Sprout Social, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Sprout Social provides cloud-based social media management software and reported results against the three months ended March 31, 2022.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $75.2 million | $57.4 million | Up 31% |
| Subscription revenue | $74.7 million | $56.8 million | Up 32% |
| Gross profit / margin | $58.3 million / 78% | $43.4 million / 76% | Margin up 2 percentage points |
| Operating loss | $11.9 million | $9.6 million | Loss widened |
| Net loss | $10.3 million | $9.8 million | Loss widened |
| Operating cash flow | $8.3 million | $5.4 million | Increased |
| Free cash flow, non-GAAP | $7.9 million | $5.1 million | Increased |
Operating expenses were $70.3 million, up 32%, with sales and marketing increasing 44% and research and development increasing 37%. Stock-based compensation was $13.7 million, versus $8.4 million. Interest income rose to $2.0 million from $0.1 million, reflecting higher interest rates and investment balances. GAAP diluted loss per share was $0.19, compared with $0.18.
At March 31, 2023, cash and cash equivalents were $78.4 million and marketable securities totaled $108.8 million; accounts receivable was $36.7 million. Total liabilities were $164.9 million, including $20.9 million of recorded operating lease liabilities. The filing reports no outstanding borrowings. Cash and cash equivalents declined $1.5 million during the quarter. Management stated that existing cash and cash equivalents should cover operating and capital needs for at least 12 months.
Business developments and comparison with prior period
- Revenue growth was primarily attributed to new customer additions and expansion within existing accounts. Customers increased to 33,861 from 32,800; ARR rose to $309.9 million from $239.1 million.
- Customers contributing more than $10,000 of ARR increased to 7,107 from 5,349; those contributing more than $50,000 increased to 1,008 from 692.
- A November 2022 price increase contributed to higher average revenue per customer but reduced the growth rate of total customers; management expects this trend to continue while it focuses on higher-value customers.
- Sprout acquired Repustate on January 19, 2023, for approximately $8.4 million in total consideration, including a $1.6 million holdback. The acquisition is intended to enhance social listening, customer care, sentiment analysis, NLP and AI capabilities. The preliminary allocation includes $6.7 million of goodwill; the acquired business’s reported impact was not material.
Outlook, risks and commitments
No specific quarterly or annual revenue or earnings guidance is provided in the filing. Management expects to continue investing in the business and to incur net losses for the foreseeable future; it also notes that operating cash flow could turn negative. Planned investment includes product development and sales and marketing. Management said macroeconomic conditions had not materially adversely affected performance to date but create ongoing uncertainty.
Key risks include customer acquisition, retention and expansion; the effects of pricing on demand and customer growth; dependence on third-party social network APIs and data access, including Twitter; competition, product innovation and data security; and macroeconomic pressures such as inflation, higher rates and possible recession. The company reported no material pending legal proceedings and no material changes to other risk factors disclosed in its 2022 Form 10-K beyond the risks described in this filing.
At quarter-end, non-cancellable operating lease payments totaled $24.4 million, with $3.5 million expected within 12 months. Minimum purchase commitments, primarily for data and services, totaled $17.4 million, with $12.4 million expected within 12 months. Marketable securities were investment grade; the company also noted that some cash investments may exceed FDIC coverage limits or be uninsured.
Important facts for investors to verify
- Whether revenue growth and ARR expansion continue, particularly among larger customers, and how the prior-year price increase affects new customer growth, renewals and spending.
- Whether rising operating expenses—especially sales and marketing, research and development, and stock-based compensation—translate into improving operating leverage and a path to GAAP profitability.
- The quality and sustainability of positive operating cash flow and free cash flow, including the contribution from deferred revenue and the effect of deferred commissions and other working-capital movements.
- Final purchase-price allocation and integration outcomes for Repustate, including the preliminary goodwill and intangible-asset valuations.
- Any changes in third-party API access, data-provider costs, customer demand, or liquidity and investment risk that could affect results.