SPS Commerce, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are in U.S. dollars; “Q2” means the three-month period. SPS Commerce provides cloud-based supply-chain management services, primarily through recurring subscriptions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $75.6m | $68.5m | $149.8m | $135.5m |
| Gross profit / margin | $51.2m / 67.8% | $44.8m / 65.4% | $101.9m / 68.0% | $90.4m / 66.7% |
| Operating income / margin | $11.1m / 14.7% | $9.3m / 13.6% | $22.6m / 15.1% | $16.7m / 12.3% |
| Net income / margin | $11.2m / 14.8% | $8.8m / 12.8% | $20.7m / 13.8% | $15.6m / 11.5% |
| Diluted GAAP EPS | $0.31 | $0.24 | $0.58 | $0.43 |
| Operating cash flow | Not separately provided | Not separately provided | $36.8m | $29.7m |
- Growth: Q2 revenue increased 10.3% year over year; first-half revenue increased 10.6%. Recurring revenue was $71.2m in Q2 and $141.3m for the first half, about 94% of revenue in both comparable periods. Fulfillment was the largest recurring-revenue category.
- Customer metrics: Recurring revenue customers increased 5% to 31,468. Annualized average recurring revenue per customer (“wallet share”) rose 5% to $9,118 in Q2 and 6% to $9,078 for the first half.
- Profitability: Q2 operating expenses rose 13.1% to $40.1m, faster than revenue, but gross margin improved and operating income grew 19.1%. First-half operating expenses increased 7.5%, while operating income grew 35.5%.
- Cash and liquidity: June 30 cash and cash equivalents were $174.9m, short-term investments $50.8m, and longer-term investments $7.6m. Management reported $225.6m of cash, cash equivalents, certificates of deposit and short-term investments, plus $34.2m of net receivables. Working capital was approximately $237.2m.
- Cash flows, first half: Operating activities generated $36.8m; investing used $32.5m, including net investment purchases and $8.4m of property and equipment purchases; financing used $8.7m, including $19.0m of share repurchases. Cash declined $4.4m to $174.9m.
- Debt: The company reported no outstanding debt. Operating lease liabilities totaled approximately $22.1m; these are lease obligations, not reported borrowings.
Material changes and notable items
- Q2 growth reflected more recurring customers and higher customer usage. First-half recurring revenue grew 11.1% year over year.
- Q2 general and administrative expense rose 25.2%, including higher stock-based compensation, $0.6m more charitable donations, and increased bad-debt expense. The first-half bad-debt expense increase was $1.5m.
- The allowance for credit losses was $3.7m at June 30, up from $1.5m at year-end 2019. The first-half provision for credit losses was $3.0m, versus $1.5m in the prior-year period. The company adopted the expected-credit-loss accounting standard in January, recording a $1.1m cumulative adjustment to retained earnings.
- Other income included foreign-currency gains; the company’s non-GAAP reconciliation identifies $1.4m of Q2 realized gains on foreign currency held in cash and investments. Lower investment income partly offset this. Consider the effect of these items when assessing earnings quality.
- Share repurchases totaled $19.0m in the first half. In Q2, SPS bought back 131,627 shares at an average $52.80 per share; $31.1m remained under the $50m authorization.
- A noncancelable computing-infrastructure services agreement signed in May carries a remaining commitment of $14.7m through May 2023. Total disclosed operating-lease and purchase commitments were $39.0m.
Outlook, risks and contingencies
- No numerical revenue or earnings guidance is provided. Management expects recurring customers and wallet share to increase as it adds solutions and expands adoption, and plans to grow through market penetration, channels, international expansion, product development and selective acquisitions.
- Management stated COVID-19 had not materially adversely affected the business or financial performance in the first half, but its future impact was uncertain and could affect customer demand, supply chains, technology providers, employees and the broader economy.
- Management believes available liquidity and operating cash flows are sufficient for working-capital and capital-expenditure needs for at least the next 12 months. This is subject to future spending, growth, competition and potential acquisitions.
- Recurring customer contracts generally allow cancellation with 30–90 days’ notice. The company also noted that stock-award tax benefits can make its effective tax rate fluctuate.
- The filing reports no material legal proceedings and no material changes to previously disclosed risk factors other than the added COVID-19 risk. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- Whether recurring-customer growth and wallet-share expansion continue, and whether subscription retention supports the revenue trajectory.
- Whether the higher credit-loss allowance and bad-debt expense reflect worsening customer credit conditions or changes in estimates; assess customer exposure and collections.
- How much earnings growth is attributable to operating performance versus foreign-currency gains, stock-based compensation adjustments and discrete tax benefits.
- Whether infrastructure investment, the $14.7m vendor commitment, leases and share repurchases affect future cash generation and capital allocation.
- How COVID-19 developments affect customers, supply chains and demand, given management’s stated uncertainty and lack of numerical guidance.