Sprout Social, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; unaudited. Sprout Social provides a subscription-based social media management platform. Amounts below are in U.S. dollars; financial statement figures are shown in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $44.7 | $31.4 | $85.5 | $61.9 |
| Gross profit / margin | $33.5 / 75% | $23.1 / 74% | $64.4 / 75% | $45.4 / 74% |
| Operating loss | $(5.3) | $(8.3) | $(11.5) | $(19.3) |
| Net loss | $(5.4) | $(8.3) | $(11.8) | $(18.8) |
| Net loss per share, basic and diluted | $(0.10) | $(0.16) | $(0.22) | $(0.37) |
Subscription revenue was 99% of revenue. For the six months, operating cash flow was $8.0 million, versus cash used of $8.5 million a year earlier; free cash flow, a company-defined non-GAAP measure, was $7.5 million versus negative $9.4 million. Q2 operating cash flow was $4.4 million and free cash flow was $4.1 million. Six-month cash flow benefited in part from a $10.8 million increase in deferred revenue.
At June 30, cash and cash equivalents were $108.3 million and marketable securities were $63.2 million, compared with $114.5 million and $49.4 million, respectively, at year-end 2020. Total current assets were $205.1 million and current liabilities $73.0 million. The company had no outstanding borrowings under its $40 million revolving credit facility. Total liabilities were $95.5 million; these included $24.9 million of operating lease liabilities. Stockholders’ equity was $150.2 million.
Changes versus comparable periods
- Q2 revenue increased 42% year over year; six-month revenue increased 38%. Management attributed subscription growth to new customers and expansion of user seats, social profiles, products, and use cases among existing customers.
- Customers increased to 29,612 from 24,356 a year earlier. ARR, as defined by the company, rose to $189.1 million from $130.8 million; customers contributing more than $10,000 of ARR increased to 3,936 from 2,544.
- Gross margin improved one percentage point to 75% in both the quarter and first half. Operating losses narrowed as revenue growth outpaced total operating expense growth.
- Sales and marketing expense rose 40% in Q2 and 35% for the first half, reflecting higher personnel, commissions, and stock-based compensation. First-half general and administrative expense fell 5%, partly because prior-year expense included a CEO restricted-stock-unit award and higher credit-loss provisions.
- GAAP losses remained, while the company’s non-GAAP measure excluding stock-based compensation showed Q2 operating income of $0.1 million and net income of $0.002 million. These are company-defined supplemental measures, not substitutes for GAAP results.
Outlook, commentary, and risks
- No specific revenue or earnings guidance is provided in the filing. Management expects continued investment in research and development, sales and marketing, and general and administrative functions, and expects operating losses for the foreseeable future.
- Management stated that existing cash and cash equivalents should fund operating and capital needs for at least the next 12 months. Future capital needs depend on growth, renewals, billing patterns, investment plans, and market acceptance; additional financing may be needed and may not be available on acceptable terms.
- The company said COVID-19 had not materially affected performance or liquidity during the reported periods, but its future effects remain uncertain, including possible impacts on customers’ budgets and ability to pay.
- Key disclosed risks include customer acquisition and retention, competition, product innovation, access to third-party social-network APIs and data, privacy and security compliance, international expansion, employee retention, and managing growth and expenses.
- The $40 million SVB facility was undrawn and the company reported covenant compliance at June 30, 2021. It matures January 31, 2022 and includes financial and other covenants.
- Non-cancellable obligations totaled $83.4 million: $30.5 million of operating lease payments and $53.0 million of minimum data and services purchase commitments. The filing reported no material pending legal proceedings or material indemnification obligations.
- Unusual items included $1.7 million received in Q1 from disgorgement of stockholder short-swing profits, recorded in additional paid-in capital, and elevated stock-based compensation of $9.4 million for the first half, versus $6.0 million a year earlier.
Important facts for investors to verify
- Whether customer, ARR, and subscription growth persist, and how much growth comes from new customers versus expansion within existing accounts.
- Whether cash generation continues, considering deferred-revenue timing, deferred commission outlays, and contractual commitments.
- The company’s path to GAAP profitability and the significance of stock-based compensation and dilution; the Q2 non-GAAP result was approximately breakeven only after excluding that expense.
- Renewal, customer retention, and expansion trends, along with exposure to third-party platform/API access and data-provider costs.
- Facility maturity and refinancing or replacement plans, as well as compliance with its covenants and liquidity requirements.
- Potential changes in customer demand, collections, or operating costs arising from COVID-19 and other economic conditions.