Please ensure Javascript is enabled for purposes of website accessibility
Small-Cap Confidential
Undiscovered stocks that can make you rich

May 3, 2023

SPT, HURN and INSP Report

Sprout Social (SPT)

Sprout Social beat on the top and bottom lines after the close yesterday. Revenue rose 31% to $75.2 million (beat by $130K) while EPS of $0.06 improved from a loss of -$0.03 in the year-ago quarter and beat by $0.07. Management said the priority in the quarter was to retain higher value customers so they de-prioritized around $6 million in revenue from small customers (those spending less than $2,000/year) at the expense of focusing on the larger ones, which now make up over 95% of total revenue. This led to annualized recurring revenue (ARR) of $309.9 million (+30%), about as expected. This subtle shift in strategy has come with a previous price increase, which puts further pressure on the low end of Sprout’s market. That price increase may also make 30% revenue growth in 2024 hard to attain given lack of catalysts to achieve the same 10% to 15% bump (rough guess) that price increases will lend to 2023.

Total customer count grew modestly (+3%) to 33,861 of which 23,511 are the larger customers (+$2K in ARR). While the drop in ARR from lower value customers (-31%) seems bad the company’s focus up market makes sense when you consider that customers with over $10K in ARR grew 33% to 7,107 and customers with over $50K grew 46% to 1,008.

Management issued full-year revenue guidance of $332 - $333 million (+31%), which is essentially in-line with consensus of $330 million. EPS for the year is expected to be between $0.07 and $0.08, versus consensus of $0.04. This would mark Sprout’s first year of profitability.

Stepping back, the key concern among larger investors with Sprout is that the company won’t be able to deliver 30% annual growth into 2025 (despite management recommitting to this growth rate), in part due to competitive threats from Sprinklr (CXM), which now has a lower-priced, self-service product. On the other hand, Sprout’s partnership with (CRM) continues to bear fruit, adding 96 customers in the quarter and expected to grow significantly from there.

The stock has been range bound this year due to offsetting bear vs. bull arguments. I don’t see enough from this report and forward guidance to change the conversation. Ultimately, SPT seems like a buyout candidate to me and that’s one of the reasons I’ve wanted to hold on to a partial position. But that offer could never come. Therefore, let’s go ahead and sell our remaining half position at a modest profit and look to deploy the capital into a fresher opportunity. SELL REMAINING HALF

Huron Consulting (HURN)

Huron delivered another significant beat on both the top and bottom lines. Revenue rose 22.2% to $317.9 million, beating by $18.3 million. Adjusted EPS of $0.87 grew 78% and beat by $0.21. Revenue in the Digital capability grew 28.5% to $140.7 million (44% of total revenue). Management reaffirmed full-year revenue guidance of $1.22 - $1.28 billion and EPS guidance of $3.75 to $4.25. The company continues to focus on its two strongest markets, healthcare (+22%) and education (+29%), where services covering revenue cycle management, financial advisory offerings, research and enrollment are in high demand. The company is focused on expanding margins back to the mid-teens by 2025 and appears to be making progress. Q1 adjusted EBITDA margin of 9.3% was higher than the 8.5% from the year-ago quarter (healthcare margins dipped while education margins expanded, both due to fluctuations in compensation costs for segment workers). Management sees a slower pace of hiring in 2023 than in 2022, which should help margins throughout the year. There was a lot more discussion on the conference call but the gist of things is that the business appears on track to grow as expected and deliver margin improvements to help fuel faster EPS growth. That should be enough to keep investors happy and the stock doing well. I will monitor the stock reaction to this report and this afternoon’s FOMC decision before considering upgrading back to buy. HOLD

Inspire Medical (INSP)

Inspire beat on both the top and bottom lines again. Revenue grew 84.3% to $128 million, beating by $7.8 million. EPS of -$0.53 beat by $0.12. Management raised full-year guidance by $20 million (more than the Q1 beat) to a range of $580 - $590 million. Consensus was at $570 million. Gross margin guidance remains at 83% to 85% and management reiterated that it is on track to add 52 to 56 new U.S. medical centers per quarter. Back to this quarter, 68 new centers were activated so there are now 973 medical centers in the U.S. where you can get Inspire therapy. As previously released Inspire also gained FDA approval for pediatric Down syndrome and gained countrywide reimbursement approval in Belgium at rates similar to other countries. Among interesting points from the call was management’s discussion of Inspire Therapy for high BMI (body mass index) patients (Inspire is approved for BMI over 32 and is expected to be approved for BMI over 40), which would expand the market size. Without going into detail, the upcoming release of Inspire 5 has the ability to address issues specific to patients with higher BMI. Stepping back, Inspire continues to do extremely well. We’ll hang in there. HOLD TWO THIRDS

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.