SPS Commerce, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet figures are as of March 31, 2015, compared with December 31, 2014. SPS Commerce provides cloud-based supply-chain management solutions, primarily through recurring subscriptions.
Financial performance
Unless otherwise noted, dollar amounts are in millions. Income-statement and cash-flow comparisons are with Q1 2014.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $36.970 | $28.939 | +27.8% |
| Gross profit / margin | $25.398 / 68.7% | $19.684 / 68.0% | +29.0%; +0.7 percentage points |
| Operating expenses | $24.476 | $19.086 | +28.2% |
| Operating income / margin | $0.922 / 2.5% | $0.598 / 2.1% | +54.2% |
| Net income / margin | $0.586 / 1.6% | $0.373 / 1.3% | +57.1% |
| Diluted GAAP EPS | $0.03 | $0.02 | — |
| Adjusted EBITDA (non-GAAP) | $4.695 | $3.902 | +20.3% |
| Operating cash flow | $3.062 | $3.558 | Down $0.496 |
| Capital expenditures | $2.308 | $0.861 | Up $1.447 |
Recurring revenue customers increased 12% year over year to 22,436; annualized average recurring revenue per customer (“wallet share”) increased 15% to $6,013. Recurring-customer revenue represented 90% of total revenue in both periods. Sales and marketing, research and development, and general and administrative expenses rose 26%, 37%, and 29%, respectively, primarily reflecting higher headcount and related costs. Non-GAAP diluted income per share was $0.17 versus $0.14; the company cautions that non-GAAP measures are not substitutes for GAAP results.
Financial position and liquidity
- Cash and cash equivalents were $133.550 million, up from $130.795 million at year-end; working capital was $141.4 million versus $137.6 million.
- Total assets were $246.870 million and total liabilities $38.646 million. The filing reports no outstanding borrowings; a $20 million revolving facility matures September 30, 2016, and the company was in covenant compliance.
- Operating activities provided $3.062 million; investing activities used $2.308 million, entirely for capital expenditures; financing activities provided $2.347 million, primarily from stock-option exercises. Cash increased $2.755 million, including a $0.346 million unfavorable currency effect.
- Management said cash and operating cash flows should be sufficient for working capital and capital expenditures for at least the next 12 months. The company reported no off-balance-sheet arrangements.
Material changes, outlook, and risks
- Revenue grew 28%, which management described as the company’s 57th consecutive quarter of revenue growth. Growth was attributed to more recurring customers and greater customer usage and larger customers increasing wallet share.
- Gross margin improved modestly, while operating expenses grew slightly faster than revenue overall. Operating cash flow declined despite higher net income, reflecting working-capital movements and other factors; capital expenditures increased substantially.
- Management expects cost of revenue, sales and marketing, research and development, and general and administrative expenses to rise in absolute dollars as the business expands. It expects a full-year 2015 effective income tax rate of approximately 40%; no specific revenue or earnings guidance is provided.
- Business plans include deeper market penetration, customer expansion, broader distribution, international growth, new solutions, and selective acquisitions. Capital needs could vary with these investments and competitive responses.
- Foreign currency translation reduced other comprehensive income by $1.299 million, resulting in a comprehensive loss of $0.713 million despite net income of $0.586 million. Management said operating results and cash flows were not materially affected by exchange-rate movements during the quarter; the company does not hedge currency exposure and notes that international expansion may increase it.
- No material changes to previously disclosed risk factors were reported. The company reported no material legal proceedings, no income tax audits, and no material changes in internal control over financial reporting; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether customer growth and wallet-share gains continue to support recurring revenue growth, and whether customer concentration or retention trends affect that growth.
- Whether rising staffing and other operating costs, along with increased capital expenditures, pressure margins or cash generation.
- How much of reported performance depends on stock-based compensation and other adjustments in non-GAAP measures; compare these with GAAP earnings and cash flow.
- Whether currency exposure, acquisition plans, or changes in capital requirements materially alter the company’s liquidity outlook.
- Management’s approximately 40% full-year tax-rate expectation and the future effect of the new revenue-recognition standard, whose impact was still under evaluation.