Sprout Social, Inc. - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-Q
_________________________________
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from to
Commission File Number 001-39156
__________________________________
SPROUT SOCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 27-2404165 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 131 South Dearborn St. | , | Suite 700 | ||||||
Chicago | , | Illinois | ||||||
60603 | ||||||||
(Address of principal executive offices and zip code) | ||||||||
(866) | 878-3231 | |||||||
(Registrant's telephone number, including area code) | ||||||||
__________________________________
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Class A Common Stock, $0.0001 par value per share | SPT | The Nasdaq Stock Market LLC | ||||||
__________________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No
As of April 28, 2023, there were 48,047,160 shares and 7,350,582 shares of the registrant’s Class A and Class B common stock, respectively, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
| Page | ||||||||
| PART I - FINANCIAL INFORMATION | ||||||||
Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II - OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
1
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q (“Quarterly Report”) not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements about Sprout Social, Inc.’s (“Sprout Social”) plans, objectives, strategies, financial performance and outlook, trends, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “explore,” “intend,” “long-term model,” “might,” “outlook,” “plan,” “potential,” “predict,” “project,” “should,” “strategy,” “target,” “will,” “would,” or the negative of these terms and similar expressions intended to identify forward-looking statements, as they relate to Sprout Social, our business and our management. Forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by Sprout Social and our management based on their knowledge and understanding of the business and industry, are inherently uncertain. These forward-looking statements should not be read as a guarantee of future performance or results, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under “Part II—Item IA. Risk Factors” and “Part I—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in our most recent Annual Report on Form 10-K under Part I—Item IA, “Risk Factors” and the risks and uncertainties related to the following:
•our ability to attract, retain, and grow customers;
•our ability to access third-party APIs and data on favorable terms;
•our future financial performance, including our revenue, cost of revenue, gross profit, operating expenses, ability to generate positive cash flow, and ability to achieve and maintain profitability;
•our ability to increase spending of existing customers;
•the evolution of the social media industry, including adapting to new regulations and use cases;
•our ability to innovate and provide a superior customer experience;
•worldwide economic conditions, including the macroeconomic impacts of the COVID-19 pandemic, the ongoing conflict between Russia and Ukraine, current and future potential banking failures, and their impact on information technology spending;
•our ability to securely maintain customer and other third-party data;
•our ability to maintain and enhance our brand;
•the effects of increased competition from our market competitors or new entrants to the market;
•our estimates of the size of our market opportunities;
•our ability to comply with modified or new laws and regulations applying to our business, including data privacy and security regulations;
•our ability to successfully enter new markets, manage our international expansion and comply with any applicable laws and regulations;
2
•our ability to maintain, protect and enhance our intellectual property;
•our ability to attract and retain qualified employees and key personnel; and
•our ability to effectively manage our growth and future expenses.
These factors are not necessarily all of the important factors that could cause our actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update forward-looking statements to reflect actual results, changes in assumptions, laws or other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.
In addition, statements such as "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this report. While we believe such information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
| Sprout Social, Inc. | |||||||||||
| Condensed Consolidated Balance Sheets (Unaudited) | |||||||||||
| (in thousands, except share and per share data) | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | $ | 78,411 | $ | 79,917 | |||||||
| Marketable securities | 99,050 | 92,929 | |||||||||
Accounts receivable, net of allowances of $1,766 and $1,789 at March 31, 2023 and December 31, 2022, respectively | 36,699 | 35,833 | |||||||||
| Deferred commissions | 21,707 | 20,369 | |||||||||
| Prepaid expenses and other assets | 10,567 | 6,418 | |||||||||
| Total current assets | 246,434 | 235,466 | |||||||||
| Marketable securities, noncurrent | 9,709 | 12,995 | |||||||||
| Property and equipment, net | 11,620 | 11,949 | |||||||||
| Deferred commissions, net of current portion | 20,201 | 19,638 | |||||||||
| Operating lease, right-of-use assets | 9,148 | 9,503 | |||||||||
| Goodwill | 9,012 | 2,299 | |||||||||
| Intangible assets, net | 3,440 | 2,006 | |||||||||
| Other assets, net | 66 | 64 | |||||||||
| Total assets | $ | 309,630 | $ | 293,920 | |||||||
Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable | $ | 5,723 | $ | 4,988 | |||||||
| Deferred revenue | 109,098 | 95,740 | |||||||||
| Operating lease liabilities | 3,580 | 3,499 | |||||||||
| Accrued wages and payroll related benefits | 13,335 | 14,257 | |||||||||
| Accrued expenses and other | 14,571 | 14,322 | |||||||||
| Total current liabilities | 146,307 | 132,806 | |||||||||
| Deferred revenue, net of current portion | 709 | 490 | |||||||||
| Operating lease liabilities, net of current portion | 17,369 | 18,287 | |||||||||
| Other noncurrent liabilities | 477 | — | |||||||||
| Total liabilities | 164,862 | 151,583 | |||||||||
| Commitments and contingencies (Note 6) | |||||||||||
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| Sprout Social, Inc. | ||
| Condensed Consolidated Balance Sheets (Unaudited) (cont’d) | ||
| (in thousands, except share and per share data) | ||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Stockholders’ equity | |||||||||||
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 50,873,771 and 48,005,966 shares issued and outstanding, respectively, at March 31, 2023; 50,413,415 and 47,562,911 shares issued and outstanding, respectively, at December 31, 2022 | 4 | 4 | |||||||||
Class B common stock, par value $0.0001 per share; 25,000,000 shares authorized; 7,577,526 and 7,370,582 shares issued and outstanding, respectively, at March 31, 2023; 7,667,376 and 7,460,432 shares issued and outstanding, respectively, at December 31, 2022 | 1 | 1 | |||||||||
| Additional paid-in capital | 415,123 | 401,419 | |||||||||
| Treasury stock, at cost | (33,832) | (32,733) | |||||||||
| Accumulated other comprehensive loss | (291) | (369) | |||||||||
| Accumulated deficit | (236,237) | (225,985) | |||||||||
| Total stockholders’ equity | 144,768 | 142,337 | |||||||||
Total liabilities and stockholders’ equity | $ | 309,630 | $ | 293,920 | |||||||
See Notes to Condensed Consolidated Financial Statements.
5
| Sprout Social, Inc. | ||
| Condensed Consolidated Statements of Operations (Unaudited) | ||
| (in thousands, except share and per share data) | ||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Revenue | |||||||||||
| Subscription | $ | 74,742 | $ | 56,780 | |||||||
| Professional services and other | 470 | 649 | |||||||||
| Total revenue | 75,212 | 57,429 | |||||||||
| Cost of revenue | |||||||||||
| Subscription | 16,633 | 13,757 | |||||||||
| Professional services and other | 242 | 234 | |||||||||
| Total cost of revenue | 16,875 | 13,991 | |||||||||
| Gross profit | 58,337 | 43,438 | |||||||||
| Operating expenses | |||||||||||
| Research and development | 17,876 | 13,065 | |||||||||
| Sales and marketing | 36,905 | 25,612 | |||||||||
| General and administrative | 15,489 | 14,370 | |||||||||
| Total operating expenses | 70,270 | 53,047 | |||||||||
| Loss from operations | (11,933) | (9,609) | |||||||||
| Interest expense | (28) | (71) | |||||||||
| Interest income | 2,020 | 123 | |||||||||
| Other expense, net | (209) | (108) | |||||||||
| Loss before income taxes | (10,150) | (9,665) | |||||||||
| Income tax expense | 102 | 90 | |||||||||
| Net loss | $ | (10,252) | $ | (9,755) | |||||||
| Net loss per share attributable to common shareholders, basic and diluted | $ | (0.19) | $ | (0.18) | |||||||
| Weighted-average shares outstanding used to compute net loss per share, basic and diluted | 55,176,425 | 54,277,676 | |||||||||
See Notes to Condensed Consolidated Financial Statements.
