SPS Commerce, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts are in millions unless otherwise noted. SPS Commerce provides cloud-based supply-chain management solutions, with most revenue generated from recurring subscriptions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $79.6 (+12.2%) | $70.9 | $229.3 (+11.1%) | $206.4 |
| Gross profit / margin | $54.5 / 68.5% | $47.7 / 67.2% | $156.4 / 68.2% | $138.1 / 66.9% |
| Operating income / margin | $14.0 / 17.5% | $10.9 / 15.4% | $36.6 / 16.0% | $27.6 / 13.4% |
| Net income / diluted EPS | $11.4 / $0.31 | $8.9 / $0.25 | $32.1 / $0.89 | $24.6 / $0.68 |
| Adjusted EBITDA (non-GAAP) | $23.2 | $18.1 | $64.0 | $50.9 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $65.5 | $51.0 |
Recurring revenue was $75.2 million in Q3 and represented 95% of revenue, compared with 94% a year earlier. Recurring customers increased 5% to 32,025; annualized average recurring revenue per customer (“wallet share”) rose 8% to $9,473 for Q3. For the nine-month period, wallet share increased 7% to $9,191.
At September 30, cash and cash equivalents were $208.9 million and short-term investments were $52.3 million; management described these, together with certificates of deposit, as $261.2 million of principal liquidity. Total liabilities were $92.7 million, including lease liabilities; the company reported no outstanding debt. Nine-month investing cash outflow was $32.0 million and financing cash outflow was $3.9 million. Capital expenditures were $11.6 million.
Changes versus comparable periods
- Q3 revenue increased 12.2%, operating income 27.6%, and net income 27.6% year over year. For the first nine months, revenue rose 11.1%, operating income 32.4%, and net income 30.8%.
- Gross and operating margins improved in both comparisons. Operating expenses grew 10.4% in Q3 and 8.5% year to date, slower than revenue growth.
- Credit-loss provision rose to $4.2 million for the first nine months, from $2.4 million; the allowance for credit losses was $3.8 million at quarter-end versus $1.5 million at year-end 2019.
- Operating cash flow increased to $65.5 million from $51.0 million year to date. Investment purchases and capital expenditures contributed to higher investing cash use; the prior-year period included an acquisition.
Outlook, risks and notable items
- Management expects customer counts and wallet share to increase as it expands its solutions and customer penetration. The filing gives no numerical earnings or revenue guidance.
- Management said COVID-19 had not materially adversely affected results through September 30, 2020, but emphasized that future effects were uncertain. Risks include customer demand and payment capacity, supply-chain disruption, third-party provider disruption, and employee limitations.
- Management stated available liquidity and operating cash flows should cover working capital and capital expenditure needs for at least 12 months. The company reported no off-balance-sheet arrangements and no material legal proceedings.
- Contractual commitments included $23.0 million of operating lease payments and a $14.4 million noncancelable computing-infrastructure purchase commitment through May 2023. Remaining EDIAdmin earn-out liability was $0.3 million, expected to be paid in Q1 2021; maximum potential payout was $1.7 million, of which $0.7 million had been paid.
- The company adopted the expected-credit-loss standard in January 2020 and recorded a $1.1 million cumulative adjustment to retained earnings. It repurchased $19.0 million of shares year to date, made no repurchases in Q3, and had $31.1 million remaining under its authorization.
- Stock-based compensation was $14.2 million for the first nine months, up from $11.3 million. Adjusted EBITDA and non-GAAP income per share are management-defined non-GAAP measures and should be considered alongside GAAP results.
Important facts for investors to verify
- Whether recurring customer growth and wallet-share expansion continue, and how much of revenue growth remains recurring.
- Credit-loss trends, including the higher allowance and provision, and customer payment performance amid COVID-19-related uncertainty.
- Cash-flow conversion and planned spending, including infrastructure investment, the vendor commitment, and share repurchases.
- The drivers and comparability of non-GAAP results, particularly stock-based compensation and other adjustments.
- Future pandemic effects and any changes to the company’s stated liquidity outlook; the filing provides no quantified forward guidance.