Social media management software company Sprout (NASDAQ:SPT) reported Q4 FY2023 results topping analysts' expectations, with revenue up 34.3% year on year to $93.58 million. The company expects next quarter's revenue to be around $97.25 million, in line with analysts' estimates. It made a non-GAAP profit of $0.02 per share, down from its profit of $0.03 per share in the same quarter last year.
Sprout Social (SPT) Q4 FY2023 Highlights:
- Revenue: $93.58 million vs analyst estimates of $90.69 million (3.2% beat)
- EPS (non-GAAP): $0.02 vs analyst estimates of $0 ($0.02 beat)
- Revenue Guidance for Q1 2024 is $97.25 million at the midpoint, roughly in line with what analysts were expecting
- Management's revenue guidance for the upcoming financial year 2024 is $425.4 million at the midpoint, in line with analyst expectations and implying 27.5% growth (vs 31.3% in FY2023)
- Free Cash Flow was -$279,000 compared to -$6.32 million in the previous quarter
- Customers: 31,320, down from 32,383 in the previous quarter
- Gross Margin (GAAP): 77.6%, in line with the same quarter last year
- Market Capitalization: $3.62 billion
Founded by Justyn Howard and Aaron Rankin in 2010, Sprout Social (NASDAQ:SPT) provides a software as a service platform that companies can use to schedule and respond to posts on major social media networks like Twitter, Facebook, Instagram, Youtube and LinkedIn.
Howard, who never attended college, was inspired to create Sprout because, in his position as an enterprise software salesman, he could see that companies were not taking full advantage of social media, in part because it wasn’t easy to manage multiple social media accounts.
Like most social media management platforms, Sprout Social allows companies to measure engagement, sort and schedule posts. However, the real value to larger companies is in their Analytics and Listening products, which allow companies to derive insights for product development, measure customer sentiment, monitor competitor traction and improve paid advertising return on investment.
Whether or not companies market their products through social media, all businesses need to meet customers where they are; and increasingly, that is social media. As more and more people use a greater number of social media platforms, social media management software become more valuable to their customers.
Sprout Social competes with companies such as Hootsuite, Sprinklr (NYSE:CXM), and Salesforce Social Studio.
As you can see below, Sprout Social's revenue growth has been very strong over the last two years, growing from $53.27 million in Q4 FY2021 to $93.58 million this quarter.
Unsurprisingly, this was another great quarter for Sprout Social with revenue up 34.3% year on year. On top of that, its revenue increased $8.05 million quarter on quarter, a very strong improvement from the $6.22 million increase in Q3 2023. This is a sign of re-acceleration of growth and great to see.
Next quarter's guidance suggests that Sprout Social is expecting revenue to grow 29.3% year on year to $97.25 million, in line with the 31% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $425.4 million at the midpoint, growing 27.5% year on year compared to the 31.4% increase in FY2023.
Sprout Social reported 31,320 customers at the end of the quarter, a decrease of 1,063 from the previous quarter, suggesting that the company's customer acquisition momentum is slowing.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Sprout Social's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 77.6% in Q4.
That means that for every $1 in revenue the company had $0.78 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Sprout Social's impressive gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Sprout Social burned through $279,000 of cash in Q4 despite being cash flow positive last year.
Sprout Social has burned through $7.34 million of cash over the last 12 months, resulting in a negative 2.2% free cash flow margin. This low FCF margin stems from Sprout Social's poor unit economics or a constant need to reinvest in its business to stay competitive.
Key Takeaways from Sprout Social's Q4 Results
This was a mostly in-line quarter for Sprout, showing the company is staying on target. Revenue outperformed Wall Street's estimates and outlook shows growth is staying steady. On the other hand, decline in customer numbers could be a warning sign. Overall, this quarter's results seemed fairly positive but investors were likely expecting more, however, and the stock is down 4.7% after reporting, trading at $61.5 per share.
Is Now The Time?
When considering an investment in Sprout Social, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
There are several reasons why we think Sprout Social is a great business. While we'd expect growth rates to moderate from here, its . And while its low free cash flow margins give it little breathing room, the good news is its very efficient customer acquisition hints at the potential for strong profitability. On top of that, its strong gross margins suggest it can operate profitably and sustainably.
The market is certainly expecting long-term growth from Sprout Social given its price-to-sales ratio based on the next 12 months is 8.5x. Looking at the tech landscape today, Sprout Social's qualities really stand out, and we really like it at this price.
Wall Street analysts covering the company had a one-year price target of $71.74 per share right before these results (compared to the current share price of $61.50), implying they saw upside in buying Sprout Social in the short term.
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