10-Q 1 spt-20220930.htm 10-Q spt-20220930
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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 September 30, 2022
  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 classTrading SymbolName 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 October 31, 2022, there were 47,261,729 shares and 7,576,582 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,” “may,” “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 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 to use our platform and products;
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 access third-party APIs and data on favorable terms;
our ability to increase spending of existing customers;
the evolution of the social media industry, including adapting to new regulations and use cases;
worldwide economic conditions, including the macroeconomic impacts of the COVID-19 pandemic and the ongoing conflict between Russia and Ukraine, and their impact on information technology spending;
our ability to innovate and provide a superior customer experience;
our ability to securely maintain customer and other third-party data;
the effects of increased competition from our market competitors or new entrants to the market;
our ability to maintain and enhance our brand;
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 privacy and data security regulations;
our ability to successfully enter new markets, manage our international expansion and comply with any applicable laws and regulations;
our ability to maintain, protect and enhance our intellectual property;
2


the attraction and retention of qualified employees and key personnel;
our ability to effectively manage our growth and future expenses;
the sufficiency of our cash to meet our liquidity needs and our ability to raise additional capital on favorable terms or at all; and
the other factors set forth under “Risk Factors.”
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.

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)
September 30, 2022December 31, 2021
Assets
Current assets
Cash and cash equivalents$95,141 $107,114 
Marketable securities76,967 69,821 
Accounts receivable, net of allowances of $1,562 and $1,298 at September 30, 2022 and December 31, 2021, respectively
26,728 25,483 
Deferred commissions 17,929 13,915 
Prepaid expenses and other assets8,483 6,199 
Total current assets225,248 222,532 
Marketable securities, noncurrent9,755  
Property and equipment, net12,251 12,854 
Deferred commissions, net of current portion 16,816 14,402 
Operating lease, right-of-use assets9,842 9,459 
Goodwill2,299 2,299 
Intangible assets, net2,263 3,045 
Other assets, net48 126 
Total assets$278,522 $264,717 
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable$7,202 $2,888 
Deferred revenue84,781 69,220 
Operating lease liabilities3,350 2,693 
Accrued wages and payroll related benefits10,989 12,556 
Accrued expenses and other13,134 11,072 
Total current liabilities119,456 98,429 
Deferred revenue, net of current portion264 132 
Operating lease liabilities, net of current portion19,117 20,946 
Total liabilities138,837 119,507 
Commitments and contingencies (Note 6)
4

Sprout Social, Inc.
Condensed Consolidated Balance Sheets (Unaudited) (cont’d)
(in thousands, except share and per share data)
September 30, 2022December 31, 2021
Stockholders’ equity
Class A common stock, par value $0.0001 per share; 1,000,000,000 shares authorized; 50,062,955 and 47,218,380 shares issued and outstanding, respectively, at September 30, 2022; 48,663,781 and 45,844,325 shares issued and outstanding, respectively, at December 31, 2021
4 4 
Class B common stock, par value $0.0001 per share; 25,000,000 shares authorized; 7,808,026 and 7,601,082 shares issued and outstanding, respectively, at September 30, 2022; 8,516,390 and 8,309,446 shares issued and outstanding, respectively, at December 31, 2021
1 1 
Additional paid-in capital386,593 351,774 
Treasury stock, at cost(32,380)(30,824)
Accumulated other comprehensive loss(490) 
Accumulated deficit (214,043)(175,745)
Total stockholders’ equity 139,685 145,210 
Total liabilities and stockholders’ equity
$278,522 $264,717 
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 September 30,Nine Months Ended September 30,
2022202120222021
Revenue
Subscription$64,536 $48,570 $182,048 $133,105 
Professional services and other771 521 2,120 1,489 
Total revenue65,307 49,091 184,168 134,594 
Cost of revenue
Subscription15,008 12,088 43,641 32,723 
Professional services and other304 258 802 775 
Total cost of revenue15,312 12,346 44,443 33,498 
Gross profit49,995 36,745 139,725 101,096 
Operating expenses
Research and development16,278 10,551 44,717 27,831 
Sales and marketing 32,411 21,383 88,373 59,358 
General and administrative15,691 11,649 45,162 32,276 
Total operating expenses64,380 43,583 178,252 119,465 
Loss from operations (14,385)(6,838)(38,527)(18,369)
Interest expense(29)(78)(128)(227)
Interest income728 73 1,172 190 
Other expense, net(160)(86)(558)(260)
Loss before income taxes (13,846)(6,929)(38,041)(18,666)
Income tax expense87 64 257 136 
Net loss$(13,933)$(6,993)$(38,298)$(18,802)
Net loss per share attributable to common shareholders, basic and diluted$(0.25)$(0.13)$(0.70)$(0.35)
Weighted-average shares outstanding used to compute net loss per share, basic and diluted54,716,77053,908,52054,450,00353,670,652
See Notes to Condensed Consolidated Financial Statements.
6

