SPS Commerce, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless otherwise noted. SPS Commerce provides cloud-based supply-chain management services to retailers, suppliers, distributors, grocers, and logistics firms.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $125.9 million | $105.2 million; up 19.7% |
| Recurring revenue | $117.3 million, 93% of revenue | $97.6 million; up 20% |
| Gross profit / margin | $82.9 million / 65.9% | $69.8 million / 66.4% |
| Operating income / margin | $16.7 million / 13.3% | $16.5 million / 15.7% |
| Net income / margin | $15.3 million / 12.1% | $12.6 million / 12.0% |
| Diluted GAAP EPS | $0.41 | $0.34 |
| Adjusted EBITDA / margin | $37.0 million / 29% | $31.8 million / 30% |
| Operating cash flow | $21.6 million | $4.3 million |
Cash and cash equivalents were $182.3 million and short-term investments were $51.1 million at quarter-end, totaling $233.5 million. Net accounts receivable was $43.4 million. Total liabilities were $131.0 million and stockholders’ equity was $565.9 million. The company reported no outstanding debt. Cash increased $19.4 million during the quarter. Investing cash flow was negative $4.6 million and financing cash flow was positive $2.4 million.
Changes and management commentary
- Revenue growth reflected both more recurring-revenue customers and higher average revenue per customer. Customer count rose 13% to 42,750; average recurring revenue per customer (“wallet share”) increased 7% to $11,050. The filing attributes growth partly to acquisitions and does not provide a clear organic-growth breakdown.
- Operating income increased only 1.3% as operating expenses rose 24.2%, faster than revenue. General and administrative expense increased 33.7%, including higher personnel costs, stock-based compensation, and charitable contributions. Amortization rose 55.9%, primarily due to acquired intangible assets.
- Gross margin eased 0.5 percentage point and Adjusted EBITDA margin declined 1 percentage point. GAAP net income increased 21.3%, supported in part by income tax expense falling to $2.7 million from $4.3 million. Management said the tax decline primarily reflected excess tax deductions from equity-award settlements and cautioned that the effective tax rate may fluctuate.
- Operating cash flow improved substantially; management attributed the increase primarily to the timing of operating asset and liability settlements and higher net income. It is therefore not solely a measure of earnings growth.
- Q1 included no share repurchases, compared with $15.2 million of repurchases in Q1 2022. A $50 million repurchase authorization remained in effect through July 2024.
Outlook, risks, and unusual items
- The filing provides no quantified revenue, earnings, or margin guidance. Management expects recurring-customer count and wallet share to continue increasing and plans to pursue market penetration, product and geographic expansion, and selective acquisitions.
- Management said cash, investments, and operating cash flow should be sufficient for working capital and capital expenditures for at least the next 12 months. Contractual commitments included $17.4 million of future operating lease payments and $4.3 million of purchase commitments.
- Recent acquisitions GCommerce and InterTrade had provisional purchase accounting at March 31, 2023; allocation was expected to be finalized within the applicable one-year measurement periods. These acquisitions contributed to reported growth and increased intangible-asset amortization.
- The company said it was incorporating acquisition-specific internal controls; the assessment scope excluded GCommerce and InterTrade under SEC guidance for recently acquired businesses. Together, they represented 3.6% of Q1 revenue and 3.4% of consolidated assets excluding goodwill and net intangible assets.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material impact from inflation during the quarter. It identified foreign-currency exposure from international operations, primarily involving the Australian and Canadian dollars, and said it does not currently hedge that exposure.
- Recurring contracts generally allow cancellation with 30 to 90 days’ notice. Management also cautioned that interim results may not indicate full-year results.
Important facts for investors to verify
- How much of revenue and customer growth came from acquisitions versus organic growth; the filing does not quantify the split.
- Whether the quarter’s cash-flow improvement persists, given management’s emphasis on working-capital timing.
- Whether operating-expense growth, acquisition amortization, and stock-based compensation affect future operating and Adjusted EBITDA margins.
- Final purchase accounting for GCommerce and InterTrade and the integration of their internal controls.
- The sustainability of the lower quarterly tax expense, given the disclosed variability from equity-award tax benefits.
- Performance and risks associated with the remaining repurchase authorization, lease obligations, and purchase commitments.