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EX-32.1 - EX-32.1 - SPS COMMERCE INCspsc-ex321_8.htm
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EX-31.1 - EX-31.1 - SPS COMMERCE INCspsc-ex311_7.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission file number 001-34702

SPS COMMERCE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

41-2015127

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

333 South Seventh Street, Suite 1000, Minneapolis, MN 55402

(Address of Principal Executive Offices, Including Zip Code)

(612) 435-9400

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

  

Accelerated Filer

 

 

 

 

 

 

 

 

Non-Accelerated Filer

 

  

Smaller Reporting Company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding at October 19, 2018 was 17,664,624 shares.

 

 


 

SPS COMMERCE, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (unaudited)

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

25

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

26

 

 

 

 

 

Item 1A.

 

Risk Factors

 

26

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

26

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

26

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

26

 

 

 

 

 

Item 5.

 

Other Information

 

26

 

 

 

 

 

Item 6.

 

Exhibits

 

27

 

 

 

 

 

Signatures

 

28

 

Unless the context otherwise requires, for purposes of the Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company” and “SPS” refer to SPS Commerce, Inc.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements regarding us, our business prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, those described under the heading “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (“SEC”).  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.  We expressly disclaim any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise interested parties of the risks and factors that may affect our business.

 

2


 

PART I. – FINANCIAL INFORMATION

Item 1.

Financial Statements

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except shares and per share amounts)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

144,748

 

 

$

123,127

 

Short-term investments

 

 

44,654

 

 

 

40,192

 

Accounts receivable, less allowance for doubtful accounts of $1,199 and $763, respectively

 

 

27,289

 

 

 

24,897

 

Deferred costs

 

 

33,134

 

 

 

29,966

 

Other current assets

 

 

6,613

 

 

 

6,149

 

Total current assets

 

 

256,438

 

 

 

224,331

 

PROPERTY AND EQUIPMENT, net

 

 

19,368

 

 

 

16,856

 

GOODWILL

 

 

50,502

 

 

 

51,613

 

INTANGIBLE ASSETS, net

 

 

13,491

 

 

 

16,529

 

INVESTMENTS

 

 

4,921

 

 

 

5,206

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Deferred costs

 

 

10,597

 

 

 

9,967

 

Deferred income tax asset

 

 

11,433

 

 

 

13,697

 

Other assets

 

 

1,710

 

 

 

1,539

 

Total assets

 

$

368,460

 

 

$

339,738

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,853

 

 

$

4,463

 

Accrued compensation

 

 

15,498

 

 

 

15,228

 

Accrued expenses

 

 

3,976

 

 

 

4,712

 

Deferred revenue

 

 

24,948

 

 

 

17,863

 

Deferred rent

 

 

1,399

 

 

 

1,679

 

Total current liabilities

 

 

49,674

 

 

 

43,945

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Deferred revenue

 

 

2,685

 

 

 

2,731

 

Deferred rent

 

 

3,979

 

 

 

3,064

 

Deferred income tax liability

 

 

1,551

 

 

 

1,887

 

Total liabilities

 

 

57,889

 

 

 

51,627

 

COMMITMENTS and CONTINGENCIES

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares authorized; 0 shares issued and outstanding

 

 

 

 

 

 

Common stock, $0.001 par value; 55,000,000 shares authorized; 17,644,364 and 17,249,153 shares issued; and 17,302,572 and 17,127,006 outstanding, respectively

 

 

18

 

 

 

17

 

Treasury stock, at cost; 341,792 and 122,147 shares, respectively

 

 

(19,682

)

 

 

(5,815

)

Additional paid-in capital

 

 

323,539

 

 

 

301,863

 

Retained earnings (accumulated deficit)

 

 

8,120

 

 

 

(8,611

)

Accumulated other comprehensive (loss) income

 

 

(1,424

)

 

 

657

 

Total stockholders’ equity

 

 

310,571

 

 

 

288,111

 

Total liabilities and stockholders’ equity

 

$

368,460

 

 

$

339,738

 

 

See accompanying notes to these condensed consolidated financial statements.

3


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited; in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

$

62,868

 

 

$

56,057

 

 

$

183,051

 

 

$

162,028

 

Cost of revenues

 

 

20,411

 

 

 

18,645

 

 

 

60,571

 

 

 

54,166

 

Gross profit

 

 

42,457

 

 

 

37,412

 

 

 

122,480

 

 

 

107,862

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

16,952

 

 

 

17,638

 

 

 

54,023

 

 

 

52,981

 

Research and development

 

 

5,146

 

 

 

6,549

 

 

 

15,571

 

 

 

17,023

 

General and administrative

 

 

11,174

 

 

 

8,743

 

 

 

31,278

 

 

 

24,709

 

Amortization of intangible assets

 

 

928

 

 

 

1,128

 

 

 

3,086

 

 

 

3,460

 

Total operating expenses

 

 

34,200

 

 

 

34,058

 

 

 

103,958

 

 

 

98,173

 

Income from operations

 

 

8,257

 

 

 

3,354

 

 

 

18,522

 

 

 

9,689

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

628

 

 

 

272

 

 

 

1,589

 

 

 

704

 

Other expense, net

 

 

(219

)

 

 

(195

)

 

 

(541

)

 

 

(356

)

Total other income, net

 

 

409

 

 

 

77

 

 

 

1,048

 

 

 

348

 

Income before income taxes

 

 

8,666

 

 

 

3,431

 

 

 

19,570

 

 

 

10,037

 

Income tax expense

 

 

605

 

 

 

1,255

 

 

 

2,839

 

 

 

2,908

 

Net income

 

$

8,061

 

 

$

2,176

 

 

$

16,731

 

 

$

7,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

 

$

0.13

 

 

$

0.97

 

 

$

0.42

 

Diluted

 

$

0.45

 

 

$

0.13

 

 

$

0.95

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,219

 

 

 

17,223

 

 

 

17,167

 

 

 

17,192

 

Diluted

 

 

17,741

 

 

 

17,410

 

 

 

17,557

 

 

 

17,394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

76

 

 

 

1,779

 

 

 

(2,155

)

 

 

4,291

 

Unrealized gain on investments, net of tax of $41, $10, $88 and $0

 

 

123

 

 

 

17

 

 

 

264

 

 

 

 

Reclassification of unrealized (gain) loss on investments into earnings, net of tax of ($11), $44, ($64) and $29

 

 

(33

)

 

 

72

 

 

 

(191

)

 

 

48

 

Comprehensive income

 

$

8,227

 

 

$

4,044

 

 

$

14,649

 

 

$

11,468

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

16,731

 

 

$

7,129

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,934

 

 

 

2,240

 

Depreciation and amortization of property and equipment

 

 

6,308

 

 

 

5,261

 

Amortization of intangible assets

 

 

3,086

 

 

 

3,460

 

Provision for doubtful accounts

 

 

1,780

 

 

 

1,365

 

Stock-based compensation

 

 

9,978

 

 

 

6,833

 

Other, net

 

 

(255

)

 

 

(19

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,279

)

 

 

(4,476

)

Deferred costs

 

 

(3,813

)

 

 

(5,188

)

Other current and non-current assets

 

 

(681

)

 

 

1,135

 

Accounts payable

 

 

382

 

 

 

632

 

Accrued compensation

 

 

(592

)

 

 

(1,517

)

Accrued expenses

 

 

(718

)

 

 

469

 

Deferred revenue

 

 

7,039

 

 

 

5,270

 

Deferred rent

 

 

647

 

 

 

(622

)

Net cash provided by operating activities

 

 

37,547

 

 

 

21,972

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(9,875

)

 

 

(5,242

)

Purchases of investments

 

 

(64,434

)

 

 

(29,819

)

Maturities of investments

 

 

60,000

 

 

 

23,029

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

 

(381

)

 

 

(500

)

Net cash used in investing activities

 

 

(14,690

)

 

 

(12,532

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(13,867

)

 

 

 

Net proceeds from exercise of options to purchase common stock

 

 

11,800

 

 

 

1,307

 

Net proceeds from employee stock purchase plan

 

 

836

 

 

 

1,011

 

Net cash (used in) provided by financing activities

 

 

(1,231

)

 

 

2,318

 

Effect of foreign currency exchange rate changes

 

 

(5

)

 

 

1,349

 

Net increase in cash and cash equivalents

 

 

21,621

 

 

 

13,107

 

Cash and cash equivalents at beginning of period

 

 

123,127

 

 

 

115,877

 

Cash and cash equivalents at end of period

 

$

144,748

 

 

$

128,984

 

 

See accompanying notes to these condensed consolidated financial statements.

