SPS Commerce, Inc. — 2017 Form 10-K Summary
Business and reporting period. SPS Commerce provides cloud-based supply-chain management and analytics services to retailers, suppliers, distributors and logistics firms. This annual filing covers the fiscal year ended December 31, 2017; quarterly figures below refer to the fourth quarter. The company reported approximately 75,000 total customers, including 25,751 recurring-revenue customers, across more than 60 countries.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $220.6 million | $193.3 million |
| Revenue growth | 14.1% | 21.9% |
| Gross profit / margin | $146.9 million / 66.6% | $128.9 million / 66.7% |
| Operating income / margin | $8.4 million / 3.8% | $7.5 million / 3.9% |
| Net income (loss) | $(2.4) million | $5.7 million |
| Adjusted EBITDA* | $32.6 million | $26.5 million |
| Operating cash flow | $31.1 million | $18.8 million |
| Cash and cash equivalents | $123.1 million | $115.9 million |
| Working capital | $176.3 million | $153.8 million |
Margins and earnings. Gross margin was nearly flat and operating margin edged down. Net loss resulted principally from $11.6 million of income-tax expense, including an $8.6 million noncash charge to remeasure deferred tax assets after the U.S. corporate tax rate reduction. Pretax income was $9.1 million, compared with $8.9 million in 2016. Adjusted EBITDA and non-GAAP earnings exclude significant items and are not substitutes for GAAP results.
Cash, debt and liquidity. Cash, cash equivalents, certificates of deposit and marketable securities totaled $168.5 million at year-end. The company reported no outstanding debt and said available cash, investments and operating cash flows should meet working-capital and capital-expenditure needs for at least 12 months. Operating cash flow increased; investing activities used $22.6 million, including $7.3 million of capital expenditures, and financing activities used $2.5 million, including $5.8 million for share repurchases.
Material changes and fourth-quarter results
- Revenue grew 14.1%, slower than the 21.9% growth reported in 2016. Recurring-revenue customers increased 3.8% to 25,751, while average recurring revenue per customer rose 9.8% to $8,067. Recurring revenue represented 92.5% of total revenue, up from 91.6%.
- Fourth-quarter revenue was $58.2 million, versus $51.1 million a year earlier. The quarter recorded an operating loss of $0.5 million and net loss of $9.1 million; the annual filing attributes the major tax charge to the Tax Act.
- General and administrative expense increased 30.0%, partly because of a $3.6 million accelerated stock-compensation charge following the CEO’s satisfaction of age and service conditions. Total stock-based compensation rose to $12.7 million from $8.0 million.
- The company authorized a $50 million repurchase program in November and bought 122,147 shares for $5.8 million during the fourth quarter. $44.2 million remained authorized at year-end.
Outlook, risks and unusual items
- Management expects recurring customers and customer spending per account to continue increasing as it expands its solutions and penetration of its customer base. It also expects operating expenses to rise in absolute dollars as the business grows. The filing provides no specific revenue or earnings guidance.
- Customer contracts commonly permit cancellation on 30 to 90 days’ notice, making retention and customer satisfaction important. Key risks include competition and pricing pressure, cybersecurity or service interruptions, scaling infrastructure, hiring and retaining skilled staff, and privacy and regulatory changes.
- Operations in Ukraine remain exposed to political and civil instability; the company reported 64 employees in Kyiv. International operations also involve currency, regulatory, tax and other risks.
- The company adopted ASU 2016-09, recording a $16.3 million opening deferred-tax-asset increase and corresponding reduction in accumulated deficit. The Tax Act reduced the federal corporate rate to 21%; the company said its accounting for the rate reduction was finalized but other tax implications remained under evaluation.
- Revenue standard Topic 606 was expected to affect certain setup-fee and commission timing. The filing estimated revenue decreases of $0.5 million for 2017 and $0.1 million for 2016, and a $2.0 million decrease in 2017 commission expense, compared with previously reported amounts. Lease accounting adoption was expected to materially increase balance-sheet assets and liabilities; the amount was not yet estimated.
- Operating lease commitments totaled $24.5 million. The Minneapolis headquarters lease was amended to add approximately 48,000 square feet in 2018 and 2020.
- The company reported no material legal proceedings. Its auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective.
*Adjusted EBITDA is a non-GAAP measure. The filing does not provide a numeric forward earnings or revenue forecast.
Important facts for investors to verify
- Whether customer growth, renewals and rising average customer revenue can sustain growth as reported revenue growth moderates; assess the short cancellation notice periods.
- How much of 2017’s GAAP net loss reflects the one-time Tax Act remeasurement, and how future cash taxes and use of net operating losses may differ. The filing cites $58.5 million of federal NOLs and an estimated $17.6 million that may expire unused under Section 382 limits.
- Whether operating margins can hold as personnel, sales, development and infrastructure costs rise; consider the scale of stock-based compensation and the difference between GAAP and non-GAAP results.
- Execution and cost implications of the headquarters expansion, outstanding lease commitments and the upcoming lease-accounting change.
- Resilience of the platform and customer data against outages or cyberattacks, and the potential financial and reputational effects of any disruption.