SPS Commerce, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts are in millions unless stated otherwise. SPS Commerce provides cloud-based supply-chain management solutions and derives most revenue from recurring subscriptions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $62.9 | $56.1 | $183.1 | $162.0 |
| Gross profit | $42.5 | $37.4 | $122.5 | $107.9 |
| Gross margin | 67.5% | 66.7% | 66.9% | 66.6% |
| Operating income | $8.3 | $3.4 | $18.5 | $9.7 |
| Operating margin | 13.1% | 5.9% | 10.1% | 6.0% |
| Net income | $8.1 | $2.2 | $16.7 | $7.1 |
| Diluted GAAP EPS | $0.45 | $0.13 | $0.95 | $0.41 |
| Adjusted EBITDA (non-GAAP) | $14.4 | $8.5 | $37.4 | $24.9 |
Revenue increased 12% in Q3 and 13% year to date. Recurring revenue was 93% of total revenue in both comparison periods. Q3 recurring revenue grew to $58.6 million from $51.9 million; fulfillment revenue was $48.5 million, analytics $8.8 million, and one-time revenue $4.2 million. Recurring customers rose 6% year over year to 26,869, while average recurring revenue per customer (“wallet share”) rose 8% to $8,838 for Q3.
Q3 operating expenses were nearly flat at $34.2 million. Sales and marketing and R&D expense declined, while G&A rose 28% to $11.2 million, driven by personnel, stock compensation and other growth-related costs. For the first nine months, operating expenses increased 6% to $104.0 million; G&A increased 27% to $31.3 million, partly offset by lower R&D expense. Net income growth also reflected lower income tax expense in Q3, including discrete tax benefits from stock activity.
Cash, liquidity and capital
- Cash and cash equivalents were $144.7 million at September 30, 2018; short-term investments were $44.7 million and longer-term investments $4.9 million. Management reported total cash, cash equivalents, certificates of deposit and marketable securities of $194.3 million.
- Operating cash flow for the first nine months was $37.5 million, versus $22.0 million in 2017. Investing cash outflow was $14.7 million; financing cash outflow was $1.2 million.
- Capital expenditures were $9.9 million. The company repurchased $13.9 million of shares year to date, partly offset by $11.8 million of proceeds from stock-option exercises. A $50 million repurchase authorization remained in effect, with $30.3 million available at quarter-end.
- Total liabilities were $57.9 million, including $27.6 million of current and non-current deferred revenue. The company reported no debt or off-balance-sheet arrangements. It said available liquidity and operating cash flow should cover working capital and capital expenditure needs for at least 12 months.
Outlook, accounting, and risks
Management described continued growth plans through market penetration, increased customer usage and wallet share, expanded channels and international presence, new solutions, and selective acquisitions. It reported 71 consecutive quarters of revenue growth. The filing provides no numerical revenue or earnings guidance.
The company adopted ASC 606 retrospectively in 2018. Adoption did not affect recurring-revenue recognition but changed the timing of certain setup-fee revenue and contract-cost recognition; 2017 comparative figures were adjusted. The company expects the lease standard effective in 2019 to materially affect the balance sheet through recognition of operating-lease right-of-use assets and liabilities, but could not yet estimate the amount.
Management warned that tax expense and the effective tax rate may be more volatile because excess tax benefits from stock awards are reflected in income tax expense. Foreign-exchange movements could adversely affect results as international operations expand; the company did not hedge currency exposure. Operating lease commitments totaled $25.7 million. The company reported no material legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether customer growth and wallet-share expansion continue to sustain recurring-revenue growth.
- Whether operating-margin improvement persists as G&A expense and stock-based compensation rise.
- The amount and balance-sheet impact of adopting the lease standard in 2019.
- The durability of reported earnings growth after considering discrete tax benefits and non-GAAP adjustments.
- Capital allocation, including repurchases, investment balances, and any acquisitions or additional capital needs.