SPS COMMERCE INC Q1 FY2023 earnings

SPS Commerce reported first-quarter FY2023 revenue of $125.9 million, up 19.7% from $105.2 million in the prior-year quarter. The company marked its 89th consecutive quarter of topline growth. Gross profit was $82.90 million, up 18.8% from $69.80 million. Operating income was $16.73 million, up 1.3% from $16.51 million. Net income was $15.29 million, up 21.3% from $12.60 million. Diluted EPS was $0.41, up from $0.34. Gross margin slipped to 65.9% from 66.4%, and operating margin fell to 13.3% from 15.7%. The margin pressure stands out because operating income grew much more slowly than revenue.

The customer base and wallet share both expanded. Recurring revenue customers increased 13% to 42,750 at March 31, 2023 from 37,900 at March 31, 2022. Wallet share increased 7% to $11,050 for the three months ended March 31, 2023 from $10,350 in the same period in 2022. Recurring revenues increased 20% and accounted for 93% of total revenues for the three months ended March 31, 2023 and 2022. Management tied the gains to sales and marketing efforts, recent acquisitions, and increased customer usage of its products. Deferred revenue, current portion, was $62.91 million, up 10.8% from $56.80 million a year earlier. That deferred balance gives some visibility into future billings. SPS Commerce says more than 115,000 companies in retail, distribution, grocery and e-commerce have chosen it as their retail network.

Cash generation improved sharply. Operating cash flow was $21.63 million, up from $4.35 million in the prior-year quarter. Capital expenditures were $5.26 million, up from $4.36 million. The MD&A says the operating cash flow increase came from changes in the amount and timing of settlement of operating assets and liabilities, plus higher net income. Management also states that cash, cash equivalents, investments, and cash flows from operations should be sufficient to meet working capital and capital expenditure requirements for at least the next twelve months. The company reports no off-balance sheet arrangements, special purpose entities, undisclosed borrowings, derivative contracts, or synthetic leases. Inflation and changing prices did not have a material effect on the business during the three months ended March 31, 2023, and the company does not expect them to materially affect the business in the foreseeable future.

Non-GAAP results were stronger than GAAP net income. Adjusted EBITDA was $37.0 million, up 16% from the prior-year quarter. Adjusted EBITDA margin was 29%, down from 30%. Non-GAAP income per diluted share was $0.67, up from $0.55. For the second quarter of 2023, management guided non-GAAP income per diluted share to $0.62 to $0.63 and Adjusted EBITDA to $36.4 million to $37.0 million. For the full year 2023, it guided non-GAAP income per diluted share to $2.67 to $2.70 and Adjusted EBITDA to $154.2 million to $155.8 million, representing 17% to 18% growth over 2022. The company does not present a reconciliation of forward-looking non-GAAP measures to comparable GAAP measures because it says forecasting certain items is impractical.

Risks remain centered on the macro backdrop and execution. Management said it is better positioned than ever despite ongoing macro dynamics. The company warns that known and unknown risks and uncertainties could cause actual results to differ materially, and it points to risk factors in its Annual Report on Form 10-K for the year ended December 31, 2022, as updated in subsequent Quarterly Reports on Form 10-Q. The MD&A identifies future capital needs tied to new product development, sales and marketing resources, international expansion, competitor response, and acquisitions. Gross margin and operating margin both declined year over year, so cost discipline will matter if the company wants to keep profit growth closer to revenue growth.