5


 

SPS COMMERCE, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

NOTE A – General

Business Description

We are a leading provider of cloud-based supply chain management solutions, providing network-proven fulfillment, sourcing, and item assortment management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide.  We provide our solutions through the SPS Commerce Platform, a cloud-based product suite that improves the way retailers, suppliers, distributors and logistics firms orchestrate the sourcing, set up of new vendors and items and fulfillment of products that consumers buy.  We derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of SPS Commerce, Inc. and its subsidiaries.  All intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP.  We have included all normal recurring adjustments considered necessary to provide a fair presentation of our financial position, results of operations and cash flows for the interim periods shown.  Operating results for these interim periods are not necessarily indicative of the results to be expected for the full year.  For further information, refer to the consolidated financial statements and accompanying notes for the year ended December 31, 2017 included in our Annual Report on Form 10-K as filed with the SEC on February 26, 2018.

Effective January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), on a retrospective basis as discussed in this Note A. All amounts and disclosures set forth in this Form 10-Q have been updated to comply with the new standards.  

Use of Estimates

Preparing financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  This guidance replaced most existing revenue recognition guidance in GAAP.  Topic 606 also includes Subtopic 340-40, Other Assets and Deferred Costs – Contracts with Customers, which requires the deferral of incremental costs of obtaining a contract with a customer.  Collectively, we refer to Topic 606 and Subtopic 340-40 as the “new standard.”  These requirements are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods.

We adopted the new standard effective January 1, 2018, on a retrospective basis.  The new standard did not impact our recognition of the recurring revenue received from customers for our cloud-based supply chain solutions; however, the adoption of the new standard impacted our accounting for certain upfront set-up fees, the periods over which the related revenues are recognized and the timing of revenue recognition for these set-up fees.  The adoption of the new standard also impacted our accounting for certain costs to obtain our contracts, specifically related to the periods over which commissions are recognized as well as the timing of cost recognition.  

6


 

Selected condensed consolidated balance sheet line items, which reflect the adoption of ASU 2014-09 are as follows (in thousands):

 

 

 

December 31, 2017

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As adjusted

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Deferred costs

 

$

25,091

 

 

$

4,875

 

 

$

29,966

 

Deferred costs, non-current

 

 

6,770

 

 

 

3,197

 

 

 

9,967

 

Deferred income tax asset

 

 

17,551

 

 

 

(3,854

)

 

 

13,697

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

Accrued compensation

 

 

15,886

 

 

 

(658

)

 

 

15,228

 

Deferred revenue

 

 

16,407

 

 

 

1,456

 

 

 

17,863

 

Deferred revenue, non-current

 

 

10,602

 

 

 

(7,871

)

 

 

2,731

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(19,902

)

 

 

11,291

 

 

 

(8,611

)

 

Selected unaudited condensed consolidated statement of operations line items, which reflect the adoption of ASU 2014-09 are as follows (in thousands):

 

 

 

For the three months ended September 30, 2017

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As adjusted

 

Revenues

 

 

56,150

 

 

 

(93

)

 

 

56,057

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

18,239

 

 

 

(601

)

 

 

17,638

 

Income from operations

 

 

2,846

 

 

 

508

 

 

 

3,354

 

Income tax expense

 

 

1,058

 

 

 

197

 

 

 

1,255

 

Net income

 

$

1,865

 

 

$

311

 

 

$

2,176

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.02

 

 

$

0.13

 

Diluted

 

$

0.11

 

 

$

0.02

 

 

$

0.13

 

 

 

 

For the nine months ended September 30, 2017

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As adjusted

 

Revenues

 

 

162,366

 

 

 

(338

)

 

 

162,028

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

54,059

 

 

 

(1,078

)

 

 

52,981

 

Income from operations

 

 

8,949

 

 

 

740

 

 

 

9,689

 

Income tax expense

 

 

2,636

 

 

 

272

 

 

 

2,908

 

Net income

 

$

6,661

 

 

$

468

 

 

$

7,129

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.39

 

 

$

0.03

 

 

$

0.42

 

Diluted

 

$

0.38

 

 

$

0.03

 

 

$

0.41

 

 

7


 

Selected unaudited condensed consolidated statement of cash flows line items, which reflect the adoption of ASU 2014-09 are as follows (in thousands):

 

 

 

For the nine months ended September 30, 2017

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,661

 

 

$

468

 

 

$

7,129

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,968

 

 

 

272

 

 

 

2,240

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred costs

 

 

(4,487

)

 

 

(701

)

 

 

(5,188

)

Accrued compensation

 

 

(1,140

)

 

 

(377

)

 

 

(1,517

)

Deferred revenue

 

 

4,932

 

 

 

338

 

 

 

5,270

 

Net cash provided by operating activities

 

 

21,972

 

 

 

 

 

 

21,972

 

 

In March 2018, we adopted FASB ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which updates the income tax accounting in U.S. GAAP to reflect the SEC interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. Additional information regarding the adoption of this standard is contained in Note F.

Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU 2016-02, Leases, which will supersede existing lease guidance and will require all leases with a term greater than 12 months to be recognized in the statements of financial position and eliminate current real estate-specific lease guidance, while maintaining substantially similar classification criteria for distinguishing between finance leases and operating leases. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.

 

We will adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. The new standard provides several optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us.  The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify which means we will not recognize right-of-use (“ROU”) assets or lease liabilities for these leases, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all leases.

 

We expect that this standard will have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to the recognition of new ROU assets and lease liabilities on our balance sheet for our existing operating leases.  We are in the process of determining the financial statement impact and are currently unable to estimate the extent of the impact on our consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures regarding stranded tax effects in accumulated other comprehensive income.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted during interim or annual periods.  We believe the adoption of this standard will not have a material impact on our consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment by eliminating step two from the goodwill impairment test. Under the new guidance, an entity should recognize an impairment charge for the amount based on the excess of a reporting unit’s carrying amount over its fair value. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. This guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019 on a prospective basis, and earlier adoption is permitted for

8


 

goodwill impairment tests performed on testing dates after January 1, 2017. We believe the adoption of this standard will not have a material impact on our consolidated financial statements.

Significant Accounting Policies

Except for the accounting policies for revenue recognition and deferred commissions that were updated as a result of adopting ASU 2014-09, there were no material changes in our significant accounting policies during the nine months ended September 30, 2018. See Note A to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on February 26, 2018, for additional information regarding our significant accounting policies.

