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SPS Commerce (SPSC), $40mm IPO at the price range mid-point of $12 |
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SUMMARY |
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Very small IPO with a $131mm market cap |
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. Appears to be the largest software-as-a-service company in its defined supply chain management solutions segment. Software-as-a-service = pay-as-you-go with little up-front customer investment
. Seems expensive but most successful pay-as-you software-as-a-service companies with recurring revenues always seem ‘expensive’
. 36 consecutive quarters of increasing revenue, 80% recurring revenue
. Appears to have gained critical mass, so future growth should be positively affected by the ‘network effect’, see below |
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BUSINESS |
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. Delivers solutions to customers over the Internet using a Software-as-a-Service model.
. Provides solutions through SPSCommerce.net, a hosted software suite that improves the way suppliers, retailers, distributors and other trading partners manage and fulfill orders.
. SPSC on-demand supply chain management solutions provide integration, collaboration, connectivity, visibility and data analytics to thousands of trading partners worldwide. |
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REVENUE |
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. Revenues increased sequentially for all quarters presented primarily due to increases in recurring revenue customers and increases in recurring revenue per recurring revenue customer.
. Over 90% of revenues for 2007, 2008 and 2009 were derived from Trading Partner Integration.
. 80% of 2009 revenue was recurring |
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CUSTOMERS |
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. As of December 31, 2009, had over 11,000 customers with contracts to pay monthly fees (recurring revenue).
. Also generated revenues by providing supply chain management solutions to an additional 24,000 organizations that, together with recurring revenue customers
. Once connected to SPSC’s platform, customers often require integrations to new organizations that allow SPSC to expand its platform and generate additional revenues. |
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IMPROVES EXISTING BUSINESS PROCESS |
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. SPSCommerce.net fundamentally changes how organizations use electronic communication to manage a supply chain by replacing the collection of traditional, custom-built, point-to-point integrations with a "hub-and-spoke" model
. Whereby a single integration to SPSCommerce.net allows an organization to connect seamlessly to the entire SPSCommerce.net network of trading partners.
. SPSCommerce.net combines integrations with 2,700 order management models across 1,300 retailers, grocers and distributors through a multi-tenant architecture and provides ancillary support applications that deliver a comprehensive set of supply chain solutions. |
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NETWORK EFFECT |
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The value SPSCommerce.net offers increases with the number of trading partners connected to the platform.
. This "network effect" creates a significant opportunity for customers to realize incremental sales by working with new trading partners connected to the platform and vice versa. As a result of this increased volume of activity amongst our customers, SPSC earns additional revenues.
. Also sells solutions through sales leads from retailers with whom SPSC integrates its customers, referrals from trading partners in the network and channel partners, as well as the direct sales force. |
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GROWTH PLAN |
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. Plans to grow the business by further penetrating the supply chain management market, increasing revenues from customers as their businesses grow, expanding distribution channels, expanding the international presence and developing new solutions and applications. |
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. Going forward anticipatese gross profit margins will approximate their current level as revenue growth begins to match the personnel costs we have added to build our business |
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. Also anticipates that average recurring revenues per recurring revenue customer will continue to increase the number of solutions offer are increased, such as the Trading Partner Intelligence solution introduced in 2009. |
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36 QUARTERS OF INCREASING REVENUE |
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The fiscal quarter ended December 31, 2009 represented SPSC’s 36th consecutive quarter of increased revenues. |
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Recurring revenues from recurring revenue customers accounted for 83%, 84% and 80% of total revenues for 2007, 2008 and 2009.
