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SPSC > SEC Filings for SPSC > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for SPS COMMERCE INC

Form 10-Q for SPS COMMERCE INC


1-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading provider of cloud-based supply chain management solutions, providing prewired, proven integrations and comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce platform, a cloud-based software suite that improves the way suppliers, retailers, distributors and other customers manage and fulfill orders. We derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions.

We plan to continue to grow our business by further penetrating the supply chain management market, increasing revenues from our customers as their businesses grow, expanding our distribution channels, expanding our international presence and, from time to time, developing new solutions and applications. We also intend to selectively pursue acquisitions that will add customers, allow us to expand into new regions or allow us to offer new functionalities.

For the three months ended March 31, 2014, our revenues were $28.9 million, an increase of 22% from the comparable period in 2013, and represented our 53rd consecutive quarter of increased revenues. Total operating expenses increased 16% and net income increased 87% for the same period in 2014 from 2013.

Key Financial Terms and Metrics

We have several key financial terms and metrics, including annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share. During the three months ended March 31, 2014, there were no changes in the definitions of our key financial terms and metrics, which are discussed in more detail under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2013 as filed with the Securities and Exchange Commission on February 20, 2014.

To supplement our financial statements, we also provide investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Our management uses these non-GAAP measures to compare the company's performance to prior periods for trend analyses and planning purposes. Adjusted EBITDA is also used for purposes of determining executive and senior management incentive compensation. These measures are also presented to our board of directors.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America ("GAAP"). These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our financial statements and are subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Critical Accounting Policies and Estimates

This discussion of our financial condition and results of operations is based upon our condensed consolidated financial statements, which are prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that we believe to be reasonable. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.


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A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Accordingly, we believe that our policies for revenue recognition, the allowance for doubtful accounts, income taxes and stock-based compensation are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

During the three months ended March 31, 2014, there were no changes in our significant accounting policies or estimates. See Note A to our consolidated financial statements included in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on February 20, 2014, for additional information regarding our accounting policies.

Results of Operations

The following table presents our results of operations for the periods indicated
(dollars in thousands):



                                                     Three Months Ended March 31,
                                                2014                             2013                         Change
                                                   % of revenue                     % of revenue          $            %
Revenues                             $ 28,939              100.0 %    $ 23,752              100.0 %    $ 5,187         21.8 %
Cost of revenues                        9,255               32.0         7,066               29.7        2,189         31.0

Gross profit                           19,684               68.0        16,686               70.3        2,998         18.0

Operating expenses
Sales and marketing                    10,884               37.6         9,225               38.8        1,659         18.0
Research and development                2,974               10.3         2,503               10.5          471         18.8
General and administrative              4,511               15.6         4,047               17.0          464         11.5
Amortization of intangible assets         717                2.5           717                3.0           -            -

Total operating expenses               19,086               66.0        16,492               69.4        2,594         15.7

Income from operations                    598                2.1           194                0.8          404        208.2
Other income (expense)
Interest income                            49                0.2            23                0.1           26        113.0
Other expense                             (56 )             (0.2 )         (84 )             (0.4 )         28        (33.3 )

Total other expense, net                   (7 )               -            (61 )             (0.3 )         54        (88.5 )

Income before income taxes                591                2.0           133                0.6          458        344.4
Income tax (expense) benefit             (218 )             (0.8 )          66                0.3         (284 )          *

Net income                           $    373                1.3      $    199                0.8          174         87.4

Due to rounding, totals may not equal the sum of the line items in the table above.

* Percentage is not meaningful.

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013

Revenues. Revenues for the three months ended March 31, 2014 increased $5.2 million, or 22%, to $28.9 million from $23.8 million for the same period in 2013. The increase in revenues resulted from two primary factors: the increase in recurring revenue customers and the increase in annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.

The number of recurring revenue customers increased 9% to 20,016 at March 31, 2014 from 18,398 at March 31, 2013.

