SPS Commerce, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. SPS Commerce provides cloud-based supply-chain management services. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $130.4m | $109.2m | $256.3m | $214.4m |
| Revenue growth | 19.5% | — | 19.6% | — |
| Gross margin | 65.8% | 65.6% | 65.9% | 66.0% |
| Operating income | $17.0m | $16.0m | $33.8m | $32.5m |
| Operating margin | 13.1% | 14.6% | 13.2% | 15.2% |
| Net income | $14.7m | $10.8m | $30.0m | $23.4m |
| Diluted GAAP EPS | $0.39 | $0.29 | $0.80 | $0.63 |
| Adjusted EBITDA | $38.2m | $30.9m | $75.2m | $62.6m |
| Adjusted EBITDA margin | 29% | 28% | 29% | 29% |
Recurring revenue was $121.5m in Q2 and $238.8m for the first half, up 20% in both comparisons and 93% of revenue. Customers with recurring revenue grew 11% year over year to 43,000; wallet share rose 8% in Q2 to $11,350 and 7% for the half to $11,200.
Cash, liquidity and capital
- Operating cash flow was $55.7m for the first half, versus $36.8m in 2022. Investing activities used $18.3m; financing provided $9.0m, versus $26.2m used in 2022, largely reflecting no share repurchases in 2023’s first half.
- At June 30, cash and cash equivalents were $209.3m and short-term investments $60.9m, totaling $270.2m; net receivables were $45.0m. Current assets were $385.0m and current liabilities $112.0m.
- The filing reports no outstanding variable-rate debt and no undisclosed borrowings or other off-balance-sheet arrangements. Management expects available cash, investments and operating cash flows to cover working capital and capital expenditures for at least 12 months.
- Remaining operating lease and purchase commitments totaled $49.4m. The 2022 repurchase authorization had $47.0m available through July 2024; no shares were repurchased in the quarter or first half of 2023.
Changes and management commentary
- Revenue growth reflected more recurring customers, increased customer usage and acquisitions. Operating expenses grew 23.6% in Q2, faster than revenue’s 19.5%; operating margin declined year over year. Management attributed expense increases chiefly to headcount, stock-based compensation and acquisition-related intangible amortization.
- Net income growth also benefited from other income of $1.9m in Q2, compared with a $1.3m expense a year earlier. The change reflected higher investment income and favorable foreign-exchange effects; first-half investment income was $2.7m.
- GCommerce and InterTrade were acquired in 2022. InterTrade purchase accounting remained provisional at June 30. On July 26, 2023, SPS agreed to acquire TIE Kinetix for €64.5m, net of cash acquired; closing was expected in Q3, subject to customary conditions and TIE Kinetix shareholder approval.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided in this filing. Management expects recurring customer numbers and wallet share to continue increasing as it pursues market penetration, and anticipates continued expenditure growth as the business expands.
- Management said inflation and changing prices had not materially affected the business and were not expected to have a material near-term effect. It considered interest-rate exposure and a hypothetical 10% foreign-exchange move or inability to access foreign funds not material to operations; 10% of cash and investments were held in foreign currencies, with no currency hedges in place.
- Income tax expense can fluctuate due to discrete tax benefits from equity-award settlements. Stock-based compensation was $12.9m in Q2 and $24.7m in the first half, up from $8.7m and $17.7m, respectively.
- The filing identifies planned CEO Archie Black retirement and Chad Collins’s succession effective October 2, 2023, and President/COO James Frome’s planned retirement effective December 31, 2024, as leadership-transition risks. It reports no material change to other disclosed risk factors and no material legal proceedings.
- Disclosure controls were assessed as effective. The assessment excluded GCommerce and InterTrade, with the company still incorporating controls for those acquired businesses.
Important facts for investors to verify
- Whether recurring customer and wallet-share growth continues, and how much growth comes from acquisitions versus organic expansion.
- Whether expense growth and stock-based compensation remain elevated and pressure GAAP operating margins.
- Completion, purchase accounting, integration costs and expected contribution of the TIE Kinetix acquisition.
- CEO and other leadership transitions, tax-rate volatility, and the effect of foreign-exchange movements and acquisition commitments on future results and liquidity.