Sprout Social, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Balance-sheet comparisons are with December 31, 2020. Sprout Social provides cloud-based social media management software, primarily through subscriptions.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $40.8 million | $30.5 million; up 34% |
| Subscription revenue | $40.4 million | $30.3 million; up 33% |
| Gross profit / margin | $30.8 million / 76% | $22.3 million / 74% |
| Operating expenses | $37.0 million | $33.3 million |
| Operating loss | $6.2 million | $10.9 million |
| Net loss / diluted loss per share | $6.4 million / $0.12 | $10.5 million / $0.21 |
| Operating cash flow | $3.6 million provided | $4.5 million used |
| Free cash flow (non-GAAP) | $3.4 million | $4.8 million used |
At March 31, cash and cash equivalents were $102.3 million and marketable securities were $65.5 million, totaling $167.8 million. Current assets were $200.9 million and current liabilities $67.6 million. The company had no outstanding borrowings on its $40 million revolving credit facility, which matures January 31, 2022; it reported compliance with facility covenants. Total liabilities were $90.8 million, including $25.5 million of operating lease liabilities.
Changes and operating metrics
- Revenue growth reflected new customers and expansion in existing accounts. Customers increased to 28,122 from 24,083 year over year.
- Total ARR was $172.0 million, up from $124.6 million; organic ARR was $171.0 million, up from $123.1 million. ARR is a company-defined operating metric, not GAAP revenue.
- Customers contributing more than $10,000 in ARR rose to 3,514 from 2,404.
- Sales and marketing expense rose 31% to $18.2 million, while research and development rose 14% to $8.3 million. General and administrative expense fell 12% to $10.6 million, partly because prior-year expense included CEO market-capitalization-based RSU vesting costs and higher credit-loss reserves.
- Cash declined $12.2 million during the quarter, primarily reflecting $16.3 million of net marketable-securities purchases; this was partly offset by positive operating cash flow.
Outlook, risks and notable items
- Management expects operating losses as it continues investing in the business and believes existing cash and cash equivalents will cover operating and capital needs for at least 12 months. The filing provides no specific quarterly or annual revenue or earnings guidance.
- Management said COVID-19 had not materially affected operations or financial performance in the periods reported, but future effects on customer budgets, payment capacity and sales cycles remain uncertain.
- Key risks include attracting and retaining customers, competition, product innovation, reliance on third-party social-network APIs and data, data security and privacy regulation, international expansion, hiring, and the ability to manage expenses and generate positive cash flow.
- Remaining performance obligations were $74.9 million, with 85% expected to be recognized within 12 months. The company also reported $58.1 million of non-cancellable purchase commitments for data and services and $31.4 million of future minimum lease payments.
- There were no material pending legal proceedings or material indemnification obligations reported. A $1.7 million receipt from disgorgement of stockholder short-swing profits was recorded in additional paid-in capital.
Important facts for investors to verify
- Whether customer, ARR and larger-customer growth continues, and how much growth comes from expansions versus new customers.
- Whether improving gross margin and cash generation persist as sales, marketing and product-development investments increase.
- How operating losses, stock-based compensation and deferred sales commissions affect the path to profitability and cash flow.
- Whether liquidity remains adequate against lease and purchase commitments, and the status and terms of the revolving facility as it approaches maturity.
- How customer demand, third-party platform/API access, privacy requirements and COVID-19-related conditions affect future results; management’s outlook is subject to these uncertainties.