SPS Commerce, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. SPS Commerce provides cloud-based supply-chain software and derives most revenue from recurring subscriptions. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $32.5 | $27.0 | $92.5 | $76.4 |
| Gross profit / margin | $22.5 / 69.3% | $18.8 / 69.5% | $63.7 / 68.8% | $53.2 / 69.6% |
| Operating income / margin | $1.4 / 4.2% | $0.4 / 1.4% | $3.0 / 3.2% | $1.0 / 1.4% |
| Net income / margin | $0.8 / 2.6% | $0.3 / 1.0% | $1.9 / 2.0% | $0.8 / 1.0% |
| Diluted GAAP EPS | $0.05 | $0.02 | $0.11 | $0.05 |
| Adjusted EBITDA (non-GAAP) | $4.7 | $3.6 | $13.1 | $10.0 |
- Q3 revenue increased 20.4% year over year; nine-month revenue grew 21.1%. Management reported this was the 55th consecutive quarter of revenue growth.
- Recurring-revenue customers rose 9% to 21,218 year over year. Annualized average recurring revenue per customer (“wallet share”) increased 12% to $5,596. Recurring revenue represented 90% of revenue in 2014, versus 89% in 2013.
- Operating expenses increased 15% in Q3 and 16.5% for the nine-month period. Higher personnel and related costs contributed to increases in cost of revenue, sales and marketing, and research and development. General and administrative costs also reflected higher legal costs, including Leadtec-related costs.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $140.8 at September 30, 2014, up from $131.3 at December 31, 2013. Working capital was $149.7, versus $137.2 at year-end.
- Nine-month operating cash flow was $11.6, down from $16.1 in 2013. Investing cash use was $4.4, all for property and equipment; financing cash inflow was $2.3, mainly from stock option exercises and the employee stock purchase plan. Cash increased $9.5 during the period.
- Total liabilities were $33.7 and stockholders’ equity was $200.9. The company had no outstanding borrowings and no reported debt. Its $20.0 revolving credit facility matures September 30, 2016; the company was covenant-compliant.
- Management stated cash and operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months. It reported no material off-balance-sheet arrangements and no material foreign-exchange or inflation effects.
Outlook, events and risks
- Management expects customer counts and wallet share to continue increasing, while cost of revenue and operating expenses are expected to rise in absolute dollars as the business expands. It expects an annual effective income tax rate of approximately 40%. No specific revenue or earnings guidance was provided.
- On October 12, 2014, after quarter-end, SPS completed the Leadtec Systems Australia asset acquisition to expand international presence, recurring-revenue customers and its supplier network. Consideration included $12.7 cash, 43,595 SPS shares and assumption of certain liabilities; the value of assumed liabilities is not stated here. Q3 and nine-month results included approximately $0.2 of transaction fees.
- The filing reports no material legal proceedings and no material changes to the risk factors disclosed in the 2013 Form 10-K. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- The company was evaluating the effect of a new revenue-recognition standard, effective for its annual reporting periods beginning after December 15, 2016.
Important facts for investors to verify
- Whether recurring-customer growth and higher wallet share continue, and how much revenue growth comes from usage, pricing or larger customers.
- Whether cash conversion improves: nine-month operating cash flow declined despite higher net income, with receivables and deferred costs increasing.
- Leadtec’s integration, acquired liabilities, contribution to revenue and cash flow, and any further acquisition-related costs.
- The effect of rising personnel, sales and marketing, research and development, stock-based compensation and tax costs on margins and earnings.
- Future use of the credit facility, capital requirements and the impact of adopting the new revenue-recognition standard.