Item 7. Management’s Discussion and Analysis
Item 7. 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 “Selected Consolidated Financial and Other Data” and our audited consolidated financial statements and related notes included elsewhere in this Annual 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” and in other parts of this Annual Report.
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 26,000 customers across 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, Pinterest, LinkedIn, Google, Reddit, Glassdoor and YouTube, 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 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.
Since our founding, we have achieved several key milestones:
• 2010 — Founded Company, launched V1 beta and Lightbank became an investor;
• 2011 — Launched our Sprout platform, surpassed 1,000 customers and entities affiliated with NEA became investors;
• 2013 — Reached 100 employees;
• 2015 — Surpassed 15,000 customers;
• 2016 — Reached 250 employees and Goldman Sachs became an investor;
• 2017 — Completed first business acquisition and awarded one of Glassdoor’s “Best Places to Work, companies under 1,000 employees, 2017” and one of the “Top CEOs, companies under 1,000 employees, 2017”;
• 2018 — Surpassed 20,000 customers, opened EMEA office, reached 500 employees, launched first add-on module (Listening), Future Fund became an investor and awarded one of Glassdoor’s “Best Places to Work, companies under 1,000 employees, 2018” and one of the “Top CEOs, companies under 1,000 employees, 2018”;
• 2019 — Completed our IPO resulting in $134.3 million of net proceeds (excluding $10.0 million of additional net proceeds from the underwriters’ exercise of their over-allotment option in January 2020), surpassed $100 million in total ARR and awarded one of Glassdoor’s “Top CEOs, companies under 1,000 employees, 2019”; and
• 2020 — Completed our follow-on offering resulting in $42.1 million in net proceeds, awarded one of Glassdoor’s “Best Place to Work” in 2020, recognized as one of Fortune’s 100 Best
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Small and Medium Workplaces, one of Fortune’s 25 Best Small and Medium Workplaces for Women, and selected as a recipient of the 2020 Tech Cares Award from TrustRadius, awarded to tech companies that went above and beyond to support their clients and communities during the COVID-19 Pandemic.
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 $132.9 million, $102.7 million and $78.8 million during the years ended December 31, 2020, 2019, and 2018, respectively, representing growth of 29% in 2020 and 30% in 2019. Excluding the impact of the 2017 acquisition of Simply Measured, Inc., or Simply Measured, our organic growth rate in 2020 and 2019 was 36% and 44%, respectively. This organic growth rate excludes the impact of revenue generated from legacy Simply Measured products as well as revenue from the transition of legacy customers to our platform up to an amount equal to such customers’ prior spend on legacy Simply Measured products. This organic growth rate includes all incremental revenue generated above such prior spend from the sale of additional or higher-priced products and users and profiles to legacy customers of Simply Measured. In 2020, software subscriptions contributed 99% of our revenue. We generated net losses of $31.7 million, $46.8 million, and $20.9 million during the years ended December 31, 2020, 2019, and 2018, respectiv ely. Our net losses include stock-based compensation expense of $11.1 million, $25.3 million and $0.1 million in the years ended December 31, 2020, 2019, and 2018, respectively. The higher stock-based compensation expense in 2019 was primarily due to the vesting of RSUs in connection with our IPO in December 2019. We expect to continue investing in the growth of our business and, as a result, generate net losses for the foreseeable future.
COVID-19
In December 2019, a novel coronavirus disease (“COVID-19”) was identified. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. The extent of the impact of COVID-19 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, our operational and financial performance were not materially impacted by COVID-19 during the year ended December 31, 2020. Our recent IPO in December 2019 resulted in $134.3 million net procee ds, as well as an additional $10.0 million of net proceeds received in January 2020 as a result of our sale of over-allotment shares to the underwriters of the Company’s IPO, all of wh ich strengthened our liquidity position prior to the pandemic. The $42.1 million in net proceeds from our equity follow-on offering in August 2020 has further strengthened our liquidity position.
We believe that over the long term, we will continue to see strong demand for our technology platform; however, the duration and spread of the pandemic could impact our customers’ marketing or
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social media budgets or ability to pay for existing subscriptions, particularly in the industries most impacted by COVID-19. 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 26,000 customers. We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by comparing (i) gross profit from net new organic ARR for the year divided by one minus the estimated subscription renewal rate to (ii) total sales and marketing expense incurred in the preceding year. On this basis, we estimate that for each of 2020 and 2019, the calculated lifetime value of our customers has exceeded six times the associated cost of acquiring them. This calculation assumes the actual subscription renewal rate for the period will remain consistent in future years. While we believe this assumption is reasonable based on our historic data and experience, subscription renewal rates may vary year-to-year, and the lifetime value of our customers may decline or fluctuate between periods. Moreover, our sales and marketing expense reflects the amortization of sales commissions, which are deferred and amortized over a three-year period in accordance with GAAP. If all sales commissions incurred in the year were expensed and not amortized, the result would not have a material impact on the lifetime value of our customers. See “—Key Business Metrics—Organic ARR” for more information on how we define and calculate organic ARR.
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 recently increased our focus on expanding their use of our platform over time.
We use dollar-based net retention rate to evaluate the long-term value of our customer relationships, because we believe this metric reflects our ability to retain and expand subscription revenue generated from our existing customers. Our dollar-based net retention rate for the years ended December 31, 2020 and 2019 was 110% in both years. Our dollar-based net retention rate excluding our SMB customers for the years ended December 31, 2020 and 2019 was 117% and 120%, respectively.