No customer represented over 1% of revenues for 2007, 2008 or 2009. For 2008 and 2009, 2% of revenues were generated outside of North America. |
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COMPETITION |
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Consolidation among Software-as-a-Service vendors could create a direct competitor that is able to compete with SPSC more effectively than the numerous, smaller vendors currently offering Software-as-a-Service supply chain management solutions. |
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Software-as-a-Service vendors also compete with traditional on-premise software companies and managed service providers. Traditional on-premise software companies focused on supply chain integration management include Sterling Commerce, a subsidiary of AT&T, GXS Corporation, Inovis, Extol International and Seeburger. These companies offer a "do-it-yourself" approach in which customers purchase, install and manage specialized software, hardware and value-added networks for their supply chain integration needs. This approach requires customers to invest in staff to operate and maintain the software. Traditional on-premise software companies use a single-tenant approach in which information maps to retailers are built for and used by one supplier, as compared to Software-as-a-Service solutions that allow multiple customers to share information maps with a retailer. |
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Managed service providers focused on the supply chain management market include Sterling Commerce, GXS and Inovis. These companies combine traditional on-premise software, hardware and value-added networks with professional information technology services to manage these resources. Like traditional on-premise software companies, managed service providers use a single-tenant approach. |
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Customers of traditional on-premise software companies and managed service providers typically make significant upfront investments in the supply chain management solutions these competitors provide, which can decrease the customers’ willingness to abandon their investments in favor of a Software-as-a-Service solution. Software-as-a-Service supply chain management solutions also are at a relatively early stage of development compared to traditional on-premise software and managed service providers. |
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Software-as-a-Service vendors compete with these better established solutions based on total cost of ownership and flexibility. If suppliers do not perceive the benefits of Software-as-a-Service solutions, or if suppliers are unwilling to abandon their investments in other supply chain management solutions, SPSC business and growth may suffer. |
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INTELLECTUAL PROPERTY |
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. Relies on a combination of copyright, trademark and trade secret laws in the United States as well as confidentiality procedures and contractual provisions to protect proprietary technology and brand.
. Enters into confidentiality and proprietary rights agreements with employees, consultants and other third parties and control access to software, documentation and other proprietary information
. Does not have any patents or applications for patents. Trade secrets consist primarily of the software developed for the SPSCommerce.net integration center.
. Software is also protected under copyright law, but SPSC does not have any registered copyrights. |
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USE OF IPO PROCEEDS of $26mm |
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From2.5mm shares, shareholders intent to sell .83mm shares |
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Repay debt |
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SPS Commerce |
SPSC, C+, 7 |
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Post-IPO shares: 11mm |
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on-demand software |
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Minneapolis, MN |
2005 |
2006 |
2007 |
2008 |
2009 |
IPO Mkt |
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Revenue ($mm) |
$14 |
$20 |
$25 |
$31 |
$38 |
Cap (mm) |
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Gross profit % |
71% |
73% |
75% |
69% |
69% |
$131 |
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Operating profit % |
-2% |
-4% |
-7% |
-5% |
5% |
@$12 |
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Profit (loss) |
-$0.7 |
-$1.3 |
-$2.2 |
-$0.2 |
$1.2 |
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Profit (loss) % of revenue |
-5% |
-7% |
-9% |
-1% |
3% |
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Adjusted EBITDA |
$0.4 |
$0.7 |
$0.1 |
$0.8 |
$3.2 |
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Adj EBITDA % |
3% |
4% |
0% |
2% |
8% |
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Recurring rev customers |
6,056 |
7,940 |
9,496 |
10,076 |
11,003 |
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Sequential quarters |
Sept 08 |
Dec 08 |
March 09 |
June 09 |
Sept 09 |
Dec 09 |
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Revenue |
$8.1 |
$8.1 |
$8.5 |
$9.6 |
$9.6 |
$10.0 |
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Gross margin |
69% |
67% |
67% |
70% |
69% |
70% |
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Operating profit % |
-0.3% |
-1.6% |
-0.8% |
7.6% |
4.8% |
7.6% |
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Profit (loss) |
-$0.13 |
-$0.29 |
-$0.05 |
$0.66 |
$0.35 |
$0.21 |
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Profit (loss) % of revenue |
-2% |
-4% |
-1% |
7% |
4% |
2% |
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EBITDA, adjusted |
$0.5 |
$0.4 |
$0.5 |
$1.1 |
$0.9 |
$0.7 |
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EBITDA % of revenue |
6% |
5% |
6% |
11% |
9% |
7% |
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VALUATION RATIOS |
IPO Mrkt |
Price / |
Price / |
Price / |
Price / |
% offered |
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annualize last 3 profitable qtrs |
Cap (mm) |
Sales |
Earnings |
BookValue |
TangibleBV |
in IPO |
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SPS Commerce (SPSC) |
$131 |
3.4 |
82 |
4.2 |
4.4 |
30% |
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SCORECARD |
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Mgt |
Market |
Market Do- |
Proprie- |
Total |
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1-5, 5 is high |
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Growth |
mination |
tary |
rating |
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20 is perfect |
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2 |
2 |
2 |
1 |
7 |
