SPS Commerce, Inc. — FY2016 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; quarterly figures below include the three months ended December 31, 2016. SPS Commerce provides cloud-based supply-chain management services, including fulfillment automation, analytics, assortment management and sourcing. At year-end it reported 24,805 recurring-revenue customers and approximately 70,000 total customers. Recurring-revenue customers generally may cancel with 30–90 days’ notice.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $193.3 million | $158.5 million |
| Gross profit / gross margin | $128.9 million / 66.7% | $108.5 million / 68.4% |
| Operating income / operating margin | $7.5 million / 3.9% | $7.0 million / 4.4% |
| Net income / diluted EPS | $5.7 million / $0.33 | $4.6 million / $0.27 |
| Adjusted EBITDA (non-GAAP) | $26.5 million | $22.6 million |
| Operating cash flow | $18.8 million | $14.4 million |
| Cash and cash equivalents, year-end | $115.9 million | $121.5 million |
| Working capital, year-end | $153.8 million | $142.6 million |
Revenue grew 21.9%. Recurring customer count increased 6% to 24,805, while average recurring revenue per recurring customer rose 16% to $7,344. Recurring revenue was 91.6% of total revenue. The largest customer contributed 2% or less of revenue. Gross margin declined 1.7 percentage points and operating margin declined 0.5 points as cost of revenue grew faster than revenue; operating expenses also increased. Net income rose 23.1%.
Investing cash outflow was $34.2 million, including $18.0 million paid for Toolbox Solutions, net of acquired cash; capital expenditures were $8.0 million. Financing cash inflow was $10.1 million, primarily from employee option exercises and the stock purchase plan. Cash, cash equivalents and marketable securities totaled approximately $146.4 million at year-end. The company reported no outstanding debt and said liquidity and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months. Operating lease commitments totaled $13.7 million.
For fourth-quarter 2016, revenue was $51.1 million, operating income $2.7 million and net income $1.8 million, compared with $42.3 million, $2.8 million and $2.1 million, respectively, in fourth-quarter 2015. Quarterly diluted EPS was $0.10 versus $0.12.
Material changes and unusual items
- Toolbox Solutions was acquired in January 2016 for approximately $18.0 million cash and $2.9 million in stock. Its products and services contributed approximately $7.9 million of 2016 revenue; standalone operating results were not separately identifiable after integration.
- A $1.1 million gain in other income resulted from remeasurement of Toolbox’s share-based earn-out liability after the contingency was resolved with no payment. The gain also affected the company’s non-GAAP reconciliations.
- Stock-based compensation increased to $8.0 million from $6.4 million. Adjusted EBITDA and non-GAAP EPS exclude significant GAAP expenses; the company said it would begin tax-effecting non-GAAP income starting in Q1 2017.
- Cash and cash equivalents declined by $5.7 million year over year, while marketable securities increased. The company remained net cash-positive and debt-free.
Outlook, commentary and principal risks
Management expects recurring customer numbers and revenue per customer to continue increasing through broader solution adoption. 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. No specific revenue or earnings guidance was provided. The company reported its 64th consecutive quarter of revenue growth.
- Growth depends on winning new customers, retaining customers with short cancellation notice, and expanding sales to existing customers; competition, customer spending and retail-sector conditions could pressure growth or margins.
- Service interruptions, failure to scale infrastructure, security breaches or loss of confidential customer data could harm reputation, cause customer losses, or result in claims and costs. The business relies on third-party data centers, software and services.
- International operations expose the company to foreign-exchange, regulatory, tax and operational risks. The filing specifically noted political and civil unrest in Ukraine, where it had a Kiev office with 60 employees.
- Toolbox integration and future acquisitions carry execution, cost and impairment risks. The company also identified risks involving privacy regulation, intellectual property and open-source software.
- Federal and state net operating loss carryforwards are subject to expiration and potential Section 382 limitations; the company estimated approximately $17.6 million of federal losses may expire unused due to those limits.
The company reported no material legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls and internal control over financial reporting. The independent auditor’s internal-control assessment excluded Toolbox, which represented about 4% of consolidated assets and revenue.
Important facts for investors to verify
- Whether recurring-revenue customer growth and wallet-share expansion continue, and how much growth comes from acquired versus existing operations.
- Whether gross-margin pressure and increasing operating costs affect future profitability and cash conversion.
- The ongoing impact of Toolbox integration, goodwill and acquired intangible assets, and the earn-out adjustment.
- How the new revenue-recognition, lease and share-based-payment accounting standards affect reported results, balance-sheet liabilities and cash-flow classification.
- Cash and marketable-securities composition, the absence of debt, lease commitments, and the practical availability of tax-loss carryforwards.
- Reconciliation of selected-data total assets ($298.2 million) with the audited balance-sheet total ($298.4 million); the filing text provides differing figures.