We calculate dollar-based net retention rate by dividing the organic ARR from our customers as of December 31st in the reported year by the organic ARR from those same customers as of December 31st in the previous year. This calculation is net of upsells, contraction, cancellation or expansion during the period but excludes organic ARR from new customers. See “—Key Business Metrics—Organic ARR” for more information on how we define and calculate organic ARR.
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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 year ended December 31, 2020 was approximately 29% of our total revenue. We have built local teams in Ireland, Canada, the United Kingdom, Singapore, India and Australia 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. Number of customers excludes customers exclusively using legacy products obtained through the acquisition of Simply Measured. 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 December 31,
2020 2019
Number of customers 26,718 23,693
Total ARR
Total ARR is ARR from all of our products. We define ARR as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period. Total ARR includes the impact of recurring revenue generated from legacy Simply Measured products, which a small number of legacy Simply Measured customers have continued to access in the periods presented. We believe total ARR is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term.
As of December 31,
2020 2019
(in thousands)
Total ARR
$ 158,268 $ 117,846
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Organic ARR
Organic ARR is ARR excluding the impact of recurring revenue generated from legacy Simply Measured products. We believe organic ARR is an indicator of the scale and visibility of our core platform while mitigating fluctuations due to seasonality and contract term.
As of December 31,
2020 2019
(in thousands)
Organic ARR
$ 157,182 $ 115,185
Number of customers contributing more than $10,000 in ARR
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.
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.
As of December 31,
2020 2019
Number of customers contributing more than $10,000 in ARR
3,149 2,185
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
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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. However, we expect our research and development expenses to decrease as a percentage of our revenue over time.
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
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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 expenses on outstanding line of credit balances and is offset by interest income earned on our cash and investment balances.
Other Income
Other income consists of sublease rental income from our Seattle, Washington and San Francisco, California offices.
Income Tax Provision
The income tax provision consists of current and deferred taxes for our U.S. and foreign jurisdictions. We have historically reported a taxable loss in our most significant jurisdiction, the U.S., 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.
Years Ended December 31,
2020 2019 2018
(in thousands)
Revenue
Subscription $ 131,804 $ 102,243 $ 78,392
Professional services and other 1,145 464 421
Total revenue 132,949 102,707 78,813
Cost of revenue (1)
Subscription 34,196 27,862 20,726
Professional services and other 721 292 268
Total cost of revenue 34,917 28,154 20,994
Gross profit 98,032 74,553 57,819
Operating expenses
Research and development (1)
30,491 28,059 25,426
Sales and marketing (1)
59,137 55,584 35,980
General and administrative (1)
40,406 38,178 17,185
Total operating expenses 130,034 121,821 78,591
Loss from operations (32,002) (47,268) (20,772)
Interest expense (366) (270) (617)
Interest income 617 307 35
Other income 223 490 442
Loss before income taxes (31,528) (46,741) (20,912)
Income tax expense 127 66 22
Net loss and comprehensive loss $ (31,655) $ (46,807) $ (20,934)
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(1) Includes stock-based compensation expense as follows:
Years Ended December 31,
2020 2019 2018
(in thousands)
Cost of revenue $ 749 $ 1,126 $ 9
Research and development 1,935 2,290 28
Sales and marketing 2,464 8,697 15
General and administrative 5,931 13,220 1
Total stock-based compensation $ 11,079 $ 25,333 $ 53
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Years Ended December 31,
2020 2019 2018
(as a percentage of total revenue)
Revenue
Subscription 99 % 100 % 99 %
Professional services and other 1 % — % 1 %
Total revenue 100 % 100 % 100 %
Cost of revenue
Subscription 26 % 27 % 26 %
Professional services and other — % — % — %
Total cost of revenue 26 % 27 % 26 %
Gross profit 74 % 73 % 74 %
Operating expenses
Research and development 23 % 27 % 32 %
Sales and marketing 45 % 54 % 46 %
General and administrative 30 % 37 % 22 %
Total operating expenses 98 % 118 % 100 %
Loss from operations (24) % (45) % (26) %
Interest expense — % — % (1) %
Interest income — % — % — %
Other income — % — % — %
Loss before income taxes (24) % (45) % (27) %
Income tax expense — % — % — %
Net loss and comprehensive loss (24) % (45) % (27) %
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenue
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Revenue
Subscription $ 131,804 $ 102,243 $ 29,561 29 %
Professional services and other 1,145 464 681 147 %
Total revenue $ 132,949 $ 102,707 $ 30,242 29 %
Percentage of Total Revenue
Subscription 99 % 100 %
Professional services and other 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 23,693 as of December 31, 2019 to 26,718 as of December 31, 2020. The increase in new customers was primarily
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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
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Cost of revenue
Subscription $ 34,196 $ 27,862 $ 6,334 23 %
Professional services and other 721 292 429 147 %
Total cost of revenue 34,917 28,154 6,763 24 %
Gross profit $ 98,032 $ 74,553 $ 23,479 31 %
Gross margin
Total gross margin 74 % 73 %
The increase in cost of subscription revenue for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:
Change
( in thousands )
Data provider fees $ 4,790
Personnel costs 1,220
Stock-based compensation expense (377)
Other 701
Subscription cost of revenue $ 6,334
Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 12% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth. The decrease in stock-based compensation was due to the higher expense in 2019 related to employee restricted stock units (“RSUs”) vesting upon the completion of our IPO on December 17, 2019.
