SPS Commerce, Inc. — Q2 2016 Form 10-Q
Business and period: Cloud-based supply-chain management and retail analytics provider, with most revenue from recurring subscriptions. This filing covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $47.4m | $38.8m | $93.0m | $75.8m |
| Gross profit / margin | $31.4m / 66.3% | $26.5m / 68.2% | $62.1m / 66.8% | $51.9m / 68.5% |
| Operating income / margin | $0.9m / 1.9% | $1.0m / 2.6% | $2.2m / 2.4% | $1.9m / 2.6% |
| Net income / diluted EPS | $0.4m / $0.02 | $0.7m / $0.04 | $1.4m / $0.08 | $1.2m / $0.07 |
| Adjusted EBITDA (non-GAAP) | $5.7m | $5.0m | $11.7m | $9.7m |
Q2 revenue grew 21.9%; six-month revenue grew 22.6%. Management attributed growth to a 6% increase in recurring-revenue customers, to 24,186, and higher annualized average recurring revenue per customer: up 16% in Q2 to $7,223 and 17% for the six-month period to $7,139. Recurring-customer revenue represented 92% of total revenue, versus 91% a year earlier.
Operating expenses rose 19.7% in Q2 and 19.9% in the first half, below revenue growth overall, but higher cost of revenue reduced gross margin by about 1.9 percentage points in Q2 and 1.7 points for the first half. Q2 net income declined 45.9%, while first-half net income increased 12.9%. Adjusted EBITDA and non-GAAP EPS are company-defined non-GAAP measures and should be considered alongside GAAP results.
Cash, liquidity, and debt
- Cash and cash equivalents were $107.2m at June 30, down from $121.5m at year-end; marketable securities totaled $28.6m. Management reported $135.8m of cash, equivalents, and marketable securities.
- Six-month operating cash flow was $8.8m, versus $2.4m in 2015. The increase was primarily associated with higher deferred revenue and payment timing, partly offset by increases in deferred costs and other assets.
- Investing cash outflow was $27.1m, including $18.1m for the acquisition; capital expenditures were $3.1m. Financing cash inflow was $4.0m. No debt was outstanding, and the company reported no off-balance-sheet arrangements.
- Management believes available liquidity and operating cash flows are sufficient for working capital and capital expenditures for at least the next 12 months. Operating lease obligations totaled $15.1m.
Material changes, outlook, and risks
- Toolbox Solutions acquisition: Completed January 5, 2016 for $18.1m cash, 48,668 shares valued at $3.3m, and an earn-out liability initially valued at $1.0m. The acquisition added point-of-sale analytics and category-management capabilities. Toolbox contributed approximately $1.9m of Q2 revenue and $3.5m from acquisition through June 30; its operating income or loss was not separately identifiable. Purchase accounting remained preliminary.
- Management expects recurring customers and wallet share to continue growing, and expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to increase in absolute dollars as the business expands. The filing gives no specific revenue or earnings forecast.
- The company expected a full-year 2016 effective income tax rate of approximately 40%. It was evaluating the impact of new revenue-recognition, lease, and stock-compensation accounting standards.
- Q2 other expense included a $293,000 unfavorable fair-value adjustment to the Toolbox earn-out liability. The liability was valued at $981,000 at June 30. First-half results included a $72,000 favorable adjustment.
- Management cited foreign-currency exposure as the company expands internationally; it had not used hedges. Approximately 12% of cash and cash equivalents were held outside the United States, primarily in Australian and Canadian dollars. Management reported no material legal proceedings and no material change in previously disclosed risk factors.
- Disclosure controls were deemed effective as of June 30. Toolbox was excluded from the period’s internal-control assessment as a recently acquired business.
Important facts for investors to verify
- Whether customer growth and higher wallet share continue to support recurring-revenue growth, and whether recurring revenue remains near 92% of total.
- Whether cost growth, including infrastructure and personnel costs, stabilizes enough to recover the decline in gross and operating margins.
- Toolbox integration, revenue contribution, preliminary acquired-asset valuations, and the possibility of further earn-out remeasurement.
- The assumptions behind management’s approximately 40% full-year tax-rate expectation and the timing and impact of new accounting standards.
- Liquidity and cash-flow quality, particularly the extent to which operating cash flow depends on deferred revenue and working-capital timing.