Sprout Social, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(in thousands)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net loss$(13,933)$(6,993)$(38,298)$(18,802)
Other comprehensive loss:
Net unrealized loss on available-for-sale securities, net of tax(176) (490) 
Comprehensive loss$(14,109)$(6,993)$(38,788)$(18,802)
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 June 30, 202254,633,680 $5 $373,519 3,045,562 $(32,037)(314)$(200,110)$141,063 
Exercise of stock options
 —   
Stock-based compensation13,074 13,074 
Issuance of common stock from equity award settlement
185,782 —  
Taxes paid related to net share settlement of equity awards
5,957 (343)(343)
Other comprehensive loss, net of tax(176)(176)
Net loss
(13,933)(13,933)
Balances at September 30, 202254,819,462 $5 $386,593 3,051,519 $(32,380)$(490)$(214,043)$139,685 
Voting Common Stock (Class A and B)
Additional
Paid-in
Capital
Treasury Stock
Accumulated
Deficit
Total
Stockholders’ Equity
Shares
Amount
Shares
Amount
Balances at June 30, 202153,804,274 $5 $339,389 3,022,739 $(30,380)$(158,852)$150,162 
Exercise of stock options
1,247 — 1 1 
Stock-based compensation5,226 5,226 
Issuance of common stock from equity award settlement
163,863 —  
Taxes paid related to net share settlement of equity awards
3,661 (444)(444)
Net loss
(6,993)(6,993)
Balances at September 30, 202153,969,384 $5 $344,616 3,026,400 $(30,824)$(165,845)$147,952 





8

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, 202154,153,771 $5 $351,774 3,026,400 $(30,824)$ $(175,745)$145,210 
Exercise of stock options
38,545 — 14 14 
Stock-based compensation34,130 34,130 
Issuance of common stock from equity award settlement
613,477 —  
Taxes paid related to net share settlement of equity awards
25,119 (1,556)(1,556)
Issuance of common stock in connection with employee stock purchase plan13,669 — 675 675 
Other comprehensive loss, net of tax(490)(490)
Net loss
(38,298)(38,298)
Balances at September 30, 202254,819,462 $5 $386,593 3,051,519 $(32,380)$(490)$(214,043)$139,685 
Voting Common Stock (Class A and B)
Additional
Paid-in
Capital
Treasury Stock
Accumulated
Deficit
Total
Stockholders’ Equity
Shares
Amount
Shares
Amount
Balances at December 31, 202053,266,472 $5 $328,343 3,006,448 $(29,206)$(147,043)$152,099 
Exercise of stock options
56,747 — 30 30 
Stock-based compensation14,579 14,579 
Issuance of common stock from equity award settlement
646,165 —  
Taxes paid related to net share settlement of equity awards
19,952 (1,618)(1,618)
Proceeds from disgorgement of stockholder short-swing profits1,664 1,664 
Net loss
(18,802)(18,802)
Balances at September 30, 202153,969,384 $5 $344,616 3,026,400 $(30,824)$(165,845)$147,952 