Annualized average recurring revenues per recurring revenue customer, or wallet share, increased 13% to $5,220 for the three months ended March 31, 2014 from $4,634 for the same period in 2013. This increase in wallet share was primarily attributable to increased fees resulting from increased usage of our solutions by our recurring revenue customers and growth in larger customers.


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Recurring revenues from recurring revenue customers accounted for 90% of our total revenues for the three months ended March 31, 2014, compared to 89% for the same period in 2013. We anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base.

Cost of Revenues. Cost of revenues for the three months ended March 31, 2014 increased $2.2 million, or 31%, to $9.3 million from $7.1 million for the same period in 2013. The increase in cost of revenues for the three month period in 2014 was primarily due to increased headcount in 2014 which resulted in higher personnel costs. Also contributing to the increase were higher costs of resale and increased expenses for software subscriptions in 2014 as compared to 2013. As a percentage of revenues, cost of revenues was 32% for the three months ended March 31, 2014, compared to 30% for the same period in 2013. Going forward, we anticipate that cost of revenues will increase in absolute dollars as we continue to expand our business.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended March 31, 2014 increased $1.7 million, or 18%, to $10.9 million from $9.2 million for the same period in 2013. The increase in sales and marketing expenses for the three month period in 2014 was primarily due to increased headcount in 2014, which resulted in higher personnel costs, as well as increased commissions earned by sales personnel from new business. We also had increased expenses for stock-based compensation in 2014 as compared to 2013. As a percentage of revenues, sales and marketing expenses were 38% for the three months ended March 31, 2014 compared to 39% for the same period in 2013. As we expand our business, we will continue to add resources to our sales and marketing efforts over time, and we expect that these expenses will continue to increase in absolute dollars.

Research and Development Expenses. Research and development expenses for the three months ended March 31, 2014 increased $471,000, or 19%, to $3.0 million from $2.5 million for the same period in 2013. The increase in research and development expenses for the three month period in 2014 was primarily due to increased headcount in 2014, which resulted in higher personnel costs. We also had increased expenses for stock-based compensation, depreciation and software subscriptions in 2014 as compared to 2013. As a percentage of revenues, research and development expenses were approximately 10% for each of the three months ended March 31, 2014 and 2013, respectively. As we enhance and expand our solutions and applications, we expect that research and development expenses will continue to increase in absolute dollars.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2014 increased $464,000, or 12%, to $4.5 million from $4.0 million for the same period in 2013. The increase in general and administrative expenses for the three month period in 2014 was primarily due to increased stock-based compensation and software maintenance and subscriptions expenses in 2014 as compared to 2013. As a percentage of revenues, general and administrative expenses were 16% for the three months ended March 31, 2014 compared to 17% for the same period in 2013. Going forward, we expect that general and administrative expenses will continue to increase in absolute dollars as we expand our business.

Income Tax (Expense) Benefit. We recorded income tax expense of $218,000 for the three months ended March 31, 2014. We recorded an income tax benefit of $66,000 for the three months ended March 31, 2013. Our provisions for income taxes included current foreign and state income tax expense, as well as deferred tax expense. We expect that our annual effective income tax rate will be approximately 40%.

The increase in income tax expense for the three months ended March 31, 2014, compared to the same period in 2013, was primarily due increased pretax income in 2014 as well as a discrete tax benefit in 2013 for the retroactive benefit of the 2012 federal R&D credit. The American Taxpayer Relief Act of 2012 was enacted on January 2, 2013 and extended the federal R&D credit from January 1, 2012 through December 31, 2013.


