SPS Commerce, Inc. — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015; it was filed February 24, 2016. SPS Commerce provides cloud-based supply-chain management, fulfillment, analytics and related services. It reported approximately 23,410 recurring-revenue customers and approximately 65,000 total customers. Recurring revenue represented 91% of annual revenue; no single customer accounted for more than 2%.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $158.5 million | $127.9 million | +23.9% |
| Gross profit / margin | $108.5 million / 68.4% | $88.0 million / 68.7% | Margin down 0.3 percentage points |
| Operating income / margin | $7.0 million / 4.4% | $4.4 million / 3.4% | +60.2% |
| Net income / diluted EPS | $4.6 million / $0.27 | $2.7 million / $0.16 | Net income +71.6% |
| Adjusted EBITDA / non-GAAP diluted EPS | $22.6 million / $0.84 | $18.2 million / $0.65 | Non-GAAP measures |
| Cash from operating activities | $14.4 million | $16.8 million | Down $2.4 million |
Fourth-quarter 2015 revenue was $42.3 million, versus $35.4 million a year earlier. Quarterly operating income was $2.8 million versus $1.4 million, and net income was $2.1 million versus $0.9 million; diluted EPS was $0.12 versus $0.05.
- Recurring customers increased 6% to 23,410. Average recurring revenue per customer increased 15% to $6,343, supporting annual recurring-revenue growth of 25%.
- Operating expenses rose 21.4% to $101.5 million, including sales and marketing of $55.4 million, research and development of $18.0 million, and general and administrative expense of $24.8 million. Management attributed much of the increase to staffing and expansion.
- Year-end cash and cash equivalents were $121.5 million; marketable securities totaled $22.5 million, for combined cash and securities of approximately $144.0 million. Working capital was $142.6 million.
- No debt was outstanding at year-end. The company closed its $20 million revolving credit facility in the fourth quarter. Management said available cash, securities and operating cash flow should cover working-capital and capital-expenditure needs for at least 12 months.
- Investing cash outflow was $31.3 million, including $22.5 million of securities purchases and $8.8 million of capital expenditures. Financing cash inflow was $8.3 million, primarily from employee stock plans and option exercises.
Changes, outlook and notable items
- Revenue growth continued, marking the company’s 60th consecutive quarter of increased revenue. Gross margin edged lower, while operating and net income increased.
- Management expects recurring customer counts and revenue per customer to grow as it expands its products and customer penetration. It also expects operating expenses, including sales and marketing, research and development, and general and administrative costs, to increase in absolute dollars. The filing provides no numerical revenue or earnings guidance.
- In January 2016, after year-end, the company acquired Toolbox Solutions, a provider of point-of-sale analytics and category-management services, for $18.4 million cash and $4.5 million in stock, including stock subject to an earn-out. Purchase accounting was not finalized at filing.
- The 2015 results include $6.4 million of stock-based compensation. Adjusted EBITDA and non-GAAP EPS exclude certain expenses and should be considered alongside GAAP results. The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements.
Risks and contingencies
- Most recurring-customer contracts can be cancelled on 30 to 90 days’ notice, creating potential for churn despite the recurring-revenue model.
- Key risks include competition and pricing pressure, slower technology spending or retail weakness, service outages and cybersecurity incidents, data-privacy regulation, and the ability to scale infrastructure and introduce successful products.
- International expansion exposes the company to foreign-exchange, regulatory and operational risks. It reported 60 employees in Kyiv and cited continuing political and civil unrest in Ukraine as a potential risk.
- The company had $82.9 million of federal and $31.4 million of state net operating loss carryforwards; it estimated approximately $17.6 million of federal losses may expire unused due to ownership-change limitations.
- Operating lease commitments totaled $15.5 million, including $3.3 million due within one year. The filing identifies no material legal contingency.
Important facts for investors to verify
- Whether recurring customer growth and higher customer spending persist, and whether short-notice cancellation terms lead to elevated churn.
- Cash conversion: operating cash flow declined despite higher net income; review working-capital movements and deferred costs.
- How ongoing hiring and infrastructure investment affect margins, and how much reported non-GAAP performance depends on exclusions such as stock-based compensation.
- Toolbox acquisition consideration, earn-out terms, final purchase accounting, integration progress and contribution to growth.
- Exposure to cybersecurity, service continuity, Ukraine-related disruption, foreign currency movements and NOL utilization limits.