See Notes to Condensed Consolidated Financial Statements.
9

Sprout Social, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended September 30,
20222021
Cash flows from operating activities
Net loss$(38,298)$(18,802)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation of property and equipment2,127 2,230 
Amortization of line of credit issuance costs30 144 
Amortization of premium (accretion of discount) on marketable securities(20)502 
Amortization of acquired intangible assets782 782 
Amortization of deferred commissions13,310 8,620 
Amortization of right-of-use operating lease asset696 503 
Stock-based compensation expense34,030 14,579 
Provision for accounts receivable allowances562 141 
Changes in operating assets and liabilities
Accounts receivable(1,807)995 
Prepaid expenses and other current assets(2,208)2,510 
Deferred commissions(19,738)(14,988)
Accounts payable and accrued expenses4,808 4,414 
Deferred revenue15,693 12,231 
Lease liabilities(2,251)(1,521)
Net cash provided by operating activities7,716 12,340 
Cash flows from investing activities
Purchases of property and equipment(1,427)(662)
Purchases of marketable securities(135,742)(79,524)
Proceeds from maturity of marketable securities118,370 68,710 
Net cash used in investing activities(18,799)(11,476)
Cash flows from financing activities
Payments for line of credit issuance costs(23)(123)
Proceeds from exercise of stock options14 30 
Proceeds from employee stock purchase plan675  
Proceeds from disgorgement of stockholders short-swing profits 1,664 
Employee taxes paid related to the net share settlement of stock-based awards(1,556)(1,618)
Net cash used in financing activities(890)(47)
Net (decrease) increase in cash and cash equivalents(11,973)817 
Cash and cash equivalents
Beginning of period107,114 114,515 
End of period$95,141 $115,332 
Supplemental noncash disclosures
Operating lease liability arising from operating ROU asset obtained$1,079 $ 
See Notes to Condensed Consolidated Financial Statements.
10

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, 2021, 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, 2021 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, 2021, filed with the SEC on February 23, 2022.
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, including but not limited to the potential impacts arising from the COVID-19 pandemic and the effects of global macroeconomic and geopolitical uncertainty. As the extent and duration of the impact of these factors remains uncertain, the Company’s estimates and judgments may evolve as conditions change. 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 November 4, 2022, the date of issuance of this Quarterly Report on Form 10-Q. 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
11

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
operating leases, calculation of allowance for credit losses, useful lives of long-lived assets, stock-based compensation, income taxes, commitments and contingencies and litigation, among others.
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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 23, 2022. There have been no significant changes to these policies during the nine months ended September 30, 2022.
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-cancelable 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 September 30, 2022 and 2021 that was included in deferred revenue at the beginning of each period was $38.8 million and $26.8 million, respectively. The amount of revenue recognized during the nine months ended September 30, 2022 and 2021 that was included in deferred revenue at the beginning of each period was $63.6 million and $39.3 million, respectively.
As of September 30, 2022, including amounts already invoiced and amounts contracted but not yet invoiced, $136.9 million of revenue is expected to be recognized from remaining performance obligations, of which 81% is expected to be recognized in the next 12 months, with the remainder thereafter.
3.Operating Leases
The Company has operating lease agreements for offices in Chicago, Illinois, and Seattle, Washington. The Chicago lease expires in January 2028 and the Seattle lease expires in January 2031. The Company’s existing operating leases require escalating monthly rental payments ranging from $72,000 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 Company entered into a new lease agreement for an office in Dublin, Ireland, with an expected total future commitment of $1.1 million and lease commencement date of July 2022. The lease has an expected expiration date of June 2024. For accounting purposes under ASC 842, the lease
12

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
commenced on June 30, 2022, resulting in the recording of a $1.1 million right-of-use operating lease asset and operating lease liability.
The following table provides a summary of operating lease assets and liabilities as of September 30, 2022 (in thousands):
Assets
Operating lease right-of-use assets $9,842 
Liabilities
Operating lease liabilities3,350 
Operating lease liabilities, non-current19,117 
Total operating lease liabilities$22,467 
The following table provides information about leases on the condensed consolidated statements of operations (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Operating lease expense$640 $503 $1,646 $1,505 
Variable lease expense866 839 2,599 2,517 
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 nine months ended September 30, 2022 and September 30, 2021 were $5.7 million and $5.0 million, respectively. As of September 30, 2022, the weighted-average remaining lease term is 6.1 years and the weighted-average discount rate is 5.5%.
Remaining maturities of operating lease liabilities as of September 30, 2022 are as follows (in thousands):
Years ending December 31,
2022$1,112 
20234,513 
20244,358 
20254,205 
20264,298 
Thereafter7,995 
Total future minimum lease payments$26,481 
Less: imputed interest(4,014)
Total operating lease liabilities$22,467 

13

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 generally 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.
The Company accounts for Global Intangible Low–Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.
There has historically been no federal or state provision for income taxes because the Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets. For the nine months ended September 30, 2022, the Company recognized an immaterial provision related to foreign income taxes.
5.Incentive Stock Plan
Stock-based compensation expense is included in the unaudited condensed consolidated statements of operations as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Cost of revenue$674 $280 $1,888 $698 
Research and development3,122 1,067 7,907 2,721 
Sales and marketing6,164 2,316 16,341 6,793 
General and administrative3,014 1,563 7,894 4,367 
Total stock-based compensation$12,974 $5,226 $34,030 $14,579 