Operating Expenses
Research and Development
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Research and development $ 30,491 $ 28,059 $ 2,432 9 %
Percentage of total revenue 23 % 27 %
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The increase in research and development expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:
Change
( in thousands )
Personnel costs $ 2,933
Stock-based compensation expense (355)
Other (146)
Research and development $ 2,432
Personnel costs increased as a result of increased headcount to grow our research and development teams to drive our technology innovation through the development of new products and features. Since prior year, we have increased headcount within our engineering team by 9%. The decrease in stock-based compensation was due to the higher expense in 2019 related to employee RSUs vesting upon the completion of our IPO on December 17, 2019.
Sales and Marketing
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Sales and marketing $ 59,137 $ 55,584 $ 3,553 6 %
Percentage of total revenue 45 % 54 %
The increase in sales and marketing expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:
Change
( in thousands )
Personnel costs $ 8,953
Stock-based compensation expense (6,233)
Other 833
Sales and marketing $ 3,553
Personnel costs increased primarily as a result of a 25% 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 decrease in stock-based compensation was due to higher expense in 2019 related to employee RSUs vesting upon the completion of our IPO on December 17, 2019.
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General and Administrative
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
General and administrative $ 40,406 $ 38,178 $ 2,228 6 %
Percentage of total revenue 30 % 37 %
The increase in general and administrative expense for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following:
Change
( in thousands )
Personnel costs $ 7,513
Accounting and legal fees 850
Stock-based compensation expense (7,289)
Other 1,154
General and administrative $ 2,228
Personnel costs increased primarily as a result of an 18% increase in headcount as we continue to grow our business and operate as a publicly traded company. Accounting and legal fees increased due to operating as a publicly traded company and costs incurred with the equity follow-on offering. The decrease in stock-based compensation was due to higher expense in 2019 related to a restricted stock award and RSU grants to our Chairman and Chief Executive Officer that immediately vested in June and December 2019, respectively, as well as expense related to employee RSUs vesting upon the completion of our IPO on December 17, 2019. The increase in other was primarily driven by an increase of $0.3 million in consulting fees, an increase of $0.3 million in charitable contributions, and other expenses related to overhead and operating as a publicly traded company.
Interest Income (Expense), Net
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Interest income (expense), net $ 251 $ 37 $ 214 n/m (1)
Percentage of total revenue — % — %
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(1) Calculated metric is not meaningful.
The increase in net interest income was primarily driven by interest earned on cash deposits and marketable securities related to the proceeds of our IPO and equity follow-on offering.
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Other Income
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Other income $ 223 $ 490 $ (267) (54) %
Percentage of total revenue — % — %
The decrease in other income is due to sublease rental income declining as the San Francisco office lease expired in June 2019.
Income Tax Expense
Years Ended December 31,
Change
2020 2019 Amount %
( dollars in thousands )
Income tax expense $ 127 $ 66 $ 61 92 %
Percentage of total revenue — % — %
The increase in income tax expense is due to the provision related to foreign income taxes.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenue
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Revenue
Subscription $ 102,243 $ 78,392 $ 23,851 30 %
Professional services and other 464 421 43 10 %
Total revenue $ 102,707 $ 78,813 $ 23,894 30 %
Percentage of Total Revenue
Subscription 100 % 99 %
Professional services and other — % 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 21,135 as of December 31, 2018 to 23,693 as of December 31, 2019. 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.
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Cost of Revenue and Gross Margin
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Cost of revenue
Subscription $ 27,862 $ 20,726 $ 7,136 34 %
Professional services and other 292 268 24 9 %
Total cost of revenue 28,154 20,994 7,160 34 %
Gross profit $ 74,553 $ 57,819 $ 16,734 29 %
Gross margin
Total gross margin 73 % 74 %
The increase in cost of subscription revenue for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to the following:
Change
( in thousands )
Data provider fees $ 2,989
Personnel costs 2,913
Stock-based compensation expense 1,117
Other 117
Subscription cost of revenue $ 7,136
Fees paid to our data providers increased due to revenue growth. Personnel costs increased primarily as a result of a 63% increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth. The increase in stock-based compensation was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.
Operating Expenses
Research and Development
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Research and development $ 28,059 $ 25,426 $ 2,633 10 %
Percentage of total revenue 27 % 32 %
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The increase in research and development expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to the following:
Change
( in thousands )
Stock-based compensation expense $ 2,262
Other 371
Research and development $ 2,633
The increase in stock-based compensation was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.
Sales and Marketing
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Sales and marketing $ 55,584 $ 35,980 $ 19,604 54 %
Percentage of total revenue 54 % 46 %
The increase in sales and marketing expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to the following:
Change
( in thousands )
Personnel costs $ 9,748
Stock-based compensation expense 8,682
Other 1,174
Sales and marketing $ 19,604
Personnel costs increased primarily as a result of a 31% 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 was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.
General and Administrative
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
General and administrative $ 38,178 $ 17,185 $ 20,993 122 %
Percentage of total revenue 37 % 22 %
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The increase in general and administrative expense for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to the following:
Change
( in thousands )
Stock-based compensation expense $ 13,219
Personnel costs 2,755
Bad debt expense 1,415
Rent expense 1,101
Other 2,503
General and administrative $ 20,993
Stock-based compensation expense increased $9.4 million as the result of restricted stock award and restricted stock unit grants to our Chairman and Chief Executive Officer that immediately vested in June and December 2019, respectively. The remaining increase in stock-based compensation was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019. Personnel costs increased primarily as a result of a 72% increase in headcount as we continue to grow our business. Bad debt expense increased due to higher accounts receivable balances and the attrition of customers acquired in the Simply Measured acquisition. Rent expense increased due to renting additional office space.
