SPS Commerce, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparative periods ended June 30, 2013. SPS Commerce provides cloud-based supply-chain management solutions, with most revenue from recurring subscriptions.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q2 2014 | Q2 2013 | H1 2014 | H1 2013 |
|---|---|---|---|---|
| Revenue | $31.1 | $25.7 | $60.0 | $49.4 |
| Gross profit / margin | $21.5 / 69.0% | $17.7 / 69.0% | $41.2 / 68.6% | $34.4 / 69.6% |
| Operating income / margin | $1.0 / 3.3% | $0.5 / 1.9% | $1.6 / 2.7% | $0.7 / 1.4% |
| Net income | $0.6 | $0.3 | $1.0 | $0.5 |
| Diluted GAAP EPS | $0.04 | $0.02 | $0.06 | $0.03 |
| Adjusted EBITDA (non-GAAP) | $4.5 | $3.4 | $8.4 | $6.4 |
- Q2 revenue grew 21.2%, operating income 109.9%, and net income 121.9% year over year. H1 revenue grew 21.5% and net income 107.8%.
- Recurring-revenue customers increased 10% to 20,745. Q2 annualized average recurring revenue per customer (“wallet share”) rose 12% to $5,467. Recurring-customer revenue represented 90% of revenue in both Q2 and H1 2014.
- H1 operating cash flow was $6.9 million, versus $8.6 million a year earlier; capital expenditures were $3.4 million versus $1.7 million. Cash increased $5.2 million to $136.5 million.
Balance sheet and liquidity
- At June 30, 2014, current assets were $164.9 million and current liabilities $19.4 million; working capital was $145.5 million, up from $137.2 million at year-end 2013.
- No borrowings were outstanding. The company had a $20 million revolving credit facility, maturing September 30, 2016, and reported covenant compliance.
- Total liabilities were $32.0 million; the filing reports no other debt or off-balance-sheet arrangements. Management believed cash and operating cash flows would meet working-capital and capital-expenditure needs for at least 12 months.
Changes, outlook, and risks
- Revenue growth reflected more recurring customers and greater customer usage, including growth among larger customers. Management reported its 54th consecutive quarter of revenue growth.
- Operating expenses grew 18.7% in Q2 and 17.3% in H1, mainly from increased headcount and related personnel costs. Management expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to continue rising in absolute dollars as the business expands.
- Management expects an annual effective tax rate of approximately 40%. 2013 comparisons included a $117,000 discrete tax benefit related to the federal R&D credit.
- Q2 Adjusted EBITDA included a $69,000 “other” adjustment for a use-tax refund on previously expensed items. Adjusted EBITDA and non-GAAP EPS are supplemental measures, not GAAP results; stock-based compensation was $1.4 million in Q2 and $2.7 million in H1.
- No material changes to previously disclosed risk factors; no material legal proceedings were reported. Management said disclosure controls were effective and there were no material changes in internal control during the quarter. The company was evaluating new revenue-recognition guidance effective for annual periods beginning after December 15, 2016.
- No specific numerical revenue or earnings guidance was provided. Forward-looking plans include expanding market penetration, distribution channels, international presence, and solutions, and selectively pursuing acquisitions. Actual results remain subject to the risks described in the filing and prior annual report.
Investor verification points
- Confirm the drivers and durability of customer growth and 12% wallet-share expansion, and the sustainability of recurring revenue.
- Assess whether expense growth and higher H1 capital expenditures affect margins and cash generation; H1 operating cash flow declined despite higher net income.
- Review the effect of stock-based compensation, the use-tax refund adjustment, and tax-rate assumptions when evaluating non-GAAP performance and earnings.
- Verify that management’s 12-month liquidity assessment remains supported by cash flows, given continued expected investment and potential acquisitions.