non-GAAP measures exclude stock-based compensation and acquisition-related expense; Q2 non-GAAP operating income was $1.9 million and non-GAAP net income was $3.8 million.
Outlook, acquisitions, and risks
- Management expects to continue investing in the business and to incur net losses for the foreseeable future. It believes existing cash and cash equivalents will fund operating and capital needs for at least 12 months, while noting macroeconomic uncertainty and that future capital needs depend on growth, spending, renewals, and other factors. The filing provides no numerical revenue or earnings guidance.
- Repustate was acquired in January 2023 for approximately $8.4 million of consideration, including a holdback. Its technology adds social listening, sentiment analysis, natural-language processing, and AI capabilities; its reported financial impact was not material.
- After quarter-end, Sprout acquired Tagger Media on August 2, 2023, for $140 million in cash, subject to customary adjustments. On August 1 it borrowed $75 million under a new $100 million senior secured revolving facility maturing in 2028. The facility is variable-rate and secured by substantially all company assets. Covenants include minimum liquidity and recurring-revenue-growth requirements.
- Remaining performance obligations were $206.4 million at June 30; 74% was expected to be recognized within 12 months. Operating lease liabilities were $20.1 million on the balance sheet, with $23.2 million of undiscounted future minimum payments; additional data and services purchase commitments totaled $10.7 million.
- Key disclosed risks include customer retention and expansion, price sensitivity, dependence on third-party social-network APIs and data access, macroeconomic conditions, competition, privacy and security, and acquisition integration. The company reported no material pending legal proceedings and no material indemnification obligations at June 30. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Track whether ARR and higher-value customer growth can continue despite the decline in total customer count and the effects of pricing changes.
- Assess the quality and sustainability of operating cash flow and free cash flow, including the effects of deferred revenue, deferred commissions, and substantial stock-based compensation.
- Review the Tagger acquisition’s final purchase accounting, integration results, and contribution to growth; evaluate the impact of the $75 million borrowing, variable interest rates, secured collateral, and facility covenants.
- Monitor gross-margin trends, rising operating expenses, and the path to GAAP profitability; distinguish company-defined non-GAAP results from GAAP losses.
- Confirm liquidity and covenant headroom after the acquisition, and monitor customer renewal behavior, macroeconomic exposure, and changes to third-party API access or terms.