SPS Commerce, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
SPS Commerce provides cloud-based supply-chain management and retail analytics solutions. Most revenue comes from recurring subscriptions. Management cited customer growth and greater customer usage as the main revenue drivers.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $40.4 | $32.5 | $116.2 | $92.5 |
| Gross profit / margin | $27.7 / 68.5% | $22.5 / 69.3% | $79.6 / 68.5% | $63.7 / 68.8% |
| Operating income / margin | $2.3 / 5.6% | $1.4 / 4.2% | $4.2 / 3.6% | $3.0 / 3.2% |
| Net income / margin | $1.3 / 3.1% | $0.8 / 2.6% | $2.5 / 2.2% | $1.9 / 2.0% |
| Diluted earnings per share | $0.07 | $0.05 | $0.15 | $0.11 |
| Adjusted EBITDA (non-GAAP) | $6.2 | $4.7 | $15.9 | $13.1 |
- Q3 revenue rose 24.1%; nine-month revenue rose 25.5%. The company reported its 59th consecutive quarter of revenue growth.
- Recurring-revenue customers increased 9% to 23,092 year over year; annualized average recurring revenue per customer (“wallet share”) rose 15% to $6,436 in Q3. Recurring revenue represented 91% of revenue, versus 90% a year earlier.
- Q3 operating expenses grew 19.9%, slower than revenue growth, while cost of revenue grew 27.4%. Gross margin declined 0.8 percentage points year over year for the quarter; operating margin improved 1.4 points. For the nine-month period, gross margin edged down 0.3 points and operating margin improved 0.4 points.
- Operating cash flow was $6.9, down from $11.6 for the prior-year nine months. Investing cash outflow was $24.0, including $17.5 of marketable-security purchases and $6.5 of capital expenditures. Financing provided $5.2, primarily from employee equity plans.
- At September 30, cash and cash equivalents were $117.9 and marketable securities totaled $17.5, or $135.4 combined. Current assets were $161.4 and current liabilities $23.4. Total liabilities were $38.2; no debt was outstanding.
Changes, outlook, and risks
- Compared with December 31, 2014, cash declined $12.9, while total assets increased to $252.9 from $243.8. Marketable securities were newly reported at $17.5. Stockholders’ equity rose to $214.7 from $205.1.
- Management expects operating costs to continue increasing in absolute dollars as it expands sales, product development, staffing, and operations. It expects a 2015 annual effective tax rate of approximately 40% and believes available liquidity and operating cash flows will fund needs for at least the next 12 months. The filing provides no specific revenue or earnings forecast.
- Foreign-currency translation adjustments were a loss of $4.3 for the nine months; comprehensive loss was $1.8 despite net income of $2.5. Management said currency fluctuations had not materially affected results to date but noted greater exposure as international operations expand.
- A $20.0 revolving credit facility matures September 30, 2016; it was undrawn and covenants were met. Operating lease commitments totaled $16.7, including a new New Jersey lease beginning in February 2016 and running through June 2023.
- Stock-based compensation was $4.8 for the nine months, versus $4.0 a year earlier; $12.7 of unrecognized compensation remained, expected to be recognized over a weighted-average 2.7 years. Management reported no material legal proceedings, no material change in risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether customer additions and wallet-share growth continue, and how recurring-customer and recurring-revenue metrics are defined and tracked.
- Whether rising staffing, cost of revenue, and research-and-development spending affect margins and cash generation.
- The composition, liquidity, and credit quality of the marketable-securities portfolio, and the effect of foreign exchange on comprehensive results.
- The assumptions behind non-GAAP Adjusted EBITDA and non-GAAP income per share, particularly their treatment of stock-based compensation and intangible amortization.
- Future cash needs, capital expenditures, equity-plan dilution, and obligations under the lease and credit facility.