6
| Sprout Social, Inc. | ||
| Condensed Consolidated Statements of Comprehensive Loss (Unaudited) | ||
| (in thousands) | ||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss | $ | (10,252) | $ | (9,755) | |||||||
| Other comprehensive gain (loss): | |||||||||||
| Net unrealized gain (loss) on available-for-sale securities, net of tax | 78 | (160) | |||||||||
| Comprehensive loss | $ | (10,174) | $ | (9,915) | |||||||
See Notes to Condensed Consolidated Financial Statements.
7
| Sprout Social, Inc. | ||
| Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) | ||
| (in thousands, except share data) | ||
Voting Common Stock (Class A and B) | Additional Paid-in Capital | Treasury Stock | Accumulated other comprehensive loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2022 | 55,023,343 | $ | 5 | $ | 401,419 | 3,057,448 | $ | (32,733) | $ | (369) | $ | (225,985) | $ | 142,337 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | 13,704 | 13,704 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock from equity award settlement | 353,205 | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Taxes paid related to net share settlement of equity awards | 17,301 | (1,099) | (1,099) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive gain, net of tax | 78 | 78 | |||||||||||||||||||||||||||||||||||||||||||||
Net loss | (10,252) | (10,252) | |||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2023 | 55,376,548 | $ | 5 | $ | 415,123 | 3,074,749 | $ | (33,832) | $ | (291) | $ | (236,237) | $ | 144,768 | |||||||||||||||||||||||||||||||||
Voting Common Stock (Class A and B) | Additional Paid-in Capital | Treasury Stock | Accumulated other comprehensive loss | Accumulated Deficit | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2021 | 54,153,771 | $ | 5 | $ | 351,774 | 3,026,400 | $ | (30,824) | $ | — | $ | (175,745) | $ | 145,210 | |||||||||||||||||||||||||||||||||
Exercise of stock options | 13,545 | — | 6 | 6 | |||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 8,392 | 8,392 | |||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock from equity award settlement | 239,875 | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Taxes paid related to net share settlement of equity awards | 13,865 | (939) | (939) | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (160) | (160) | |||||||||||||||||||||||||||||||||||||||||||||
Net loss | (9,755) | (9,755) | |||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2022 | 54,407,191 | $ | 5 | $ | 360,172 | 3,040,265 | $ | (31,763) | $ | (160) | $ | (185,500) | $ | 142,754 | |||||||||||||||||||||||||||||||||
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| Sprout Social, Inc. | ||
| Condensed Consolidated Statements of Cash Flows (Unaudited) | ||
| (in thousands) | ||
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities | |||||||||||
| Net loss | $ | (10,252) | $ | (9,755) | |||||||
| Adjustments to reconcile net loss to net cash provided by operating activities | |||||||||||
| Depreciation of property and equipment | 708 | 696 | |||||||||
| Amortization of line of credit issuance costs | — | 30 | |||||||||
| Amortization of premium (accretion of discount) on marketable securities | (882) | 133 | |||||||||
| Amortization of acquired intangible assets | 366 | 261 | |||||||||
| Amortization of deferred commissions | 5,855 | 4,020 | |||||||||
| Amortization of right-of-use operating lease asset | 355 | 179 | |||||||||
| Stock-based compensation expense | 13,656 | 8,392 | |||||||||
| Provision for accounts receivable allowances | 353 | 91 | |||||||||
| Changes in operating assets and liabilities, excluding impact from business acquisition | |||||||||||
| Accounts receivable | (1,148) | 2,312 | |||||||||
| Prepaid expenses and other current assets | (4,098) | (2,868) | |||||||||
| Deferred commissions | (7,757) | (6,317) | |||||||||
| Accounts payable and accrued expenses | (1,589) | 1,541 | |||||||||
| Deferred revenue | 13,554 | 7,338 | |||||||||
| Lease liabilities | (837) | (651) | |||||||||
| Net cash provided by operating activities | 8,284 | 5,402 | |||||||||
| Cash flows from investing activities | |||||||||||
| Expenditures for property and equipment | (383) | (313) | |||||||||
| Payments for business acquisition, net of cash acquired | (6,432) | — | |||||||||
| Purchases of marketable securities | (30,078) | (66,085) | |||||||||
| Proceeds from maturity of marketable securities | 22,631 | 36,500 | |||||||||
| Proceeds from sale of marketable securities | 5,571 | — | |||||||||
| Net cash used in investing activities | (8,691) | (29,898) | |||||||||
| Cash flows from financing activities | |||||||||||
| Payments for line of credit issuance costs | — | (23) | |||||||||
| Proceeds from exercise of stock options | — | 6 | |||||||||
| Employee taxes paid related to the net share settlement of stock-based awards | (1,099) | (939) | |||||||||
| Net cash used in financing activities | (1,099) | (956) | |||||||||
| Net decrease in cash and cash equivalents | (1,506) | (25,452) | |||||||||
| Cash and cash equivalents | |||||||||||
| Beginning of period | 79,917 | 107,114 | |||||||||
| End of period | $ | 78,411 | $ | 81,662 | |||||||
See Notes to Condensed Consolidated Financial Statements.
9
| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
1.Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Sprout Social, Inc. (“Sprout Social” or the “Company”), a Delaware corporation, began operating on April 21, 2010 to design, develop and operate a web-based comprehensive social media management tool enabling companies to manage and measure their online presence. Customers access their accounts online via a web-based interface or a mobile application. Some customers also purchase the Company’s professional services, which primarily consist of consulting and training services. The Company’s fiscal year end is December 31. The Company’s customers are primarily located throughout the United States, and a portion of customers are located in foreign countries. The Company is headquartered in Chicago, Illinois.
Principles of Consolidation and Basis of Presentation
The unaudited condensed consolidated financial statements and accompanying notes were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable regulations of the United States Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The Company has prepared the unaudited condensed consolidated financial statements on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2022, and these unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair statement of the results of the interim periods presented but are not necessarily indicative of the results of operations to be anticipated for the full year or any future period. The consolidated balance sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures including certain disclosures required by GAAP on an annual basis. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and on other assumptions that its management believes are reasonable under the circumstances. Actual results could differ from those estimates. The Company’s estimates and judgments include, but are not limited to, the estimated period of benefit for incremental costs of obtaining a contract with a customer, the incremental borrowing rate for operating leases, calculation of allowance for credit losses, valuation of assets and liabilities acquired as part of business combinations, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others. The Company is not aware of any events or circumstances that would require an update to its estimates and judgments or a revision of the carrying value of its assets or liabilities as of May 3, 2023, the date of issuance of this Quarterly Report on Form 10-Q. Actual results could differ from those estimates.
10
| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
Summary of Significant Accounting Policies
The Company’s significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. There have been no significant changes to these policies during the three months ended March 31, 2023, except as noted below.
Business Combinations
The Company recognizes and measures the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date. Any excess or deficiency of the purchase consideration when compared to the fair value of the net assets acquired, if any, is recorded as goodwill or gain from a bargain purchase. Such valuations require that management make estimates and assumptions, especially with respect to the identifiable intangible assets. The estimates in valuing intangible assets include, but are not limited to, the time and expense to recreate the assets, future expected cash flows from the asset, useful lives, and discount rates.
The estimates are inherently uncertain and subject to revision as additional information is obtained during the measurement period for an acquisition, which may last up to one year from the acquisition date. During the measurement period the Company may record adjustments to the fair value of tangible and intangible assets acquired and liabilities assumed, with a corresponding offset to Goodwill. After the conclusion of the measurement period or the final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to earnings.
2.Revenue Recognition
Disaggregation of Revenue
The Company provides disaggregation of revenue based on geographic region in Note 7 and based on the subscription versus professional services and other classification on the condensed consolidated statements of operations, as it believes these best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Deferred Revenue
Deferred revenue is recorded upon establishment of unconditional right to payment under non-cancellable contracts and is recognized as the revenue recognition criteria are met. The Company generally invoices customers in advance in monthly, quarterly, semi-annual and annual installments. The deferred revenue balance is influenced by several factors, including the compounding effects of renewals, invoice duration, timing and size. The amount of revenue recognized during the three months ended March 31, 2023 and 2022 that was included in deferred revenue at the beginning of each period was $44.1 million and $32.4 million, respectively.
