SPS Commerce, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in millions of dollars unless stated otherwise. SPS provides hosted SaaS supply-chain management and analytics solutions, with most revenue from recurring subscriptions.
Financial performance
- Q3 revenue: $20.27 million, up 30.5% year over year. Net income was $174,000 versus $177,000; diluted EPS was $0.01 in both periods.
- Nine-month revenue: $54.62 million, up 29.7%. Net income was $856,000 versus $560,000; diluted EPS was $0.06 versus $0.04.
- Margins: Q3 gross margin declined to 70.7% from 73.8%; operating margin was 0.7% versus 1.7%. For nine months, gross margin was 72.1% versus 73.5%, while operating margin improved to 2.5% from 1.7%.
- Adjusted EBITDA (non-GAAP): $2.19 million for Q3 versus $1.53 million; $6.39 million for nine months versus $3.78 million. The company cautions that this measure is not a substitute for GAAP results.
- Operating cash flow: $8.27 million for nine months, compared with $3.55 million. Investing cash outflow was $29.11 million, mainly for the Edifice acquisition; financing cash inflow was $58.57 million, mainly from the stock offering.
- Liquidity and debt: Cash was $69.72 million and working capital $74.0 million at September 30. No debt was outstanding; the company had a $20 million revolving facility and reported covenant compliance. The $11 million acquisition-related draw was repaid in September.
Material changes and notable items
- Recurring-revenue customers increased 11% to 17,723; annualized average recurring revenue per customer rose 21% to $4,101. Recurring revenue represented 88% of Q3 revenue versus 85% a year earlier.
- Edifice was acquired in August for $26.3 million cash, 347,852 SPS shares, and assumed liabilities. Purchase accounting included $19.63 million of goodwill and $16.24 million of intangible assets; allocation remained preliminary. Edifice contributed approximately $1.8 million of revenue after acquisition through September 30.
- A September public offering of 1.84 million shares at $33.50 per share generated approximately $57.8 million net proceeds. The offering and acquisition shares increased the share count; 14,683,384 shares were outstanding October 25.
- Q3 cost of revenue grew faster than revenue, contributing to gross-margin compression. Management attributed cost growth to personnel and depreciation, with network services and stock compensation also contributing over nine months. Operating expenses rose as the company invested in sales, marketing, research and development, and administration.
Outlook, risks and contingencies
- No specific numerical revenue or earnings guidance is provided. Management expects customer counts and recurring revenue per customer to grow, and expects operating costs to increase in absolute dollars as the business expands.
- Management believes cash and operating cash flows will cover working-capital and capital-expenditure needs for at least 12 months. Future capital needs depend on product development, expansion, competition, and potential acquisitions.
- Control weakness: Disclosure controls were deemed ineffective because contract billing masterfile changes in a recently upgraded ERP system could occur without independent review. Management began remediation with a system-generated change log and review process; effectiveness was not yet established.
- The company disclosed no material legal proceedings and no material changes to the risk factors in its 2011 Form 10-K. It reported no off-balance-sheet arrangements. A new headquarters lease begins November 2012 and runs through April 2020, with future minimum lease payments of $16.9 million.
- Quarterly results are not necessarily indicative of full-year results. The filing highlights risks and uncertainties in forward-looking statements and cautions against undue reliance on them.
Key facts for investors to verify
- Whether recurring-revenue and per-customer growth persist, and how much growth is organic versus attributable to Edifice.
- Whether gross-margin pressure moderates as acquisition costs, personnel, and infrastructure scale with revenue.
- Final Edifice purchase-price allocation, integration outcomes, and the expected contribution to earnings and cash flow.
- Use of remaining offering proceeds, share-count dilution, and any future borrowing under the revolving facility.
- Remediation and independent review of the ERP contract-billing control weakness, including the outcome of the year-end assessment.