SPS Commerce, Inc. — Q2 2011 Form 10-Q
Business and period: SPS Commerce provides hosted, subscription-based supply-chain management and integration services. This unaudited report covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Amounts below are in millions except per-share data and customer metrics.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $13.94 | $10.94 | $26.59 | $21.19 |
| Revenue growth | 27.3% | — | 25.5% | — |
| Gross profit / margin | $10.19 / 73.1% | $7.84 / 71.7% | $19.52 / 73.4% | $15.11 / 71.3% |
| Operating income (loss) | $(0.04) | $0.68 | $0.47 | $1.73 |
| Net income (loss) | $(0.11) | $0.64 | $0.38 | $1.56 |
| Adjusted EBITDA, non-GAAP | $1.03 | $1.27 | $2.25 | $2.69 |
| GAAP diluted EPS | $(0.01) | $0.05 | $0.03 | $0.15 |
- Revenue grew through increases in recurring-revenue customers and average recurring revenue per customer. Customers increased 30% to 15,324, including about 1,800 from Direct EDI. Q2 annualized average recurring revenue per customer rose 5% to $3,321 (8% excluding Direct EDI). Recurring-customer revenue was 84% of total revenue.
- Operating expenses rose 43% in Q2 and 42% in the first half, outpacing revenue growth. Sales and marketing and general and administrative costs were the largest increases. Q2 operating margin fell to negative 0.3% from 6.2%; first-half operating margin declined to 1.8% from 8.1%.
- Q2 included $0.20 million of Direct EDI acquisition-related costs in general and administrative expense and $0.12 million of acquired-intangible amortization. Stock-based compensation was $0.49 million for Q2 and $0.80 million for the first half, versus $0.18 million and $0.23 million, respectively, a year earlier.
Cash, liquidity, and debt
- Cash and cash equivalents were $29.79 million at June 30, down from $40.47 million at December 31, 2010. Working capital was $33.2 million, versus $42.6 million at year-end.
- First-half operating cash flow was $1.13 million, down from $2.70 million. Investing cash flow was $(11.85) million, including $10.87 million for Direct EDI and $0.99 million of capital expenditures. Financing cash flow was $0.04 million; cash declined $10.69 million overall.
- The company reported no outstanding borrowings or off-balance-sheet debt. Its prior credit facility was terminated in 2010, and capital lease obligations were fully repaid in January 2011. Management said cash and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
Material changes, outlook, and risks
- On May 18, 2011, SPS completed its $10.87 million cash asset acquisition of Direct EDI, assuming certain liabilities. The preliminary allocation included $6.12 million of identifiable intangible assets and $4.71 million of goodwill. Direct EDI contributed approximately $0.48 million of Q2 revenue; its operating income or loss was not separately identifiable. The purchase-price allocation could be adjusted as it is finalized.
- Management described plans to grow through market penetration, greater customer usage, new solutions, distribution and international expansion, and selective acquisitions. It expected cost of revenues, sales and marketing, research and development, and general and administrative expenses to rise in absolute dollars. No quantified financial guidance was provided.
- Management cited growth in sales and marketing, public-company costs, personnel, and stock-based compensation as expense drivers. It reported no material change to previously disclosed risk factors and no material legal proceedings. The filing notes that federal and state net operating loss carryforwards are subject to ownership-change limitations; management estimated that some carryforwards may expire unused.
- Management reported effective disclosure controls as of June 30, 2011 and no materially affecting change in internal control during the quarter. Interim results are not necessarily indicative of full-year results.
Key facts for investors to verify
- Whether customer growth and recurring-revenue expansion continue, and how much is attributable to acquisitions versus organic growth.
- Whether operating-expense growth moderates enough to restore operating and net-income margins.
- Direct EDI’s subsequent contribution to revenue and profitability, and any final purchase-accounting adjustments or impairment indicators.
- Cash conversion and working-capital trends, including the effect of receivables, deferred costs, and future acquisition or capital-spending needs.
- The continuing impact of stock-based compensation and amortization on reported versus non-GAAP results.