SPS Commerce, Inc. — Q2 2013 Form 10-Q
Business context and period. SPS Commerce provides cloud-based, on-demand supply-chain management software under a SaaS model, with most revenue from recurring subscriptions. This unaudited report covers the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $25.7 million | $17.8 million | $49.4 million | $34.4 million |
| Gross profit / margin | $17.7 million / 69.0% | $13.0 million / 72.8% | $34.4 million / 69.6% | $25.1 million / 73.0% |
| Operating income | $0.5 million | $0.8 million | $0.7 million | $1.2 million |
| Net income | $0.3 million | $0.4 million | $0.5 million | $0.7 million |
| Diluted EPS | $0.02 | $0.03 | $0.03 | $0.05 |
| Adjusted EBITDA (non-GAAP) | $3.4 million | $2.3 million | $6.4 million | $4.2 million |
For the six months, operating cash flow was $8.6 million, capital expenditures were $1.7 million, and financing cash flow was $2.2 million, primarily from option exercises and the employee stock purchase plan. Cash increased to $75.1 million from $66.1 million at December 31, 2012. At June 30, current assets were $99.8 million, current liabilities $17.8 million, and working capital $82.1 million. Total liabilities were $28.5 million; no debt was outstanding. The company had an undrawn $20 million revolving credit facility maturing September 30, 2016, and was in covenant compliance.
Material changes and management commentary
- Revenue grew 44% year over year in both Q2 and the first half. Management attributed growth to customer additions and greater recurring revenue per customer; recurring-revenue customers rose 11% to 18,871, while Q2 annualized average recurring revenue per customer rose 33% to $4,869. Recurring revenue represented 88% of Q2 revenue and 89% of first-half revenue.
- Despite higher revenue, gross margin declined 3.8 percentage points in Q2 and 3.4 points for the first half, as cost of revenue grew faster than sales. Management cited increased headcount, personnel costs, depreciation, and occupancy.
- Operating expenses increased 41% in the first half, led by sales and marketing (+41%) and research and development (+45%). Operating income and net income fell year over year. Intangible amortization rose following the 2012 Edifice acquisition.
- Management said the quarter marked the company’s 50th consecutive quarter of revenue growth. It expects revenue customers and recurring revenue per customer to continue increasing, and expects cost of revenue, sales and marketing, R&D, and G&A to rise in absolute dollars as the business expands.
- The company plans to pursue market penetration, customer expansion, distribution and international growth, new products, and selective acquisitions. It believes cash and operating cash flow will cover working-capital and capital-expenditure needs for at least the next 12 months. No specific numerical earnings or revenue guidance is provided in the filing.
Risks, contingencies, and unusual items
- A software-license agreement entered into in Q2 resulted in accrued future payments of approximately $0.9 million for the remainder of 2013 and $1.4 million for 2014.
- First-half income tax expense was $0.1 million versus $0.5 million a year earlier; the comparison includes a $117,000 discrete benefit in 2013 from the retroactive federal R&D credit.
- Stock-based compensation was $2.0 million for the first half, up from $1.3 million. Approximately $9.3 million of unrecognized compensation expense remained, expected to be recognized over a weighted-average 2.9 years.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control. Management identified no material foreign-exchange exposure and reported no off-balance-sheet arrangements.
- Forward-looking statements are subject to risks described in the company’s 2012 Form 10-K; actual results may differ, and the company disclaims an obligation to update such statements.
Important facts for investors to verify
- Whether recurring customer growth and wallet-share expansion continue, and how much growth depends on acquired Edifice customers.
- Whether gross margins stabilize as staffing and infrastructure costs rise, given expenses grew faster than revenue in the period.
- The conversion of reported earnings to cash flow, including working-capital movements and the timing of deferred revenue and deferred costs.
- The effects of stock-based compensation, outstanding equity awards, and share-count growth on per-share results and dilution.
- The future cash commitments under the software-license agreement and the assumptions supporting management’s 12-month liquidity assessment.