SPS Commerce, Inc. — Form 10-Q summary
Reporting period: Three and six months ended June 30, 2019. Dollar amounts are in millions except per-share data. SPS provides cloud-based supply-chain management solutions, with most revenue generated from recurring subscriptions.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $68.5 | $61.1 | $135.5 | $120.2 |
| Gross profit / margin | $44.8 / 65.4% | $40.7 / 66.6% | $90.4 / 66.7% | $80.0 / 66.6% |
| Operating income / margin | $9.3 / 13.6% | $6.0 / 9.8% | $16.7 / 12.3% | $10.3 / 8.5% |
| Net income / margin | $8.8 / 12.8% | $5.4 / 8.9% | $15.6 / 11.5% | $8.7 / 7.2% |
| Diluted GAAP EPS | $0.49 | $0.31 | $0.87 | $0.50 |
| Adjusted EBITDA (non-GAAP) | $16.4 | $12.1 | $32.8 | $23.0 |
| Non-GAAP diluted EPS | $0.60 | $0.49 | $1.20 | $0.88 |
Q2 revenue grew 12.2% year over year; first-half revenue grew 12.7%. Recurring revenue customers increased 14% to 29,889. Recurring revenue represented 94% of total revenue in both Q2 and the first half. Average recurring revenue per customer was nearly flat year over year: $8,674 in Q2 and $8,588 for the first half.
For the first six months, operating cash flow was $29.7 million, compared with $22.2 million a year earlier. Capital expenditures were $5.4 million, implying operating cash flow less capital expenditures of approximately $24.3 million, versus $15.8 million in the prior-year period. Investing activities used $12.2 million and financing activities used $4.5 million.
Financial position and liquidity
- At June 30, cash and cash equivalents were $147.0 million and short-term investments were $51.7 million, totaling $198.7 million. Accounts receivable was $30.7 million.
- Current assets were $272.8 million and current liabilities were $58.4 million. SPS reported no outstanding debt.
- Total liabilities were $80.3 million, including $20.4 million of operating lease liabilities. Lease accounting adoption in January 2019 initially recognized approximately $15.7 million of lease right-of-use assets and liabilities.
- Cash and cash equivalents increased $13.2 million from year-end 2018. The company said available cash, investments and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months.
Changes, outlook and notable items
- Operating income increased 56% in Q2 and 63% in the first half, while total operating expenses rose 2% and 6%, respectively. Q2 gross margin declined 1.2 percentage points, primarily amid higher personnel, contractor and platform-infrastructure costs; first-half gross margin was broadly stable.
- Sales and marketing expense declined, while research and development expense rose 23% in Q2 and 22% in the first half. General and administrative costs also increased, including software, bad-debt and other business-growth costs.
- Management expects recurring customers and average recurring revenue per customer to continue increasing as it expands its solutions and penetration within its customer base. It provided no specific numerical revenue or earnings guidance in the supplied filing text.
- The company recognized $0.4 million of Q2 income and $0.3 million of first-half income from remeasuring the EDIAdmin acquisition earn-out liability. The liability was $1.0 million at June 30, with potential payments up to $1.7 million based on revenue milestones.
- Share repurchases totaled $9.0 million in the first half; 58,115 shares were repurchased in Q2 at an average $103.24 per share. Approximately $15.4 million remained under the announced repurchase program at quarter-end.
- A subsequent-event disclosure states that the board declared a two-for-one stock split on July 25, 2019, to be distributed August 22 to holders of record August 8.
- Management cited potential risks including execution and costs of product development, competition, international expansion, and possible acquisitions. It reported no material change to previously disclosed risk factors, no material legal proceedings, and effective disclosure controls.
Investor verification priorities
- Verify that customer growth translates into higher recurring revenue per customer; the reported average remained nearly flat.
- Monitor gross margin and the rising costs of personnel, contractors and platform infrastructure.
- Assess the sustainability of cash generation, including deferred revenue and working-capital movements, and planned capital spending.
- Review non-GAAP reconciliations and the effects of stock-based compensation and the EDIAdmin earn-out remeasurement on reported results.
- Confirm the timing and share-count effect of the announced stock split, and remaining authorization and use of the repurchase program.