SPS Commerce, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. SPS Commerce provides cloud-based supply-chain management and retail analytics solutions, with most revenue from recurring subscriptions.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $49.3 million | $40.4 million | $142.2 million | $116.2 million |
| Gross profit / margin | $33.1 million / 67.2% | $27.7 million / 68.5% | $95.2 million / 66.9% | $79.6 million / 68.5% |
| Operating income / margin | $2.7 million / 5.4% | $2.3 million / 5.6% | $4.9 million / 3.4% | $4.2 million / 3.6% |
| Net income | $2.5 million | $1.3 million | $3.9 million | $2.5 million |
| Diluted EPS | $0.14 | $0.07 | $0.23 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $7.4 million | $6.2 million | $19.1 million | $15.9 million |
For the nine months, operating cash flow was $10.4 million versus $6.9 million; investing cash use was $29.7 million versus $24.0 million, including the Toolbox Solutions acquisition; and financing cash provided was $7.0 million versus $5.2 million. Cash and cash equivalents were $109.6 million at September 30, down from $121.5 million at year-end 2015.
Cash, cash equivalents and marketable securities totaled $137.8 million; accounts receivable was $21.4 million. The company reported no outstanding debt. Current assets were $172.6 million and current liabilities $30.2 million. Operating lease commitments totaled $14.9 million.
Material changes and drivers
- Revenue increased 22.1% in Q3 and 22.4% for the first nine months. Management attributed growth to more recurring customers and higher customer spend (“wallet share”): Q3 wallet share rose 15% to $7,399, and recurring customers increased 6% to 24,583. Recurring revenue represented 92% of revenue, versus 91% in the comparable periods.
- Gross margin declined 1.3 percentage points in Q3 and 1.6 points year to date, as cost of revenue grew faster than sales, including higher staffing, occupancy, cloud and software costs.
- Operating expenses grew 19.9% year to date, below revenue growth; operating income rose 15.6%. Net income increased 55.8%, aided in part by other income from the Toolbox earn-out remeasurement.
- Toolbox Solutions was acquired January 5, 2016 for $18.1 million cash, 48,668 shares and contingent consideration. Its products and services contributed approximately $5.7 million of revenue through September 30. Acquisition-related amortization increased expense.
Outlook, risks and unusual items
- Management expects recurring customers and wallet share to continue increasing, and expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to rise in absolute dollars as the business expands. No specific revenue or earnings guidance was provided.
- Management expected an approximately 40% full-year 2016 effective tax rate and believed existing cash, securities and operating cash flow would fund working capital and capital expenditures for at least 12 months.
- The Toolbox share-based earn-out liability was reduced to zero after management judged the revenue milestones highly unlikely; the remeasurement produced $1.0 million of Q3 other income and $1.1 million for the nine-month period. This nonrecurring benefit supported reported earnings.
- Management reported effective disclosure controls and no material change in internal control during the quarter. It excluded the recently acquired Toolbox business from its internal-control assessment for 2016. No material legal proceedings or material changes to previously disclosed risk factors were reported.
- Risks include execution of growth and acquisition plans, continued investment and expense growth, foreign-currency exposure (no hedging in place), and accounting uncertainty around future standards. The company said adoption of the new lease standard is expected to materially increase balance-sheet assets and liabilities; revenue-standard effects on certain upfront setup fees remained under evaluation.
Important facts for investors to verify
- Whether recurring-customer growth and wallet-share expansion continue, and whether they offset slower margin growth.
- How much of earnings growth reflects ongoing operations versus the one-time earn-out remeasurement, and how non-GAAP adjustments affect comparisons.
- Toolbox integration, contribution to recurring revenue, acquisition accounting and any final purchase-price adjustments.
- Cash conversion and liquidity trends, including deferred revenue, deferred costs, capital spending and future lease obligations.
- Future effects of lease and revenue-recognition accounting changes, and exposure to foreign-currency movements.