Revenue Recognition

We derive our revenues primarily from the following revenue streams (in thousands):  

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Recurring revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fulfillment

 

$

48,482

 

 

$

41,962

 

 

$

140,326

 

 

$

120,754

 

Analytics

 

 

8,750

 

 

 

8,679

 

 

 

25,639

 

 

 

25,517

 

Other

 

 

1,412

 

 

 

1,257

 

 

 

3,969

 

 

 

3,721

 

Recurring Revenues

 

 

58,644

 

 

 

51,898

 

 

 

169,934

 

 

 

149,992

 

One-time revenues

 

 

4,224

 

 

 

4,159

 

 

 

13,117

 

 

 

12,036

 

 

 

$

62,868

 

 

$

56,057

 

 

$

183,051

 

 

$

162,028

 

 

Revenues are recognized when our services are made available to our customers, in an amount that reflects the consideration we are contractually and legally entitled to in exchange for those services.

We determine revenue recognition through the following steps:

 

-

Identification of the contract, or contracts, with a customer

 

-

Identification of the performance obligations in the contract

 

-

Determination of the transaction price

 

-

Allocation of the transaction price to the performance obligations in the contract

 

-

Recognition of revenue when, or as, we satisfy a performance obligation

Recurring Revenues

Recurring revenues consists of recurring subscriptions from customers that utilize our Fulfillment, Analytics and Other cloud-based supply chain management solutions.  Revenue for these solutions is generally recognized on a ratable basis over the contract term beginning on the date that our service is made available to the customer.  Our contracts with our recurring revenue customers are recurring in nature, ranging from monthly to annual, and generally allow the customer to cancel the contract for any reason with 30 to 90 days’ notice.  Timing of billings varies by customer and by contract type and are either in advance or within 30 days of the service being performed.

The deferred revenue liabilities for recurring revenue contracts are for one year or less and recognized on a ratable basis over the contract term. We have applied the optional exemption under ASC 606-10-50-14(a) and will not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.

One-time Revenues

One-time revenues consist of set-up fees from customers and miscellaneous one-time fees.

Set-up fees are specific for each connection a customer has with a trading partner and many of our customers have connections with numerous trading partners.  Set-up fees related to our cloud-based supply chain management solutions are nonrefundable upfront fees that are necessary for our customers to utilize our cloud-based services.  These set-up fees do not provide any standalone value to our customers.  Except for our Analytics platform, we have determined the set-up fees represent a material renewal option right to our customers as they will not be incurred again upon renewal.  These set-up fees and related costs are deferred and recognized ratably

9


 

over two years, which is the estimated connection life between the customer and the trading partner.  For our Analytics platform, we have determined the set-up fees do not represent a material customer renewal right and, as such, are deferred and recognized ratably over the estimated initial contract term, which is one year.

The table below presents the activity of the portion of the deferred revenue liability relating to set-up fees (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Balances, at beginning of period

 

$

9,886

 

 

$

10,280

 

 

$

10,031

 

 

$

9,995

 

Invoiced set-up fees

 

 

2,697

 

 

 

2,450

 

 

 

7,807

 

 

 

8,063

 

Amortized set-up fees

 

 

(2,596

)

 

 

(2,634

)

 

 

(7,851

)

 

 

(7,962

)

Balances, at end of period

 

$

9,987

 

 

$

10,096

 

 

$

9,987

 

 

$

10,096

 

 

The entire balance of set-up fees will be recognized within two years and, as such, current amounts will be recognized in the next 1-12 months and long-term amounts will be recognized in the next 13-24 months.

Miscellaneous one-time fees consist of professional services and testing and certification. The deferred revenue liability for these one-time fees are for one year or less and recognized at the time service is provided. We have applied the optional exemption under ASC 606-10-50-14(a) and will not disclose information about the remaining performance obligations for contracts which have original durations of one year or less.

Deferred Costs

Deferred costs consist of costs to obtain customer contracts, such as commissions paid to sales personnel and to third-party partners for customer referrals, and costs to fulfill customer contracts, such as customer implementation costs.

Sales commissions relating to recurring revenues are considered incremental and recoverable costs of obtaining a contract with our customer.  These commissions are calculated based on estimated annual recurring revenue to be generated over the customer’s initial contract year.  These costs are deferred and amortized over the expected period of benefit which we have determined to be two years.  Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statements of operations.

The table below presents the activity of deferred costs and amortization of set-up fees (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Balances, at beginning of period

 

$

42,544

 

 

$

35,332

 

 

$

39,933

 

 

$

32,117

 

Incurred deferred costs

 

 

12,391

 

 

 

11,294

 

 

 

36,807

 

 

 

32,142

 

Amortized deferred costs

 

 

(11,204

)

 

 

(9,316

)

 

 

(33,009

)

 

 

(26,949

)

Balances, at end of period

 

$

43,731

 

 

$

37,310

 

 

$

43,731

 

 

$

37,310

 

 

There was no impairment loss in relation to the costs capitalized for the periods presented.

NOTE B – Financial Instruments

We invest primarily in money market funds, certificates of deposit, highly liquid debt instruments of the U.S. government and U.S. corporate debt securities.  All highly liquid investments with original maturities of 90 days or less are classified as cash equivalents.  All investments with original maturities greater than 90 days and remaining maturities less than one year from the balance sheet date are classified as short-term investments.  Investments with remaining maturities of more than one year from the balance sheet date are classified as long-term investments.

Our short- and long-term marketable securities are classified as available-for-sale.  We intend to hold marketable securities until maturity; however, we may sell these securities at any time for use in current operations or for other purposes.  Consequently, we may or may not keep securities with stated holding periods to maturity.

10


 

Our marketable securities are carried at fair value and unrealized gains and losses on these investments, net of taxes, are included in accumulated other comprehensive loss in the condensed consolidated balance sheets.  Realized gains or losses are included in other income (expense), net, in the condensed consolidated statements of comprehensive income.  When a determination has been made that an other-than-temporary decline in fair value has occurred, the amount of the decline that is related to a credit loss is realized and is included in other income (expense), net, in the condensed consolidated statements of comprehensive income.

Cash equivalents and short- and long-term investments consisted of the following (in thousands):

 

 

 

September 30, 2018

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

121,594

 

 

$

 

 

$

121,594

 

Certificate of deposit

 

 

7,224

 

 

 

 

 

 

7,224

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

12,642

 

 

 

51

 

 

 

12,693

 

Commercial paper

 

 

17,323

 

 

 

57

 

 

 

17,380

 

U.S. treasury securities

 

 

12,300

 

 

 

(22

)

 

 

12,278

 

 

 

$

171,083

 

 

$

86

 

 

$

171,169

 

Due within one year

 

 

$

166,248

 

Due within two years

 

 

 

4,921

 

Total

 

 

$

171,169

 

 

 

 

December 31, 2017

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

104,544

 

 

$

 

 

$

104,544

 

Certificate of deposit

 

 

7,814

 

 

 

 

 

 

7,814

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

17,758

 

 

 

(57

)

 

 

17,701

 

Commercial paper

 

 

7,456

 

 

 

20

 

 

 

7,476

 

U.S. treasury securities

 

 

12,381

 

 

 

26

 

 

 

12,407

 

 

 

$

149,953

 

 

$

(11

)

 

$

149,942

 

Due within one year

 

 

 

 

 

 

 

 

 

$

144,736

 

Due within two years

 

 

 

 

 

 

 

 

 

 

5,206

 

Total

 

 

 

 

 

 

 

 

 

$

149,942

 

 

We do not believe any of the unrealized losses represent an other-than-temporary impairment based on our valuation of available evidence as of September 30, 2018.  We expect to receive the full principal and interest on all of these cash equivalents, certificate of deposit and marketable securities.


