Sprout Social, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Sprout Social sells subscription-based social media management software; subscription services generated 99% of quarterly revenue. Figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $96.8 million | $75.2 million | +29% |
| Gross profit / margin | $74.4 million / 77% | $58.3 million / 78% | Margin down 1 percentage point |
| Operating expenses | $87.6 million | $70.3 million | +25% |
| Operating loss | $13.3 million | $11.9 million | Loss widened |
| Net loss | $13.6 million | $10.3 million | Loss widened |
| Basic and diluted loss per share | $0.24 | $0.19 | Loss per share increased |
| Operating cash flow | $11.2 million | $8.3 million | +$2.9 million |
| Non-GAAP free cash flow | $11.3 million | $7.9 million | +$3.4 million |
Subscription revenue grew 28%; professional services revenue was $1.0 million. Higher-tier customers were a key growth driver: customers contributing over $10,000 in ARR increased 24% to 8,823, and those over $50,000 in ARR increased 44% to 1,449. The company says total customer count declined year over year, while it no longer considers ARR and total customers key performance indicators or publicly discloses them.
Stock-based compensation was $18.1 million, up from $13.7 million. Non-GAAP operating income was $6.0 million versus $1.7 million, and non-GAAP net income was $5.7 million versus $3.4 million; these measures exclude specified costs, including stock compensation and Tagger-related acquired-intangible amortization, and are not substitutes for GAAP results.
Liquidity, debt, and balance sheet
- At March 31, 2024, cash and cash equivalents were $69.2 million, restricted cash was $4.3 million, and marketable securities totaled $26.0 million. The company reported total cash, cash equivalents, and restricted cash of $73.4 million in its cash flow statement.
- Accounts receivable was $50.4 million; current liabilities were $182.4 million, including $146.4 million of current deferred revenue. Deferred revenue is generally billed in advance and is not equivalent to debt.
- Debt under the $100 million senior secured revolving facility was $45.0 million, down $10.0 million during the quarter. The outstanding borrowing rate was approximately 8.2%. The facility matures August 1, 2028.
- The company reported $290.0 million of remaining performance obligations, with 73% expected to be recognized within 12 months. It was compliant with credit-agreement covenants at quarter-end.
- Operating cash flow was supported in part by a $13.0 million decrease in accounts receivable and a $5.6 million increase in deferred revenue. Investing cash flow was positive $20.1 million, mainly reflecting maturities of marketable securities; financing cash flow was negative $11.5 million, primarily from debt repayment and employee tax withholding on equity awards.
Material changes and unusual items
- Effective January 1, 2024, Sprout changed the estimated amortization period for sales commissions from three years to five years. This prospective estimate change reduced Q1 sales and marketing expense by $4.4 million and increased basic and diluted earnings per share by $0.08.
- Revenue growth was driven principally by larger customers. Sales and marketing expense rose 21%, research and development rose 33%, and general and administrative expense rose 25%; management cited increased headcount and, in part, higher stock compensation.
- Gross margin fell from 78% to 77%, with subscription cost of revenue increasing 33%, including higher data-provider fees and acquired-technology amortization.
- Interest expense increased to $1.0 million from $28,000, while interest income declined to $1.0 million from $2.0 million. Net interest expense was approximately $11,000, versus net interest income of $2.0 million a year earlier.
- The 2023 Tagger acquisition expanded the company into influencer marketing. Its preliminary purchase-price allocation remained subject to revision, principally for income taxes. The company paid the $1.5 million Repustate purchase-price holdback in January 2024.
Outlook, commentary, and risks
The filing provides no quantified quarterly or full-year revenue or earnings guidance. Management expects continued investment in research and development, sales and marketing, and general and administrative functions, and expects operating losses to continue for the foreseeable future. It believes existing cash and cash equivalents will meet operating and capital needs for at least the next 12 months, while noting that future needs depend on growth, customer renewals, spending plans, and macroeconomic conditions.
Management said macroeconomic conditions—including inflation, high interest rates, geopolitical conflict, and market uncertainty—had not materially harmed results to date, but remain a source of uncertainty. Key risks include customer acquisition and retention, competition and product innovation, access to third-party social-network APIs and data, privacy and cybersecurity compliance, AI-related scrutiny, international expansion, acquisition integration, employee retention, and managing secured debt. The credit facility includes minimum-liquidity and recurring-revenue covenants, along with other restrictions. No material pending legal proceedings were reported.
Investor verification priorities
- Check whether subscription growth and expansion among larger customers continue, particularly as the company reports total customers have declined.
- Assess the effect of the five-year commission amortization estimate: it reduced quarterly sales and marketing expense by $4.4 million, a material comparison factor.
- Track GAAP losses, stock-based compensation, gross margin, and cash conversion alongside the company’s non-GAAP measures.
- Monitor the $45 million floating-rate debt balance, covenant compliance, and liquidity relative to the facility’s minimum requirements.
- Review Tagger’s integration and final purchase-price allocation, as well as the company’s ability to sustain growth amid higher operating costs and macroeconomic uncertainty.