SPS Commerce, Inc. — Q1 2014 Form 10-Q
Business and period: SPS Commerce provides cloud-based supply-chain management software, with most revenue from recurring subscriptions. This unaudited report covers the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are against December 31, 2013.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $28.9 million | $23.8 million; up 21.8% |
| Gross profit / margin | $19.7 million / 68.0% | $16.7 million / 70.3% |
| Operating income / margin | $0.6 million / 2.1% | $0.2 million / 0.8% |
| Net income / diluted EPS | $0.4 million / $0.02 | $0.2 million / $0.01 |
| Operating cash flow | $3.6 million | $6.5 million |
| Cash and cash equivalents | $134.6 million | $131.3 million at Dec. 31, 2013 |
| Working capital | $140.9 million | $137.2 million at Dec. 31, 2013 |
Recurring-revenue customers increased 9% year over year to 20,016; annualized average recurring revenue per customer (“wallet share”) rose 13% to $5,220. Recurring-customer revenue was 90% of total revenue, versus 89% a year earlier. Management reported this as the company’s 53rd consecutive quarter of revenue growth.
Cost of revenue rose 31%, faster than revenue, and gross margin declined 2.3 percentage points, primarily reflecting higher personnel costs, resale costs, and software subscriptions. Operating expenses increased 15.7%, more slowly than revenue, and operating margin improved. Net income grew 87.4%. Adjusted EBITDA, a non-GAAP measure, was $3.9 million versus $2.9 million; non-GAAP diluted income per share was $0.14 versus $0.12.
Cash, debt, and liquidity
Cash increased $3.3 million during the quarter. Operating cash flow was lower year over year, partly reflecting working-capital changes; investing cash use was $0.9 million, all for capital expenditures. Financing provided $0.6 million, primarily from stock-option exercises. The company had no debt outstanding and had a $20 million revolving credit facility maturing September 30, 2016; it reported compliance with facility covenants. Management said cash and operating cash flows should cover working capital and capital expenditure needs for at least the next 12 months. No off-balance-sheet arrangements were reported.
Outlook, risks, and notable items
- Management expects customer counts and wallet share to continue increasing, and expects cost of revenue and operating expenses to rise in absolute dollars as the business expands. The filing does not provide a specific revenue or earnings forecast.
- Management expected an annual effective income tax rate of approximately 40%. Q1 2014 tax expense was $218,000, compared with a $66,000 tax benefit in Q1 2013; the prior-year result included a discrete benefit from the retroactive federal R&D credit.
- Stock-based compensation was $1.34 million, up from $0.92 million. Approximately $11.5 million of unrecognized compensation expense was expected to be recognized over a weighted-average 3.1 years.
- The company said foreign-exchange movements and inflation had no material effect, and reported no material legal proceedings or material changes to the risk factors disclosed in its 2013 Form 10-K. Forward-looking statements remain subject to risks described in that filing.
Important facts for investors to verify
- Whether recurring-customer growth and wallet-share gains continue, and how much is attributable to customer usage and larger customers.
- Whether gross-margin pressure from higher service-delivery costs persists as revenue grows.
- Why operating cash flow declined despite higher net income, including the effects of working capital.
- The effects of stock-based compensation, share issuance, and non-GAAP adjustments on reported per-share performance.
- Future tax-rate outcomes and continued access to the undrawn credit facility under its terms and covenants.