11


 

Fair Value Measurements

We measure certain financial assets at fair value on a recurring basis based on a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The three levels of inputs that may be used to measure fair value are:

 

Level 1 – quoted prices in active markets for identical assets or liabilities.

 

Level 2 – observable inputs other than Level 1 prices, such as: (a) quoted prices for similar assets or liabilities, (b) quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or (c) model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.  We obtain the fair values of our level 2 available-for-sale securities from a professional pricing service.

 

Level 3 – unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

The following table presents information about our financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

 

 

 

September 30, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

121,594

 

 

$

 

 

$

 

 

$

121,594

 

Certificate of deposit

 

 

7,224

 

 

 

 

 

 

 

 

 

7,224

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

12,693

 

 

 

 

 

 

12,693

 

Commercial paper

 

 

 

 

 

17,380

 

 

 

 

 

 

17,380

 

U.S. treasury securities

 

 

 

 

 

12,278

 

 

 

 

 

 

12,278

 

Total

 

$

128,818

 

 

$

42,351

 

 

$

 

 

$

171,169

 

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

104,544

 

 

$

 

 

$

 

 

$

104,544

 

Certificate of deposit

 

 

7,814

 

 

 

 

 

 

 

 

 

7,814

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

17,700

 

 

 

 

 

 

17,700

 

Commercial paper

 

 

 

 

 

7,477

 

 

 

 

 

 

7,477

 

U.S. treasury securities

 

 

 

 

 

12,407

 

 

 

 

 

 

12,407

 

Total

 

$

112,358

 

 

$

37,584

 

 

$

 

 

$

149,942

 

 

NOTE C – Goodwill and Intangible Assets, net

The changes in the net carrying amount of goodwill for the nine months ended September 30, 2018 are as follows (in thousands):

 

 

 

2018

 

Balances, January 1

 

$

51,613

 

Goodwill acquired during the period

 

 

 

Foreign currency translation adjustments

 

 

(1,111

)

Balances, September 30

 

$

50,502

 

 

12


 

Intangible assets subject to amortization primarily include subscriber relationships, non-competition agreements and acquired technology and are amortized over their respective useful lives (ranging from 1 to 9 years).  Intangible assets, net of amortization, included the following (in thousands):

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

35,512

 

 

$

(22,710

)

 

$

(64

)

 

$

12,738

 

Non-competition agreements

 

 

2,560

 

 

 

(2,204

)

 

$

(13

)

 

 

343

 

Technology and other

 

 

2,289

 

 

 

(1,859

)

 

$

(20

)

 

 

410

 

 

 

$

40,361

 

 

$

(26,773

)

 

$

(97

)

 

$

13,491

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

34,350

 

 

$

(19,592

)

 

$

614

 

 

$

15,372

 

Non-competition agreements

 

 

2,499

 

 

 

(2,058

)

 

 

45

 

 

 

486

 

Technology and other

 

 

2,130

 

 

 

(1,518

)

 

 

59

 

 

 

671

 

 

 

$

38,979

 

 

$

(23,168

)

 

$

718

 

 

$

16,529

 

 

Total amortization expense for intangible assets during the three months ended September 30, 2018 and 2017 was $0.9 million and $1.1 million, respectively.  Total amortization expense for intangible assets during the nine months ended September 30, 2018 and 2017 was $3.1 million and $3.5 million, respectively. The estimated annual amortization expense related to intangible assets subject to amortization for the next five years is as follows (in thousands):

 

Remainder of 2018

 

$

930

 

2019

 

 

3,716

 

2020

 

 

3,361

 

2021

 

 

2,521

 

2022

 

 

1,449

 

Thereafter

 

 

1,514

 

 

 

$

13,491

 

 

NOTE D – Commitments and Contingencies

Operating Leases

At September 30, 2018, our future minimum payments under operating leases were as follows (in thousands):

 

Remainder of 2018

 

$

1,012

 

2019

 

 

4,146

 

2020

 

 

3,476

 

2021

 

 

4,345

 

2022

 

 

4,035

 

Thereafter

 

 

8,671

 

 

 

$

25,685

 

 

NOTE E – Stock-Based Compensation

Our equity compensation plans provide for the grant of incentive and nonqualified stock options, restricted stock awards, restricted stock units and performance stock units to employees, non-employee directors and other consultants who provide services to us.  We also provide an employee stock purchase plan and 401(k) stock match.

Restricted stock awards result in the issuance of new shares when granted.  For other stock-based awards, new shares are issued when the award is exercised, vested or released according to the terms of the agreement.  In January 2018, 1,027,620 additional shares

13


 

were reserved for future issuance under our 2010 Equity Incentive Plan.  At September 30, 2018, there were approximately 5.3 million shares available for grant under approved equity compensation plans.

We recognize stock-based compensation expense on a straight-line basis over the vesting period, except for expense relating to retirement-eligible employees, which is recognized immediately upon the employee becoming retirement-eligible.

We recorded stock-based compensation expense of $3.3 million and $10.0 million for the three and nine months ended September 30, 2018 and $2.3 million and $6.8 million for the three and nine months ended September 30, 2017, respectively.  This expense was allocated in the condensed consolidated statements of comprehensive income as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of revenues

 

$

535

 

 

$

494

 

 

$

1,587

 

 

$

1,414

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

691

 

 

 

565

 

 

 

2,054

 

 

 

1,656

 

Research and development

 

 

287

 

 

 

241

 

 

 

973

 

 

 

698

 

General and administrative

 

 

1,753

 

 

 

1,047

 

 

 

5,364

 

 

 

3,065

 

Total stock-based compensation expense

 

$

3,266

 

 

$

2,347

 

 

$

9,978

 

 

$

6,833

 

 

Stock-based compensation expense by plan type was as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Stock options

 

$

677

 

 

$

943

 

 

$

2,670

 

 

$

2,817

 

Performance share units

 

 

74

 

 

 

 

 

 

960

 

 

 

 

Restricted stock units

 

 

1,976

 

 

 

1,173

 

 

 

4,727

 

 

 

3,334

 

Restricted stock awards

 

 

137

 

 

 

79

 

 

 

352

 

 

 

238

 

Employee stock purchase plan

 

 

109

 

 

 

152

 

 

 

332

 

 

 

444

 

401(k) stock match

 

 

293

 

 

 

 

 

 

937

 

 

 

 

Total stock-based compensation expense

 

$

3,266

 

 

$

2,347

 

 

$

9,978

 

 

$

6,833

 

 

As of September 30, 2018, there was approximately $14.3 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of 2.6 years.

Stock Options

Stock options generally vest over four years and have a contractual term of seven to ten years from the date of grant.  Our stock option activity was as follows:

 

 

 

 

 

 

 

Weighted Average

 

 

 

Options

 

 

Exercise Price

 

 

 

(#)

 

 

($/share)

 

Outstanding at December 31, 2017

 

 

1,097,331

 

 

$

47.60

 

Granted

 

 

181,472

 

 

 

59.88

 

Exercised

 

 

(286,237

)

 

 

41.23

 

Forfeited

 

 

(60,270

)

 

 

56.71

 

Outstanding at September 30, 2018

 

 

932,296

 

 

 

51.35

 

 

Of the total outstanding options at September 30, 2018, 594,300 were exercisable with a weighted average exercise price of $48.92 per share. The total outstanding options had a weighted average remaining contractual life of 3.3 years.

