SPS Commerce, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 22, 2019. The filing also provides unaudited fourth-quarter results. SPS provides cloud-based supply-chain management services; approximately 93% of FY 2018 revenue was recurring.
Key financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Revenue | $248.2 million | $220.1 million | +12.8% |
| Gross profit / margin | $166.5 million / 67.1% | $146.5 million / 66.5% | Margin +0.6 percentage points |
| Operating income / margin | $26.7 million / 10.8% | $10.0 million / 4.5% | Operating income +167.8% |
| Net income / diluted EPS | $23.9 million / $1.36 | $0.4 million / $0.02 | Net income increased substantially |
| Adjusted EBITDA (non-GAAP) | $51.3 million | $34.2 million | +50.1% |
| Operating cash flow | $55.0 million | $31.1 million | +$23.9 million |
Fourth quarter: Revenue was $65.2 million, gross profit $44.0 million, operating income $8.2 million, net income $7.1 million and diluted EPS $0.40. In Q4 2017, revenue was $58.1 million, operating income $0.3 million, net loss $6.8 million and diluted EPS a loss of $0.39.
Balance sheet and liquidity: At year-end, cash and cash equivalents were $133.9 million and short-term investments $44.5 million, or approximately $178.4 million combined. Working capital was $193.1 million; total liabilities were $67.1 million and stockholders’ equity $319.0 million. The company reported no outstanding debt. Management said existing cash, investments and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months.
Changes and notable items
- Recurring revenue customers grew 14% to 29,308; average recurring revenue per customer (“wallet share”) rose 4% to $8,378. Recurring revenue increased 13%.
- Profitability improved as revenue grew faster than operating expenses. Gross margin rose to 67.1%; operating expenses were 56.3% of revenue versus 62.0% in 2017.
- FY 2018 net income benefited from lower income tax expense: $4.5 million versus $10.3 million in 2017. The prior year included a $6.8 million discrete tax charge associated with the Tax Cuts and Jobs Act. Stock-based compensation tax benefits also reduced 2018 tax expense.
- Operating cash flow increased to $55.0 million. Investing used $40.5 million, including $27.3 million for acquisitions and intangible assets and higher capital expenditures; financing used $3.8 million, including $19.9 million of share repurchases, partly offset by option-exercise proceeds.
- Acquired EDIAdmin and CovalentWorks in 2018. Their combined reported 2018 revenue contribution was each less than 1% of company revenue. CovalentWorks purchase-price allocation remained provisional at year-end.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided in the supplied filing. Management expects recurring customer counts and wallet share to continue growing as it expands its offerings and customer penetration, and plans to pursue market expansion, international growth, product development and selective acquisitions.
- Most recurring customer contracts can be cancelled on 30–90 days’ notice. Customer retention, satisfaction and the ability to add customers and sell additional services are central risks.
- Other principal risks include cybersecurity incidents or service outages, reliance on third-party data centers and technology, intensifying competition, privacy and regulatory changes, acquisition integration, international operations and ongoing political uncertainty in Ukraine.
- Operating lease commitments totaled $24.9 million at year-end. Adoption of the new lease standard in January 2019 was expected to add approximately $15 million each to right-of-use assets and lease liabilities.
- The company reported no material legal proceedings. The auditor gave unqualified opinions on the financial statements and internal control over financial reporting; acquired businesses were excluded from the year-end control assessment.
Most important facts for investors to verify
- Whether recurring customer growth, wallet-share expansion and retention continue, given short cancellation notice periods.
- How much of the sharp GAAP earnings increase reflects sustained operating improvement versus prior-year tax charges and stock-based compensation or other adjustments; compare GAAP results with the company’s non-GAAP measures.
- Whether acquisitions deliver expected customer, revenue and cost benefits, and whether CovalentWorks purchase accounting or EDIAdmin earn-out estimates change.
- Cash generation relative to acquisition spending, capital expenditures, buybacks and lease commitments; assess the effect of the 2019 lease-accounting adoption.
- Monitor cybersecurity, service availability, customer credit losses and the impacts of competition, regulation and international exposure.