Interest Income (Expense), Net
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Interest income (expense), net $ 37 $ (582) $ 619 106 %
Percentage of total revenue — % (1) %
The increase in net interest income was driven by interest earned on cash deposits, as well as a decrease in interest expense related to line of credit borrowings.
Other Income
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Other income $ 490 $ 442 $ 48 11 %
Percentage of total revenue — % — %
The increase in other income is due to sublease rental income from our Seattle, Washington and San Francisco, California offices.
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Income Tax Expense
Years Ended December 31,
Change
2019 2018 Amount %
( dollars in thousands )
Income tax expense $ 66 $ 22 $ 44 n/m (1)
Percentage of total revenue — % — %
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(1) Calculated metric is not meaningful.
The increase in income tax expense is due to the provision related to foreign income taxes.
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 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.
Year Ended December 31,
2020 2019 2018
( dollars in thousands, except per share data )
Non-GAAP operating loss $ (20,923) $ (21,935) $ (20,719)
Non-GAAP net loss (20,576) (21,474) (20,881)
Non-GAAP net loss per share (0.40) (1.16) (1.26)
Free cash flow $ (15,367) $ (15,174) $ (19,335)
Non-GAAP Operating Loss
We define non-GAAP operating loss as GAAP loss from operations, excluding stock-based compensation expense. We believe non-GAAP operating 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, particularly given the impact of stock-based compensation expense recognized in December 2019 upon the completion of the IPO.
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Year Ended December 31,
2020 2019 2018
Reconciliation of Non-GAAP operating loss ( dollars in thousands )
Loss from operations $ (32,002) $ (47,268) $ (20,772)
Stock-based compensation expense 11,079 25,333 53
Non-GAAP operating loss $ (20,923) $ (21,935) $ (20,719)
Non-GAAP Net Loss
We define non-GAAP net loss as GAAP net loss and comprehensive loss, excluding stock-based compensation expense. We believe non-GAAP net 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, particularly given the impact of stock-based compensation expense recognized in December 2019 upon the completion of the IPO.
Year Ended December 31,
2020 2019 2018
Reconciliation of Non-GAAP net loss ( dollars in thousands )
Net loss and comprehensive loss $ (31,655) $ (46,807) $ (20,934)
Stock-based compensation expense 11,079 25,333 53
Non-GAAP net loss $ (20,576) $ (21,474) $ (20,881)
Non-GAAP Net Loss per Share
We define non-GAAP net 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 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, particularly given the impact of stock-based compensation expense recognized in December 2019 upon the completion of the IPO.
Year Ended December 31,
2020 2019 2018
Reconciliation of Non-GAAP net loss per share
Net loss per share attributable to common shareholders, basic and diluted $ (0.62) $ (2.54) $ (1.26)
Stock-based compensation expense per share 0.22 1.38 —
Non-GAAP net loss per share $ (0.40) $ (1.16) $ (1.26)
Free Cash Flow
Free cash flow is a non-GAAP financial measure that we define as net cash used in 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 used in our core operations that, after the purchases of property and equipment, is not 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
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reflect our future contractual obligations. Additionally, free cash flow does not represent the total increase or decrease in our cash balance for a given period.
Year Ended December 31,
2020 2019 2018
Reconciliation of Free cash flow ( dollars in thousands )
Net cash (used in) operating activities $ (11,352) $ (14,414) $ (17,238)
Purchases of property and equipment (4,015) (760) (2,097)
Free cash flow $ (15,367) $ (15,174) $ (19,335)
Quarterly Results of Operations
The following tables present selected unaudited quarterly statements of operations data for each of the eight fiscal quarters ended December 31, 2020, as well as the percentage of total revenue that each line item represents for each quarter for Sprout Social, Inc. and its subsidiaries. The information for each of these quarters has been prepared on a basis substantially consistent with our audited consolidated financial statements included elsewhere in this Annual Report and, in the opinion of management, includes all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report. These quarterly results are not necessarily indicative of our future results of operations to be expected for any future period.