As of March 31, 2023, including amounts already invoiced and amounts contracted but not yet invoiced, $187.8 million of revenue is expected to be recognized from remaining performance obligations, of which 76% is expected to be recognized in the next 12 months, with the remainder thereafter.
11
| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
3.Operating Leases
The Company has operating lease agreements for offices in Chicago, Illinois, Seattle, Washington, and Dublin, Ireland. The Chicago lease expires in January 2028, the Seattle lease expires in January 2031, and the Dublin lease expires in June 2024. These operating leases require escalating monthly rental payments ranging from approximately $47,000 to $280,000. Under the terms of the lease agreements, the Company is also responsible for its proportionate share of taxes and operating costs, which are treated as variable lease costs. The Company’s operating leases typically contain options to extend or terminate the term of the lease. The Company currently does not include any options to extend leases in its lease terms as it is not reasonably certain to exercise them. As such, it has recorded lease obligations only through the initial optional termination dates above.
The following table provides a summary of operating lease assets and liabilities as of March 31, 2023 (in thousands):
| Assets | |||||
| Operating lease right-of-use assets | $ | 9,148 | |||
| Liabilities | |||||
| Operating lease liabilities | 3,580 | ||||
| Operating lease liabilities, non-current | 17,369 | ||||
| Total operating lease liabilities | $ | 20,949 | |||
The following table provides information about leases on the condensed consolidated statements of operations (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating lease expense | $ | 648 | $ | 503 | |||||||
| Variable lease expense | 893 | 866 | |||||||||
Within the condensed consolidated statements of operations, operating and variable lease expense are recorded in General and administrative expenses. Cash payments related to operating leases for the three months ended March 31, 2023 and March 31, 2022 were $2.0 million and $1.8 million, respectively. As of March 31, 2023, the weighted-average remaining lease term is 5.7 years and the weighted-average discount rate is 5.5%.
12
| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
Remaining maturities of operating lease liabilities as of March 31, 2023 are as follows (in thousands):
| Years ending December 31, | |||||
| 2023 | $ | 3,464 | |||
| 2024 | 4,406 | ||||
| 2025 | 4,205 | ||||
| 2026 | 4,298 | ||||
| 2027 | 4,392 | ||||
| Thereafter | 3,604 | ||||
| Total future minimum lease payments | $ | 24,369 | |||
| Less: imputed interest | (3,420) | ||||
| Total operating lease liabilities | $ | 20,949 | |||
4.Income Taxes
The provision for income taxes for interim periods is generally determined using an estimate of the Company’s annual effective tax rate, excluding jurisdictions for which no tax benefit can be recognized due to valuation allowances. The Company’s effective tax rate differs from the U.S. federal statutory rate primarily due to a valuation allowance related to the Company’s federal and state deferred tax assets.
There is no provision for domestic income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. For the three months ended March 31, 2023, the Company recognized an immaterial provision related to foreign income taxes.
The Company assesses all available positive and negative evidence to evaluate the realizability of its deferred tax assets and whether or not a valuation allowance is necessary. The Company’s three-year cumulative loss position was significant negative evidence in assessing the need for a valuation allowance. The weight given to positive and negative evidence is commensurate with the extent such evidence may be objectively verified. Given the weight of objectively verifiable historical losses from operations, the Company has recorded a full valuation allowance on its deferred tax assets. The Company may be able to reverse the valuation allowance when sufficient positive evidence exists to support the reversal of the valuation allowance.
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| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
5.Incentive Stock Plan
Stock-based compensation expense is included in the unaudited condensed consolidated statements of operations as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Cost of revenue | $ | 501 | $ | 448 | |||||||
| Research and development | 3,602 | 1,725 | |||||||||
| Sales and marketing | 6,570 | 4,218 | |||||||||
| General and administrative | 2,983 | 2,001 | |||||||||
| Total stock-based compensation | $ | 13,656 | $ | 8,392 | |||||||
6.Commitments and Contingencies
Contractual Obligations
The Company has non-cancellable minimum guaranteed purchase commitments for primarily data and services. Material contractual commitments as of March 31, 2023 that are not disclosed elsewhere are as follows (in thousands):
| Years ending December 31, | |||||
| 2023 | $ | 10,529 | |||
| 2024 | 3,936 | ||||
| 2025 | 2,243 | ||||
| 2026 | 445 | ||||
| 2027 | 236 | ||||
| Thereafter | — | ||||
| Total contract commitments | $ | 17,389 | |||
Legal Matters
From time to time in the normal course of business, the Company may be subject to various legal matters such as threatened or pending claims or proceedings. There were no material such matters as of and for the period ended March 31, 2023.
Indemnification
In the ordinary course of business, the Company often includes standard indemnification provisions in its arrangements with third parties, including vendors, customers, investors, and the Company’s directors and officers. Pursuant to these provisions, the Company may be obligated to indemnify such parties for losses or claims suffered or incurred. It is not possible to determine the maximum potential loss under these indemnification provisions due to the Company’s limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. There were no material obligations under such indemnification agreements as of and for the period ended March 31, 2023.
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| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
7.Segment and Geographic Data
The Company operates as one operating segment. The Company’s chief operating decision maker (“CODM”) is its chief executive officer, who reviews financial information for purposes of making operating decisions, assessing financial performance and allocating resources. The Company’s CODM evaluates financial information on a consolidated basis. As the Company operates as one operating segment, all required segment financial information is found in the condensed consolidated financial statements.
Long-lived assets by geographical region are based on the location of the legal entity that owns the assets. As of March 31, 2023 and December 31, 2022, there were no significant long-lived assets held by entities outside of the United States.
Revenue by geographical region is determined by location of the Company’s customers. Revenue from customers outside of the United States was approximately 27% and 28% for the three months ended March 31, 2023 and 2022, respectively. Revenue by geographical region is as follows (in thousands):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Americas | $ | 59,111 | $ | 45,230 | |||||||
| EMEA | 12,500 | 9,454 | |||||||||
| Asia Pacific | 3,601 | 2,745 | |||||||||
| Total | $ | 75,212 | $ | 57,429 | |||||||
8.Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock for each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, restricted stock units, and restricted stock awards. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights.
The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data):
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Net loss attributable to common shareholders | $ | (10,252) | $ | (9,755) | |||||||
| Weighted average common shares outstanding | 55,176,425 | 54,277,676 | |||||||||
| Net loss per share, basic and diluted | $ | (0.19) | $ | (0.18) | |||||||
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| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
The following outstanding shares of common stock equivalents were excluded from the calculation of diluted net loss per share for each period, as the impact of including them would have been anti-dilutive.
| March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Stock options outstanding | 57,010 | 84,510 | |||||||||
| RSUs outstanding | 2,779,378 | 2,674,435 | |||||||||
| Total potentially dilutive shares | 2,836,388 | 2,758,945 | |||||||||
9. Fair Value Measurements
The Company measures certain financial assets at fair value. Fair value is determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as determined by either the principal market or the most advantageous market. Inputs used in the valuation techniques to derive fair values are classified based on a three-level hierarchy, as follows:
•Level 1: Quoted prices in active markets for identical assets or liabilities.
•Level 2: Observable inputs, other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3: Unobservable inputs that are supported by little or no market activity.
The following tables present information about the Company’s financial assets that are measured at fair value and indicate the fair value hierarchy of the valuation inputs used (in thousands):
| March 31, 2023 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Marketable Securities: | |||||||||||||||||||||||
| Commercial paper | $ | — | $ | 41,398 | $ | — | $ | 41,398 | |||||||||||||||
| Corporate bonds | — | 31,231 | — | 31,231 | |||||||||||||||||||
| U.S. agency securities | — | 21,326 | — | 21,326 | |||||||||||||||||||
| U.S. Treasury securities | — | 12,783 | — | 12,783 | |||||||||||||||||||
| Asset-backed securities | — | 2,021 | — | 2,021 | |||||||||||||||||||
| Total assets | $ | — | $ | 108,759 | $ | — | $ | 108,759 | |||||||||||||||
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| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
| December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Marketable Securities: | |||||||||||||||||||||||
| Commercial paper | $ | — | $ | 43,489 | $ | — | $ | 43,489 | |||||||||||||||
| Corporate bonds | — | 33,183 | — | 33,183 | |||||||||||||||||||
| U.S. Treasury securities | — | 14,145 | — | 14,145 | |||||||||||||||||||
| U.S. agency securities | — | 12,950 | — | 12,950 | |||||||||||||||||||
| Asset-backed securities | — | $ | 2,157 | $ | — | 2,157 | |||||||||||||||||
| Total assets | $ | — | $ | 105,924 | $ | — | $ | 105,924 | |||||||||||||||
Marketable securities are classified within Level 2 because they are valued using inputs other than quoted prices that are directly or indirectly observable in the market.
