SPS Commerce, Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2018. SPS provides cloud-based supply-chain management and analytics solutions, with most revenue coming from recurring subscriptions.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $59.1 million | $51.9 million | +13.9% |
| Gross profit / margin | $39.3 million / 66.6% | $34.5 million / 66.6% | +13.8% |
| Operating income / margin | $4.3 million / 7.3% | $3.4 million / 6.5% | +27.3% |
| Net income / diluted EPS | $3.3 million / $0.19 | $3.0 million / $0.17 | Net income +9.0% |
| Operating cash flow | $9.3 million | $10.4 million | Down $1.1 million |
Recurring revenue was $54.9 million, up from $48.0 million; it represented 93% of total revenue versus 92%. Recurring-revenue customers rose 4% to 25,888, while annualized average recurring revenue per customer (“wallet share”) increased 10% to $8,499. Adjusted EBITDA, a non-GAAP measure, was $10.9 million versus $8.5 million; non-GAAP diluted EPS was $0.39 versus $0.25.
Financial position and cash flows
At March 31, 2018, cash and cash equivalents were $120.5 million, short-term investments were $45.3 million, and long-term investments were $2.5 million. Management reported $168.3 million of cash, cash equivalents, certificates of deposit and marketable securities, plus $25.9 million of net receivables. Total liabilities were $51.2 million; the company reported no debt. It said available liquidity and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months.
Operating cash flow declined primarily due to the timing of accrued compensation payments. Investing activities used $6.7 million, including $3.9 million of capital expenditures; financing activities used $5.2 million, including $5.9 million for share repurchases. Cash and cash equivalents decreased $2.6 million during the quarter. Operating lease obligations totaled $23.5 million.
Changes, outlook, and risks
- Revenue grew 14%, while total operating expenses rose 12%. General and administrative expense increased 29%, largely from headcount and stock-based compensation; operating margin improved to 7.3%.
- Income-tax expense rose to $1.3 million from $0.5 million. Management cited higher pretax income and fewer discrete tax benefits from stock activity, partly offset by a lower overall effective tax rate following the Tax Act. Further tax-law guidance and related accounting assessments remained under evaluation.
- SPS adopted ASC 606 retrospectively on January 1, 2018. Recurring revenue recognition was not affected, but accounting for certain setup fees and contract-acquisition costs changed. The adoption increased deferred costs and deferred revenue and raised opening accumulated equity; the 2017 comparison was adjusted, with only small reported Q1 effects.
- Management cited continued growth in customers and wallet share as expectations, but the filing provides no numerical revenue or earnings guidance. It plans to pursue market penetration, customer expansion, international growth, new offerings and selective acquisitions.
- Risks include competition, execution of growth and international plans, foreign-currency exposure (not hedged), and changes in tax rules. Management said foreign-exchange movements had not materially affected results. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- The company expects the lease-accounting standard, when adopted, to materially increase reported non-current assets and liabilities; the amount was not yet estimable.
Important facts for investors to verify
- Whether recurring-customer and wallet-share growth continues to support revenue expansion.
- Whether operating margin and cash generation are sustained as personnel, infrastructure and other costs rise.
- The impact of Tax Act implementation, stock-award tax benefits, and forthcoming tax guidance on future tax expense.
- The eventual balance-sheet impact of lease accounting and the company’s future use of cash for repurchases, acquisitions and investment.
- Comparability of reported results following retrospective ASC 606 adoption; Q1 results may not indicate full-year performance.