SPS COMMERCE INC Q3 FY2023 earnings

SPS Commerce reported $135.66 million in third quarter revenue, up 18.5% from the same period a year earlier. It was the company's 91st consecutive quarter of topline growth. Revenue for the first nine months of 2023 was $391.94 million, up 19.2%. Recurring revenue carried the quarter, growing 20% to $127.4 million and accounting for 94% of total revenue. That share was 93% a year ago.

The customer base did the rest. Recurring revenue customers reached 44,500 at September 30, 2023, up 13% from 39,550 a year earlier. Wallet share, the average recurring revenue per customer, rose 7% to $11,650 for the quarter and grew 7% to $11,250 for the nine months. The company points to sales and marketing efforts to acquire new customers, and to recent acquisitions, as the main drivers. The stated growth plan leans on deeper market penetration, more revenue from existing customers as their businesses grow, wider distribution channels, a bigger international presence and selective acquisitions.

Profit growth trailed the top line. Gross profit was $90.14 million, up 18.8%, and gross margin was 66.4%, up 0.2 percentage points. Operating income rose 4.6% to $20.60 million, while operating margin fell 2.0 percentage points to 15.2%. General and administrative expense drove much of the pressure, including $2.1 million more in stock-based compensation, $1.8 million in added personnel costs and $1.3 million in credit loss expense. Net income was $16.84 million, up 6.2%, and diluted EPS was $0.45. Through nine months, net income was $46.81 million, up 19.4%, and diluted EPS was $1.25. Non-GAAP income per diluted share was $0.75, and Adjusted EBITDA rose 17% to $40.5 million, or 30% of revenue, unchanged from a year ago.

Cash generation held up better than earnings. Operating cash flow was $43.84 million in the quarter, up 10.4%, and $99.51 million year to date, up 30.1%. Capital expenditures were $5.70 million, flat against the prior-year quarter, and $15.47 million for the nine months, up 11.3%. Deferred revenue, current portion, rose 21.9% to $71.85 million, which points to work billed ahead of recognition. The MD&A attributes the operating cash increase to higher net income and to the amount and timing of settlements on operating assets and liabilities.

Fourth quarter guidance calls for revenue growth, non-GAAP income per diluted share of $0.67 to $0.69 and Adjusted EBITDA of $40.5 million to $41.3 million. For the full year 2023, the company guided to revenue growth of 18% to 19% over 2022, non-GAAP income per diluted share of $2.77 to $2.79 and Adjusted EBITDA of $156.2 million to $157.0 million, also 18% to 19% growth. Management did not reconcile forward-looking non-GAAP measures to the closest GAAP measures, saying it cannot forecast certain items within a reasonable range without unreasonable effort. Non-cash share-based compensation of $10.0 million, depreciation of $5.1 million and amortization of $4.5 million are expected in the fourth quarter.

Two things stand out. Chad Collins took over as CEO during the period, with founder Archie Black moving to Executive Chair, so the fourth quarter plan and the full-year targets now rest with a new leader. On taxes, the company said excess tax benefits from equity award settlements reduce income tax expense, so its annual effective rate will fluctuate. Credit loss expense also rose with business growth, headcount increases touched every cost line, and the filings point readers to the risk factors in the 2022 annual report. Inflation had no material effect on the business in the first nine months of 2023.