SPS Commerce, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. SPS Commerce provides cloud-based supply-chain management solutions. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Amounts are in U.S. dollars. Per-share data reflect the August 2019 two-for-one stock split.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $70.9 million | $62.9 million | $206.4 million | $183.1 million |
| Gross profit / margin | $47.7 million / 67.2% | $42.5 million / 67.5% | $138.1 million / 66.9% | $122.5 million / 66.9% |
| Operating income / margin | $10.9 million / 15.4% | $8.3 million / 13.1% | $27.6 million / 13.4% | $18.5 million / 10.1% |
| Net income / diluted EPS | $8.9 million / $0.25 | $8.1 million / $0.23 | $24.6 million / $0.68 | $16.7 million / $0.48 |
| Adjusted EBITDA (non-GAAP) | $18.1 million | $14.4 million | $50.9 million | $37.4 million |
| Operating cash flow | Nine-month period: $51.0 million | Prior-year period: $37.5 million |
Q3 revenue increased 12.8%; nine-month revenue also increased 12.8%. Recurring revenue was 94% of total revenue in both 2019 periods, versus 93% in the 2018 comparatives. At quarter-end, recurring-revenue customers numbered 30,551, up 14% year over year. Average recurring revenue per customer was $8,793 in Q3, slightly below $8,838 a year earlier; the nine-month measure was broadly stable at $8,622 versus $8,612.
At September 30, cash and cash equivalents were $149.7 million and short-term investments were $51.4 million. Current assets were $273.5 million and current liabilities $60.5 million. The company reported no debt. Nine-month investing cash outflow was $26.6 million, including $11.5 million for the MAPADOC acquisition; financing cash outflow was $8.5 million, including $15.0 million of share repurchases. Cash and cash equivalents ended the period at $149.7 million, up from $133.9 million at year-end 2018.
Changes, outlook, and notable items
- Operating income rose faster than revenue, and operating margin improved year over year in Q3 and for the nine-month period. Q3 gross margin dipped modestly; nine-month gross margin was unchanged.
- Research and development expense increased 50.5% in Q3 and 31.3% year to date, primarily reflecting higher headcount and related personnel costs. For the first nine months, sales and marketing expense declined 3.0%, while general and administrative expense increased 7.7%.
- Management cited customer growth and continued penetration of solutions as revenue drivers, and said it anticipates further increases in customer count and wallet share. The filing provides no quantified forward revenue or earnings guidance. Management said available liquidity and operating cash flows should cover working-capital and capital-expenditure needs for at least the next 12 months.
- The MAPADOC asset acquisition closed August 26 for a stated purchase price of approximately $11.8 million; purchase accounting remained provisional at quarter-end. Goodwill increased to $76.4 million, including $6.6 million associated with MAPADOC.
- The company recognized $0.4 million of nine-month income from remeasurement of the EDIAdmin contingent earn-out liability; its quarter-end fair value was $1.0 million, with a maximum payout of $1.7 million. Nine-month non-GAAP adjustments also included returned Toolbox escrow shares and an internally developed software impairment.
- After quarter-end, the board increased the share repurchase authorization from $50 million to $100 million and extended it through November 2, 2021. The program is discretionary and intended to be funded with cash on hand; $9.3 million remained under the prior authorization at September 30.
- Lease accounting adoption resulted in recognition of approximately $15.7 million of right-of-use assets and lease liabilities at January 1, 2019. Total operating lease liabilities were $19.5 million at September 30. Income tax expense may fluctuate because stock-award tax benefits are recognized as discrete items.
- Management reported effective disclosure controls, no material changes to risk factors, and no material legal proceedings. Foreign-exchange movements were not materially affecting results, but international expansion could increase exposure; the company had no currency hedges.
Important facts for investors to verify
- Whether customer growth continues to translate into revenue growth while per-customer recurring revenue remains stable; Q3 wallet share was slightly lower year over year.
- The final MAPADOC purchase-price allocation and integration effects, including acquired goodwill and intangible-asset amortization.
- Cash generation and capital allocation, including the scale and timing of repurchases under the expanded authorization.
- The sustainability of improved operating margins given higher R&D investment, and the potential effect of variable stock-award tax benefits on reported earnings.
- Non-GAAP measures alongside GAAP results: Adjusted EBITDA and non-GAAP EPS exclude specified expenses or adjustments and are not substitutes for GAAP measures.