SPS Commerce, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. SPS Commerce provides cloud-based supply-chain management and retail analytics solutions, with most revenue from recurring subscriptions. Financial amounts below are in millions of dollars except per-share data and customer counts.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $51.9 | $45.6 | +13.9% |
| Gross profit / margin | $34.6 / 66.6% | $30.7 / 67.4% | Margin down 0.8 points |
| Operating income / margin | $3.4 / 6.5% | $1.3 / 2.9% | +156.9% |
| Net income / margin | $3.0 / 5.7% | $1.0 / 2.3% | +184.6% |
| Diluted EPS | $0.17 | $0.06 | Up $0.11 |
| Operating cash flow | $10.4 | $6.9 | Up $3.5 |
- Cost of revenue rose 16.5%, faster than revenue, and gross margin declined from 67.4% to 66.6%. Total operating expenses increased 6.2%, slower than revenue.
- Cash and cash equivalents were $128.7 million; marketable securities were $28.1 million, for approximately $156.8 million in cash, cash equivalents and securities. Current assets were $204.8 million and current liabilities $37.6 million.
- The company reported no outstanding debt. Cash increased $12.8 million during the quarter. Investing activities provided $0.7 million, versus using $20.1 million in Q1 2016, which included the $17.9 million Toolbox Solutions acquisition.
Material changes and operating drivers
- Revenue growth reflected a 5% increase in recurring-revenue customers, to 25,001, and higher customer spending/usage. Recurring customer revenue represented 92% of revenue, versus 91% a year earlier.
- The filing states annualized average recurring revenue per customer, or “wallet share,” rose 9% to “$7.7 million” from “$7.1 million.” Those stated units appear inconsistent with the customer and revenue figures; verify the intended unit in the filing.
- Sales and marketing expense rose 7%, primarily from headcount and variable compensation. Research and development expense was approximately flat; higher personnel and software costs were offset partly by more internal software-development labor capitalized.
- Q1 2016 other income included a $365,000 fair-value adjustment to the Toolbox Solutions earn-out liability; there was no comparable item in Q1 2017.
- The company adopted ASU 2016-09 for share-based payments, recording a $16.3 million increase to non-current deferred tax assets and a corresponding decrease in accumulated deficit as of January 1, 2017. The company says the new treatment may make its effective tax rate more volatile.
Outlook, risks and other disclosures
- No specific numerical revenue or earnings guidance is provided. Management expects customer counts and wallet share to continue increasing, and expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to rise in absolute dollars as the business expands.
- Management said cash, securities and operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months. Operating lease obligations totaled $12.8 million.
- Management identified growth investment, competition, international expansion, new solutions and potential acquisitions as factors that could affect future capital needs. Foreign-currency movements may increasingly affect results as international operations expand; the company did not hedge currency exposure.
- The company reported no material legal proceedings, no material change in the risk factors from its 2016 Form 10-K, and no material changes in internal control over financial reporting. Disclosure controls were deemed effective at quarter-end.
- The company is evaluating revenue-recognition guidance effective for its fiscal year beginning after December 15, 2017; it expects no material impact on primary solution fees but notes possible effects on setup fees and contract acquisition costs. It expects the lease standard, effective for fiscal years beginning after December 15, 2018, to increase balance-sheet assets and liabilities; the impact had not been quantified.
Important facts for investors to verify
- Confirm the intended unit for the reported wallet-share figures of $7.7 million and $7.1 million.
- Assess whether recurring-revenue growth and customer expansion can continue while restoring gross margin, which declined year over year.
- Separate underlying operating improvement from the effects of the $16.3 million accounting adoption adjustment and quarter-to-quarter tax-rate volatility.
- Review the filing’s detailed risk factors, international currency exposure, lease commitments and potential dilution from stock-based compensation.