SPS Commerce, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. SPS Commerce provides cloud-based supply-chain management solutions, with most revenue from recurring subscriptions.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $45.6 million | $37.0 million | +23.3% |
| Gross profit / margin | $30.7 million / 67.4% | $25.4 million / 68.7% | Margin down 1.3 points |
| Operating income / margin | $1.3 million / 2.9% | $0.9 million / 2.5% | +42.5% |
| Net income | $1.0 million | $0.6 million | +78.2% |
| Diluted GAAP EPS | $0.06 | $0.03 | Up from $0.03 |
| Operating cash flow | $6.9 million | $3.1 million | Higher, mainly on deferred revenue and payment timing |
- Adjusted EBITDA, a non-GAAP measure, was $6.0 million versus $4.7 million. Non-GAAP diluted EPS was $0.22 versus $0.17; review the filing’s reconciliations and exclusions.
- Recurring revenue customers rose 6% to 23,817; annualized average recurring revenue per customer (“wallet share”) rose 17% to $7,053. Recurring-customer revenue represented 91% of total revenue, compared with 90%.
- Operating expenses increased 20% to $29.4 million. Cost of revenue grew 29%, faster than revenue, reflecting higher staffing, infrastructure, software/cloud costs, and depreciation.
Balance sheet and liquidity
- Cash and cash equivalents were $110.9 million at March 31, 2016; marketable securities totaled $22.5 million. Management reported $133.4 million in cash, cash equivalents, and marketable securities, plus $20.4 million of net receivables.
- Total assets were $281.7 million and total liabilities $48.3 million. The company reported no debt and no off-balance-sheet arrangements.
- Cash declined $10.6 million during the quarter. Investing used $20.1 million, including $17.9 million for the Toolbox Solutions acquisition; financing provided $2.1 million.
- Management believes liquidity and operating cash flow are sufficient for working capital and capital expenditures for at least the next 12 months.
Material changes, outlook, and risks
- On January 5, SPS acquired Toolbox Solutions for $17.9 million cash, 48,668 shares valued at $3.3 million, and a contingent share-based earn-out initially valued at $1.0 million. Toolbox contributed approximately $1.6 million of revenue after acquisition; its operating income or loss was not separately identifiable. Purchase-price allocation remained preliminary.
- The acquisition added $15.4 million of goodwill and $9.1 million of identifiable intangible assets. Amortization of acquired intangibles and acquisition-related costs affected results; a $365,000 earn-out fair-value adjustment was recorded as other income.
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management expects the 2016 annual effective tax rate to be approximately 40%, and expects absolute costs in cost of revenue, sales and marketing, R&D, and G&A to increase as the business expands.
- Management cited growth plans including deeper customer penetration, new solutions, channel and international expansion, and selective acquisitions. It cautioned that actual results may differ from forward-looking statements and referred investors to the risk factors in its 2015 Form 10-K; no material risk-factor changes were reported.
- Foreign-currency exposure exists, primarily to the Australian and Canadian dollars; SPS had no hedges in place. The company reported no material legal proceedings. Disclosure controls were deemed effective, but Toolbox was excluded from the quarter’s internal-control assessment under SEC guidance for newly acquired businesses.
Important facts for investors to verify
- Whether recurring-customer growth and wallet-share expansion continue, and how much growth is organic versus acquisition-related.
- Whether gross-margin pressure and rising operating costs affect profitability as the company scales.
- Toolbox integration, revenue milestones and contingent earn-out valuation, along with final purchase-price allocation and acquired-asset amortization.
- Cash generation and investment needs, given the acquisition outlay and management’s stated liquidity outlook.
- The assumptions behind non-GAAP Adjusted EBITDA and non-GAAP EPS, and the expected approximately 40% full-year tax rate.