The carrying amounts of certain financial instruments, including cash held in banks, cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short-term maturities and are excluded from the fair value tables above.
For the periods presented, the Company held investment-grade marketable securities which were accounted for as available-for-sale securities. As of March 31, 2023 and December 31, 2022, there was not a significant difference between the amortized cost and fair value of these securities. The gross unrealized gains and losses associated with these securities were immaterial in the periods presented.
The following table classifies our marketable securities by contractual maturity (in thousands):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Due in one year or less | 99,050 | 92,929 | |||||||||
| Due after one year and within two years | 9,709 | 12,995 | |||||||||
| Total | 108,759 | 105,924 | |||||||||
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| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
10. Business Combinations
On January 19, 2023, the Company completed the acquisition of all of the outstanding equity of Repustate, Inc. The acquisition is expected to increase the Company’s power, breadth and automation of social listening, messaging, and customer care capabilities with added sentiment analysis, natural language processing (NLP) and artificial-intelligence (AI). The total purchase consideration for the acquisition was approximately $8.4 million, consisting of approximately $6.8 million in cash paid at the closing of the acquisition and a holdback of $1.6 million in cash to be paid as purchase consideration after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against the holdback amount for post-closing purchase price adjustments or indemnification matters.
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed, and additional information about the fair value of assets and liabilities acquired become available.
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the date of acquisition (in thousands):
| January 19, 2023 | |||||
| Cash and cash equivalents | $ | 366 | |||
| Intangible assets | 1,800 | ||||
| Goodwill | 6,713 | ||||
| Deferred tax liability | (477) | ||||
| Other net tangible assets and liabilities assumed | (4) | ||||
| Total consideration | $ | 8,398 | |||
| Deferred consideration related to holdback | (1,600) | ||||
| Cash and cash equivalents acquired | (366) | ||||
| Cash paid for acquisition of business, net of cash acquired | $ | 6,432 | |||
The excess of purchase consideration over the fair value of net assets acquired was recorded as goodwill, and is primarily attributable to expected post-acquisition synergies from integrating the technology into Sprout’s platform. The goodwill is not deductible for income tax purposes. The fair values of the tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. These estimates are based on preliminary information and may be subject to further revision as additional information is obtained during the measurement period, which may last up to 12 months from the date of the acquisition. The primary areas that remain preliminary as of March 31, 2023 relate to the fair values of intangible assets acquired and goodwill. The Company expects to finalize the fair value measurements as soon as practicable, but not later than one year from the date of acquisition.
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| Sprout Social, Inc. | ||
| Notes to Condensed Consolidated Financial Statements (Unaudited) | ||
The estimated useful lives and fair values of the identifiable intangible assets at acquisition date were as follows (in thousands):
| Fair Value | Expected Useful Life | |||||||
| Customer Relationships | $ | 200 | 1 year | |||||
| Acquired Technology | 1,600 | 5 years | ||||||
| $ | 1,800 | |||||||
The changes in the carrying amount of goodwill during the three months ended March 31, 2023 were as follows (in thousands):
Goodwill balance as of December 31, 2022 | $ | 2,299 | |||
| Addition - acquisition of Repustate | 6,713 | ||||
Goodwill balance as of March 31, 2023 | $ | 9,012 | |||
We have included the financial results of Repustate in our condensed consolidated financial statements from the date of acquisition. Separate financial results and pro forma financial information for Repustate have not been presented as the effect of this acquisition was not material to our financial results.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” in Part II—Item 1A of this Quarterly Report and in Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, and in other parts of this Quarterly Report. See "Cautionary Note Regarding Forward-Looking Statements."
Overview
Sprout Social is a powerful, centralized platform that provides the critical business layer to unlock the massive commercial value of social media. We have made it increasingly easy to standardize on Sprout Social as the centralized system of record for social and to help customers maximize the value of this mission critical channel. Currently, more than 33,000 customers across more than 100 countries rely on our platform.
Introduced in 2011, our cloud software brings together social messaging, data and workflows in a unified system of record, intelligence and action. Operating across major networks, including Twitter, Facebook, Instagram, TikTok, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, and commerce platforms Facebook Shops, Shopify and WooCommerce, we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions. Virtually every aspect of business has been impacted by social media, from marketing, sales, commerce and public relations to customer service, product and strategy, creating a need for an entirely new category of software. We offer our customers a centralized, secure and powerful platform to manage this broad, complex channel effectively across their organization.
We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date the product is made available to customers, which typically begins on the commencement date of each contract. We also generate revenue from professional services related to our platform provided to certain customers, which is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.
Our tiered subscription-based model allows our customers to choose among three core plans to meet their needs. Each plan is licensed on a per user per month basis at prices dependent on the level of features offered. Additional product modules, which offer increased functionality depending on a customer’s needs, can be purchased by the customer on a per user per month basis.
We generated revenue of $75.2 million and $57.4 million during the three months ended March 31, 2023 and 2022, respectively, representing growth of 31%. In the three months ended March 31, 2023, software subscriptions contributed 99% of our revenue.
We generated net losses of $10.3 million and $9.8 million during the three months ended March 31, 2023 and 2022, respectively, which included stock-based compensation expense of $13.7 million and $8.4 million, respectively. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.
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Macroeconomic Conditions
As a company with a global footprint, we are subject to risks and exposures caused by significant events and their macroeconomic impacts, including, but not limited to, the COVID-19 pandemic, the Russia-Ukraine war, global geopolitical tension and more recently, rising inflation and interest rates, volatility in the capital markets and related market uncertainty. We continuously monitor the direct and indirect impacts, and the potential for future impacts, of these circumstances on our business and financial results, as well as the overall global economy and geopolitical landscape. Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, these factors have not had a material adverse impact on our operational and financial performance to date. However, the potential implications of these macroeconomic events on our business, results of operations and overall financial position, particularly in the long term, introduce additional uncertainty.
Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees. We are continuing to monitor for potential future direct and indirect impacts on our business and results of operations.
Acquisition of Repustate, Inc.
On January 19, 2023, the Company completed the acquisition of Repustate, Inc. for a total purchase consideration of approximately $8.4 million, consisting of approximately $6.8 million in cash paid at the closing time of the acquisition and a holdback of $1.6 million in cash to be paid as purchase consideration after the one-year anniversary of the closing of the acquisition, assuming no claims by the Company against the holdback amount for post-closing purchase price adjustments or indemnification matters.
The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets and liabilities acquired become available. We expect to finalize the allocation of the purchase consideration as soon as practicable, pending any other adjustments to acquired assets or liabilities, but no later than 12 months from the acquisition date. The acquisition is expected to increase the Company’s power, breadth and automation of social listening, messaging, and customer care capabilities with added sentiment analysis, natural language processing (NLP) and artificial-intelligence (AI). We have included the financial results of Repustate in our condensed consolidated financial statements from the date of acquisition. The impact of Repustate’s financial results following the date of acquisition were not significant to Sprout’s condensed consolidated financial statements. Refer to Note 10 — Business Combinations of the Notes to the Financial Statements (Part 1, Item 1 of this Form 10-Q) for further discussion.
Key Factors Affecting Our Performance
Acquiring new customers
We are focused on continuing to organically grow our customer base by increasing demand for our platform and penetrating our addressable market. We have invested, and expect to continue to invest, heavily in expanding our sales force and marketing efforts to acquire new customers. Currently, we have more than 33,000 customers. In November 2022, we announced a price increase. For the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022, this price increase contributed to an increase in our average revenue per customer and a decrease in the growth rate of our total number of customers. We expect this trend to continue as we remain focused on higher-value customers.