14


 

The weighted average grant date fair value of options granted during the first nine months of 2018 was $19.48.  This was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

Volatility

 

 

34.9

%

Dividend yield

 

 

0

%

Life (in years)

 

 

4.4

 

Risk-free interest rate

 

 

2.53

%

 

Performance Share Units and Restricted Stock Units and Awards

In February 2017, our executive officers were granted performance share unit (“PSU”) awards with vesting contingent on successful attainment of pre-determined revenue targets over the course of a three-year performance period (fiscal years 2017 – 2019).  The fair value is measured as the number of performance shares expected to be earned multiplied by the grant date fair value of our shares.  The number of performance shares expected to vest during the current service period is estimated and the fair value of those shares is recognized over the remaining service period less any amounts already recognized.

In February 2018, our executive officers were granted PSU awards with vesting contingent on the Company’s total shareholder return as compared to indexed total shareholder return over the course of a three-year performance period (fiscal years 2018 – 2020).  The grant date fair value was estimated using a Monte Carlo simulation that utilizes multiple input variables that determine the probability of satisfying the performance conditions stipulated in the award and calculates the fair market value for the performance stock units granted.  Expense is recognized on a straight-line basis over the vesting period, regardless of whether the market condition is satisfied.

Restricted stock units vest over four years and, upon vesting, the holder is entitled to receive shares of our common stock.  With restricted stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year.

Activity for our performance share units and restricted stock units was as follows:

 

 

 

Performance Share and

 

 

Weighted Average

 

 

 

Restricted Stock Units

 

 

Grant Date Fair Value

 

 

 

(#)

 

 

($/share)

 

Outstanding at December 31, 2017

 

 

321,912

 

 

$

55.16

 

Granted

 

 

156,933

 

 

 

63.09

 

Vested and common stock issued

 

 

(81,427

)

 

 

56.32

 

Forfeited

 

 

(34,318

)

 

 

54.91

 

Outstanding at September 30, 2018

 

 

363,100

 

 

 

58.35

 

 

The number of restricted stock units outstanding at September 30, 2018 included 38,321 units that have vested, but for which shares of common stock have not yet been issued pursuant to the terms of the agreement.

With restricted stock awards, shares of our common stock are issued when the award is granted and the restrictions lapse over one year. Our restricted stock awards activity was as follows:

 

 

 

Restricted Stock

 

 

Weighted Average Grant

 

 

 

Awards (#)

 

 

Date Fair Value ($/share)

 

Outstanding at December 31, 2017

 

 

1,368

 

 

$

58.29

 

Restricted common stock issued

 

 

7,304

 

 

 

74.43

 

Restrictions lapsed

 

 

(5,016

)

 

 

70.03

 

Forfeited

 

 

 

 

 

 

Outstanding at September 30, 2018

 

 

3,656

 

 

 

74.43

 

 

15


 

Employee Stock Purchase Plan

Our employee stock purchase plan allows participating employees to purchase shares of our common stock at a discount through payroll deductions.  The plan is available to all employees subject to certain eligibility requirements.  Participating employees may purchase common stock, on a voluntary after-tax basis, at a price that is the lower of 85% of the fair market value of one share of common stock at the beginning or end of each stock purchase period.  The plan consists of two six-month offering periods, beginning on January 1 and July 1 of each calendar year, respectively.  A total of 1.0 million shares of common stock are reserved for issuance under the plan.

For the offering period that began on January 1, 2018 and ended on June 30, 2018, we withheld $0.8 million from employees participating in the plan which were used to purchase 20,243 shares.  For the offering period that began on July 1, 2018 and will end on December 31, 2018, we have withheld $0.5 million as of September 30, 2018 from employees participating in the plan.

The fair value was estimated based on the market price of our common stock at the beginning of the offering period using the Black-Scholes option pricing model with the following assumptions:

 

Volatility

 

 

26.5

%

Dividend yield

 

 

0

%

Life (in years)

 

 

0.5

 

Risk-free interest rate

 

 

1.50

%

 

401(k) Stock Match

We sponsor a 401(k) retirement savings plan for our U.S. employees where employees can contribute up to 100% of their compensation, subject to the limits established by law.  In 2018, we increased our match to 50% of the employee’s elective deferrals, up to the first 6% of the employee’s pre-tax compensation for each pay period.  A portion of our match is in company stock, which is purchased from the open market by our plan provider and immediately deposited into the employee’s 401(k) account.

 

NOTE F – Income Taxes

We record our interim provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pretax income and adjust the provision for discrete tax items recorded in the period.  Differences between our effective tax rate and statutory tax rates are primarily due to the impact of permanently non-deductible expenses partially offset by the federal research and development credits.  Additionally, excess tax benefits generated upon settlement or exercise of stock awards are recognized as a reduction to income tax expense as a discrete tax item in the quarter that the event occurs creating potentially significant fluctuation in tax expense by quarter and by year.  Our provisions for income taxes include current foreign and state income tax expense, as well as deferred tax expense.

As of September 30, 2018 we do not have any unrecognized tax benefits nor any accrued interest or tax penalties.

Tax Act

The Tax Act, which was enacted on December 22, 2017, included broad and complex changes to the U.S tax code.  The Tax Act reduced the corporate federal income tax rate to 21.0% effective January 1, 2018 and established a mandatory tax on previously untaxed foreign earnings and profits (“E&P”).  The Tax Act expanded the deduction limits on executive compensation under Section 162(m) and included transition rules for previously awarded compensation.

We have completed our evaluation of the impact of the Tax Act on previously untaxed foreign E&P and the deferred tax liability for withholding taxes on dividends. We have also completed our evaluation of the impact of the expanded Section 162(m) limitations and related transition rules on our deferred tax assets related to stock compensation. As a result of our evaluation, there was no material adjustment to our previously calculated discrete income tax expense relating to the Tax Act.  

NOTE G – Net Income Per Share

Basic net income per share has been computed using the weighted average number of shares of common stock outstanding during each period.  Diluted net income per share also includes the impact of our outstanding potential common shares, including options and restricted stock units.  Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.

16


 

The following table presents the components of the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,061

 

 

$

2,176

 

 

$

16,731

 

 

$

7,129

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

 

17,219

 

 

 

17,223

 

 

 

17,167

 

 

 

17,192

 

Options to purchase common stock

 

 

395

 

 

 

152

 

 

 

293

 

 

 

169

 

Restricted stock units

 

 

127

 

 

 

35

 

 

 

97

 

 

 

33

 

Weighted average common shares outstanding, diluted

 

 

17,741

 

 

 

17,410

 

 

 

17,557

 

 

 

17,394

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

 

$

0.13

 

 

$

0.97

 

 

$

0.42

 

Diluted

 

$

0.45

 

 

$

0.13

 

 

$

0.95

 

 

$

0.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive shares (in thousands)

 

 

 

 

 

267

 

 

 

27

 

 

 

267

 

 

17


 

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 network-proven fulfillment, sourcing and item assortment management solutions, along with comprehensive retail performance analytics to thousands of customers worldwide. We provide our solutions through the SPS Commerce Platform, a cloud-based product suite that improves the way retailers, suppliers, distributors and logistics firms orchestrate the sourcing, set up of new vendors and items and fulfillment of products that consumers buy.  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 September 30, 2018, our revenues were $62.9 million, an increase of 12% from the comparable period in 2017, and represented our 71st consecutive quarter of increased revenues.  Total operating expenses increased less than 1% for the same period in 2018 from 2017.  For the nine months ended September 30, 2018, revenues increased 13% and operating expenses increased 6% compared to the same period in 2017.

