SPS Commerce, Inc. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014. This is an annual filing; it also reports fourth-quarter results. Dollar amounts are in U.S. dollars.
Business context
SPS Commerce provides cloud-based supply-chain management services, including trading-partner fulfillment, analytics, assortment, sourcing and enablement. Revenue is primarily subscription and transaction fees. At year-end, the company reported 21,983 recurring-revenue customers and approximately 60,000 total customers; recurring revenue was 90% of FY 2014 revenue. No single customer contributed more than 2% of revenue.
Financial results and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $127.9 million | $104.4 million | +22.6% |
| Gross profit / margin | $88.0 million / 68.7% | $72.6 million / 69.6% | Margin down 0.9 percentage points |
| Operating income / margin | $4.4 million / 3.4% | $1.8 million / 1.7% | +147.3% |
| Net income / diluted EPS | $2.7 million / $0.16 | $1.1 million / $0.07 | Net income +157.3% |
| Adjusted EBITDA | $18.2 million | $13.8 million | +31.8% |
| Operating cash flow | $16.8 million | $18.2 million | Down $1.5 million |
Adjusted EBITDA and non-GAAP earnings per share are company-defined non-GAAP measures and should be considered alongside GAAP results. FY 2014 non-GAAP diluted EPS was $0.65, versus $0.53 in 2013. Cost of revenue grew faster than sales, reducing gross margin, while operating expenses grew more slowly than revenue and operating margin improved.
Fourth quarter: Revenue was $35.4 million, compared with $28.0 million in Q4 2013. Operating income was $1.4 million and net income was $0.9 million, versus $0.7 million and $0.3 million, respectively, a year earlier.
Cash, debt and liquidity: Cash and cash equivalents were $130.8 million at year-end, down $0.5 million from 2013; working capital was $137.6 million. Investing activities used $20.2 million, including $12.6 million for the Leadtec acquisition and $7.6 million for capital expenditures. Financing activities provided $3.5 million. The company had no debt outstanding and approximately $20 million available on its revolving credit facility. Long-term liabilities were $14.1 million. Operating lease commitments totaled $16.6 million. Operating cash flow less capital expenditures was approximately $9.2 million, calculated from reported amounts.
Material changes and unusual items
- Revenue increased 22.6%; recurring-revenue customers rose 12% to 21,983, and average recurring revenue per customer increased 12% to $5,524.
- The October 2014 Leadtec acquisition added Australian and New Zealand customers and integrations. Consideration was $14.8 million, comprising $12.6 million cash and $2.2 million in stock. Leadtec contributed approximately $1.2 million of revenue and an operating loss of approximately $280,000 after acquisition through year-end.
- FY 2014 included $338,000 of Australian stamp duty related to Leadtec in other expense. The 2013 tax provision included a one-time benefit from the retroactive 2012 federal R&D credit.
- Foreign-currency translation reduced comprehensive income by $1.5 million in 2014. The company reported an accumulated deficit of $44.1 million despite positive net income.
Outlook, commentary and risks
Management expects customer numbers and revenue per customer to keep growing as it adds solutions and expands adoption, and expects operating expenses to increase in absolute dollars as the business grows. It forecast an approximately 40% annual effective tax rate for 2015. The filing provides no specific revenue, earnings or cash-flow guidance. Management said cash, cash flows from operations and available resources should cover working-capital and capital-expenditure needs for at least the next 12 months.
Key risks include the early-stage cloud supply-chain market and intensifying competition; customer contracts that generally permit cancellation on 30 days’ notice; service availability, cybersecurity and data privacy; reliance on third-party infrastructure; hiring and scaling execution; acquisition integration; and international, foreign-exchange and regulatory exposure. The company had 51 employees in Kyiv and cited continuing uncertainty in Ukraine. It had no material legal proceedings and reported effective internal controls; Leadtec was excluded from the 2014 internal-control assessment as a recently acquired business. A new revenue-recognition standard was under evaluation and was effective for the company’s annual periods beginning after December 15, 2016.
Important facts for investors to verify
- Whether growth in recurring customers and customer spend continues to offset the slight decline in gross margin and rising operating costs.
- Leadtec’s integration, contribution to recurring revenue and profitability, and any final purchase-accounting adjustments.
- Customer retention, given typical 30-day cancellation rights, and the quality of reported recurring-revenue metrics.
- Cash conversion and investment needs, including capital expenditures, lease commitments and the unused but covenant-bound $20 million credit facility.
- Exposure to cybersecurity, data privacy, Ukraine operations and foreign-currency movements, as well as the impact of the forthcoming revenue-recognition standard.