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Expanding within our current customer base
We believe that there is a substantial and largely untapped opportunity for organic growth within our existing customer base. Customers often begin by purchasing a small number of user subscriptions and then expand over time, increasing the number of users or social profiles, as well as purchasing additional product modules. Customers may then expand use-cases between various departments to drive collaboration across their organizations. Our sales and customer success efforts include encouraging organizations to expand use-cases to more fully realize the value from the broader adoption of our platform throughout an organization. We will continue to invest in enhancing awareness of our brand, creating additional uses for our products and developing more products, features and functionality of existing products, which we believe are vital to achieving increased adoption of our platform. We have a history of attracting new customers and we have increased our focus on expanding their use of our platform over time.
Sustaining product and technology innovation
Our success is dependent on our ability to sustain product and technology innovation and maintain the competitive advantage of our proprietary technology. We continue to invest resources to enhance the capabilities of our platform by introducing new products, features and functionality of existing products.
International expansion
We see international expansion as a meaningful opportunity to grow our platform. Revenue generated from non-U.S. customers during the three months ended March 31, 2023 was approximately 27% of our total revenue. We have built local teams in Ireland, Canada, the United Kingdom, Singapore, India, Australia and the Philippines to support our growth internationally. We believe global demand for our platform and offerings will continue to increase as awareness of our platform in international markets grows. We plan to continue adding to our local sales, customer support and customer success teams in select international markets over time.
Key Business Metrics
We review the following key business metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions.
Number of customers
We define a customer as a unique account, multiple accounts containing a common non-personal email domain, or multiple accounts governed by a single agreement or entity. We believe that the number of customers using our platform is an indicator not only of our market penetration, but also of our potential for future growth as our customers often expand their adoption of our platform over time based on an increased awareness of the value of our platform and products.
| As of March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Number of customers | 33,861 | 32,800 | |||||||||
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ARR
We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period. We believe ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term.
| As of March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| ARR | $ | 309,913 | $ | 239,091 | |||||||
Number of customers contributing more than $10,000 in ARR
We define customers contributing more than $10,000 in ARR as those on a paid subscription plan that had more than $10,000 in ARR as of a period end.
We view the number of customers that contribute more than $10,000 in ARR as a measure of our ability to scale with our customers and attract larger organizations. We believe this represents potential for future growth, including expanding within our current customer base. Over time, larger customers have constituted a greater share of our revenue.
| As of March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
Number of customers contributing more than $10,000 in ARR | 7,107 | 5,349 | |||||||||
Number of customers contributing more than $50,000 in ARR
We define customers contributing more than $50,000 in ARR as those on a paid subscription plan that had more than $50,000 in ARR as of a period end.
We view the number of customers that contribute more than $50,000 in ARR as a measure of our ability to scale with our largest customers and attract more sophisticated organizations. We believe this represents potential for future growth, including expanding within our current customer base. Over time, our largest customers have constituted a greater share of our revenue.
| As of March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Number of customers contributing more than $50,000 in ARR | 1,008 | 692 | |||||||||
Components of our Results of Operations
Revenue
Subscription
We generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model. Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term. Subscription revenue is recognized ratably over the contract terms beginning on the date our product is made available to customers, which typically begins on the commencement date of each contract. Our customers do not have the right to take possession of the online software solution. We also generate a small portion of our subscription revenue from third-party resellers.
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Professional Services
We sell professional services consisting of, but not limited to, implementation fees, specialized training, one-time reporting services and recurring periodic reporting services. Professional services revenue is recognized at the time these services are provided to the customer. This revenue has historically represented less than 1% of our revenue and is expected to be immaterial for the foreseeable future.
Cost of Revenue
Subscription
Cost of revenue primarily consists of expenses related to hosting our platform and providing support to our customers. These expenses are comprised of fees paid to data providers, hosted data center costs and personnel costs directly associated with cloud infrastructure, customer success and customer support, including salaries, benefits, bonuses and allocated overhead. These costs also include depreciation expense and amortization expense related to acquired developed technologies. Overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount. Although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows, we expect our cost of revenue to decrease as a percentage of our revenue over time.
Professional Services and Other
Cost of professional services primarily consists of expenses related to our professional services organization and are comprised of personnel costs, including salaries, benefits, bonuses and allocated overhead.
Gross Profit and Gross Margin
Gross margin is calculated as gross profit as a percentage of total revenue. Our gross margin may fluctuate from period to period based on revenue earned, the timing and amount of investments made to expand our hosting capacity, our customer support and professional services teams and in hiring additional personnel, and the impact of acquisitions. We expect our gross profit and gross margin to increase as our business grows over time.
Operating Expenses
Research and Development
Research and development expenses primarily consist of personnel costs, including salaries, benefits and allocated overhead. Research and development expenses also include depreciation expense and other expenses associated with product development. We plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our plan offerings.
Sales and Marketing
Sales and marketing expenses primarily consist of personnel costs directly associated with our sales and marketing department, online advertising expenses, as well as allocated overhead, including depreciation expense and amortization related to acquired developed technologies. Sales force commissions and bonuses are considered incremental costs of obtaining a contract with a customer. Sales commissions are earned and recorded at contract commencement for both new customer contracts and expansion of contracts with existing customers. Sales commissions are deferred and amortized on a straight-line basis over a period of benefit of three years. We plan to increase the dollar amount of our
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investment in sales and marketing for the foreseeable future, primarily for increased headcount for our sales department.
General and Administrative
General and administrative expenses primarily consist of personnel expenses associated with our finance, legal, human resources and other administrative employees. Our general and administrative expenses also include professional fees for external legal, accounting and other consulting services, depreciation and amortization expense, as well as allocated overhead. We expect to increase the size of our general and administrative functions to support the growth of our business. We expect the dollar amount of our general and administrative expenses to increase for the foreseeable future. However, we expect our general and administrative expenses to decrease as a percentage of revenue over time.
Interest Income (Expense), Net
Interest income (expense), net consists primarily of interest income earned on our cash and investment balances.
Other Expense, Net
Other expense, net primarily consists of foreign currency transaction gains and losses.
Income Tax Provision
The income tax provision consists of current and deferred taxes for our United States and foreign jurisdictions. We have historically reported a taxable loss in our most significant jurisdiction, the United States, and have a full valuation allowance against our deferred tax assets. We expect this trend to continue for the foreseeable future.
