SPS Commerce, Inc. — Q3 2017 Form 10-Q
Business and period: SPS Commerce provides cloud-based supply-chain management solutions, with most revenue from recurring subscriptions. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with the same 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $56.2m (+13.9%) | $49.3m | $162.4m (+14.2%) | $142.2m |
| Gross profit / margin | $37.5m / 66.8% | $33.1m / 67.2% | $108.2m / 66.6% | $95.2m / 66.9% |
| Operating income / margin | $2.8m / 5.1% | $2.7m / 5.4% | $8.9m / 5.5% | $4.9m / 3.4% |
| Net income / diluted EPS | $1.9m / $0.11 | $2.5m / $0.14 | $6.7m / $0.38 | $3.9m / $0.23 |
| Adjusted EBITDA (non-GAAP) | $8.0m | $7.4m | $24.1m | $19.1m |
For the nine months, operating cash flow was $22.0m, compared with $10.4m. Investing used $12.5m, including $5.2m of property and equipment purchases; financing provided $2.3m. Cash and cash equivalents were $129.0m at September 30. Cash, cash equivalents and marketable securities totaled $166.3m; accounts receivable, net, was $24.2m. The company reported no debt.
Changes and key drivers
- Recurring-revenue customers increased 3% year over year to 25,359. Average annualized recurring revenue per customer rose 11% in Q3 to $8,219 and 10% for the nine months to $7,974. Recurring revenue represented 92% of Q3 revenue and 91% of nine-month revenue.
- Q3 net income declined 25.7% despite revenue growth; 2016 Q3 included a $1.0m gain from a fair-value adjustment to the Toolbox Solutions earn-out liability. The arrangement was resolved, with no comparable 2017 item.
- Nine-month net income rose 70.6%, and operating income rose 84.0%. Operating expenses increased 13.9% in Q3 and 9.9% year to date; cost of revenue rose faster than revenue, and gross margin edged down.
- At the start of 2017, adoption of share-based payment guidance increased non-current deferred tax assets and reduced accumulated deficit by $16.3m. Excess tax benefits now affect income tax expense, which management expects to make the effective tax rate more volatile.
Outlook, risks and other items
- No numerical revenue or earnings guidance is provided in the filing. Management expects recurring customers and customer wallet share to continue growing, and expects cost of revenue, sales and marketing, R&D and G&A expenses to rise in absolute dollars as the business expands.
- Management believes cash, marketable securities and operating cash flows will cover working-capital and capital needs for at least the next 12 months. Planned growth investment and potential acquisitions could affect future capital requirements.
- Foreign-currency exposure includes Australian and Canadian currencies; about 11% of cash and cash equivalents was held outside the U.S. in foreign currencies. The company had not hedged this exposure. Management said interest-rate exposure was not material.
- Operating lease commitments totaled $12.4m. The company expects the forthcoming lease-accounting standard to materially increase reported non-current assets and liabilities; the impact had not been estimated.
- No material legal proceedings, material changes to previously disclosed risk factors, or off-balance-sheet arrangements were reported. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether customer growth and wallet-share gains continue to support approximately 14% revenue growth.
- Whether investment-driven expense growth and slightly lower gross margin affect operating profitability.
- The drivers and sustainability of cash-flow improvement, including deferred revenue and working-capital movements.
- The effects of share-based compensation tax accounting on quarterly tax rates and reported earnings.
- The eventual balance-sheet impact of lease accounting and any changes in currency exposure or acquisition activity.