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Three Months Ended
March 31, 2019 June
30, 2019
September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020
(in thousands)
Revenue
Subscription $ 23,332 $ 24,669 $ 26,284 $ 27,958 $ 30,329 $ 31,190 $ 33,370 $ 36,915
Professional services and other
47 94 137 186 206 212 296 431
Total revenue 23,379 24,763 26,421 28,144 30,535 31,402 33,666 37,346
Cost of revenue (1)
Subscription 5,815 6,154 7,144 8,749 8,086 8,178 8,588 9,344
Professional services and other
30 60 85 117 122 142 186 271
Total cost of revenue
5,845 6,214 7,229 8,866 8,208 8,320 8,774 9,615
Gross profit 17,534 18,549 19,192 19,278 22,327 23,082 24,892 27,731
Operating expenses
Research and development (1)
6,352 6,424 6,361 8,922 7,281 7,712 7,693 7,805
Sales and marketing (1)
10,452 11,728 11,894 21,510 13,894 14,184 14,774 16,285
General and administrative (1)
6,084 11,277 6,056 14,761 12,096 9,528 9,346 9,436
Total operating expenses
22,888 29,429 24,311 45,193 33,271 31,424 31,813 33,526
Loss from operations
(5,354) (10,880) (5,119) (25,915) (10,944) (8,342) (6,921) (5,795)
Interest expense (52) (77) (70) (71) (95) (96) (94) (81)
Interest income 105 90 61 51 460 53 50 54
Other income 149 131 108 102 102 101 19 1
Loss before income taxes
(5,152) (10,736) (5,020) (25,833) (10,477) (8,284) (6,946) (5,821)
Income tax expense
11 19 19 17 3 18 51 55
Net loss and comprehensive loss
$ (5,163) $ (10,755) $ (5,039) $ (25,850) $ (10,480) $ (8,302) $ (6,997) $ (5,876)
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(1) Includes stock-based compensation expense as follows:
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Three Months Ended
March 31, 2019 June
30, 2019
September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020
(in thousands)
Cost of revenue $ — $ — $ — $ 1,126 $ 295 $ 169 $ 153 $ 132
Research and development
— — — 2,290 484 450 509 492
Sales and marketing
— — — 8,697 469 697 667 631
General and administrative
— 5,298 65 7,857 2,274 1,165 1,231 1,261
Total stock-based compensation expense
$ — $ 5,298 $ 65 $ 19,970 $ 3,522 $ 2,481 $ 2,560 $ 2,516
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Three Months Ended
March 31, 2019 June
30, 2019
September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020 September 30, 2020 December 31, 2020
(as a percentage of total revenue)
Revenue
Subscription 100 % 100 % 99 % 99 % 99 % 99 % 99 % 99 %
Professional services and other
— % — % 1 % 1 % 1 % 1 % 1 % 1 %
Total revenue 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenue
Subscription 25 % 25 % 27 % 31 % 26 % 26 % 26 % 25 %
Professional services and other
— % — % — % — % — % — % — % — %
Total cost of revenue
25 % 25 % 27 % 31 % 26 % 26 % 26 % 25 %
Gross profit 75 % 75 % 73 % 69 % 74 % 74 % 74 % 75 %
Operating expenses
Research and development
27 % 26 % 24 % 32 % 24 % 25 % 23 % 21 %
Sales and marketing
45 % 47 % 45 % 76 % 46 % 45 % 44 % 44 %
General and administrative
26 % 46 % 23 % 52 % 40 % 30 % 28 % 25 %
Total operating expenses
98 % 119 % 92 % 160 % 110 % 100 % 95 % 90 %
Loss from operations
(23) % (44) % (19) % (91) % (36) % (26) % (21) % (15) %
Interest expense — % — % — % — % — % — % — % — %
Interest income — % — % — % — % 2 % — % — % — %
Other income 1 % 1 % (1) % — % — % — % — % — %
Loss before income taxes
(22) % (43) % (20) % (91) % (34) % (26) % (21) % (15) %
Income tax expense
— % — % — % — % — % — % — % — %
Net loss and comprehensive loss
(22) % (43) % (20) % (91) % (34) % (26) % (21) % (15) %
Quarterly Revenue, Cost of Revenue and Gross Profit Trends
Our revenue increased sequentially for all periods presented primarily due to increased subscription revenue from new customers and expansion within existing customers. Total cost of revenue increased sequentially for all periods presented, consistent with our revenue growth, in order to support our overall growth. Gross profit generally increased sequentially in each of the quarters presented, primarily driven by an increase in revenue. Our gross profit margins were generally consistent for all periods presented. During the fourth quarter of 2019, our total cost of revenue and gross profit margins were impacted by stock-based compensation that was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019.
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Quarterly Operating Expenses Trends
Total operating expenses generally increased sequentially for all periods presented due primarily to increases in headcount, other related personnel costs to support our growth, and operating as a new publicly traded company. We plan to continue our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our product offerings. We also plan to continue our investment in sales and marketing for the foreseeable future and incur additional costs for increased headcount for our sales department. During the second quarter of 2019, we experienced a significant increase in general and administrative expenses due to $5.3 million of stock-based compensation expense as the result of a restricted stock award to our Chairman and Chief Executive Officer that immediately vested in June 2019. During the fourth quarter of 2019, we experienced a significant one-time increase in operating expenses from stock-based compensation that was due to the initial expense related to employee RSUs vesting as a result of the completion of our IPO on December 17, 2019. During the year ended December 31, 2020, we incurred $11.1 million in stock-based compensation and additional expenses to support business growth and from operating as a publicly traded company. For the foreseeable future, we expect to continue to expand our general and administrative functions to support the growth of our business and our operations as a public company.
Liquidity and Capital Resources
Our liquidity and capital resources were not materially impacted by the COVID-19 pandemic and the governmental responses to address the pandemic and the related economic impact during the year ended December 31, 2020. For further discussion regarding the future potential impacts of COVID-19 and the related economic impacts on our liquidity and capital resources, see “Risk Factors—Risks Related to our Business Model and Operations—The effects of the COVID-19 pandemic are unpredictable and may materially affect our customers and how we operate our business, and the duration and extent to which the pandemic continues (including any reemergence of COVID-19) to threaten our future results of operations and overall financial performance remains uncertain.”
As of December 31, 2020, our principal sources of liquidity were cash and cash equivalents of $114.5 million, marketable securities of $49.4 million, and net accounts receivable of $17.2 million. We have generated losses from operations and negative cash flows from operations, as evidenced by our accumulated deficit and statement of cash flows. We expect to continue to incur operating losses and 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 if the COVID-19 pandemic and the governmental responses to address the pandemic and any re-emergence of COVID-19 persist for a prolonged period of time. The impact of the COVID-19 pandemic 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. See Notes 1, 7 and 8 to our audited consolidated financial statements for more information regarding these transactions. 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. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, billing frequency, the impact of the COVID-19 pandemic 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
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introduction of new and enhanced product offerings, and the continuing market acceptance of our product. In the future, we may 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.