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Results of Operations
The following tables set forth information comparing the components of our results of operations in dollars and as a percentage of total revenue for the periods presented.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Revenue | |||||||||||
| Subscription | $ | 74,742 | $ | 56,780 | |||||||
| Professional services and other | 470 | 649 | |||||||||
| Total revenue | 75,212 | 57,429 | |||||||||
Cost of revenue(1) | |||||||||||
| Subscription | 16,633 | 13,757 | |||||||||
| Professional services and other | 242 | 234 | |||||||||
| Total cost of revenue | 16,875 | 13,991 | |||||||||
| Gross profit | 58,337 | 43,438 | |||||||||
| Operating expenses | |||||||||||
Research and development(1) | 17,876 | 13,065 | |||||||||
Sales and marketing(1) | 36,905 | 25,612 | |||||||||
General and administrative(1) | 15,489 | 14,370 | |||||||||
| Total operating expenses | 70,270 | 53,047 | |||||||||
| Loss from operations | (11,933) | (9,609) | |||||||||
| Interest expense | (28) | (71) | |||||||||
| Interest income | 2,020 | 123 | |||||||||
| Other expense, net | (209) | (108) | |||||||||
| Loss before income taxes | (10,150) | (9,665) | |||||||||
| Income tax expense | 102 | 90 | |||||||||
| Net loss | $ | (10,252) | $ | (9,755) | |||||||
_______________
(1)Includes stock-based compensation expense as follows:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Cost of revenue | $ | 501 | $ | 448 | |||||||
| Research and development | 3,602 | 1,725 | |||||||||
| Sales and marketing | 6,570 | 4,218 | |||||||||
| General and administrative | 2,983 | 2,001 | |||||||||
| Total stock-based compensation | $ | 13,656 | $ | 8,392 | |||||||
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| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (as a percentage of total revenue) | |||||||||||
| Revenue | |||||||||||
| Subscription | 99 | % | 99 | % | |||||||
| Professional services and other | 1 | % | 1 | % | |||||||
| Total revenue | 100 | % | 100 | % | |||||||
| Cost of revenue | |||||||||||
| Subscription | 22 | % | 24 | % | |||||||
| Professional services and other | — | % | — | % | |||||||
| Total cost of revenue | 22 | % | 24 | % | |||||||
| Gross profit | 78 | % | 76 | % | |||||||
| Operating expenses | |||||||||||
| Research and development | 24 | % | 23 | % | |||||||
| Sales and marketing | 49 | % | 45 | % | |||||||
| General and administrative | 21 | % | 25 | % | |||||||
| Total operating expenses | 93 | % | 92 | % | |||||||
| Loss from operations | (16) | % | (17) | % | |||||||
| Interest expense | — | % | — | % | |||||||
| Interest income | 3 | % | — | % | |||||||
| Other expense, net | — | % | — | % | |||||||
| Loss before income taxes | (13) | % | (17) | % | |||||||
| Income tax expense | — | % | — | % | |||||||
| Net loss | (14) | % | (17) | % | |||||||
Note: Certain amounts may not sum due to rounding
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Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022
Revenue
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||
| Subscription | $ | 74,742 | $ | 56,780 | $ | 17,962 | 32 | % | |||||||||||||||
| Professional services and other | 470 | 649 | (179) | (28) | % | ||||||||||||||||||
| Total revenue | $ | 75,212 | $ | 57,429 | $ | 17,783 | 31 | % | |||||||||||||||
| Percentage of Total Revenue | |||||||||||||||||||||||
| Subscription | 99 | % | 99 | % | |||||||||||||||||||
| Professional services and other | 1 | % | 1 | % | |||||||||||||||||||
The increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers. The total number of customers grew from 32,800 as of March 31, 2022 to 33,861 as of March 31, 2023. Customers contributing over $10,000 in ARR grew 33% versus the prior year and customers contributing over $50,000 in ARR grew 46% versus the prior year. The increase in new customers was primarily driven by our growing sales force capacity to meet market demand. Expansion within existing customers was driven by our ability to increase the number of users, social profiles and products purchased by customers. This is in part attributable to the expansion of use-cases across various functions within our existing customers’ organizations.
Cost of Revenue and Gross Margin
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Subscription | $ | 16,633 | $ | 13,757 | $ | 2,876 | 21 | % | |||||||||||||||
| Professional services and other | 242 | 234 | 8 | 3 | % | ||||||||||||||||||
| Total cost of revenue | 16,875 | 13,991 | 2,884 | 21 | % | ||||||||||||||||||
| Gross profit | $ | 58,337 | $ | 43,438 | $ | 14,899 | 34 | % | |||||||||||||||
| Gross margin | |||||||||||||||||||||||
| Total gross margin | 78 | % | 76 | % | |||||||||||||||||||
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The increase in cost of subscription revenue for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the following:
| Change | |||||
(in thousands) | |||||
| Data provider fees | $ | 2,488 | |||
| Personnel costs | 160 | ||||
| Other | 228 | ||||
| Subscription cost of revenue | $ | 2,876 | |||
Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 11% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth.
Operating Expenses
Research and Development
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Research and development | $ | 17,876 | $ | 13,065 | $ | 4,811 | 37 | % | |||||||||||||||
| Percentage of total revenue | 24 | % | 23 | % | |||||||||||||||||||
The increase in research and development expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the following:
| Change | |||||
(in thousands) | |||||
| Personnel costs | $ | 2,849 | |||
| Stock-based compensation expense | 1,877 | ||||
| Other | 85 | ||||
| Research and development | $ | 4,811 | |||
Personnel costs increased primarily as a result of a 21% increase in headcount to grow our research and development teams to drive our technology innovation through the development and maintenance of our platform. The increase in stock-based compensation expense was primarily due to the increased headcount.
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Sales and Marketing
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Sales and marketing | $ | 36,905 | $ | 25,612 | $ | 11,293 | 44 | % | |||||||||||||||
| Percentage of total revenue | 49 | % | 45 | % | |||||||||||||||||||
The increase in sales and marketing expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the following:
| Change | |||||
(in thousands) | |||||
| Personnel costs | $ | 8,927 | |||
| Stock-based compensation expense | 2,352 | ||||
| Other | 14 | ||||
| Sales and marketing | $ | 11,293 | |||
Personnel costs increased primarily as a result of a 32% increase in headcount as we continue to expand our sales teams to grow our customer base, as well as additional sales commission expense due to the year-over-year sales growth, which increased the amortization of contract acquisition costs. The increase in stock-based compensation expense was primarily due to the increased headcount.
General and Administrative
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| General and administrative | $ | 15,489 | $ | 14,370 | $ | 1,119 | 8 | % | |||||||||||||||
| Percentage of total revenue | 21 | % | 25 | % | |||||||||||||||||||
The increase in general and administrative expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the following:
| Change | |||||
(in thousands) | |||||
| Stock-based compensation expense | $ | 982 | |||
| Credit losses on accounts receivable | 262 | ||||
| Other | (125) | ||||
| General and administrative | $ | 1,119 | |||
Stock-based compensation expense increased primarily as a result of a 13% increase in headcount. The increase in credit losses on accounts receivable was primarily driven by higher accounts receivable balances.
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Interest Income, Net
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Interest income, net | $ | 1,992 | $ | 52 | $ | 1,940 | n/m(1) | ||||||||||||||||
| Percentage of total revenue | 3 | % | — | % | |||||||||||||||||||
_________________
(1)Calculated metric is not meaningful.
The increase in interest income, net was primarily driven by the increased investment in marketable securities and higher interest rates.
Other Expense, Net
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Other expense net | $ | (209) | $ | (108) | $ | (101) | 94 | % | |||||||||||||||
| Percentage of total revenue | — | % | — | % | |||||||||||||||||||
The change in other expense, net was primarily driven by foreign exchange transaction losses.
Income Tax Expense
| Three Months Ended March 31, | Change | ||||||||||||||||||||||
| 2023 | 2022 | Amount | % | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||
| Income tax expense | $ | 102 | $ | 90 | $ | 12 | 13 | % | |||||||||||||||
| Percentage of total revenue | — | % | — | % | |||||||||||||||||||
The increase in income tax expense is due to higher earnings in foreign jurisdictions.
Non-GAAP Financial Measures
In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the below non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be indicative of our business, operating results or future outlook.
However, non-GAAP financial information is presented for supplemental informational purposes only, has limitations as an analytical tool and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate non-GAAP financial measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP
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financial measures as tools for comparison. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business.
Non-GAAP Gross Profit
We define non-GAAP gross profit as GAAP gross profit, excluding stock-based compensation expense. We believe non-GAAP gross profit provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of Non-GAAP gross profit | (dollars in thousands) | ||||||||||
| Gross profit | $ | 58,337 | $ | 43,438 | |||||||
| Stock-based compensation expense | 501 | 448 | |||||||||
| Non-GAAP gross profit | $ | 58,838 | $ | 43,886 | |||||||
Non-GAAP Operating Income (Loss)
We define non-GAAP operating income (loss) as GAAP loss from operations, excluding stock-based compensation expense. We believe non-GAAP operating income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of Non-GAAP operating income (loss) | (dollars in thousands) | ||||||||||
| Loss from operations | $ | (11,933) | $ | (9,609) | |||||||
| Stock-based compensation expense | 13,656 | 8,392 | |||||||||
| Non-GAAP operating income (loss) | $ | 1,723 | $ | (1,217) | |||||||
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Non-GAAP Net Income (Loss)
We define non-GAAP net income (loss) as GAAP net loss, excluding stock-based compensation expense. We believe non-GAAP net income (loss) provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of Non-GAAP net income (loss) | (dollars in thousands) | ||||||||||
| Net loss | $ | (10,252) | $ | (9,755) | |||||||
| Stock-based compensation expense | 13,656 | 8,392 | |||||||||
| Non-GAAP net income (loss) | $ | 3,404 | $ | (1,363) | |||||||
Non-GAAP Net Income (Loss) per Share
We define non-GAAP net income (loss) per share as GAAP net loss per share attributable to common shareholders, basic and diluted, excluding stock-based compensation expense. We believe non-GAAP net income (loss) per share provides our management and investors consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations, as this non-GAAP financial measure eliminates the effect of stock-based compensation, which is often unrelated to overall operating performance.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of Non-GAAP net income (loss) per share | |||||||||||
| Net loss per share attributable to common shareholders, basic and diluted | $ | (0.19) | $ | (0.18) | |||||||
| Stock-based compensation expense per share | 0.25 | 0.15 | |||||||||
| Non-GAAP net income (loss) per share | $ | 0.06 | $ | (0.03) | |||||||
Free Cash Flow
Free cash flow is a non-GAAP financial measure that we define as net cash provided by operating activities less purchases of property and equipment. We believe that free cash flow is a useful indicator of liquidity that provides information to management and investors about the amount of cash provided by our core operations that, after the purchases of property and equipment, is available to be used for strategic initiatives. For example, if free cash flow is negative, we may need to access cash reserves or other sources of capital to invest in strategic initiatives. One limitation of free cash flow is that it does not reflect our future contractual obligations. Additionally, free cash flow does not represent the
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total increase or decrease in our cash balance for a given period.
