Sprout Social, Inc. Q1 FY2023 earnings

Sprout Social opened fiscal 2023 with revenue of $75.2 million, up 31% from $57.4 million in the prior-year quarter. Subscription revenue did nearly all the work, while professional services and other revenue fell 28%. Gross profit climbed 34% to $58.3 million, and gross margin reached 77.6%, up from 75.6% a year earlier. The adjusted picture looks different. Non-GAAP operating income was $1.7 million against a non-GAAP operating loss of $1.2 million in the prior-year quarter, and non-GAAP net income was $3.4 million against a non-GAAP net loss of $1.4 million.

GAAP results remain unprofitable. Operating loss widened to $11.9 million from $9.6 million a year earlier, and net loss widened to $10.3 million from $9.8 million. Diluted loss per share was $0.19 against $0.18. Operating margin was -15.9% compared with -16.7%. Stock-based compensation, which the company strips out to reach its non-GAAP numbers, totaled $13.7 million, up from $8.4 million, and that gap is the main reason the two sets of results diverge.

Cash generation was a bright spot. Operating cash flow was $8.3 million, up 53.4% from $5.4 million. Capital expenditures were $0.38 million. Free cash flow, a non-GAAP measure, was $7.9 million compared with $5.1 million. Deferred revenue of $109.1 million rose 42.5%, and remaining performance obligations of $187.8 million rose 62.0%. Cash and equivalents plus marketable securities totaled $187.2 million as of March 31, 2023, up from $185.8 million at December 31, 2022.

ARR reached $309.9 million, up 30%. Customer counts tell the strategy story. Total customers rose 3% to 33,861. Customers contributing more than $10,000 in ARR grew 33% to 7,107, and those contributing more than $50,000 grew 46% to 1,008. At the low end, customers contributing less than $2,000 in ARR fell 31% to 10,350, and churn from those non-core accounts cost roughly $6 million in ARR. Accounts spending at least $2,000 now make up more than 95% of total ARR and grew ARR 35% year over year.

Guidance points to continued growth. For the second quarter of 2023, the company guides to total revenue growth of 28% year over year, with services revenue lower than the prior-year second quarter. It guides a second-quarter non-GAAP operating loss of $1.8 million to $1.5 million and a non-GAAP net loss per share of $0.02 on about 55.7 million weighted-average shares. For the full year 2023, the company guides to total revenue growth of 31% and lifted its ARR target, saying full-year ARR growth will exceed reported revenue growth by at least 225 basis points, up from a prior forecast of at least 200 basis points, which implies growth of greater than 33%. Full-year non-GAAP operating income is guided to $2.1 million to $2.4 million, and non-GAAP net income per share to $0.07 to $0.08 on roughly 56.0 million shares.

The quarter also included the Repustate acquisition, which closed in January for total consideration of about $8.4 million, including roughly $6.8 million in cash paid at closing. Management credits a November 2022 price increase with lifting average revenue per customer while slowing growth in the total customer count, and the company lists price-related demand and retention risk among its leading concerns. Other named risks include platform, API or social network outages, dependence on unpaid acquisition channels, cybersecurity and data breaches, shifting privacy rules, and macroeconomic pressure such as recession risk, inflation, higher interest rates and bank failures. Revenue from non-U.S. customers was about 27% of the total.