SPS Commerce, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. SPS Commerce provides cloud-based supply-chain management services. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $135.7 (+18.5%) | $114.5 | $391.9 (+19.2%) | $328.9 |
| Gross profit / margin | $90.1 / 66.4% | $75.9 / 66.3% | $258.9 / 66.1% | $217.3 / 66.1% |
| Operating income / margin | $20.6 / 15.2% | $19.7 / 17.2% | $54.4 / 13.9% | $52.2 / 15.9% |
| Net income / margin | $16.8 / 12.4% | $15.9 / 13.9% | $46.8 / 11.9% | $39.2 / 11.9% |
| Diluted GAAP EPS | $0.45 | $0.43 | $1.25 | $1.06 |
| Adjusted EBITDA / margin (non-GAAP) | $40.5 / 30% | $34.7 / 30% | $115.7 / 30% | $97.3 / 30% |
- Recurring revenue was $127.4 million in Q3, up 20%, and represented 94% of revenue (93% in Q3 2022). For the first nine months, recurring revenue rose 20% to $366.2 million and represented 93% of revenue.
- Management attributed growth to more recurring-revenue customers and higher customer wallet share. Customer count rose 13% year over year to 44,500; wallet share rose 7% to $11,650 for Q3.
- Operating expenses grew faster than revenue, including Q3 general and administrative expense up 31%; operating margin declined. Higher stock-based compensation, staffing, credit-loss expense, and acquisition-related amortization contributed to expense growth.
Cash flow, liquidity and balance sheet
- For the first nine months, operating cash flow was $99.5 million, versus $76.5 million a year earlier. Investing cash use was $93.4 million, including $70.2 million for acquisitions; financing provided $10.0 million, compared with $36.7 million used in 2022, when the company repurchased shares.
- Cash and cash equivalents were $178.7 million and short-term investments $60.6 million at September 30, totaling $239.3 million. Net accounts receivable was $45.1 million.
- Total liabilities were $160.6 million and stockholders’ equity $626.8 million. The company reported no debt or variable-rate borrowings. Management said available cash, investments, and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months.
- Operating cash flow benefited from higher net income and timing of working-capital settlements. Deferred revenue was $78.7 million, including current and non-current balances.
Material developments, outlook and risks
- SPS acquired European supply-chain digitalization provider TIE Kinetix on September 13, 2023, for €63.9 million (reported as $68.7 million at the transaction-date exchange rate), net of cash acquired. Purchase accounting remained provisional at quarter-end. The company also reported $1.5 million of other acquisition activity in Q3.
- Goodwill increased to $252.0 million from $197.3 million at year-end, largely reflecting acquisitions. Acquired intangible assets were $103.6 million, with $11.1 million of amortization expense in the first nine months.
- Management expects recurring-customer count and wallet share to continue increasing through its growth strategy, but the filing provides no quantified revenue or earnings guidance.
- Management cited leadership-transition risk: CEO Archie Black retired effective October 2, 2023, with Chad Collins succeeding him; President and COO James Frome is expected to retire effective December 31, 2024. The company also highlighted reliance on retaining key personnel and the risks of integrating acquisitions.
- There were no material legal proceedings or material changes to previously disclosed risk factors other than the revised personnel and leadership-transition risk. The company disclosed $29.1 million of purchase commitments and $16.1 million of future gross operating lease payments. No off-balance-sheet arrangements were reported.
- Disclosure controls were assessed as effective. The company had not yet included InterTrade and TIE Kinetix in its internal-control assessment under the SEC’s guidance for recently acquired businesses; integration of their controls was in progress.
Important facts for investors to verify
- Whether recurring-revenue customer growth and wallet-share expansion continue, and how much growth reflects acquisitions versus organic performance.
- Whether operating expense growth, especially stock-based compensation and general and administrative costs, moderates and supports operating-margin recovery.
- Final purchase accounting for TIE Kinetix and the effect of acquisitions on goodwill, amortization, cash flow, and future results.
- Execution of the CEO and planned COO transitions, and integration of acquired-company controls.
- How sustainable reported earnings and cash generation are, considering investment income, working-capital timing, and non-GAAP adjustments.