SPS Commerce, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial amounts below are in U.S. dollars; statements are unaudited. SPS Commerce provides hosted, subscription-based supply-chain management software and services.
Financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $15.529 million | $11.491 million | $42.115 million | $32.678 million |
| Gross profit / margin | $11.453 million / 73.8% | $8.280 million / 72.1% | $30.968 million / 73.5% | $23.385 million / 71.6% |
| Operating income / margin | $0.270 million / 1.7% | $0.868 million / 7.6% | $0.736 million / 1.7% | $2.594 million / 7.9% |
| Net income | $0.177 million | $0.886 million | $0.560 million | $2.443 million |
| Diluted EPS | $0.01 | $0.07 | $0.04 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $1.530 million | $1.418 million | $3.779 million | $4.107 million |
- Revenue rose 35.1% in Q3 and 28.9% year to date. Management attributed growth to more recurring-revenue customers and higher average recurring revenue per customer. Recurring-revenue customers reached 15,896, up 31% year over year, including approximately 1,800 acquired with Direct EDI. Quarterly annualized average recurring revenue per customer increased 5% to $3,376.
- Gross margin improved, but operating income and net income declined as operating expenses grew faster than revenue. Q3 sales and marketing expense increased 55% year over year; research and development rose 45%, and general and administrative expense rose 35%. The company cited hiring, commissions, growth investments, public-company costs, and acquisition-related costs.
- Operating cash flow was $3.546 million for the first nine months, versus $4.072 million a year earlier. Investing cash outflow was $12.581 million, including $10.865 million for Direct EDI and $1.716 million in capital expenditures. Financing provided $0.108 million. Cash declined $8.927 million from year-end to $31.546 million.
Balance sheet, liquidity, and debt
- At September 30, cash and equivalents were $31.546 million, accounts receivable $7.695 million, current assets $45.960 million, and current liabilities $11.508 million. Working capital was $34.5 million, down from $42.6 million at December 31, 2010.
- Total liabilities were $17.837 million and stockholders’ equity was $45.585 million. The company reported no borrowings under its new $20 million revolving credit facility and had repaid its capital leases.
- The credit facility matures September 30, 2016, is subject to a borrowing base and covenants—including minimum cash of $10 million and a fixed-charge coverage ratio of at least 1.20:1. The company reported covenant compliance at quarter-end. Management said cash and operating cash flow should cover working-capital and capital-expenditure needs for at least the next 12 months.
Material changes, outlook, and risks
- On May 18, 2011, SPS acquired substantially all of Direct EDI’s assets for $10.865 million in cash. The preliminary purchase allocation included $6.120 million of identifiable intangible assets and $4.712 million of goodwill. Direct EDI customers contributed approximately $1.1 million of Q3 revenue and $1.6 million for the nine-month period; its operating income or loss was not separately identifiable. Acquisition-related costs were approximately $232,000 for the first nine months.
- Management expects recurring customers and revenue per customer to continue growing as it expands solutions and customer penetration. It also expects absolute spending on cost of revenues, sales and marketing, research and development, and general and administrative functions to rise as the business grows. The filing provides no numerical revenue or earnings guidance.
- The company reported $50.8 million of federal and $30.2 million of state net operating loss carryforwards, but estimated that Section 382 limits could cause approximately $17.6 million of federal and $15.4 million of state losses to expire unused. Deferred tax assets are fully offset by a valuation allowance.
- The Direct EDI purchase-price allocation remained preliminary and could be adjusted as valuations are finalized. Management reported no material legal proceedings, no material change to the risk factors in its 2010 Form 10-K, and no material change in internal control over financial reporting. Forward-looking statements are subject to the risks described in the filing and prior annual report.
Investor verification points
- Assess whether customer growth and higher recurring revenue per customer persist, and distinguish organic growth from Direct EDI’s contribution.
- Track operating-expense growth against revenue growth and the effect of acquisition amortization and stock-based compensation on reported earnings.
- Review cash conversion, working-capital movements, and the use and covenant headroom of the $20 million credit facility.
- Check final Direct EDI purchase accounting, integration results, and any subsequent goodwill or intangible-asset impairment indicators.
- Evaluate the availability and Section 382 limitations of tax loss carryforwards; compare non-GAAP measures with GAAP results.