14

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 September 30, 2022 that are not disclosed elsewhere are as follows (in thousands):
Years ending December 31,
2022$7,578 
202317,687 
20242,523 
2025610 
2026 
Thereafter 
Total contract commitments$28,398 
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 September 30, 2022.
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 September 30, 2022.
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 September 30, 2022 and December 31, 2021, there were no significant long-lived assets held by entities outside of the United States.
15

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Revenue by geographical region is determined by location of the Company’s customers. Revenue from customers outside of the United States was approximately 28% for the nine months ended September 30, 2022 and 2021. Revenue by geographical region is as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Americas$51,315 $38,888 $144,830 $105,998 
EMEA10,984 7,788 30,713 21,743 
Asia Pacific3,008 2,415 8,625 6,853 
Total$65,307 $49,091 $184,168 $134,594 
8.Net Loss per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of outstanding shares of common stock for each period. Diluted net loss per share is calculated by giving effect to all potential dilutive common stock equivalents, which includes stock options, restricted stock units, and restricted stock awards. Because the Company incurred net losses each period, the basic and diluted calculations are the same. Basic and diluted net loss per share are the same for each class of common stock, as both Class A and Class B stockholders are entitled to the same liquidation and dividend rights.
The following table presents the calculation for basic and diluted net loss per share (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net loss attributable to common shareholders$(13,933)$(6,993)$(38,298)$(18,802)
Weighted average common shares outstanding54,716,770 53,908,520 54,450,003 53,670,652 
Net loss per share, basic and diluted$(0.25)$(0.13)$(0.70)$(0.35)
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.
September 30,
20222021
Stock options outstanding59,510 104,263 
RSUs2,688,608 1,897,648 
Total potentially dilutive shares2,748,118 2,001,911 

16

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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):
September 30, 2022
Level 1Level 2Level 3Total
Marketable Securities:
  Corporate bonds$ $26,918 $ $26,918 
  Commercial paper 36,975  36,975 
  U.S. Treasury securities 16,415  16,415 
  Asset-backed securities 3,643  3,643 
  U.S. agency securities 2,771  2,771 
Total assets$ $86,722 $ $86,722 
December 31, 2021
Level 1Level 2Level 3Total
Marketable Securities:
  Corporate bonds$ $26,274 $ $26,274 
  Commercial paper 33,481  33,481 
  Asset-backed securities $10,066 $ 10,066 
Total assets$ $69,821 $ $69,821 
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 September 30, 2022 and December 31, 2021, there
17

Sprout Social, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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):
September 30, 2022December 31, 2021
Due in one year or less76,967 69,821 
Due after one year and within two years9,755  
Total86,722 69,821 

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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, including the potential impact of the COVID-19 pandemic on our business. 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 this Quarterly Report and Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, 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 34,000 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 $65.3 million and $49.1 million during the three months ended September 30, 2022 and 2021, respectively, representing growth of 33%. We generated revenue of $184.2 million and $134.6 million during the nine months ended September 30, 2022 and 2021, respectively, representing growth of 37%. In the nine months ended September 30, 2022, software subscriptions contributed 99% of our revenue.
We generated net losses of $13.9 million and $7.0 million during the three months ended September 30, 2022 and 2021, respectively, which included stock-based compensation expense of $13.0 million and $5.3 million, respectively. We generated net losses of $38.3 million and $18.8 million during the nine months ended September 30, 2022 and 2021, respectively, which included stock-based
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compensation expense of $34.0 million and $14.6 million, respectively. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.
COVID-19
We continue to monitor the actual and potential effects of the COVID-19 pandemic across our business. The extent of the pandemic’s impact on our operational and financial performance and financial position will depend on certain developments, including the duration and spread of the outbreak and the governmental responses to address the pandemic and any re-emergence of COVID-19, impact on our customers and sales cycles and impact on our employees, all of which are uncertain and cannot be predicted.
Given the importance of our technology platform and heightened market awareness of social media as a strategic communications channel, the pandemic has not had a material adverse impact on our operational and financial performance to date. We will continue to monitor the potential impact of COVID-19; however, at this time, the extent to which the pandemic may impact our financial condition or results of operations is uncertain.
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 34,000 customers. In November 2022, we announced a price increase, which may result in a decrease in our total number of customers or the number of new customers we are able to acquire, even as the average spend of each new customer increases over time.
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 nine months ended September 30, 2022 was approximately 28% 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
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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. 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 September 30,
20222021
Number of customers34,258 30,705 
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 September 30,
20222021
(in thousands)
ARR$271,266 $204,641 
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 September 30,
20222021
Number of customers contributing more than $10,000 in ARR
6,111 4,380 
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
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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 September 30,
20222021
Number of customers contributing more than $50,000 in ARR843 478 