Key Financial Terms and Metrics

We use several key financial terms and metrics to analyze our business, including annualized average recurring revenues per recurring revenue customer, which we also refer to as wallet share.  During the three and nine months ended September 30, 2018, 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, 2017 as filed with the SEC on February 26, 2018.

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 that of 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 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 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.  On an ongoing basis, we evaluate our estimates and assumptions.  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.  Our actual results may differ from these estimates under different assumptions or conditions.

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 relating to 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 and income taxes are the most critical to fully understand and evaluate our financial condition and results of operations.

18


 

During the three and nine months ended September 30, 2018, there were no changes in our significant accounting policies or estimates, except for the adoptions of ASU No. 2014-09 and ASU No. 2018-05 as detailed in Note A.  See Note A to our condensed 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, 2017, as filed with the SEC on February 26, 2018, for additional information regarding our accounting policies.  

Results of Operations

Three months ended September 30, 2018 Compared to Three months ended September 30, 2017

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

 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

% of revenue

 

 

 

 

 

 

% of revenue

 

 

$

 

 

%

 

Revenues

 

$

62,868

 

 

 

100.0

%

 

$

56,057

 

 

 

100.0

%

 

$

6,811

 

 

 

12.2

%

Cost of revenues

 

 

20,411

 

 

 

32.5

 

 

 

18,645

 

 

 

33.3

 

 

 

1,766

 

 

 

9.5

 

Gross profit

 

 

42,457

 

 

 

67.5

 

 

 

37,412

 

 

 

66.7

 

 

 

5,045

 

 

 

13.5

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

16,952

 

 

 

26.9

 

 

 

17,638

 

 

 

31.5

 

 

 

(686

)

 

 

(3.9

)

Research and development

 

 

5,146

 

 

 

8.2

 

 

 

6,549

 

 

 

11.7

 

 

 

(1,403

)

 

 

(21.4

)

General and administrative

 

 

11,174

 

 

 

17.8

 

 

 

8,743

 

 

 

15.6

 

 

 

2,431

 

 

 

27.8

 

Amortization of intangible assets

 

 

928

 

 

 

1.5

 

 

 

1,128

 

 

 

2.0

 

 

 

(200

)

 

 

(17.7

)

Total operating expenses

 

 

34,200

 

 

 

54.4

 

 

 

34,058

 

 

 

60.8

 

 

 

142

 

 

 

0.4

 

Income from operations

 

 

8,257

 

 

 

13.1

 

 

 

3,354

 

 

 

5.9

 

 

 

4,903

 

 

 

146.2

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

628

 

 

 

1.0

 

 

 

272

 

 

 

0.5

 

 

 

356

 

 

 

130.9

 

Other income (expense), net

 

 

(219

)

 

 

(0.3

)

 

 

(195

)

 

 

(0.3

)

 

 

(24

)

 

 

(12.3

)

Total other income, net

 

 

409

 

 

 

0.7

 

 

 

77

 

 

 

0.2

 

 

 

332

 

 

 

431.2

 

Income before income taxes

 

 

8,666

 

 

 

13.8

 

 

 

3,431

 

 

 

6.1

 

 

 

5,235

 

 

 

152.6

 

Income tax expense

 

 

605

 

 

 

1.0

 

 

 

1,255

 

 

 

2.2

 

 

 

(650

)

 

 

(51.8

)

Net income

 

$

8,061

 

 

 

12.8

%

 

$

2,176

 

 

 

3.9

%

 

$

5,885

 

 

 

270.5

%

 

Revenues.  Revenues for the three months ended September 30, 2018 increased $6.8 million, or 12%, to $62.9 million from $56.1 million for the same period in 2017.  The increase in revenues resulted from two primary factors: an increase in recurring revenue customers and an 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 6% to 26,869 at September 30, 2018 from 25,359 at September 30, 2017.

 

Wallet share increased 8% to $8,838 for the three months ended September 30, 2018 from $8,219 for the same period in 2017.  This increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

Recurring revenues from recurring revenue customers accounted for 93% of our total revenues for the three months ended September 30, 2018 and 2017.  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 September 30, 2018 increased $1.8 million, or 10%, to $20.4 million from $18.6 million for the same period in 2017.  The increase was primarily due to an increase in personnel-related costs of approximately $1.2 million, driven by increased salaries and benefits due to business growth and by increased contract labor, and due to an increase in depreciation expense of $0.3 million driven by continued investment in the infrastructure supporting our platform.  As a percentage of revenues, cost of revenues was 33% for the three months ended September 30, 2018 and 2017.

19


 

Sales and Marketing Expenses.  Sales and marketing expenses for the three months ended September 30, 2018 decreased $0.7 million, or 4%, to $16.9 million from $17.6 million for the same period in 2017.  The decrease was primarily driven by a $1.5 million decrease in personnel-related costs, due to decreased headcount which reduced salaries and benefits, offset by an increase of $0.5 million in variable compensation earned by sales personnel and referral partners as a result of new business, and by a $0.3 million increase in promotional expenses.  As a percentage of revenues, sales and marketing expenses were 27% and 32% for the three months ended September 30, 2018 and 2017, respectively.

Research and Development Expenses.  Research and development expenses for the three months ended September 30, 2018 decreased $1.4 million, or 21%, to $5.1 million from $6.5 million for the same period in 2017.  The decrease was primarily due to a $1.4 million decrease in personnel-related costs, due to an increase of internally developed capitalized software, which reduces personnel expenses, and by decreases in salaries and benefits, due to decreases in headcount. As a percentage of revenues, research and development expenses were 8% and 12% for the three months ended September 30, 2018 and 2017, respectively.

General and Administrative Expenses.  General and administrative expenses for the three months ended September 30, 2018 increased $2.4 million, or 28%, to $11.2 million from $8.8 million for the same period in 2017. This increase was primarily driven by an increase of $1.1 million in personnel-related costs due to headcount growth and an increase of $0.7 million in stock-based compensation expense due to headcount growth and stock grants made to retirement-eligible employees which results in immediate expensing. Additionally, there was an increase of $0.6 million in other general and administrative expenses, as a result of continued growth in the business. As a percentage of revenues, general and administrative expenses were 18% and 16% for the three months ended September 30, 2018 and 2017, respectively.

Other Income (Expense), net.  Other income (expense), net, for the three months ended September 30, 2018 increased $0.3 million over the same period in 2017 primarily due to an increase of interest income from investments, as a result of additional cash being invested.

Income Tax Expense.  We recorded income tax expense of $0.6 million for the three months ended September 30, 2018 compared to income tax expense of $1.3 million for the same period in 2017.  The decrease was primarily due to a reduction in the overall effective tax rate in 2018, as a result of the Tax Act and due to discrete tax benefits.  The decreases were partially offset by increased pre-tax income.  Discrete tax benefits increased $1.8 million, primarily due to excess tax deductions on stock activity.  Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are no longer recognized as additional paid-in capital but are instead recognized as a reduction to income tax expense.  As a result of recording these excess tax benefits in income tax expense, we expect that our annual effective income tax rate will be more volatile than it has been historically.

