Sprout Social, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Sprout Social provides subscription-based social media management software; subscriptions generated 99% of revenue. The company reported more than 34,000 customers and operates as one segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $65.3 million | $49.1 million | $184.2 million | $134.6 million |
| Revenue growth | 33% | — | 37% | — |
| Gross profit / margin | $50.0 million / 77% | $36.7 million / 75% | $139.7 million / 76% | $101.1 million / 75% |
| Operating loss | $(14.4) million | $(6.8) million | $(38.5) million | $(18.4) million |
| Net loss | $(13.9) million | $(7.0) million | $(38.3) million | $(18.8) million |
| Basic and diluted loss per share | $(0.25) | $(0.13) | $(0.70) | $(0.35) |
| Operating cash flow | $1.0 million | $4.4 million | $7.7 million | $12.3 million |
| Free cash flow, non-GAAP | $0.5 million | $4.2 million | $6.3 million | $11.7 million |
- Growth and customer mix: Q3 subscription revenue rose 33%, which management attributed to new customers and expansion in existing accounts. Customer count increased to 34,258 from 30,705 year over year. ARR was $271.3 million, up from $204.6 million. Customers above $10,000 ARR increased 40% to 6,111; those above $50,000 ARR increased 76% to 843.
- Expense and profitability trend: Q3 operating expenses rose 48% to $64.4 million, outpacing revenue growth. R&D increased 54%, sales and marketing 52%, and general and administrative 35%. Stock-based compensation was $13.0 million in Q3 and $34.0 million for the nine-month period, versus $5.2 million and $14.6 million, respectively, in 2021.
- Cash, liquidity and debt: At September 30, cash and equivalents were $95.1 million and marketable securities were $86.7 million; accounts receivable was $26.7 million. Current assets were $225.2 million and current liabilities $119.5 million. The company had no outstanding borrowings; its $40 million revolving credit facility expired January 31, 2022. Management said existing cash and equivalents should cover operating and capital needs for at least 12 months.
- Cash movement: Cash and equivalents declined $12.0 million over the first nine months to $95.1 million. Investing activities used $18.8 million, primarily reflecting net purchases of marketable securities. Operating cash flow fell from $12.3 million to $7.7 million, while free cash flow fell from $11.7 million to $6.3 million.
Changes, outlook and risks
- Compared with the prior-year quarter, the net loss nearly doubled and loss per share widened, despite higher revenue and gross margin. The operating loss margin widened to 22% from 14% of revenue. For the nine months, the operating loss margin widened to 21% from 14%.
- Management expects continued investment in the business and operating losses for the foreseeable future, including spending on R&D, sales and marketing, and administrative functions. The filing provides no quantified financial guidance.
- In November 2022, the company announced a price increase. Management warned this could reduce trial conversion, new customer acquisition, or customer counts, and could affect customer sentiment and competitiveness, even if average customer spend rises.
- Remaining performance obligations were $136.9 million, of which 81% was expected to be recognized within 12 months. Contractual commitments included $26.5 million of future lease payments and $28.4 million of minimum purchase commitments, primarily for data and services; $24.8 million of purchase commitments was expected within 12 months.
- Key stated risks include customer acquisition, renewal and expansion; pricing and competition; access to third-party social-network APIs and data; macroeconomic and IT-spending conditions; privacy and security obligations; and the ability to innovate and manage growth. Non-U.S. customers accounted for approximately 28% of nine-month revenue.
- The company reported no material pending legal proceedings or material indemnification obligations. It reported effective disclosure controls and no material change in internal control over financial reporting. Available-for-sale securities generated a $0.5 million nine-month unrealized loss recorded in other comprehensive loss.
Important facts for investors to verify
- Whether customer, ARR and large-customer growth continues to translate into subscription revenue growth and durable renewals, particularly after the announced price increase.
- Whether expense growth, especially sales and marketing, R&D and stock-based compensation, moderates enough to improve GAAP operating leverage and profitability.
- Whether operating cash flow and free cash flow remain positive as deferred commissions, contractual commitments and investment needs evolve.
- The composition, maturity, credit exposure and valuation changes of the marketable-securities portfolio, and liquidity relative to lease and purchase obligations.
- Any subsequent updates to financial outlook, customer retention, price-increase effects, macroeconomic conditions, or reliance on third-party platforms and APIs.