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| Reconciliation of Free cash flow | (dollars in thousands) | ||||||||||
| Net cash provided by operating activities | $ | 8,284 | $ | 5,402 | |||||||
| Purchases of property and equipment | (383) | (313) | |||||||||
| Free cash flow | $ | 7,901 | $ | 5,089 | |||||||
Liquidity and Capital Resources
As of March 31, 2023, our principal sources of liquidity were cash and cash equivalents of $78.4 million, marketable securities of $108.8 million and net accounts receivable of $36.7 million. Historically, we have generated losses from operations as evidenced by our accumulated deficit and in previous years, we had negative cash flows from operations. However, for the three months ended March 31, 2023 and 2022, we generated positive cash flows from operations. We expect to continue to incur operating losses and may have negative operating cash flows for the foreseeable future due to the investments in our business we intend to make as described above. We may experience greater than anticipated operating losses in the short- and long-term due to macroeconomic, financial, and other factors that are beyond our control, such as rising inflation rates and a potential recession. The impact of these factors on our customers and our operations going forward remains uncertain, and we continue to proactively monitor our liquidity position.
Prior to our IPO in December 2019, we financed our operations primarily through private issuance of equity securities and line of credit borrowings. In our IPO, we received net proceeds of $134.3 million after deducting underwriting discounts and commissions of $10.5 million and offering expenses of $5.2 million. We subsequently received an additional $10.0 million of net proceeds after deducting underwriting discounts and commissions in January 2020 as a result of the over-allotment option exercise by the underwriters of our IPO. In August 2020, we received $42.1 million of net proceeds from our equity follow-on offering after deducting underwriting discounts and commissions. Our principal uses of cash in recent periods have been to fund operations and invest in capital expenditures.
We believe our existing cash and cash equivalents will be sufficient to meet our operating and capital needs for at least the next 12 months. We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash, investment balances, and potential future equity or debt transactions. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of macroeconomic conditions on our customers and our operations, the timing and extent of spending to support our research and development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced product offerings, and the continuing market acceptance of our product. We have in the past, and may in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies, including intellectual property rights. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us, or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations, our business, results of operations and financial condition could be adversely affected.
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The following table summarizes our cash flows for the periods presented:
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 8,284 | $ | 5,402 | |||||||
| Net cash used in investing activities | (8,691) | (29,898) | |||||||||
| Net cash used in financing activities | (1,099) | (956) | |||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (1,506) | $ | (25,452) | |||||||
Operating Activities
Our largest source of operating cash is cash collections from our customers for subscription services. Our primary uses of cash from operating activities are for personnel costs across the sales and marketing and research and development departments and hosting costs. Historically, we have generated negative cash flows from operating activities. However, for the three months ended March 31, 2023 and 2022, we generated positive cash flows from operating activities.
Net cash provided by operating activities during the three months ended March 31, 2023 was $8.3 million, which resulted from a net loss of $10.3 million adjusted for non-cash charges of $20.4 million and net cash outflow of $1.9 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $13.7 million of stock-based compensation expense, $5.9 million for amortization of deferred contract acquisition costs, which were primarily commissions, $0.4 million of amortization of right-of-use, or ROU, operating lease assets, and $1.1 million of depreciation and intangible asset amortization expense. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $7.8 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $4.1 million increase in prepaid expenses and other assets, a $0.8 million decrease in operating lease liabilities, a $1.1 million increase in accounts receivable and a $1.6 million decrease in accounts payable and accrued expenses. These outflows were primarily offset by a $13.6 million increase in deferred revenue.
Net cash provided by operating activities during the three months ended March 31, 2022 was $5.4 million, which resulted from a net loss of $9.8 million adjusted for non-cash charges of $13.8 million and net cash inflow of $1.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $8.4 million of stock-based compensation expense, $1.0 million of depreciation and intangible asset amortization expense, $4.0 million for amortization of deferred contract acquisition costs, which were primarily commissions, and $0.2 million of amortization of ROU operating lease assets. The net cash inflow from changes in operating assets and liabilities was primarily the result of a $7.3 million increase in deferred revenue, a $1.5 million increase in accounts payable and accrued expenses and a $2.3 million decrease in gross accounts receivable. These inflows were primarily offset by a $6.3 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $2.9 million decrease in prepaid expenses and other assets as well as a $0.7 million decrease in operating lease liabilities.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2023 was $8.7 million, which was primarily due to $30.1 million in purchases of marketable securities and $6.4 million for the acquisition of Repustate, partially offset by $28.2 million in proceeds from the maturities and sale of marketable securities.
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Net cash used in investing activities for the three months ended March 31, 2022 was $29.9 million, which was primarily due to $66.1 million in purchases of marketable securities, partially offset by $36.5 million in proceeds from maturities of marketable securities.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2023 was $1.1 million, primarily driven by $1.1 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards.
Net cash used in financing activities for the three months ended March 31, 2022 was $1.0 million, primarily driven by $0.9 million in payments related to employee withholding taxes as a result of the net settlement of stock-based awards.
Contractual Obligations
As of March 31, 2023, we have non-cancellable contractual obligations related primarily to operating leases and minimum guaranteed purchase commitments for data and services. As of March 31, 2023, the total obligation for operating leases was $24.4 million, of which $3.5 million is expected to be paid in the next twelve months. As of March 31, 2023, our purchase commitment for primarily data and services was $17.4 million, of which $12.4 million is expected to be paid in the next twelve months. See Note 3 and Note 6 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information regarding these obligations.
Recent Accounting Pronouncements
Refer to section titled “Summary of Significant Accounting Policies” in Note 1 of the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report for more information.
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates.
Our significant accounting policies are discussed in Note 1, “Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements as of and for the year ended December 31, 2022 included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 22, 2023. There have been no significant changes to these policies during the three months ended March 31, 2023.
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Item 3. Quantitative and Qualitative Disclosures of Market Risk
Interest Rate Risk
We had cash and cash equivalents totaling $78.4 million as of March 31, 2023, the majority of which was invested in money market accounts and money market funds. We also had marketable securities of $108.8 million which were invested in investment-grade corporate bonds, commercial paper, treasury securities and asset-backed securities. Such interest-earning instruments carry a degree of interest rate risk with respect to the interest income generated. Additionally, certain of these cash investments are maintained at balances beyond Federal Deposit Insurance Corporation, or FDIC, coverage limits or are not insured by the FDIC. Accordingly, there may be a risk that we will not recover the full principal of our cash investments and marketable securities. To date, fluctuations in interest income have not been significant. Because these accounts are highly liquid, we do not have material exposure to market risk. Our cash is held for working capital purposes. We do not enter into investments for trading or speculative purposes.
We have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our financial statements.
