SPS Commerce, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts are in U.S. dollars.
Business context
SPS Commerce provides cloud-based supply-chain management solutions, including fulfillment and analytics. Most revenue comes from recurring subscriptions. The company reported its 83rd consecutive quarter of revenue growth.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $97.9 million | $79.6 million | $282.5 million | $229.3 million |
| Gross profit / margin | $63.5 million / 64.9% | $54.5 million / 68.5% | $186.5 million / 66.0% | $156.4 million / 68.2% |
| Operating income / margin | $13.5 million / 13.8% | $14.0 million / 17.5% | $39.7 million / 14.1% | $36.6 million / 16.0% |
| Net income / margin | $11.4 million / 11.7% | $11.4 million / 14.3% | $31.8 million / 11.3% | $32.1 million / 14.0% |
| Diluted GAAP EPS | $0.31 | $0.31 | $0.86 | $0.89 |
| Adjusted EBITDA / margin (non-GAAP) | $26.5 million / 27% | $23.2 million / 29% | $79.3 million / 28% | $64.0 million / 28% |
For the first nine months, operating cash flow was $81.6 million, compared with $65.5 million a year earlier. Investing activities used $32.1 million and financing activities used $3.4 million. Cash and cash equivalents were $195.8 million at quarter-end; cash, cash equivalents, certificates of deposit and short-term investments totaled approximately $252.0 million. Current assets were $343.3 million and current liabilities were $94.9 million. The company reported no debt or off-balance-sheet borrowing arrangements.
Material changes versus comparable periods
- Q3 revenue increased 23.0%; nine-month revenue increased 23.2%. Recurring customers reached 35,400, up 10% year over year. Average recurring revenue per customer (“wallet share”) rose 10% to $10,350 for Q3 and to $10,100 for the nine-month period.
- Recurring revenue represented 92% of revenue in both 2021 periods, versus 95% in Q3 2020 and 94% for the first nine months of 2020. One-time revenue increased notably, to $7.5 million in Q3 from $4.4 million, and to $22.4 million year to date from $12.9 million.
- Profitability margins contracted. Q3 gross margin fell 3.6 percentage points and operating margin fell 3.7 points year over year. Nine-month gross margin fell 2.2 points and operating margin fell 1.9 points. Q3 net income was nearly flat; nine-month net income declined 0.9% despite higher revenue.
- Cost of revenue and operating expenses rose with headcount, personnel costs and stock-based compensation; infrastructure investment and acquired-intangible amortization also contributed. Data Masons, acquired in December 2020, drove increased intangible amortization.
- Other expense shifted from income in the prior-year periods, primarily due to unfavorable foreign-currency movements; lower investment income also affected the nine-month comparison. Q3 tax expense decreased due to discrete stock-award tax benefits, while year-to-date tax expense increased.
Outlook, risks and unusual items
- Management expects recurring customers and wallet share to grow as it expands solutions and customer adoption. It plans to pursue market penetration, channel and international expansion, new solutions, and selective acquisitions. The filing gives no specific revenue or earnings guidance.
- Management believes cash, investments and operating cash flow will be sufficient for working capital and capital expenditures for at least the next 12 months. It expects expenditures to rise as the business expands.
- Principal exposures discussed include execution of growth and product investment, competition, acquisitions, and foreign exchange. The company had no foreign-currency hedges; it said a hypothetical 10% exchange-rate change or inability to access foreign funds would not materially impair operations, while noting dollar appreciation could adversely affect results. COVID-19 may amplify business risks. Management said inflation and changing prices had not materially affected the business and were not expected to do so in the foreseeable future.
- Operating lease liabilities were $20.6 million; future gross lease payments were $22.9 million. Purchase commitments totaled $11.9 million, primarily for computing infrastructure and customer relationship management services through 2023.
- The Data Masons acquisition’s purchase accounting was finalized. Its controls were excluded from the current internal-control assessment under the SEC’s recently acquired business guidance; the company was integrating controls and planned to include Data Masons in its year-end 2021 assessment. Disclosure controls were concluded effective. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- The company repurchased 42,299 shares for $4.2 million in Q3. In October, the board authorized a new $50 million repurchase program, effective November 28, 2021. Q3 results also included $0.9 million of realized foreign-currency loss in other income (expense). Non-GAAP measures exclude specified items, including stock compensation and acquired-intangible amortization; review the filing’s reconciliations alongside GAAP results.
Important facts for investors to verify
- Whether revenue growth and customer wallet-share expansion can continue while recurring revenue remains a high proportion of sales.
- Whether higher staffing, stock compensation and platform investment stabilize relative to revenue, given the decline in GAAP margins.
- The composition and expected conversion of one-time revenue, deferred revenue and deferred costs.
- The cash-flow contribution from deferred revenue and accrued compensation, and planned capital spending, repurchases and acquisition activity.
- Integration of Data Masons and completion of the year-end internal-control assessment, as well as continued foreign-currency exposure and the terms and execution of the new repurchase program.