SPS Commerce, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. SPS Commerce provides cloud-based supply-chain management solutions, with most revenue from recurring subscriptions.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $66.9 million | $59.1 million | +13.3% |
| Gross profit / margin | $45.6 million / 68.1% | $39.3 million / 66.6% | Margin +1.5 percentage points |
| Operating income / margin | $7.4 million / 11.0% | $4.3 million / 7.2% | +71.6% |
| Net income / diluted EPS | $6.8 million / $0.38 | $3.3 million / $0.19 | Net income +109.4% |
| Operating cash flow | $10.2 million | $9.3 million | +$0.9 million |
- Recurring revenue was $62.7 million, up from $54.9 million; it represented 94% of revenue versus 93%. Fulfillment revenue was $52.4 million, analytics $8.9 million, and one-time revenue $4.2 million.
- Recurring-revenue customers increased 14% to 29,466. Annualized average recurring revenue per customer (“wallet share”) was $8,541 versus $8,499.
- Operating expenses rose 9% to $38.2 million. Sales and marketing decreased 3.9%, while research and development increased 20.7% and general and administrative increased 26.1%.
- Adjusted EBITDA, a non-GAAP measure, was $16.5 million versus $10.9 million. Non-GAAP diluted income per share was $0.60 versus $0.39; these measures exclude specified expenses and should be considered alongside GAAP results.
Financial position, cash flow, and capital
- At March 31, cash and cash equivalents were $143.7 million and short-term investments were $41.7 million. Management reported $185 million of cash, equivalents, certificates of deposit, and marketable securities, plus $28 million of net receivables.
- Total assets were $407.2 million and total liabilities were $76.5 million. The company reported no outstanding debt and no off-balance-sheet arrangements.
- Operating cash flow was $10.2 million; investing cash flow was negative $0.1 million and financing cash flow negative $0.5 million. Cash increased $9.9 million to $143.7 million.
- Capital expenditures were $2.9 million. Share repurchases used $3.0 million for 33,732 shares in the quarter.
- Management said cash, investments, and operating cash flows should be sufficient for working-capital and capital-expenditure needs for at least the next 12 months.
Material changes and notable items
- Revenue growth reflected more recurring customers and slightly higher wallet share. The company described Q1 as its 73rd consecutive quarter of revenue growth.
- Gross margin improved as revenue growth outpaced cost of revenue growth. Higher cost of revenue primarily reflected personnel and platform infrastructure costs.
- General and administrative expense increased partly because of higher stock-based compensation, including the timing and immediate expense recognition of the CEO’s 2019 restricted-stock-unit grants. Total stock-based compensation was $5.3 million versus $3.5 million.
- Tax expense fell to $1.0 million from $1.3 million, primarily due to discrete tax benefits from stock activity; management cautioned that the annual effective tax rate may be more volatile.
- Adoption of lease accounting on January 1, 2019 added approximately $15.7 million of right-of-use assets and lease liabilities. At quarter-end, operating lease liabilities were $21.2 million; future minimum lease payments totaled $24.1 million, including imputed interest.
- The EDIAdmin acquisition earn-out liability was $1.4 million at quarter-end; its fair-value remeasurement generated $0.1 million of expense. The maximum contingent payout is $1.7 million. The CovalentWorks purchase-price allocation was finalized without Q1 adjustments.
Outlook, risks, and contingencies
The filing does not provide numerical revenue or earnings guidance. Management’s stated growth priorities include deeper market penetration, increasing sales to existing customers, expanding distribution and international operations, developing solutions, and selectively pursuing acquisitions. The company noted that expenditures are expected to increase as the business expands.
Management cited potential capital needs for product development, sales and marketing, geographic expansion, competition, and acquisitions. Foreign-currency movements could adversely affect results as international operations grow; the company did not hedge this exposure. It reported no material legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; the filing noted that internal-control assessments excluded the recently acquired EDIAdmin and CovalentWorks businesses.
Investor verification priorities
- Assess whether recurring-customer growth and customer monetization sustain revenue growth; verify customer counts, retention, and wallet-share trends in subsequent filings.
- Monitor the durability of margin improvement against rising R&D, G&A, infrastructure, and stock-based compensation costs.
- Compare GAAP earnings and cash generation with non-GAAP Adjusted EBITDA and non-GAAP EPS, including the effect of stock-based compensation and other adjustments.
- Track lease obligations, EDIAdmin earn-out assumptions and potential payments, and any future acquisition-related liabilities.
- Review tax-rate volatility, international currency exposure, and the use of cash for repurchases, investment, and potential acquisitions.