SPS COMMERCE INC Q2 FY2023 earnings

SPS Commerce reported second quarter fiscal 2023 revenue of $130.4 million, up 19.5% from $109.2 million in the prior-year quarter, and the company flagged the period as its 90th consecutive quarter of topline growth. Recurring revenue did most of the work. It rose 20% to $121.5 million and represented 93% of total revenue. Customer counts kept climbing, with recurring revenue customers reaching 43,000 at June 30, 2023, up 11% from 38,650 a year earlier. Wallet share, the average recurring revenue per customer, rose 8% to $11,350 for the quarter from $10,550. Management credited new customer acquisition, recent acquisitions, and heavier usage of existing products. First-half revenue of $256.3 million was up 19.6%.

Margins told a more complicated story. Gross profit of $85.9 million rose 19.9%, and gross margin of 65.8% was up 0.2 percentage points from 65.6%. Operating leverage went the other way. Operating income rose 6.7% to $17.0 million, well short of the revenue growth rate, and operating margin fell to 13.1% from 14.6%. Spending explains the gap. The company attributed the increase in cost of revenues, sales and marketing, and research and development to higher headcount, while a jump in stock-based compensation and support for continued growth drove general and administrative costs. Amortization of intangible assets also rose on intangibles tied to recent business combinations.

Below the operating line, results improved. Net income was $14.7 million, up 36.5% from $10.8 million, and diluted earnings per share were $0.39 versus $0.29. Favorable investment returns and foreign currency exchange rate changes lifted other income (expense), net, and income tax expense grew more slowly than pretax income after excess tax deductions from equity award settlements. For the first six months, net income was $30.0 million, up 28.3%, and diluted EPS was $0.80 compared with $0.63. Operating cash flow was $34.0 million in the quarter, up 4.9%, and $55.7 million for the first half, up 51.3%. Capital expenditures for the half were $9.8 million, up 19.3%. Deferred revenue, current portion only, stood at $66.4 million at quarter end, up 12.3% from a year earlier.

On a non-GAAP basis, income per diluted share was $0.69 compared with $0.53, and Adjusted EBITDA increased 24% to $38.2 million. Adjusted EBITDA margin was 29%, up from 28%. Guidance for the third quarter points to non-GAAP income per diluted share of $0.65 to $0.67 and Adjusted EBITDA of $39.3 million to $40.0 million. For the full fiscal year, the company guided non-GAAP income per diluted share to $2.69 to $2.72 and Adjusted EBITDA to $155.8 million to $156.9 million, and it said its revenue outlook represents 17% to 18% growth over 2022. Neither forecast includes the pending TIE Kinetix acquisition.

The main swing factor is that deal. SPS expects to pay EUR 64.5 million for TIE Kinetix in the quarter ending September 30, 2023, and management excluded any contribution from it when setting guidance. Acquired businesses also drive a meaningful share of the growth in amortization and headcount costs, and the company said its annual effective income tax rate will keep fluctuating with equity award settlement activity. Purchase commitments of $33.1 million and operating lease obligations are additional fixed claims on cash, although the company stated that its cash, equivalents, investments, and operating cash flows should cover working capital and capital expenditure needs for at least the next twelve months. Demand still hinges on retailers and suppliers continuing to invest in supply chain technology, the same spending cycle behind the 11% customer growth reported this quarter.