SPS Commerce, Inc. — Q2 2017 Form 10-Q
Business context and period. The company provides cloud-based supply-chain management solutions, with most revenue from recurring subscriptions. This unaudited quarterly report covers the three and six months ended June 30, 2017; comparisons are with the same 2016 periods unless noted.
Financial performance
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $54.3 million, up 14.6% | $106.2 million, up 14.3% |
| Gross profit and margin | $36.1 million; 66.5% | $70.7 million; 66.6% |
| Operating income and margin | $2.7 million; 5.0% | $6.1 million; 5.7% |
| Net income and diluted EPS | $1.8 million; $0.11 | $4.8 million; $0.28 |
| Adjusted EBITDA (non-GAAP) | $7.7 million | $16.2 million |
For the six months, operating cash flow was $17.9 million, investing cash outflow was $5.2 million, and financing cash inflow was $2.3 million. Cash and cash equivalents ended the period at $131.7 million. Cash, cash equivalents, and marketable securities totaled $163.6 million; net accounts receivable was $21.5 million. Total liabilities were $54.8 million, with no outstanding debt. Current assets of $209.1 million exceeded current liabilities of $37.9 million.
Material changes and management commentary
- Q2 revenue growth reflected a 4% increase in recurring-revenue customers to 25,153 and an 11% increase in quarterly annualized average recurring revenue per customer (“wallet share”) to $7,993. Recurring customers generated 92% of revenue.
- Six-month net income rose from $1.4 million to $4.8 million; operating income increased from $2.2 million to $6.1 million. Operating expenses rose 7.8%, slower than revenue growth of 14.3%. Gross margin was 66.6%, versus 66.8% a year earlier.
- Management attributed higher costs mainly to staffing, sales variable compensation, consulting, and platform infrastructure. Research and development expense was slightly lower, partly because more internal software-development labor was capitalized.
- Operating cash flow more than doubled year over year, helped by higher net income and increased deferred revenue. Investing outflow was lower than in 2016, when the company paid $18.1 million for the Toolbox Solutions acquisition.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided. Management expects recurring customers and wallet share to continue growing, and expects cost of revenues, sales and marketing, research and development, and general and administrative expenses to increase in absolute dollars as the business expands.
- Management believes available cash, marketable securities, and operating cash flows will cover working capital and capital expenditure needs for at least the next 12 months. It identifies product development, sales investment, international expansion, competition, and potential acquisitions as factors affecting future capital needs.
- The adoption of ASU 2016-09 increased non-current deferred tax assets and reduced accumulated deficit by $16.3 million as of January 1, 2017. Stock-award tax benefits are now recorded in income tax expense, which management expects will make the effective tax rate more volatile.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control. It reported no off-balance-sheet arrangements. Foreign-exchange movements could adversely affect results as international operations grow; the company had not used currency hedges.
- Management expects the new lease standard to increase non-current assets and liabilities; the financial impact had not yet been estimated. The company reported $12.6 million of future operating lease payments.
Important facts for investors to verify
- Whether recurring-customer growth and wallet-share gains continue, and whether recurring revenue remains near 92% of total revenue.
- Whether operating profitability and cash conversion persist as hiring, consulting, infrastructure, and other growth costs increase.
- The effect of share-based compensation, stock-award tax benefits, and the $16.3 million accounting transition adjustment on reported earnings and comparability.
- The eventual balance-sheet impact of lease accounting and any exposure to foreign-currency movements or future acquisitions.