SPS Commerce, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. SPS Commerce provides cloud-based supply-chain management services. Amounts below are in millions except per-share data and customer metrics.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $114.5 | $97.9 | $328.9 | $282.5 |
| Gross profit / margin | $75.9 / 66.3% | $63.5 / 64.9% | $217.3 / 66.1% | $186.5 / 66.0% |
| Operating income / margin | $19.7 / 17.2% | $13.5 / 13.8% | $52.2 / 15.9% | $39.7 / 14.1% |
| Net income / margin | $15.9 / 13.9% | $11.4 / 11.7% | $39.2 / 11.9% | $31.8 / 11.3% |
| Diluted GAAP EPS | $0.43 | $0.31 | $1.06 | $0.86 |
| Adjusted EBITDA / margin | $34.7 / 30% | $26.5 / 27% | $97.3 / 30% | $79.3 / 28% |
- Q3 revenue increased 17.0% year over year; recurring revenue rose 18% to $106.6 million and represented 93% of revenue. For the nine months, revenue increased 16.4% and recurring revenue rose 17% to $305.3 million.
- Recurring revenue customers grew 12% to 39,550. Average recurring revenue per customer (“wallet share”) increased 5% to $10,900 for Q3 and 4% to $10,550 for the nine-month period.
- Operating cash flow was $76.5 million for the first nine months, versus $81.6 million a year earlier. Capital expenditures were $13.9 million; reported operating cash flow less those expenditures was $62.6 million.
- At September 30, cash and cash equivalents were $186.2 million and short-term investments were $50.9 million, totaling $237.2 million of cash and investments. Net accounts receivable was $36.8 million. Total liabilities were $129.4 million; the company reported no debt or undisclosed borrowings.
Changes, transactions, and capital allocation
- Profitability improved year over year: Q3 gross margin increased 1.4 percentage points and operating margin increased 3.4 points. For the nine months, operating margin increased 1.8 points. Operating expenses grew more slowly than revenue for both comparisons.
- Operating cash flow declined by $5.1 million year over year for the nine-month period, which management attributed primarily to the timing of operating asset and liability settlements, particularly accrued compensation. Investing cash use increased, including the GCommerce acquisition; financing cash use rose mainly due to repurchases.
- Acquired GCommerce, an automotive-aftermarket EDI provider, on July 19, 2022 for approximately $45 million in cash. Purchase accounting remained provisional at quarter-end; recorded goodwill from the acquisition was $24.6 million.
- After quarter-end, acquired Canadian-based InterTrade for $49 million in cash on October 4, 2022. The filing identifies this transaction as a future capital requirement.
- Repurchased 357,430 shares for $42.7 million during the first nine months; the Q3 average repurchase price was $122.04 per share. A new $50 million repurchase authorization became effective August 26, 2022, with $47.5 million available at September 30.
Outlook, risks, and other items
- No quantified revenue or earnings guidance is provided. Management expects recurring customers and wallet share to continue increasing as it pursues market penetration, customer growth, distribution expansion, international growth, product development, and selective acquisitions.
- Management said cash, investments, and operating cash flows should be sufficient for working capital and capital expenditure needs for at least the next 12 months. Contractual commitments totaled $27.4 million, including $19.974 million of operating lease payments and $7.446 million of purchase commitments.
- Management reported no material effect from inflation during the nine months and did not expect a material effect in the foreseeable future. Foreign-currency movements generated a $2.0 million realized loss for the nine months; management cited foreign-exchange fluctuations as a risk. No hedges were in place.
- Q3 income tax expense rose to $3.1 million from $1.4 million, primarily due to higher pretax income and fewer excess tax deductions from equity-award settlements. Management expects the effective tax rate to fluctuate. Q3 G&A also included a $1.0 million increase in charitable contributions.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective. Internal-control assessments excluded recently acquired Genius Central and GCommerce; the company was incorporating controls for those businesses.
Important facts for investors to verify
- Whether customer growth and wallet-share gains continue, and how much growth reflects acquisitions versus organic activity.
- The final GCommerce purchase-price allocation and the integration, performance, and accounting impact of both GCommerce and post-quarter InterTrade.
- Whether operating cash flow recovers and how acquisitions, infrastructure investment, repurchases, and purchase commitments affect liquidity.
- The effect of stock-based compensation, acquisition-related amortization, foreign-exchange movements, and variable tax benefits on reported results; adjusted EBITDA is a non-GAAP measure.
- Progress integrating acquired-company internal controls and any future changes in the company’s risk disclosures.