SPS Commerce, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report; fourth-quarter figures are included where noted. SPS Commerce provides cloud-based supply-chain integration, enablement, and analytics services. At year-end it reported 17,977 recurring-revenue customers and more than 50,000 total customers.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $77.1 million | $58.0 million |
| Gross profit / gross margin | $55.1 million / 71.4% | $42.6 million / 73.5% |
| Operating income / margin | $1.6 million / 2.0% | $1.1 million / 2.0% |
| Net income / diluted EPS | $1.2 million / $0.09 | $13.7 million / $1.08 |
| Adjusted EBITDA (non-GAAP) | $9.0 million | $5.4 million |
| Operating cash flow | $6.8 million | $4.5 million |
Revenue grew 33%. Recurring revenue was 88% of revenue, up from 85%; recurring customers increased 11% and average recurring revenue per customer rose 15% to $3,964. Gross margin fell 2.1 percentage points as cost of revenue grew faster than sales. Net income declined sharply because 2011 included a $12.6 million income-tax benefit, mainly from releasing a deferred-tax valuation allowance; 2012 included $121,000 of tax expense.
Fourth-quarter revenue was $22.5 million, compared with $15.9 million in Q4 2011. Q4 operating income was $224,000 versus $399,000; net income was $366,000 versus $13.1 million, with the prior-year quarter benefiting from the tax item.
At year-end, cash and cash equivalents were $66.1 million, working capital was $77.0 million, and total debt was zero. The company reported $159.2 million in assets and $24.4 million in liabilities. A $20 million revolving credit facility had $16.8 million available, subject to borrowing-base limits; the company reported covenant compliance. Cash increased by $34.1 million during 2012, primarily reflecting $57.8 million in net proceeds from a stock offering, partly offset by the Edifice acquisition and capital expenditures.
Changes, outlook, and notable items
- In August 2012, SPS acquired substantially all Edifice assets for $26.3 million cash and 347,852 shares, for total consideration of $37.7 million. The acquisition expanded point-of-sale analytics and added customers; Edifice contributed approximately $5.0 million of revenue after closing. Goodwill and intangible assets increased materially.
- Sales and marketing, research and development, and general and administrative expenses rose 26%, 40%, and 21%, respectively. Management expects these expenses and cost of revenue to continue increasing in absolute dollars as the business expands.
- No formal revenue or earnings guidance is provided. Management said cash and operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months, and expects recurring customers and revenue per customer to continue growing.
- Key risks include short customer cancellation notice (typically 30 days), dependence on Trading Partner Integration (over 85% of 2012 revenue), competition, economic conditions, service availability and cybersecurity, technology scalability, and acquisition integration. International customers generated 2% of revenue.
- A material weakness identified in the ERP contract-billing controls during Q3 2012 was reported as remediated in Q4 through added review and system change-log controls. Management and the independent auditor concluded internal control over financial reporting was effective at December 31, 2012. The auditor issued unqualified opinions on the financial statements and controls.
- No material legal proceedings or off-balance-sheet arrangements were reported. Operating lease commitments totaled $10.5 million. The company does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- How much of reported growth reflects organic customer expansion versus acquisitions, and whether Edifice delivers expected returns.
- Whether recurring-customer growth and higher revenue per customer continue, given short cancellation terms and reliance on one principal solution.
- Whether gross-margin pressure and rising operating costs stabilize as revenue scales.
- The sustainability of operating cash generation, and the use of offering proceeds and available credit capacity.
- Progress in maintaining effective ERP controls and protecting platform availability and customer data.