Sprout Social, Inc. Q3 FY2022 earnings

Sprout Social posted revenue of $65.31 million in the September 2022 quarter, up 33.0% from $49.09 million a year earlier. Gross profit rose 36.1% to $50.00 million, and gross margin improved to 76.6% from 74.9%. Through the first nine months of the fiscal year, revenue reached $184.17 million, up 36.8% from the prior-year period, and gross profit reached $139.72 million, up 38.2%. Annual recurring revenue stood at $271.3 million as of September 30, 2022, up 33% from the end of the third quarter of 2021.

Profitability moved the other way. GAAP operating loss widened to $14.38 million from $6.84 million, and operating margin fell to -22.0% from -13.9%. GAAP net loss widened to $13.93 million from $6.99 million, and diluted loss per share widened to $0.25 from $0.13. The adjusted picture is far less severe. Non-GAAP operating loss was $1.4 million versus $1.6 million, non-GAAP net loss was $1.0 million versus $1.8 million, and non-GAAP net loss per share was $0.02 versus $0.03. Stock-based compensation sits between the two views, so reported losses widened while adjusted losses narrowed. Headcount explains much of the gap. Research and development headcount rose 42%, sales and marketing headcount rose 46% and general and administrative headcount rose 36% year over year. Management said it expects to keep investing and to generate net losses for the foreseeable future.

Customer metrics firmed up. Total customers reached 34,258 as of September 30, 2022, up 12% from a year earlier. Customers contributing more than $10,000 in ARR grew 40% to 6,111, and customers contributing more than $50,000 in ARR grew 76% to 843. Deferred revenue was $84.78 million, up 51.7% from the prior-year quarter, and remaining performance obligations were $136.90 million, up 57.0%. Those balances support the view that multi-year commitments and larger accounts are carrying more of the growth.

Cash generation slowed. Net cash provided by operating activities was $1.05 million in the quarter, down 76.0% from $4.36 million a year earlier, and $7.72 million for the nine months, down 37.5% from $12.34 million. Free cash flow, which the company defines as operating cash flow less purchases of property and equipment, was $0.5 million in the quarter against $4.2 million a year earlier. The CFO called it a seventh consecutive quarter of positive free cash flow. Capital expenditures were $0.51 million, up 162.2% from $0.20 million.

Guidance for the fourth quarter of 2022 points to revenue growth of more than 31% year over year and a non-GAAP operating loss between $1.0 million and $0.9 million, with non-GAAP operating margin improvement of more than 300 basis points. Non-GAAP net loss per share is guided to $0.02 on roughly 54.8 million weighted-average shares. For the full year 2022, the company expects revenue growth of more than 35%, a non-GAAP operating loss between $5.5 million and $5.4 million, which implies 130 basis points of year-over-year operating margin improvement, and non-GAAP net loss per share of $0.10 on about 54.6 million shares. Sprout does not provide a reconciliation of this non-GAAP guidance to comparable GAAP measures.

Risks run from demand to infrastructure. Management noted that a November 2022 price increase could reduce the total customer count or new customer additions even as average spend per new customer rises. It also flagged unstable market and economic conditions, including recession risk, inflation, labor shortages, supply chain issues, higher interest rates and the geopolitical impact of Russia's invasion of Ukraine. The platform depends on APIs from social networks such as Twitter, Facebook, Instagram and TikTok, so any interruption or change in access terms matters. Cybersecurity attacks, data breaches and evolving privacy regulation are named risks as well. Non-U.S. customers produced about 28% of revenue in the first nine months of the fiscal year, which adds currency and execution exposure.