SVB Credit Facility
In December 2017, we entered into a Loan and Security Agreement with Silicon Valley Bank, or SVB, which comprised a $15.0 million line of credit, or the Revolver, and a $5.0 million incremental revolving line commitment, or the Incremental Revolver, and, together with the Revolver, the SVB Credit Facility.
In November 2019, we amended the SVB Credit Facility to increase the Revolver (including the exercise of the Incremental Revolver, as amended) to $40.0 million and amended, among other terms, levels for the minimum adjusted EBITDA and minimum liquidity covenants, the advance rate and the interest rate. The November 2019 amendment includes a “streamline period”, or Streamline Period, concept, which occurs when we maintain, for every consecutive day in the immediately preceding fiscal quarter, the sum of (i) unrestricted cash at SVB plus (ii) unused availability under the Revolver in an amount equal to or greater than $75.0 million (the Streamline Balance). Any Streamline Period terminates on the earlier of the occurrence of an event of default and failure to maintain the Streamline Balance. The minimum adjusted EBITDA and minimum liquidity covenants do not apply during any Streamline Period. As of December 31, 2020, we did not have any outstanding principal balance under the SVB Credit Facility.
In connection with the November 2019 amendment, the Revolver now has a floating interest rate equal to the greater of (i) 4.75% and (ii) (x) at any time when the Streamline Period is not in effect, one and one-half of one percent (1.50%) above the prime rate and (y) at any time when the Streamline Period is in effect, the prime rate, which interest is payable monthly. The SVB Credit Facility matures on January 31, 2022.
The SVB Credit Facility contains customary negative covenants that limit our ability to, or require mandatory prepayment in the event that we, among other things, incur additional indebtedness or liens, merge with other companies or consummate certain changes of control, acquire other companies, engage in new lines of business, add new offices or business locations, make certain investments, pay dividends, transfer or dispose of certain assets, liquidate or dissolve and enter into various specified transactions. The SVB Credit Facility also contains affirmative covenants, including certain financial covenants such as minimum adjusted EBITDA and minimum liquidity covenants and financial reporting requirements. With limited exceptions, our obligations under the SVB Credit Facility are secured by all of our property other than intellectual property (which is subject to a negative pledge). As of December 31, 2020, we were in compliance with the covenants in the SVB Credit Facility.
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The following table summarizes our cash flows for the periods presented:
Years Ended December 31,
2020 2019 2018
(in thousands)
Net cash (used in) operating activities $ (11,352) $ (14,414) $ (17,238)
Net cash (used in) investing activities (53,802) (760) (2,097)
Net cash provided by financing activities
44,359 124,294 37,248
Net increase in cash $ (20,795) $ 109,120 $ 17,913
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.
Net cash used in operating activities during the year ended December 31, 2020 was $11.4 million, which resulted from a net loss of $31.7 million adjusted for non-cash charges of $26.7 million and net cash outflow of $6.4 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $11.1 million of stock-based compensation expense, $4.2 million of depreciation and intangible asset amortization expense, $7.7 million for amortization of deferred contract acquisition costs, which were primarily commissions, $2.0 million for bad debt expense and $1.1 million of amortization of right-of-use, or ROU, operating lease assets. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $14.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $8.1 million increase in gross accounts receivable, a $4.7 million increase in prepaid expenses and a $0.2 million decrease in operating lease liabilities. These outflows were offset by a $14.0 million increase in deferred revenue and a $6.6 million increase in accounts payable and other accrued liabilities.
Net cash used in operating activities during the year ended December 31, 2019 was $14.4 million, which resulted from a net loss of $46.8 million adjusted for non-cash charges of $37.9 million and net cash outflow of $5.5 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $25.3 million of stock-based compensation expense, $4.3 million of depreciation and intangible asset amortization expense, $4.8 million for amortization of deferred contract acquisition costs, which were primarily commissions, $2.2 million for bad debt expense and $1.1 million of amortization of right-of-use, or ROU, operating lease assets. The net cash outflow from changes in operating assets and liabilities was primarily the result of a $8.2 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $2.8 million increase in gross accounts receivable, a $2.7 million increase in prepaid expenses and a $1.6 million decrease in operating lease liabilities. These outflows were offset by a $8.2 million increase in deferred revenue.
Net cash used in operating activities during the year ended December 31, 2018 was $17.2 million, which resulted from a net loss of $20.9 million adjusted for non-cash charges of $7.8 million and net cash outflow of $4.1 million from changes in operating assets and liabilities. Non-cash charges primarily consisted of $4.0 million of depreciation and intangible asset amortization expense and $2.8 million for amortization of deferred contract acquisition costs, which were primarily commissions. The net cash outflow from changes in operating assets and liabilities was the result of a $7.0 million increase in deferred commissions due to the addition of new customers and expansion of the business, a $4.9 million increase in accounts receivable due to the growth of our business and a $1.2 million increase in prepaid expenses and other assets. These outflows were offset by a $7.2 million increase in deferred revenue and
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a $1.8 million net increase in accounts payable, accrued expenses and accrued wages and payroll due to growth in our business and higher headcount.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2020 was $53.8 million, which was primarily due to the purchase of marketable securities and leasehold improvements for the new Seattle office.
Net cash used in investing activities for the year ended December 31, 2019 was $0.8 million, which was primarily due to purchases of computer equipment and hardware.
Net cash used in investing activities for the year ended December 31, 2018 was $2.1 million, which was primarily due to leasehold improvements of our Chicago office.
