SPS Commerce, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; filed February 20, 2014. SPS Commerce provides cloud-based supply-chain integration and analytics services. Its platform served more than 55,000 organizations, including 19,690 customers with monthly-fee contracts. Recurring revenue customers generated 89% of FY 2013 revenue.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $104.4 million | $77.1 million |
| Gross profit / gross margin | $72.6 million / 69.6% | $55.1 million / 71.4% |
| Operating income / margin | $1.8 million / 1.7% | $1.6 million / 2.0% |
| Net income | $1.1 million | $1.2 million |
| Diluted GAAP earnings per share | $0.07 | $0.09 |
| Adjusted EBITDA (non-GAAP) | $13.8 million | $9.0 million |
| Operating cash flow | $18.2 million | $6.8 million |
| Cash and cash equivalents at year-end | $131.3 million | $66.1 million |
| Working capital at year-end | $137.2 million | $77.0 million |
| Total debt at year-end | None | None |
Revenue grew 35.4%. Recurring customers increased 10% to 19,690, while average recurring revenue per customer rose 24% to $4,920. Revenue growth reflected both customer additions and increased customer usage, including contributions from the Edifice acquisition. Cost of revenue grew faster than revenue, and gross margin fell 1.8 percentage points. Operating expenses rose 32%, broadly in line with growth, leaving operating margin slightly lower. Net income declined despite higher operating income, partly reflecting a higher tax provision. Adjusted EBITDA is a company-defined non-GAAP measure; FY 2013 included a $105,000 adjustment for a use-tax refund.
Fourth-quarter revenue was $28.0 million, compared with $22.5 million in Q4 2012. Q4 2013 net income was $294,000 versus $366,000 a year earlier; diluted EPS was $0.02 in both quarters.
Operating cash flow increased substantially, while investing cash outflow was $5.7 million, all for capital expenditures. Financing provided $52.7 million, principally from the November 2013 stock offering, which generated approximately $47.6 million net. The company had an undrawn $20 million revolving facility, was compliant with its covenants, and stated cash and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months.
Material changes and unusual items
- FY 2013 stock offering issued 750,000 shares at $67 per share and raised approximately $47.6 million net, increasing cash and share count.
- Stock-based compensation increased to $4.2 million from $2.8 million; depreciation and amortization increased to $8.1 million from $4.9 million.
- Intangible amortization was $3.2 million and included a $290,000 impairment of a non-compete agreement.
- The FY 2013 tax provision was $686,000 and included a one-time benefit from the retroactive 2012 federal R&D credit; excluding that benefit, management estimated the provision would have been $803,000.
- FY 2011 net income of $13.7 million included a $12.8 million tax benefit from releasing a valuation allowance; this makes reported net-income comparisons across periods unusual.
- International customers generated 2% of revenue in 2013, 2012, and 2011. No customer represented more than 2% of revenue in any of those years.
Outlook, management commentary, and risks
The filing gives no quantified revenue, earnings, or margin guidance. Management expects recurring customers and average revenue per customer to continue increasing as it adds solutions and sells more to existing customers. It also expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to rise in absolute dollars as the business expands. Growth plans include market penetration, broader sales and channel distribution, international expansion, platform development, and selective acquisitions.
Key risks include customer cancellations: most recurring-revenue contracts can be terminated on 30 days’ notice. Other material risks include competition and pricing pressure, economic weakness affecting retailers and technology spending, service outages or scaling problems, cybersecurity and confidentiality breaches, reliance on third-party data centers and licensed technology, and execution and integration risks from acquisitions. SPS reported an accumulated deficit of $46.8 million despite positive net income in recent years. It disclosed $71.3 million of federal and $30.3 million of state net operating loss carryforwards; Section 382 limitations may cause approximately $17.6 million of federal losses to expire unused. The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting; KPMG also gave an unqualified audit opinion.
Important facts for investors to verify
- Whether customer growth and the 24% increase in average recurring revenue per customer continue, and whether contract cancellations remain limited.
- Whether gross-margin pressure and rising operating costs affect future operating leverage and GAAP profitability.
- How much of cash growth came from the equity offering versus internally generated cash, and the associated dilution.
- The sustainability and reconciliation of Adjusted EBITDA and other non-GAAP measures to GAAP results.
- Progress on platform reliability, cybersecurity protections, and customer-data safeguards, given the disclosed operational and security risks.
- The usability and expiration profile of tax-loss carryforwards, including Section 382 restrictions and valuation-allowance judgments.