Foreign Currency Exchange Risk
We are not currently subject to significant foreign currency exchange risk as our U.S. and international sales are predominantly denominated in U.S. dollars. However, we have some foreign currency risk related to a small amount of sales denominated in Canadian dollars. Sales denominated in Canadian dollars reflect the prevailing U.S. dollar exchange rate on the date of invoice for such sales. Decreases in the relative value of the U.S. dollar to the Canadian dollar may negatively affect revenue and other operating results as expressed in U.S. dollars. We do not believe that an immediate ten percent increase or decrease in the relative value of the U.S. dollar to the Canadian dollars would have a material effect on operating results.
We have not engaged in the hedging of foreign currency transactions to date. However, as our international operations expand, our foreign currency exchange risk may increase. If our foreign currency exchange risk increases in the future, we may evaluate the costs and benefits of initiating a foreign currency hedge program in connection with non-U.S. dollar denominated transactions.
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of March 31, 2023. Based on such evaluation, our CEO and CFO have concluded that as of March 31, 2023, our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal controls
There have been no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Inherent Limitations of Internal Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company will have been detected.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings arising from the normal course of business. We are not currently a party to any material pending legal proceedings.
Item 1A. Risk Factors
Other than the risk factors set forth below, there have been no material changes from the risk factors disclosed in our Annual Report (under the heading “Risk Factors” ) in response to Part 1, Item 1A of the Form 10-K.
If we fail to attract new customers and retain and increase the spending of existing customers, our revenue, business, results of operations, financial condition and growth prospects would be harmed.
We derive, and expect to continue to derive, substantially all of our revenue and cash flows from sales of subscriptions to our platform and products. Our ability to generate increasing revenue is dependent on our capacity to attract new customers and retain and increase the spending of existing customers. Demand for our platform and products is affected by a number of factors, many of which are beyond our control, such as:
•continued market acceptance of our platform and products for existing and new use-cases;
•the timing of development and release of new products and functionality introduced by us and our competitors;
•our ability to develop functionality and integrations with third parties, including social media networks, based on customer demand;
•the usability and time to value of our products;
•the pricing of our products and the impact of any future price increases;
•the level of customer service that we provide;
•technological change;
•growth or contraction in our addressable market; and
•macroeconomic factors and their impacts on users of our platform and products.
Our current and prospective customers are impacted by worsening macroeconomic conditions to varying degrees. Such conditions include, but are not limited to, bank failures, higher borrowing costs, and inflation. We cannot predict the impact macroeconomic conditions will have on our existing or prospective customers and how that may impact their spending with us.
We announced a price increase in November 2022 and may announce additional price increases in the future. For the quarter ended March 31, 2023, as compared to the quarter ended March 31, 2022, this price increase contributed to an increase in our average revenue per customer and a decrease in the growth rate of our total number of customers. As a result of this and any future pricing increase, we may experience a decrease in our total number of customers, in the number of prospective customers requesting demonstrations, signing up for our free trial or converting to paying customers, and the number of new customers who purchase subscriptions to our products and services may decrease. As a result, our total number of customers or the number of net new customers we add each quarter may decrease even if the average spend of each new customer increases over time. We may also experience softening demand or negative sentiment from our customers and prospective customers as a result of our increased pricing, which could impact our brand and competitiveness.
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If we are unable to meet customer demands and manage customer experiences through flexible solutions designed to address their needs or otherwise achieve more widespread market acceptance of our platform and products, our revenue, business, results of operations and financial condition and growth prospects will be adversely affected.
In order for us to maintain or improve our operating results, it is important that our existing customers renew their subscriptions, maintain or increase the level of their plans and add additional users, social profiles and products to their subscriptions. Our customers have no obligation to renew their subscriptions, and we cannot assure you that our customers will renew subscriptions with a similar or increased subscription term or plan level or with the same or a greater number of users, social profiles or products. Some of our customers have elected not to renew their agreements with us and we may not be able to accurately predict renewal rates. Moreover, while our contracts are generally non-cancellable during the contractual subscription term, certain customers have the right to cancel their agreements prior to the expiration of the subscription term. Our renewal rates may decline or fluctuate and our cancellation rates may increase as a result of a number of factors, including customer satisfaction with our platform and products, our customer success and support experience, the price and functionality of our solutions relative to those of our competitors, mergers and acquisitions affecting our customer base, the effects of global economic conditions, or reductions in our customers’ spending levels. This may also cause our calculation of the lifetime value of our customers to decline or fluctuate between periods as this calculation assumes the subscription renewal rate for a given year will remain consistent in future years. If our customers cancel or do not renew their subscriptions, renew on less favorable terms, fail to add more users or products or fail to purchase additional products, our revenues and growth prospects may decline.
Our platform and products are dependent on APIs built and owned by third parties, including social media networks, and if we lose access to data provided by such APIs or the terms and conditions on which we obtain such access become less favorable, our business could suffer.
Our platform and products depend on the ability to access and integrate with third-party APIs. In particular, we have developed our platform and products to integrate with certain social media network APIs and the third-party applications of other parties. Generally, APIs and the data we receive from the APIs are written and controlled by the application provider. Any changes or modifications to the APIs or the data provided could negatively impact the functionality of, or require us to make changes to, our platform and products, which would need to occur quickly to avoid interruptions in service for our customers.
To date, we have not relied on negotiated agreements to govern our relationships with most data providers and, in many cases, we rely on publicly available APIs. As a result, we are often subject to the standard terms and conditions for application developers of such providers, which govern the distribution, operation and fees of such integrations and which are subject to change by such providers from time to time. In other cases, we rely on negotiated agreements with social media networks and other data providers. These negotiated agreements may provide increased access to APIs and data that may allow us to provide a more comprehensive solution for our customers. These agreements are subject to termination and renewal according to their terms.
There can be no assurance that we will be able to renew any of our agreements with social media networks and other data providers, or that the terms of any such renewal, including pricing and levels of service, will be favorable. We cannot accurately predict the potential impact of any modification or termination of such agreements, including the impact on our access to the related APIs. There can be no assurance that following any such modification or termination, we would be able to maintain our platform’s current level of functionality in such circumstances, as a result of more limited access to APIs or otherwise, which could adversely affect our results of operations. For example, we are currently a member of the Twitter Official Partner Program (TOPP). There can be no assurance that Twitter will
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maintain TOPP in its current form or at all and any change to the program, our access or the terms of our membership may have a negative impact on our business. In addition, there can be no assurance that we will not be required to enter into new negotiated agreements with data providers in the future to maintain or enhance the level of functionality of our platform, or that the terms and conditions of such agreements, including pricing and levels of service, will not be less favorable, which could adversely affect our results of operations.
Our business, cash flows or results of operations may be harmed if any data provider:
•changes, limits or discontinues our access to its APIs and data;
•modifies its terms of service or other policies, including fees charged or restrictions on us or application developers;
•changes or limits how customer information is accessed by us or our customers;
•changes or limits how we can use customer information and other data collected through the APIs;
•establishes more favorable relationships with one or more of our competitors; or
•experiences disruptions of its technology, services or business generally.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Use of Proceeds from Initial Public Offering of Class A Common Stock
On December 17, 2019, we closed our IPO at a price to the public of $17.00 per share. The offer and sale of the shares in our IPO were registered under the Securities Act pursuant to our Registration Statement on Form S-1 (Registration No. 333-234316), which was declared effective on December 12, 2019.
There has been no material change in the planned use of IPO proceeds from that described in the final prospectus filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act on December 13, 2019.
Item 5. Other Information.
None.
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Item 6. Exhibits
INDEX TO EXHIBITS
| 3.1 | |||||
| 3.2 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1* | |||||
| 32.2* | |||||
| 101 | The following information from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Loss, (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements | ||||
| 104 | The cover page from the Quarterly Report on Form 10-Q, formatted as Inline XBRL. | ||||
________________
* Furnished, not filed.
***
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned; thereunto duly authorized.
| Sprout Social, Inc. | ||||||||
| May 3, 2023 | By: | /s/ Joe Del Preto | ||||||
| Joe Del Preto | ||||||||
| Chief Financial Officer and Treasurer (Principal Financial and Principal Accounting Officer) | ||||||||
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