SPS Commerce, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless stated otherwise. Financial amounts below are in U.S. dollars.
Business context
SPS Commerce provides cloud-based supply-chain management services, including fulfillment and analytics solutions. Most revenue comes from recurring customer subscriptions. The company reported its 77th consecutive quarter of revenue growth.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $74.2 million | $66.9 million | +10.8% |
| Recurring revenue | $70.0 million | $62.7 million | About +11.6% |
| Gross profit / margin | $50.6 million / 68.3% | $45.6 million / 68.1% | Profit +11.2% |
| Operating income / margin | $11.5 million / 15.5% | $7.4 million / 11.0% | Income +56.3% |
| Net income / diluted EPS | $9.5 million / $0.26 | $6.8 million / $0.19 | Net income +39.7% |
| Adjusted EBITDA (non-GAAP) | $20.4 million | $16.5 million | +23.7% |
| Operating cash flow | $14.7 million | $10.2 million | +$4.5 million |
Recurring revenue customers increased 5% to 31,010, and annualized average recurring revenue per customer (“wallet share”) rose 6% to $9,069. Recurring revenue represented 94% of total revenue in both periods. Non-GAAP diluted income per share was $0.38 versus $0.30; these non-GAAP measures should not be treated as substitutes for GAAP results.
Liquidity, cash flow and capital
- Cash and cash equivalents were $184.5 million at March 31, 2020; short-term investments were $30.1 million. The company reported $214.6 million of cash, cash equivalents, certificates of deposit and marketable securities as principal liquidity sources.
- Total assets were $439.8 million and total liabilities were $84.6 million. The company had no outstanding debt.
- Cash flow was $14.7 million from operations, $0.6 million used in investing, and $8.9 million used in financing. Cash and cash equivalents increased $5.2 million to $184.5 million.
- Capital expenditures were $4.0 million. The company repurchased 240,275 shares for $12.0 million during the quarter; $38.0 million remained available under its $50 million repurchase authorization.
- Management stated that available liquidity and operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months.
Material changes and unusual items
- Operating expenses increased 2.4%, slower than revenue growth. Research and development expense rose 22.2%, primarily with increased headcount and stock compensation; general and administrative expense fell 6.7%, mainly because of lower stock-based compensation following a change to the CEO’s employment agreement.
- Other expense included a $1.2 million realized foreign-currency loss on cash and investments. Foreign-currency translation reduced other comprehensive income by $3.9 million.
- Operating cash flow benefited from a $2.8 million reimbursement for tenant-improvement costs. Cash use for share repurchases and a $0.7 million earn-out payment contributed to financing outflows.
- Adoption of the expected-credit-loss standard produced a $1.1 million cumulative adjustment to retained earnings. The allowance for credit losses was $2.9 million at quarter-end, compared with $1.5 million at year-end 2019; the filing states the standard’s adoption did not materially affect the financial statements.
Outlook, risks and contingencies
- The filing provides no numerical revenue, earnings or margin guidance. Management described growth plans involving deeper market and customer penetration, new solutions, expanded distribution and international operations, and selective acquisitions.
- COVID-19 was identified as a material uncertainty. Potential effects included customer and supply-chain disruption, demand volatility, third-party technology-provider disruptions, and limits on employee work and travel. The ultimate impact was uncertain and not quantified.
- Management cited potential future capital needs related to product development, sales and marketing, domestic and international expansion, competition and acquisitions.
- The company reported no material legal proceedings, off-balance-sheet arrangements or undisclosed borrowings. Management concluded disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- Whether COVID-19 materially affected customer demand, renewals, usage, collections or supply-chain activity after quarter-end; the filing does not quantify an impact.
- Whether customer growth and wallet-share expansion continued, and how recurring revenue and customer concentration developed.
- The sustainability of margin and earnings improvement, including the effects of increased R&D spending, stock-based compensation and credit-loss provisions.
- The nature and potential recurrence of foreign-currency losses, and the assumptions underlying the credit-loss allowance and acquisition earn-out liability.
- Subsequent cash deployment, repurchases and liquidity relative to operating and investment needs.