SPS Commerce, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. The filing also reports fourth-quarter results. SPS Commerce provides cloud-based supply-chain management services. At year-end, it reported approximately 31,000 recurring-revenue customers and 90,000 total customers.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $279.1 million | $248.2 million | +12.4% |
| Gross profit / margin | $186.9 million / 67.0% | $166.5 million / 67.1% | +12.2% gross profit |
| Operating income / margin | $38.4 million / 13.8% | $26.7 million / 10.8% | +43.7% operating income |
| Net income / diluted EPS | $33.7 million / $0.94 | $23.9 million / $0.68 | +41.2% net income |
| Cash from operating activities | $71.8 million | $55.0 million | +$16.8 million |
| Cash and cash equivalents | $179.3 million | $133.9 million | +$45.4 million |
| Working capital | $223.6 million | $193.1 million | +$30.5 million |
- Cash, cash equivalents, certificates of deposit and marketable securities totaled $213.5 million at year-end, compared with $178.4 million a year earlier.
- The company reported no outstanding debt. Long-term liabilities were $24.5 million, primarily reflecting operating lease liabilities after adoption of the lease accounting standard.
- Recurring revenue was $262.0 million, or 94% of total revenue, up 14% year over year. Fulfillment recurring revenue was $219.3 million; Analytics was $37.0 million.
- Recurring-revenue customers rose 5% to 30,771; average recurring revenue per customer increased 4% to $8,722.
- Adjusted EBITDA, a non-GAAP measure, was $69.8 million versus $51.3 million. Non-GAAP diluted income per share was $1.28 versus $0.96; these measures exclude specified expenses and adjustments.
- Investing activities used $14.3 million, including $11.5 million for acquisitions and intangible assets; financing activities used $12.1 million, including $20.6 million for share repurchases. Property and equipment purchases were $13.6 million.
Material changes and notable items
- Revenue growth reflected both customer additions and higher customer spending. The fourth quarter was the company’s 76th consecutive quarter of revenue growth.
- Operating margin improved as total operating expenses grew more slowly than revenue. Research and development expense rose 28.2% to $28.3 million, while sales and marketing expense declined 2.2% to $70.1 million.
- Gross margin was nearly flat, decreasing from 67.1% to 67.0%; cost of revenue rose 12.8%, including increased personnel and infrastructure costs.
- Income tax expense increased to $8.4 million from $4.5 million, alongside higher pretax income. The 2017 comparison was affected by a $6.8 million discrete tax charge related to the Tax Cuts and Jobs Act.
- The company acquired MAPADOC in August 2019 for a purchase price of approximately $11.8 million. Goodwill and acquired intangible assets were recorded. EDIAdmin acquisition earn-out remeasurement contributed $0.4 million of other income; approximately $0.5 million was expected to be paid in 2020.
- A two-for-one stock split took effect in August 2019; reported historical per-share and share data are adjusted for the split. A new $50 million repurchase authorization was approved in November; none had been used under the new program by year-end.
Outlook, risks and contingencies
- No quantified forward guidance is provided in the supplied filing text. Management expects recurring customers and average revenue per customer to continue increasing as it expands its services and customer penetration. It also plans to invest in product development, sales capacity and international expansion, and to pursue 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. Operating lease commitments totaled $26.4 million undiscounted, including $4.6 million due within one year.
- Customer retention is a key exposure: most recurring-revenue contracts can be cancelled with 30 to 90 days’ notice. Other principal risks include competition and pricing pressure, cybersecurity incidents or service outages, dependence on third-party infrastructure, privacy and regulatory requirements, and challenges scaling operations and integrating acquisitions.
- International operations introduce currency, regulatory and geopolitical exposures; the filing specifically identifies the potential disruption of software development operations in Ukraine. The company reported no material legal proceedings and no material effect from currency fluctuations in 2019.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. The assessment excluded MAPADOC, representing approximately 3% of consolidated assets and less than 1% of revenue; management said it would include MAPADOC in the following year’s assessment.
Investor verification priorities
- Confirm the drivers and durability of recurring-revenue growth, customer additions, customer retention and increased wallet share.
- Review GAAP results alongside non-GAAP reconciliations, particularly the impact of stock-based compensation, amortization and acquisition-related adjustments.
- Assess cash conversion and investment needs, including capital expenditures, acquisition spending, share repurchases and lease obligations.
- Evaluate cybersecurity, service continuity and third-party infrastructure controls, as well as the operational exposure related to Ukraine.
- Track MAPADOC integration and acquisition earn-out payments, and verify that internal-control testing includes the acquired business.