SPS Commerce, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise. SPS Commerce provides hosted, subscription-based supply-chain management and retail-network solutions.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $16.534 million | $12.649 million | +30.7% |
| Gross profit / margin | $12.086 million / 73.1% | $9.328 million / 73.7% | Gross profit +29.6%; margin down 0.6 percentage points |
| Operating income / margin | $459,000 / 2.8% | $507,000 / 4.0% | Down 9.5% |
| Net income / diluted EPS | $256,000 / $0.02 | $492,000 / $0.04 | Net income down 48.0% |
| Adjusted EBITDA (non-GAAP) | $1.858 million | $1.223 million | +51.9% |
| Cash from operations | $1.604 million | $560,000 | Increased |
Operating expenses rose 31.8% to $11.627 million, including $260,000 of intangible-asset amortization related to the Direct EDI acquisition. Stock-based compensation increased to $612,000 from $312,000. Non-GAAP diluted income per share was $0.09 versus $0.06; these non-GAAP measures exclude specified expenses and should be considered alongside GAAP results.
Liquidity, debt and cash flow
At March 31, 2012, cash and cash equivalents were $33.063 million, current assets $49.807 million, and working capital $38.6 million, up from $36.8 million at December 31, 2011. The company reported no outstanding borrowings and had a $20 million revolving credit facility maturing September 30, 2016; it was in compliance with facility covenants. Q1 investing cash outflow was $630,000, all for capital expenditures. Cash increased $1.078 million during the quarter to $33.063 million.
Material changes, outlook and risks
- Revenue growth reflected a 26% increase in recurring-revenue customers, to 16,433, and a 7% increase in annualized average recurring revenue per recurring-revenue customer, to $3,529. Recurring-customer subscriptions represented 87% of revenue, versus 83% a year earlier.
- Management expects recurring customers and recurring revenue per customer to continue growing, and expects cost of revenue and sales, marketing, research and development, and general and administrative expenses to rise in absolute dollars as the business expands. No specific earnings or revenue guidance was provided.
- Management said cash, cash flows from operations, and available liquidity should meet working-capital and capital-expenditure needs for at least the next 12 months. Future capital needs may depend on product development, sales and marketing, expansion, competition, and acquisitions.
- Q1 income-tax expense was $153,000 versus $29,000. The filing attributes the increase primarily to the substantial release of a deferred-tax valuation allowance in Q4 2011 and the subsequent tax effect on 2012 pretax income. The company reported approximately $12.8 million of deferred tax assets considered realizable following that assessment.
- A new headquarters lease signed in February 2012 begins November 1, 2012, includes expansion provisions and a rent holiday through October 2013, and entails approximately $172,000 of cash or letter-of-credit security. Disclosed future minimum operating-lease payments totaled $17.431 million.
- The company reported no material legal proceedings, no material changes to the risk factors in its 2011 Form 10-K, and no material impact from foreign-exchange fluctuations. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the durability and drivers of recurring-customer growth, customer retention, and per-customer revenue expansion.
- Assess whether rising operating costs and stock-based compensation could continue to pressure GAAP operating margins and earnings despite Adjusted EBITDA growth.
- Review the assumptions supporting realization of deferred tax assets and the resulting tax expense in future periods.
- Verify the cash-flow effects of the headquarters lease, planned expansion, capital spending, and any future acquisitions or credit-facility borrowings.
- Compare non-GAAP Adjusted EBITDA and income per share with GAAP results and their stated reconciliations.