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

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Net income

 

$

8,061

 

 

$

2,176

 

Depreciation and amortization of property and equipment

 

 

2,132

 

 

 

1,830

 

Amortization of intangible assets

 

 

928

 

 

 

1,128

 

Interest income, net

 

 

(628

)

 

 

(272

)

Income tax expense

 

 

605

 

 

 

1,255

 

Stock-based compensation expense

 

 

3,266

 

 

 

2,347

 

Adjusted EBITDA

 

$

14,364

 

 

$

8,464

 

 

20


 

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 stock-based compensation expense, amortization expense related to intangible assets and income tax effects of adjustments 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

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Net income

 

$

8,061

 

 

$

2,176

 

Stock-based compensation expense

 

 

3,266

 

 

 

2,347

 

Amortization of intangible assets

 

 

928

 

 

 

1,128

 

Income tax effects of adjustments

 

 

(3,008

)

 

 

(1,254

)

Non-GAAP income

 

$

9,247

 

 

$

4,397

 

Shares used to compute Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

 

17,219

 

 

 

17,223

 

Diluted

 

 

17,741

 

 

 

17,410

 

Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.54

 

 

$

0.26

 

Diluted

 

$

0.52

 

 

$

0.25

 

 

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

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

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

% of revenue

 

 

 

 

 

 

% of revenue

 

 

$

 

 

%

 

Revenues

 

$

183,051

 

 

 

100.0

%

 

$

162,028

 

 

 

100.0

%

 

$

21,023

 

 

 

13.0

%

Cost of revenues

 

 

60,571

 

 

 

33.1

 

 

 

54,166

 

 

 

33.4

 

 

 

6,405

 

 

 

11.8

 

Gross profit

 

 

122,480

 

 

 

66.9

 

 

 

107,862

 

 

 

66.6

 

 

 

14,618

 

 

 

13.6

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

54,023

 

 

 

29.5

 

 

 

52,981

 

 

 

32.7

 

 

 

1,042

 

 

 

2.0

 

Research and development

 

 

15,571

 

 

 

8.5

 

 

 

17,023

 

 

 

10.5

 

 

 

(1,452

)

 

 

(8.5

)

General and administrative

 

 

31,278

 

 

 

17.1

 

 

 

24,709

 

 

 

15.3

 

 

 

6,569

 

 

 

26.6

 

Amortization of intangible assets

 

 

3,086

 

 

 

1.7

 

 

 

3,460

 

 

 

2.1

 

 

 

(374

)

 

 

(10.8

)

Total operating expenses

 

 

103,958

 

 

 

56.8

 

 

 

98,173

 

 

 

60.6

 

 

 

5,785

 

 

 

5.9

 

Income from operations

 

 

18,522

 

 

 

10.1

 

 

 

9,689

 

 

 

6.0

 

 

 

8,833

 

 

 

91.2

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income, net

 

 

1,589

 

 

 

0.9

 

 

 

704

 

 

 

0.4

 

 

 

885

 

 

 

125.7

 

Other income (expense), net

 

 

(541

)

 

 

(0.3

)

 

 

(356

)

 

 

(0.2

)

 

 

(185

)

 

 

(52.0

)

Total other income, net

 

 

1,048

 

 

 

0.6

 

 

 

348

 

 

 

0.2

 

 

 

700

 

 

 

201.1

 

Income before income taxes

 

 

19,570

 

 

 

10.7

 

 

 

10,037

 

 

 

6.2

 

 

 

9,533

 

 

 

95.0

 

Income tax expense

 

 

2,839

 

 

 

1.6

 

 

 

2,908

 

 

 

1.8

 

 

 

(69

)

 

 

(2.4

)

Net income

 

$

16,731

 

 

 

9.1

%

 

$

7,129

 

 

 

4.4

%

 

$

9,602

 

 

 

134.7

%

 

Revenues.  Revenues for the nine months ended September 30, 2018 increased $21.0 million, or 13%, to $183.1 million from $162.0 million for the same period in 2017.  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 6% to 26,869 at September 30, 2018 from 25,359 at September 30, 2017.

 

Wallet share increased 8% to $8,612 for the nine months ended September 30, 2018 from $7,973 for the same period in 2017.  This increase was primarily attributable to increased usage of our solutions by our recurring revenue customers.

21


 

Recurring revenues from recurring revenue customers accounted for 93% of our total revenues for the nine months ended September 30, 2018, consistent with the same period in 2017.  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 nine months ended September 30, 2018 increased $6.4 million, or 12%, to $60.6 million from $54.2 million for the same period in 2017. The increase was primarily due to an increase in personnel-related costs of approximately $5.2 million, driven by increased salaries and benefits due to continued business growth and by increased contract labor, and due to an increase in depreciation expense of $1.1 million, driven by continued investment in infrastructure supporting our platform. As a percentage of revenues, cost of revenues was 33% for the nine months ended September 30, 2018 and 2017.

Sales and Marketing Expenses.  Sales and marketing expenses for the nine months ended September 30, 2018 increased $1.0 million, or 2%, to $54.0 million from $53.0 million for the same period in 2017.  The increase was due to an increase of $1.6 million in variable compensation earned by sales personnel and referral partners, as a result of new business, partially offset by an $0.6 million decrease in personnel expenses, due to decreased headcount which reduced salaries and benefits.  As a percentage of revenues, sales and marketing expenses were 30% and 33% for the nine months ended September 30, 2018 and 2017, respectively.

Research and Development Expenses.  Research and development expenses for the nine months ended September 30, 2018 decreased $1.4 million, or 8%, to $15.6 million from $17.0 million for the same period in 2017.  The decrease was primarily due to decreases in personnel-related costs of $1.9 million, due to an increase of internally developed capitalized software which reduces personnel expenses.  These decreases were offset by increases in software subscriptions of $0.3 million and stock-based compensation of $0.3 million, both of which were consistent with business growth. As a percentage of revenues, research and development expenses were 9% and 10% for the nine months ended September 30, 2018 and 2017, respectively.

General and Administrative Expenses.  General and administrative expenses for the nine months ended September 30, 2018 increased $6.6 million, or 27%, to $31.3 million from $24.7 million for the same period in 2017.  The increase was primarily due to an increase of $2.3 million in personnel-related costs due to headcount growth and an increase of $2.3 million in stock-based compensation due to headcount growth and stock grants made to retirement-eligible employees which results in immediate expensing.  Additionally, other expenses increased by $2.0 million, primarily driven by business growth which resulted in increased costs of software subscriptions, credit card fees and bad debt expense.  As a percentage of revenues, general and administrative expenses were 17% and 15% for the nine months ended September 30, 2018 and 2017 respectively.

Other Income (Expense), net.  Other income (expense), net, for the nine months ended September 30, 2018 increased $0.7 million over the same period in 2017 primarily due to an increase in interest income from investments.

Income Tax Expense.  We recorded income tax expense of $2.8 million for the nine months ended September 30, 2018 compared to income tax expense of $2.9 million for the same period in 2017.  The decrease was primarily due to a reduction in overall effective tax rate in 2018 as compared to 2017 due to the Tax Act, offset by increased pre-tax income.  In addition, discrete tax benefits increased $1.6 million for the nine months ended September 30, 2018 compared to the same period in 2017.  The increase is primarily due to a $1.0 million increase from stock activity and due to a $0.6 million increase in research and development tax credits. Under ASU 2016-09, excess tax benefits generated upon the settlement or exercise of stock awards are no longer recognized as additional paid-in capital but are instead recognized as a reduction to income tax expense.  As a result of recording these excess tax benefits in income tax expense, we expect that our annual effective income tax rate will be more volatile than it has been historically.

