SPS Commerce, Inc. — Q2 2018 Form 10-Q
Business and period: For the quarter and six months ended June 30, 2018. SPS Commerce provides cloud-based supply-chain management and analytics solutions, with most revenue from recurring subscriptions. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $61.1 | $54.1 | $120.2 | $106.0 |
| Gross profit / margin | $40.7 / 66.6% | $35.9 / 66.4% | $80.0 / 66.6% | $70.5 / 66.5% |
| Operating income / margin | $6.0 / 9.8% | $3.0 / 5.5% | $10.3 / 8.6% | $6.3 / 6.0% |
| Net income | $5.4 | $2.0 | $8.7 | $5.0 |
| Diluted EPS | $0.31 | $0.11 | $0.50 | $0.29 |
| Operating cash flow | Not reported separately for quarter | Not reported separately for quarter | $22.2 | $17.9 |
- Q2 revenue grew 12.9%; management reported this as the company’s 70th consecutive quarter of revenue growth. Recurring revenue customers rose 4% year over year to 26,212; Q2 annualized average recurring revenue per customer (“wallet share”) increased 8% to $8,665.
- Recurring revenue was $56.4 million in Q2, up from $50.1 million; one-time revenue was $4.7 million, versus $4.0 million. Recurring revenue represented 92% of Q2 revenue, compared with 93% a year earlier.
- For the first half, revenue grew 13.4% and net income grew 75.0%. Operating expenses rose 8.8%, slower than revenue; G&A expense increased 25.9%, principally from higher personnel and stock-based compensation costs.
- First-half adjusted EBITDA, a non-GAAP measure, was $23.0 million versus $16.4 million. Diluted non-GAAP income per share was $0.88 versus $0.48. These measures exclude specified expenses and should be considered alongside GAAP results.
Liquidity, cash flow, and capital
- At June 30, cash and cash equivalents were $125.4 million, short-term investments $47.4 million, and long-term investments $4.9 million. Management reported $177.7 million of cash, cash equivalents, certificates of deposit, and marketable securities, plus $28.2 million of net receivables.
- First-half operating cash flow was $22.2 million. Investing activities used $14.0 million, including $6.5 million of property and equipment purchases; financing activities used $5.9 million, including $11.9 million of share repurchases.
- The company had no outstanding debt and reported no off-balance-sheet arrangements. Current liabilities were $48.4 million against current assets of $239.9 million. Management believes available resources and operating cash flows will meet working-capital and capital-expenditure needs for at least the next 12 months.
- Operating lease commitments totaled $26.8 million. The company said adoption of the new lease standard, effective for it in 2019, is expected to materially increase non-current assets and liabilities; the amount was not yet estimated.
Changes, outlook, and risks
- Revenue growth reflected both customer additions and higher customer usage. Management expects recurring customers and wallet share to continue increasing as it expands solutions and customer penetration. The filing provides no quantitative earnings or revenue guidance.
- The company adopted ASC 606 retrospectively on January 1, 2018. Recurring subscription revenue recognition was not affected, but accounting for certain setup fees and contract-acquisition costs changed. Comparative 2017 figures in this filing are adjusted under the new standard.
- The 2017 Tax Act lowered the federal corporate tax rate; Q2 tax expense was also affected by discrete research-credit and stock-award tax benefits. Management expects greater volatility in the annual effective tax rate. Further evaluation of certain Tax Act effects was ongoing.
- Management cited continued investment in platform infrastructure and business growth. It also noted that foreign-currency movements may affect results as international operations expand; approximately 8% of cash and cash equivalents was held outside the U.S., and the company had no currency hedges.
- No material changes to previously disclosed risk factors were reported, and the company was not subject to material legal proceedings. Disclosure controls were assessed as effective.
- The board’s $50 million repurchase program had $32.3 million remaining at June 30. The company repurchased 79,410 shares in June at an average $75.51 per share during the quarter.
Investor verification points
- Confirm the sustainability of recurring-revenue growth, customer additions, and wallet-share gains.
- Review ASC 606’s effects on setup-fee revenue, deferred costs, and comparability with earlier periods.
- Assess rising G&A costs and stock-based compensation, and compare GAAP results with the company’s non-GAAP measures.
- Track cash generation against capital spending, repurchases, and the $26.8 million of operating lease commitments; review the eventual quantified lease-standard impact.
- Monitor effective tax-rate volatility and foreign-currency exposure as the company grows internationally.