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $44.4 million, which was primarily the result of $42.1 million of net proceeds from our equity follow-on offering, $10.0 million of net proceeds from our sale of over-allotment shares to the underwriters of our IPO, offset by $8.6 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards. Additionally, we received $1.1 million from the disgorgement of stockholder short-swing profits under Section 16(b) of the Exchange Act.
Net cash provided by financing activities for the year ended December 31, 2019 was $124.3 million, which was the result of $139.5 million of net proceeds from our IPO, offset by $9.9 million in payments related to the employee withholding taxes as a result of the net settlement of stock-based awards and $5.2 million in payments of deferred costs associated with our IPO.
Net cash provided by financing activities for the year ended December 31, 2018 was $37.2 million, which was primarily driven by the net proceeds of $40.3 million from the issuance of the Series D preferred stock, offset by net cash payments for borrowings on the line of credit of $3.0 million.
Contractual Obligations
The following table summarizes our non-cancellable contractual obligations as of December 31, 2020.
Payments Due by Period
Total Less Than
One Year
1-3 Years 3-5 Years More Than
Five Years
( in thousands )
Operating lease obligations $ 32,101 $ 3,540 $ 7,951 $ 8,317 $ 12,293
Other purchase obligations (1)
63,203 20,486 42,717 — —
Total $ 95,304 $ 24,026 $ 50,668 $ 8,317 $ 12,293
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(1) Consists of minimum guaranteed purchase commitments for data and services.
Off-Balance Sheet Arrangements
As of December 31, 2020, we did not have any relationships with any entities or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other purposes.
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Recent Accounting Pronouncements
Refer to section titled “Recently Adopted Accounting Pronouncements” in Note 1 of the notes to our audited consolidated financial statements for more information.
Critical Accounting Policies and Estimates
Our audited consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these audited 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.
We believe that of our significant accounting policies, which are described in Note 1 to our audited consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our audited consolidated financial condition and results of operations.
Revenue Recognition
We generate revenue 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. Our customers do not have the right to take possession of the online software solution.
We adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018, utilizing the full retrospective method of adoption. As such, the consolidated financial statements present revenue in accordance with Topic 606 for the periods presented.
We commence revenue recognition when control of these products is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for such products.
We determine revenue recognition through the following steps:
• identify the contract with a customer;
• identify the performance obligations in a contract;
• determination of the transaction price;
• allocate the transaction price to the performance obligations identified in the contract; and
• recognize revenue when (or as) performance obligations are satisfied.
We have determined that subscriptions for our online software products are a distinct performance obligation, because the online software product is fully functional once a customer has access. In addition, we sell additional professional services, which are considered a distinct performance obligation, as they are sold separately, and the customer can benefit from the services to make better use of the online product purchased. For contracts containing multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative standalone selling price, or SSP, of the services provided to the customer. We determine the SSP based upon the prices at which we separately sell subscription and various professional services, and based on our overall pricing
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objectives, taking into consideration market conditions, the value of our contracts, the types of offerings sold, customer demographics and other factors.
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 subscription service arrangements are generally non-cancellable during the contractual subscription term and do not provide for refunds of subscription fees. Professional services revenue is recognized at the time these services are provided to the customer and represent less than 1% of our revenue for the periods presented and is expected to be immaterial for the foreseeable future.
Deferred Revenue
Deferred revenue is recorded upon establishment of unconditional right to payment under non-cancellable contracts for subscription and professional services before transferring the related product or service to a customer. Deferred revenue is recognized to revenue over time as products and professional services are delivered. We generally invoice customers 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.
As of December 31, 2020, including amounts already invoiced and amounts contracted but not yet invoiced, $64.4 million of revenue is expected to be recognized from remaining performance obligations, of which 85% is expected to be recognized in the next 12 months, 13% is expected to be recognized in the subsequent 12 months and the remainder thereafter.
Deferred Sales Commissions
Sales force commissions are considered incremental costs of obtaining a contract with a customer. Sales commissions earned for initial contracts and for expansion of contracts with existing customers are deferred and amortized on a straight-line basis over a period of benefit of three years. We determined the three-year period by taking into consideration the products sold, expected customer life, expected contract renewals, technology life cycle and other factors.
Goodwill
Goodwill consists of the excess purchase price over the fair value of net assets acquired in purchase business combinations. We conduct a test for the impairment of goodwill on at least an annual basis as of October 1 st or sooner if indicators of impairment arise. We first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. As part of the qualitative assessment, we evaluate factors including macroeconomic conditions, industry and market considerations, cost factors and overall financial performance of its reporting units. While the most recent October 1 st assessment indicated no impairment, assumptions used in the qualitative assessment are highly sensitive to changes.
If we conclude that it is more likely than not that a reporting unit is impaired or if we elect not to perform the optional qualitative assessment, a quantitative assessment is performed. For the quantitative assessment, the fair value of each reporting unit is compared with the carrying amounts of net assets, including goodwill, related to each reporting unit. We recognize an impairment charge for the amount, if any, by which the carrying amount of a reporting unit exceeds the fair value of the reporting unit.
Stock-Based Compensation
For equity awards with only service conditions, we recognize compensation expense based on the grant‐date fair value on a straight-line basis over the remaining requisite service period for the award. For equity awards with both service and performance conditions, compensation expense is recognized on a graded vesting basis over the requisite service period once the achievement of the performance condition is considered probable.