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Adjusted EBITDA. Adjusted EBITDA, which is a non-GAAP measure of financial performance, consists of net income plus depreciation and amortization, interest expense, interest income, income tax expense, non-cash, stock-based compensation expense and other adjustments as necessary for a fair presentation. The following table provides a reconciliation of net income to Adjusted EBITDA (in thousands):

                                                              Three Months Ended
                                                                   March 31,
                                                              2014           2013
  Net income                                                $     373       $   199
  Depreciation and amortization of property and equipment       1,304         1,171
  Amortization of intangible assets                               717           717
  Interest income                                                 (49 )         (23 )
  Income tax expense (benefit)                                    218           (66 )

  EBITDA                                                        2,563         1,998
  Stock-based compensation expense                              1,339           924

  Adjusted EBITDA                                           $   3,902       $ 2,922

Non-GAAP Income Per Share. Non-GAAP income per share, which is also a non-GAAP measure of financial performance, consists of net income plus non-cash, stock-based compensation expense and amortization expense related to intangible assets divided by the weighted average number of shares of common stock outstanding during each period. The following table provides a reconciliation of net income to non-GAAP income per share (in thousands, except per share amounts):

                                                           Three Months Ended
                                                                March 31,
                                                            2014          2013
      Net income                                         $      373     $    199
      Stock-based compensation expense                        1,339          924
      Amortization of intangible assets                         717          717

      Non-GAAP income                                    $    2,429     $  1,840

      Shares used to compute non-GAAP income per share
      Basic                                                  16,155       14,884
      Diluted                                                16,830       15,564
      Non-GAAP income per share
      Basic                                              $     0.15     $   0.12
      Diluted                                            $     0.14     $   0.12

Liquidity and Capital Resources

At March 31, 2014, our principal sources of liquidity were cash and cash equivalents of $134.6 million and accounts receivable, net of allowance for doubtful accounts, of $12.2 million. Our working capital at March 31, 2014 was $140.9 million compared to $137.2 million at December 31, 2013. The increase in working capital from December 31, 2013 to March 31, 2014 resulted from the following:

$3.3 million increase in cash and cash equivalents, due primarily to the $3.6 million of cash provided by operations and the $587,000 of cash received from the exercise of stock options, reduced by the $861,000 of cash used for capital expenditures;

$555,000 increase in net accounts receivable, as new accounts slightly exceeded collections of outstanding balances for the three months ended March 31, 2014;


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$491,000 increase in deferred costs, current, for expenses related to increased implementation resources and commission payments for new business;

$445,000 increase in accounts payable, primarily due to timing of payments;

$287,000 decrease in accrued compensation and benefits, due primarily to payroll timing;

$268,000 increase in accrued expenses and other current liabilities due primarily to accrued professional service fees; and

$158,000 increase in deferred revenue, current, due to new business for the three months ended March 31, 2014.

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $3.6 million for the three months ended March 31, 2014 compared to $6.5 million for the same period in 2013. The slight increase in net income, the changes in non-cash expenses, including increased depreciation and stock-based compensation, and the changes in our working capital accounts, including those discussed above, resulted in the overall decrease in net cash provided by operations.

Net Cash Flows from Investing Activities

Net cash used in investing activities was $861,000 and $1.1 million for the three months ended March 31, 2014 and 2013, respectively, all for capital expenditures. Our capital expenditures are for supporting our business growth and existing customer base, as well as for our internal use such as equipment for our employees.

Net Cash Flows from Financing Activities

Net cash provided by financing activities was $612,000 and $1.0 million for the three months ended March 31, 2014 and 2013, respectively, all related to the exercise of stock options.

Credit Facility

We have a revolving credit agreement with JPMorgan Chase Bank, N.A. that will mature on September 30, 2016. The revolving credit agreement provides for a $20 million revolving credit facility that we may draw upon from time to time, subject to certain terms and conditions. There were no borrowings outstanding at March 31, 2014 and we were in compliance with all covenants under the revolving credit agreement as of that date.

Adequacy of Capital Resources

Our future capital requirements may vary significantly from those now planned and will depend on many factors, including the costs to develop and implement new solutions and applications, the sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications we develop, the expansion of our operations in the United States and internationally, the response of competitors to our solutions and applications and our use of capital for acquisitions, if any. Historically, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business.

We believe our cash and cash equivalents and our cash flows from operations will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.

Inflation and changing prices did not have a material effect on our business during the three months ended March 31, 2014. We do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

Our results of operations and cash flows are not materially affected by fluctuations in foreign currency exchange rates.


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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

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