Sprout Social, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited consolidated results. Sprout Social provides a cloud-based social media management platform and earns almost all revenue from subscriptions.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $31.4m | $24.8m | $61.9m | $48.1m |
| Revenue growth | 27% (35% organic) | — | 29% (38% organic) | — |
| Gross profit / margin | $23.1m / 74% | $18.5m / 75% | $45.4m / 74% | $36.1m / 75% |
| Operating loss | $(8.3)m | $(10.9)m | $(19.3)m | $(16.2)m |
| Net loss | $(8.3)m | $(10.8)m | $(18.8)m | $(15.9)m |
| Basic and diluted loss per share | $(0.16) | $(0.64) | $(0.37) | $(0.95) |
| Operating cash flow | Not separately stated in summary tables | — | $(8.5)m | $(6.4)m |
| Free cash flow (non-GAAP) | $(4.5)m | $(2.8)m | $(9.4)m | $(6.8)m |
At June 30, 2020, cash and cash equivalents were $79.8m and marketable securities were $49.7m. Current assets were $154.4m against current liabilities of $49.7m. Total liabilities were $72.8m, including $24.8m of operating lease liabilities; there was no principal outstanding on the $40m revolving credit facility. The company reported an accumulated deficit of $134.2m.
Material changes versus comparable periods
- Quarterly revenue rose 27%, driven by new customers and expansion of users, profiles, and products within existing customers. Customer count increased to 24,356 from 22,418; customers exceeding $10,000 in ARR increased to 2,544 from 1,650.
- Q2 net loss narrowed year over year, but six-month net loss widened. Q2 operating expenses were lower in general and administrative expense, partly because Q2 2019 included a CEO restricted-stock award that immediately vested; for the first half, higher personnel, bad-debt, and other costs outweighed that comparison benefit.
- Gross margin declined one percentage point in both comparisons, to 74%, as cost of revenue grew faster than revenue. Six-month bad-debt expense increased by $0.7m, reflecting higher receivables and management’s assessment of COVID-19 payment risk.
- Cash and cash equivalents fell from $135.3m at year-end 2019, while the company invested $49.7m in marketable securities. Total cash, equivalents, and marketable securities were approximately $129.5m at June 30.
Outlook, risks, and unusual items
- No specific numeric revenue or earnings guidance is provided. Management expects operating losses and negative operating cash flows for the foreseeable future as it invests in growth. It believes existing cash and equivalents will meet operating and capital needs for at least 12 months.
- Management said COVID-19 had not materially affected operating or financial performance through the first half, but future effects remain uncertain. Risks include reduced customer marketing budgets, slower sales, nonpayment, renewals or cancellations, and further bad-debt expense.
- Management reported $50.9m of remaining performance obligations at June 30, of which 86% was expected to be recognized in the next 12 months. This is not a guarantee of future revenue.
- Non-cancellable purchase commitments for data and services totaled $70.0m; contractual obligations including operating leases totaled $103.8m. A new Seattle office lease carries an expected total commitment of $7.9m.
- Privacy and data-transfer regulation is a material risk. The filing notes the July 2020 invalidation of the EU-U.S. Privacy Shield and potential costs or operational changes to establish lawful transfer mechanisms; it also identifies CCPA compliance risks.
- Disclosure controls were deemed ineffective at June 30 because a previously identified material weakness in internal control over financial reporting had not been remediated. Management said additional review procedures supported the fairness of the reported statements, while remediation and testing continue.
- Unusual compensation item: a CEO market-capitalization-triggered RSU award resulted in $1.4m of stock-based compensation in Q1 2020; the company expected a further $0.4m of related expense.
Important facts for investors to verify
- Whether customer growth, expansion, ARR, and renewals remain strong as COVID-19 effects evolve; reported total ARR was $130.8m and organic ARR was $129.4m.
- Whether receivables quality and bad-debt expense worsen, and how much of remaining performance obligations converts to recognized revenue.
- Cash burn, investment spending, and liquidity against the company’s stated 12-month sufficiency expectation and substantial lease and purchase commitments.
- Progress in remediating and validating the material weakness and restoring effective disclosure controls.
- Costs and business effects of privacy-law compliance and replacement arrangements for cross-border data transfers.