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Sprout Social's (NASDAQ:SPT) Posts Q3 Sales In Line With Estimates But Quarterly Guidance Underwhelms


Full Report / November 03, 2022
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Social media management software company Sprout (NASDAQ:SPT) reported results in line with analyst expectations in Q3 FY2022 quarter, with revenue up 33% year on year to $65.3 million. The company expects that next quarter's revenue would be around $69.8 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Sprout Social made a GAAP loss of $13.9 million, down on its loss of $6.99 million, in the same quarter last year.

Sprout Social (SPT) Q3 FY2022 Highlights:

  • Revenue: $65.3 million vs analyst estimates of $64.9 million (small beat)
  • EPS (non-GAAP): -$0.02 vs analyst estimates of -$0.04
  • Revenue guidance for Q4 2022 is $69.8 million at the midpoint, below analyst estimates of $70 million
  • Free cash flow of $533 thousand, down 20% from previous quarter
  • Customers: 34,258, up from 33,620 in previous quarter
  • Gross Margin (GAAP): 76.5%, up from 74.8% same quarter last year

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.

Sales Growth

As you can see below, Sprout Social's revenue growth has been very strong over the last two years, growing from quarterly revenue of $33.6 million in Q3 FY2020, to $65.3 million.

Sprout Social Total Revenue

And unsurprisingly, this was another great quarter for Sprout Social with revenue up 33% year on year. Quarter on quarter the revenue increased by $3.87 million in Q3, which was in line with Q2 2022. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates Sprout Social is expecting revenue to grow 31.1% year on year to $69.8 million, slowing down from the 42.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 30.7% over the next twelve months.

Customer Growth

You can see below that Sprout Social reported 34,258 customers at the end of the quarter, an increase of 638 on last quarter. That is a little slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

Sprout Social Customers

Profitability

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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 76.5% in Q3.

Sprout Social Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like Sprout Social to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Sprout Social's free cash flow came in at $533 thousand in Q3, down 87.2% year on year.

Sprout Social Free Cash Flow

Sprout Social has generated $8.5 million in free cash flow over the last twelve months, a decent 3.58% of revenues. This FCF margin is a result of Sprout Social asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Sprout Social's Q3 Results

With a market capitalization of $2.57 billion Sprout Social is among smaller companies, but its more than $172.1 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see Sprout Social deliver strong revenue growth this quarter. And we were also glad to see the improvement in gross margin. On the other hand, it was unfortunate to see the slowdown in customer growth. The company is flat on the results and currently trades at $47.43 per share.

Is Now The Time?

When considering Sprout Social, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Sprout Social is a solid business. We would expect growth rates to moderate from here, but its revenue growth has been strong, over the last two years. On top of that, its strong gross margins suggest it can operate profitably and sustainably, and its ability to generate free cash flow avoids a dependency on capital markets.

The market is certainly expecting long term growth from Sprout Social given its price to sales ratio based on the next twelve months is 8.4x. There are definitely things to like about Sprout Social and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $74.8 per share right before these results, implying that they saw upside in buying Sprout Social even in the short term.

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