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

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Net income

 

$

16,731

 

 

$

7,129

 

Depreciation and amortization of property and equipment

 

 

6,308

 

 

 

5,261

 

Amortization of intangible assets

 

 

3,086

 

 

 

3,460

 

Interest income, net

 

 

(1,589

)

 

 

(705

)

Income tax expense

 

 

2,839

 

 

 

2,908

 

Stock-based compensation expense

 

 

9,978

 

 

 

6,833

 

Adjusted EBITDA

 

$

37,353

 

 

$

24,886

 

22


 

 

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 stock-based compensation expense, amortization expense related to intangible assets and income tax effects of adjustments 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):

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

Net income

 

$

16,731

 

 

$

7,129

 

Stock-based compensation expense

 

 

9,978

 

 

 

6,833

 

Amortization of intangible assets

 

 

3,086

 

 

 

3,460

 

Income tax effects of adjustments

 

 

(5,188

)

 

 

(4,609

)

Non-GAAP income

 

$

24,607

 

 

$

12,813

 

Shares used to compute Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

 

17,167

 

 

 

17,192

 

Diluted

 

 

17,557

 

 

 

17,394

 

Non-GAAP income per share

 

 

 

 

 

 

 

 

Basic

 

$

1.43

 

 

$

0.75

 

Diluted

 

$

1.40

 

 

$

0.74

 

 

Liquidity and Capital Resources

At September 30, 2018, our principal sources of liquidity were cash, cash equivalents, certificates of deposit and marketable securities of $194.3 million and accounts receivable, net of allowance for doubtful accounts, of $27.3 million.  Certificates of deposit and marketable securities are invested in accordance with our investment policy, with a goal of maintaining liquidity and capital preservation.  Our cash equivalents and marketable securities are held in highly liquid money market funds, commercial paper, federal agency securities and corporate debt securities.

Net Cash Flows from Operating Activities

Net cash provided by operating activities was $37.6 million and $22.0 million for the nine months ended September 30, 2018 and 2017, respectively.  The increase was primarily due to increased net income as a result of continued revenue growth and reduction in operating expenses, primarily from personnel-related expenses.  

Net Cash Flows from Investing Activities

Net cash used in investing activities was $14.7 million and $12.5 million for the nine months ended September 30, 2018 and 2017, respectively.  The increase was primarily due to increased capital expenditures, offset by net maturities of investments compared to net purchases of investments for the same period in 2017.  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 financing activities resulted in cash used of $1.2 million and cash provided of $2.3 million for the nine months ended September 30, 2018 and 2017, respectively.  The decrease was primarily due to $13.9 million of common stock repurchases offset by $11.8 million of proceeds from stock-based compensation plans for the nine months ended September 30, 2018 compared to $2.3 million of proceeds from stock activity for the same period in 2017.

Effect of Foreign Currency Exchange Rate Changes

Our results of operations and cash flows were not materially affected by fluctuations in foreign currency exchange rates.  We maintain approximately 6% of our total cash and cash equivalents outside of the U.S. in foreign currencies, primarily in Australian and Canadian dollars.  We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs.

23


 

Adequacy of Capital Resources

Our future capital requirements may vary significantly from those now planned and will depend on many factors, including:

 

costs to develop and implement new solutions and applications, if any;

 

sales and marketing resources needed to further penetrate our market and gain acceptance of new solutions and applications that we may develop;

 

expansion of our operations in the United States and internationally;

 

response of competitors to our solutions and applications; and,

 

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 expand our business.

We believe our cash, cash equivalents, certificates of deposit, marketable securities 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 nine months ended September 30, 2018 and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.

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.

Contractual and Commercial Commitment Summary

Our contractual obligations and commercial commitments as of September 30, 2018 are summarized below:

 

 

 

Payments Due By Period (in thousands)

 

 

 

 

 

 

 

Less Than

 

 

 

 

 

 

 

 

 

 

More Than

 

Contractual Obligations

 

Total

 

 

1 Year

 

 

1-3 Years

 

 

3-5 Years

 

 

5 Years

 

Operating lease obligations

 

$

25,685

 

 

$

1,012

 

 

$

7,622

 

 

$

8,380

 

 

$

8,671

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Sensitivity Risk

The principal objectives of our investment activities are to preserve principal, provide liquidity and maximize income consistent with minimizing risk of material loss.  We are exposed to market risk related to changes in interest rates.  However, based on the nature and current level of our investments (primarily cash and cash equivalents, which approximate fair value due to their short maturities, certificates of deposit and marketable securities), we believe there is no material risk exposure.  We do not enter into investments for trading or speculative purposes.

We did not have any outstanding debt as of September 30, 2018.  Therefore, we do not have any material risk to interest rate fluctuations.

Foreign Currency Exchange Risk

We have revenue, expenses, assets and liabilities that are denominated in currencies other than the U.S. dollar, primarily the Australian dollar and Canadian dollar.  As of September 30, 2018, we maintained approximately 6% of our total cash and cash equivalents outside of the U.S. in foreign currencies.  We believe that a significant change in foreign currency exchange rates or an inability to access these funds would not affect our ability to meet our operational needs.  As we expand internationally, our results of operations and cash flows may be impacted by changes in foreign currency exchange rates, and would be adversely impacted when the U.S. dollar appreciates relative to other foreign currencies.  We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk, although we may do so in the future.

24


 

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934).  Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

25


 

PART II. – OTHER INFORMATION

Item 1.

Legal Proceedings

We are not currently subject to any material legal proceedings.  From time to time, we may be named as a defendant in legal actions or otherwise be subject to claims arising from our normal business activities.  Any such actions, even those that lack merit, could result in the expenditure of significant financial and managerial resources.  We believe that we have obtained adequate insurance coverage or rights to indemnification in connection with potential legal proceedings that may arise.

Item 1A.

Risk Factors

There have been no material changes in our risk factors from those disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on February 26, 2018.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(c) Share Repurchases

The following table presents the total number of shares of our common stock that we purchased during the third quarter of 2018, the average price paid per share, the number of shares that we purchased as part of our publicly announced repurchase program and the approximate dollar value of shares that still could be repurchased at the end of the applicable period.

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Program (1)

 

 

Approximate Dollar Value of Shares that May Yet be Purchased Under the Program (1)

 

July 1 -31, 2018

 

 

26,251

 

 

$

76.11

 

 

 

26,251

 

 

$

30,318,000

 

August 1 - 31, 2018

 

 

 

 

 

 

 

 

 

 

 

30,318,000

 

September 1 - 30, 2018

 

 

 

 

 

 

 

 

 

 

 

30,318,000

 

Total third quarter 2018

 

 

26,251

 

 

$

76.11

 

 

 

26,251

 

 

$

30,318,000

 

 

(1)

Pursuant to a $50.0 million share repurchase program that was authorized by our board of directors on November 2, 2017. There is no expiration date governing the period over which we can repurchase shares under the November 2017 share repurchase program.

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

Not Applicable.

26


 

Item 6.

Exhibits

 

Number

 

Description

 

 

 

   3.1

 

Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-3 (File No. 333-182097) filed with the SEC on September 13, 2012).

 

 

 

   3.2

 

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 001-34702) filed with the SEC on October 12, 2017).

 

 

 

  31.1

 

Certification of Principal Executive Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

 

 

 

  31.2

 

Certification of Principal Financial Officer pursuant to Rules 13a-14(a) under the Securities Exchange Act of 1934, as amended (filed herewith).

 

 

 

  32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

 

 

 

  101

 

Interactive Data Files Pursuant to Rule 405 of Regulation S-T (filed herewith).

 

27


 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated: October 26, 2018

  SPS COMMERCE, INC.

 

 

 

  /s/ KIMBERLY K. NELSON

 

  Kimberly K. Nelson

 

  Executive Vice President and Chief Financial Officer

  (principal financial and accounting officer)

 

 

28