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Restricted Stock Units
At the end of 2015, we began issuing restricted stock units to certain of our employees. The general terms of the restricted stock units required both a service and performance condition to be satisfied prior to vesting. The service condition is satisfied upon the participant’s completion of a required period of continuous service from the vesting start date. The performance condition was satisfied upon the consummation of our IPO, which resulted in recognition of stock-based compensation expense in the fourth quarter of 2019 for awards that had vested prior to December 31, 2019. In 2019 and 2020, we issued restricted stock units to certain employees that require a service condition to be satisfied prior to vesting, but that do not require a liquidity event condition to be satisfied prior to vesting. One executive grant was issued during 2020 under the 2019 Plan requiring both the satisfaction of a service condition and a performance condition which includes the achievement of certain subscription revenue targets, prior to vesting.
Pursuant to his employment agreement, our Chairman and CEO was eligible to receive awards of fully vested restricted stock units with respect to shares of our Class B common stock under our 2019 Class B Incentive Plan, or the Class B Plan, covering up to 1.0% of our fully diluted common equity determined as of the date of our IPO, or 483,663 shares, following the consummation of our IPO, depending on the valuation of the Company in connection with our IPO and the achievement of market capitalization thresholds thereafter, which we refer to as the Howard IPO Award. The initial grant under the Howard IPO Award was based on the valuation of the Company (calculated based on the closing price of the Company’s Class A common stock on its first trading day on The Nasdaq Capital Market on December 13, 2019) and calculated as follows: (i) a valuation between $750,000,000 and $999,999,999, would result in an initial grant under the Howard IPO Award equal to 0.5% of our outstanding fully diluted common equity; (ii) a valuation at least $1,000,000,000 but less than $2,000,000,000, would result in an initial grant under the Howard IPO Award equal to 0.75% of our fully diluted common equity; and (iii) a valuation at least $2,000,000,000, would result in an initial grant under the Howard IPO Award equal to 1.0% of our outstanding fully diluted common equity. No initial grant under the Howard IPO Award would be made as a result of our IPO if the valuation of the Company calculated as described above was below $750,000,000. The initial Howard IPO Award resulted in a grant equal to 0.5% of our fully diluted common equity, or 241,831 shares on December 17, 2019, which settled in March 2020. In connection with these RSUs granted to Mr. Howard pursuant to the Howard IPO Award that immediately vested in December 2019, we recognized $4.1 million of stock-based compensation expense in the fourth quarter of 2019.
If during the twenty-four month period immediately following the effectiveness of our IPO, the Company achieved a “market cap threshold” (calculated based on the 30-day average of the product of the closing price per share of our Class A common stock on a trading day and the number of shares outstanding on such trading day using the treasury stock method) of $1,000,000,000 or greater, Mr. Howard was eligible to receive RSU awards under our Class B Plan equal to: (i) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market capitalization threshold of $1,000,000,000; and (ii) 0.25% of our fully diluted common equity as of the date of our IPO, or 120,916 shares, upon the Company’s achievement of a market capitalization threshold of $2,000,000,000, in each case, to the extent the applicable market capitalization threshold value was not previously achieved in connection with any previous grant made under the Howard IPO Award, and subject to Mr. Howard’s continued service to the Company through each applicable award date. All such RSUs granted pursuant to the Howard IPO Award would be fully vested and the maximum number of Class B common stock issuable upon settlement of such RSUs will not exceed 1.0% of our fully diluted common equity (as described above).
In February 2020, Mr. Howard received 120,916 RSUs upon the Company’s achievement of a market capitalization threshold of $1,000,000,000. In October 2020, Mr. Howard received 120,916 shares upon the Company’s achievement of a market capitalization threshold of $2,000,000,000. The Company recognized approximately $2.0 million of stock-based compensation expense during 2020 in relation to these awards.
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Common Stock Valuations
Prior to the consummation of our IPO our common stock was not publicly traded. As such, we were required to estimate the fair value of our common stock. Our board of directors considered numerous objective and subjective factors to determine the fair value of our common stock as awards were approved, including utilizing third‐party valuations to assist with the determination of the estimated fair‐market value and common stock price. Given the absence of a public trading market for our common stock, the valuations of common stock were determined in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation , and our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of fair value of our common stock, including the following factors:
• contemporaneous valuations performed by independent third-party specialists;
• the prices, rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock;
• the prices of common or preferred stock sold to third-party investors by us and in secondary transactions or repurchased by us in arms-length transactions;
• lack of marketability of our common stock;
• our actual operating and financial performance;
• current business conditions and projections;
• our stage of development;
• likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions;
• the market performance of comparable publicly traded companies; and
• the U.S. and global capital market conditions.
In valuing our common stock, our board of directors determined the equity value of our business using various valuation methods including combinations of income and market approaches with input from management. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows were discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in our industry or similar business operations as of each valuation date and adjusted to reflect the risks inherent in our cash flows.
For each valuation, the equity value determined by the income and market approaches was then allocated to the common stock. The Option Pricing Method was selected as the principal equity allocation method. When we had completed or were expecting to complete a preferred equity financing, the terms and pricing of the financing round were included in the analysis used to estimate our value and the value of our common stock.
Application of these approaches involves the use of estimates, judgments and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions affect our valuations as of each valuation date and may have a material impact on the valuation of our common stock.
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For valuations after the completion of the IPO, our board of directors will determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.
JOBS Act Accounting Election
We are an “emerging growth company” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this exemption from new or revised accounting standards and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that have not made this election. While we have elected to use this extended transition period, to date we have not delayed the adoption of any applicable accounting standards.
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