SPS Commerce, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; filed March 9, 2012. The filing is an annual report, not a standalone fourth-quarter filing. Amounts below are U.S. dollars.
Business context
SPS Commerce provides hosted, subscription-based supply-chain integration and related services through its SPSCommerce.net platform. At year-end it reported 16,129 recurring-revenue customers and more than 45,000 total customers. Recurring revenue was 85% of 2011 revenue; no customer accounted for more than 2%.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $58.0 million | $44.6 million |
| Gross profit / margin | $42.6 million / 73.5% | $32.0 million / 71.7% |
| Operating income / margin | $1.1 million / 2.0% | $3.0 million / 6.8% |
| Net income | $13.7 million | $2.9 million |
| Adjusted EBITDA (non-GAAP) | $5.4 million | $5.2 million |
| Net cash from operating activities | $4.5 million | $4.9 million |
| Cash and cash equivalents at year-end | $32.0 million | $40.5 million |
| Working capital at year-end | $36.8 million | $42.6 million |
| Total debt at year-end | None | $0.1 million |
Revenue grew 30%, reflecting 30% growth in recurring-revenue customers and an 8% increase in average recurring revenue per customer. Gross margin improved, but operating expenses rose 43%, led by sales and marketing, and operating income fell 63%. The $13.7 million GAAP net income included a $12.8 million non-cash deferred-tax valuation-allowance release. Excluding specified items, diluted non-GAAP income per share was $0.26 versus $0.31 in 2010.
Investing cash outflow was $13.4 million, including $10.8 million for the Direct EDI acquisition and $2.6 million of capital expenditures. The company had a $20 million revolving credit facility, with no borrowings and approximately $11.6 million available at year-end; availability was subject to facility terms. Management said cash and operating cash flows should cover working-capital and capital-expenditure needs for at least 12 months.
Material changes and unusual items
- Acquired substantially all Direct EDI assets in May 2011 for $10.8 million cash. Direct EDI contributed approximately $2.7 million of 2011 revenue after acquisition; its operating contribution was not separately identifiable.
- Recorded $643,000 of acquired-intangible amortization and $232,000 of acquisition-related costs in 2011.
- Released a substantial portion of the deferred-tax valuation allowance after concluding that realization of $12.8 million of deferred tax assets was more likely than not. The release materially increased reported net income but was non-cash.
- Cash declined primarily because of the acquisition. The company repaid its remaining capital leases and had no debt outstanding at year-end.
- Fourth-quarter 2011 revenue was $15.9 million, operating income $399,000 and net income $13.1 million. The filing’s quarterly data show the annual earnings spike concentrated in the fourth quarter; investors should distinguish the tax benefit from operating performance.
Outlook, risks and other disclosures
Management planned to expand sales and marketing, develop additional solutions, grow internationally and selectively pursue acquisitions. It expected operating expenses to increase in absolute dollars as the business expanded. No quantified revenue or earnings guidance was provided.
- Recurring-customer contracts generally permit cancellation on 30 days’ notice. The business also remains heavily dependent on Trading Partner Integration, which generated more than 90% of revenue.
- Key risks include customer retention and market acceptance of SaaS solutions; competition and pricing pressure; service availability, cybersecurity and data protection; reliance on third-party data centers and licensed technology; and the ability to scale operations and retain skilled personnel.
- Federal and state net operating loss carryforwards were $51.1 million and $22.5 million, respectively, but Section 382 limits may cause some to expire unused. The company estimated approximately $17.6 million of federal and $13.0 million of state losses would expire unused.
- No material legal proceedings were reported. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
- In February 2012, the company signed a new headquarters lease running from November 2012 through April 2020, with planned space expansion. The lease was a subsequent event, not reflected in year-end lease commitments.
Important facts for investors to verify
- How much of future earnings growth is supported by recurring customer and usage growth, rather than tax accounting or acquisition effects?
- Whether rising sales, marketing and administrative costs can translate into improved operating margins.
- Direct EDI’s ongoing revenue, retention and profitability contribution, which was not separately reported.
- Actual borrowing availability under the credit facility and compliance with its cash, coverage-ratio and customer-count covenants.
- Customer churn, service reliability and security performance, given short cancellation terms and platform dependence.
- The realization and expiration timetable of tax assets, including the effects of Section 382 limitations.