SPS Commerce, Inc. — Q3 2013 Form 10-Q
Business and period. SPS Commerce provides cloud-based supply-chain management software on a Software-as-a-Service basis, with most revenue from recurring subscriptions. This unaudited report covers the quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $27.0 (+33%) | $20.3 | $76.4 (+40%) | $54.6 |
| Gross profit / margin | $18.8 / 69.5% | $14.3 / 70.7% | $53.2 / 69.6% | $39.4 / 72.1% |
| Operating income / margin | $0.37 / 1.4% | $0.14 / 0.7% | $1.05 / 1.4% | $1.35 / 2.5% |
| Net income / diluted EPS | $0.27 / $0.02 | $0.17 / $0.01 | $0.76 / $0.05 | $0.86 / $0.06 |
| Adjusted EBITDA (non-GAAP) | $3.63 | $2.19 | $10.00 | $6.39 |
Q3 revenue increased $6.7 million; management attributed growth to more recurring customers and higher revenue per customer. Recurring customers rose 9% to 19,387, while annualized average recurring revenue per customer rose 22% to $5,018. Recurring revenue represented 89% of revenue in both Q3 and the nine-month period. The company reported its 51st consecutive quarter of revenue growth.
For the first nine months, revenue growth did not translate into higher GAAP operating or net income: operating income declined 22% and net income declined 12% year over year. Gross margin contracted 2.5 percentage points. Q3 net income rose 55%, though operating margin remained low.
Cash, balance sheet and liquidity
- Cash and equivalents were $80.8 million at September 30, 2013, up from $66.1 million at December 31, 2012. Working capital was $86.0 million, versus $77.0 million.
- Nine-month operating cash flow was $16.1 million, compared with $8.3 million in 2012. Investing used $5.0 million, all for capital expenditures; financing provided $3.7 million, primarily from option exercises and employee stock purchases.
- Total liabilities were $31.2 million and stockholders’ equity was $142.4 million. The filing reports no debt outstanding. A $20 million revolving credit facility matures September 30, 2016; the company was covenant-compliant.
- Management said cash and operating cash flow should meet working-capital and capital-expenditure needs for at least the next 12 months. No numerical revenue or earnings guidance was provided.
Management commentary, changes and notable items
- Revenue growth reflected a 9% increase in recurring customers and a 22% increase in customer wallet share, partly from greater usage and larger customers, including customers acquired with Edifice in 2012.
- Expenses rose with headcount and business expansion. Sales and marketing, R&D, and G&A increased in absolute dollars; management expects these costs, as well as cost of revenue, to continue increasing as the business grows.
- Cost of revenue grew faster than revenue over nine months, contributing to lower gross margin. Amortization increased following the Edifice acquisition; nine-month intangible amortization included a $290,000 impairment of a non-compete agreement.
- Q3 Adjusted EBITDA included a $105,000 “other” adjustment related to a use-tax refund on previously expensed items. Adjusted EBITDA and non-GAAP income per share are company-defined non-GAAP measures and should be considered alongside GAAP results.
- A software-license agreement creates approximately $1.4 million of future payments in 2014. The company reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. It identified no material market risk from foreign exchange or interest rates as of quarter-end.
- The nine-month tax provision included a $117,000 discrete benefit related to the retroactive 2012 federal R&D credit. The company remained subject to tax examinations for prior years due to net operating loss carryforwards and reported no unrecognized tax benefits.
Important facts for investors to verify
- Whether recurring-customer and wallet-share growth continues, and how the company defines and calculates these operating metrics.
- Whether expense growth, particularly cost of revenue, stabilizes enough to recover the decline in gross margin and support durable GAAP profitability.
- The drivers of operating cash flow, including deferred costs, accrued compensation, and deferred revenue, and the sustainability of cash conversion.
- The effects of Edifice-related amortization and the impairment, and the reconciliation and recurring nature of non-GAAP adjustments.
- Potential dilution from stock compensation: nine-month stock-based compensation was $3.1 million, and $8.2 million remained unrecognized over a weighted-average 2.7 years.
- Capital spending needs, the 2014 software-license payment, and continued compliance with the revolving-credit-facility covenants.