SPS Commerce, Inc. — Q2 2012 Form 10-Q
Business context and period. The filing covers the quarter and six months ended June 30, 2012. SPS Commerce provides hosted, subscription-based supply-chain management and connectivity software. Amounts below are in millions of dollars except per-share data, customer metrics, and percentages.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $17.8 | $13.9 | $34.4 | $26.6 |
| Gross profit / margin | $13.0 / 72.8% | $10.2 / 73.1% | $25.1 / 73.0% | $19.5 / 73.4% |
| Operating income (loss) / margin | $0.8 / 4.2% | $(0.04) / (0.3)% | $1.2 / 3.5% | $0.5 / 1.8% |
| Net income (loss) | $0.4 | $(0.1) | $0.7 | $0.4 |
| Diluted EPS | $0.03 | $(0.01) | $0.05 | $0.03 |
| Adjusted EBITDA, non-GAAP | $2.3 | $1.0 | $4.2 | $2.2 |
- Q2 revenue grew 27.9%; six-month revenue grew 29.2%. Management attributed growth to more recurring-revenue customers and higher average recurring revenue per customer. The customer count rose 11% year over year to 17,035; quarterly annualized average recurring revenue per customer rose 10% to $3,668. Recurring-customer revenue represented 86% of revenue.
- Operating expenses grew more slowly than revenue overall, improving operating results. Sales and marketing spending rose in dollars but declined as a share of revenue. Gross margin eased 0.3 percentage point in Q2 and 0.4 point for the six-month period.
- For the six months, operating cash flow was $4.6 versus $1.1 in 2011; capital expenditures were $1.9. Cash increased $3.5 to $35.5. Working capital was $40.7, compared with $36.8 at year-end 2011.
- At June 30, total liabilities were $20.5, primarily deferred revenue; the company had no debt outstanding. It had a $20 million revolving credit facility maturing in September 2016 and reported compliance with its covenants.
Changes, outlook, and notable items
- Q2 returned to operating and net profitability compared with a small operating and net loss a year earlier. Six-month net income increased 78% to $0.7.
- Management said it expects customer count and recurring revenue per customer to continue increasing, and expects cost of revenue and operating expenses to rise in absolute dollars as the business grows. Its stated growth plans include deeper market penetration, more solutions and distribution channels, international expansion, and selective acquisitions. The filing provides no quantified earnings or revenue guidance.
- Income-tax expense increased to $0.3 in Q2 and $0.5 for the six months. The company attributed the increase mainly to deferred tax expense after releasing a substantial valuation allowance on deferred tax assets in Q4 2011. It reported no unrecognized tax benefits.
- A new headquarters lease begins November 2012 and runs through April 2020, with expansion provisions and extension options. Future minimum operating lease payments totaled $17.2 at June 30; the company also provided approximately $0.2 of cash or a letter of credit as lease security.
- The company implemented a new ERP system during the quarter, changing certain internal controls. Management said disclosure controls were effective and that steps were taken to monitor and maintain financial-reporting controls. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Forward-looking statements are subject to the risks described in the company’s 2011 Form 10-K; interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether recurring-customer growth and higher revenue per customer persist, and how those trends affect recurring revenue and retention.
- Whether expense growth, including sales, product development, personnel, and stock-based compensation, remains controlled as the company expands.
- The sustainability of positive operating cash flow and the impact of capital spending, deferred costs, and deferred revenue on cash conversion.
- The tax impact of the prior valuation-allowance release and future deferred-tax assumptions.
- Lease obligations and expansion terms, and the effect of ERP implementation on internal controls and reporting.
- Adjusted EBITDA and non-GAAP income per share are company-defined measures; review their reconciliations and limitations alongside GAAP results.