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.
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
22


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 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 also recognized certain non-recurring professional fees and other expenses as part of our transition to becoming a public company and expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with rules and regulations applicable to companies listed on a U.S. securities exchange, costs related to compliance and reporting obligations pursuant to the rules and regulations of the SEC, investor relations and professional services. 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 expense related to our line of credit, which expired in January 2022, and is offset by 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 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 September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Revenue
Subscription$64,536 $48,570 $182,048 $133,105 
Professional services and other771 521 2,120 1,489 
Total revenue65,307 49,091 184,168 134,594 
Cost of revenue(1)
Subscription15,008 12,088 43,641 32,723 
Professional services and other304 258 802 775 
Total cost of revenue15,312 12,346 44,443 33,498 
Gross profit49,995 36,745 139,725 101,096 
Operating expenses
Research and development(1)
16,278 10,551 44,717 27,831 
Sales and marketing(1)
32,411 21,383 88,373 59,358 
General and administrative(1)
15,691 11,649 45,162 32,276 
Total operating expenses64,380 43,583 178,252 119,465 
Loss from operations(14,385)(6,838)(38,527)(18,369)
Interest expense(29)(78)(128)(227)
Interest income728 73 1,172 190 
Other expense, net(160)(86)(558)(260)
Loss before income taxes(13,846)(6,929)(38,041)(18,666)
Income tax expense87 64 257 136 
Net loss$(13,933)$(6,993)$(38,298)$(18,802)
_______________
(1)Includes stock-based compensation expense as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Cost of revenue$674 $280 $1,888 $698 
Research and development3,122 1,067 7,907 2,721 
Sales and marketing6,164 2,316 16,341 6,793 
General and administrative3,014 1,563 7,894 4,367 
Total stock-based compensation$12,974 $5,226 $34,030 $14,579 

24


Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(as a percentage of total revenue)
Revenue
Subscription99 %99 %99 %99 %
Professional services and other%%%%
Total revenue100 %100 %100 %100 %
Cost of revenue
Subscription23 %25 %24 %24 %
Professional services and other— %%— %%
Total cost of revenue23 %25 %24 %25 %
Gross profit77 %75 %76 %75 %
Operating expenses
Research and development25 %21 %24 %21 %
Sales and marketing50 %44 %48 %44 %
General and administrative24 %24 %25 %24 %
Total operating expenses99 %89 %97 %89 %
Loss from operations(22)%(14)%(21)%(14)%
Interest expense— %— %— %— %
Interest income%— %%— %
Other expense, net— %— %— %— %
Loss before income taxes(21)%(14)%(21)%(14)%
Income tax expense— %— %— %— %
Net loss(21)%(14)%(21)%(14)%
Note: Certain amounts may not sum due to rounding


25


Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Revenue
Three Months Ended September 30,
Change
20222021
Amount
%
(dollars in thousands)
Revenue
Subscription$64,536 $48,570 $15,966 33 %
Professional services and other771 521 250 48 %
Total revenue$65,307 $49,091 $16,216 33 %
Percentage of Total Revenue
Subscription99 %99 %
Professional services and other%%
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 30,705 as of September 30, 2021 to 34,258 as of September 30, 2022. Customers contributing over $10,000 in ARR grew 40% versus the prior year and customers contributing over $50,000 in ARR grew 76% 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 September 30,
Change
20222021
Amount
%
(dollars in thousands)
Cost of revenue
Subscription$15,008 $12,088 $2,920 24 %
Professional services and other304 258 46 18 %
Total cost of revenue15,312 12,346 2,966 24 %
Gross profit$49,995 $36,745 $13,250 36 %
Gross margin
Total gross margin77 %75 %
26


The increase in cost of subscription revenue for the three months ended September 30, 2022 compared to the th