spsc-10q_20180331.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: March 31, 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  (Do not check if a smaller reporting company)

  

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 April 20, 2018 was 17,362,565 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 March 31, 2018 and December 31, 2017 (unaudited)

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

22

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

23

 

 

 

 

 

Item 1A.

 

Risk Factors

 

23

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

23

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

23

 

 

 

 

 

Item 5.

 

Other Information

 

23

 

 

 

 

 

Item 6.

 

Exhibits

 

24

 

 

 

 

 

Signatures

 

25

 

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 Commission 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 share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

120,547

 

 

$

123,127

 

Short-term investments

 

 

45,272

 

 

 

40,192

 

Accounts receivable, less allowance for doubtful accounts of $775 and $763, respectively

 

 

25,948

 

 

 

24,897

 

Deferred costs

 

 

31,318

 

 

 

29,966

 

Other current assets

 

 

5,696

 

 

 

6,149

 

Total current assets

 

 

228,781

 

 

 

224,331

 

PROPERTY AND EQUIPMENT, net

 

 

17,304

 

 

 

16,856

 

GOODWILL

 

 

51,030

 

 

 

51,613

 

INTANGIBLE ASSETS, net

 

 

15,577

 

 

 

16,529

 

INVESTMENTS

 

 

2,471

 

 

 

5,206

 

OTHER ASSETS

 

 

 

 

 

 

 

 

Deferred costs

 

 

10,239

 

 

 

9,967

 

Deferred income tax asset

 

 

12,596

 

 

 

13,697

 

Other assets

 

 

1,598

 

 

 

1,539

 

Total assets

 

$

339,596

 

 

$

339,738

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,472

 

 

$

4,463

 

Accrued compensation

 

 

11,617

 

 

 

15,228

 

Accrued expenses

 

 

4,111

 

 

 

4,712

 

Deferred revenue

 

 

21,583

 

 

 

17,863

 

Deferred rent

 

 

1,313

 

 

 

1,679

 

Total current liabilities

 

 

42,096

 

 

 

43,945

 

OTHER LIABILITIES

 

 

 

 

 

 

 

 

Deferred revenue

 

 

2,691

 

 

 

2,731

 

Deferred rent

 

 

4,690

 

 

 

3,064

 

Deferred income tax liability

 

 

1,768

 

 

 

1,887

 

Total liabilities

 

 

51,245

 

 

 

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; 17,346,080 and 17,249,153 shares issued; and 17,109,949 and 17,127,006 outstanding, respectively

 

 

17

 

 

 

17

 

Treasury stock, at cost; 236,131 and 122,147 shares, respectively

 

 

(11,686

)

 

 

(5,815

)

Additional paid-in capital

 

 

305,759

 

 

 

301,863

 

Accumulated deficit

 

 

(5,357

)

 

 

(8,611

)

Accumulated other comprehensive (loss) income

 

 

(382

)

 

 

657

 

Total stockholders’ equity

 

 

288,351

 

 

 

288,111

 

Total liabilities and stockholders’ equity

 

$

339,596

 

 

$

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

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Revenues

 

$

59,092

 

 

$

51,879

 

Cost of revenues

 

 

19,758

 

 

 

17,330

 

Gross profit

 

 

39,334

 

 

 

34,549

 

Operating expenses

 

 

 

 

 

 

 

 

Sales and marketing

 

 

18,647

 

 

 

17,023

 

Research and development

 

 

5,132

 

 

 

5,105

 

General and administrative

 

 

10,130

 

 

 

7,827

 

Amortization of intangible assets

 

 

1,125

 

 

 

1,215

 

Total operating expenses

 

 

35,034

 

 

 

31,170

 

Income from operations

 

 

4,300

 

 

 

3,379

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest income, net

 

 

414

 

 

 

191

 

Other income (expense), net

 

 

(154

)

 

 

(60

)

Total other income, net

 

 

260

 

 

 

131

 

Income before income taxes

 

 

4,560

 

 

 

3,510

 

Income tax expense

 

 

1,306

 

 

 

525

 

Net income

 

$

3,254

 

 

$

2,985

 

 

 

 

 

 

 

 

 

 

Net income per share

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

 

$

0.17

 

Diluted

 

$

0.19

 

 

$

0.17

 

 

 

 

 

 

 

 

 

 

Weighted average common shares used to compute net income per share

 

 

 

 

 

 

 

 

Basic

 

 

17,093

 

 

 

17,154

 

Diluted

 

 

17,307

 

 

 

17,393

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,055

)

 

 

1,577

 

Unrealized gain (loss) on investments, net of tax of $13 and ($5)

 

 

39

 

 

 

(8

)

Reclassification of unrealized gain on investments into earnings, net of tax of ($8) and ($9)

 

 

(24

)

 

 

(16

)

Comprehensive income

 

$

2,214

 

 

$

4,538

 

 

See accompanying notes to these condensed consolidated financial statements.

 

4


 

SPS COMMERCE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

3,254

 

 

$

2,985

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

1,020

 

 

 

299

 

Depreciation and amortization of property and equipment

 

 

2,083

 

 

 

1,691

 

Amortization of intangible assets

 

 

1,125

 

 

 

1,215

 

Provision for doubtful accounts

 

 

410

 

 

 

332

 

Stock-based compensation

 

 

3,533

 

 

 

2,300

 

Other, net

 

 

(32

)

 

 

(25

)

Changes in assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,520

)

 

 

(2,201

)

Deferred costs

 

 

(1,628

)

 

 

(1,343

)

Other current and non-current assets

 

 

367

 

 

 

180

 

Accounts payable

 

 

317

 

 

 

1,169

 

Accrued compensation

 

 

(3,939

)

 

 

(1,870

)

Accrued expenses

 

 

(592

)

 

 

945

 

Deferred revenue

 

 

3,680

 

 

 

5,041

 

Deferred rent

 

 

1,271

 

 

 

(319

)

Net cash provided by operating activities

 

 

9,349

 

 

 

10,399

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,884

)

 

 

(1,299

)

Purchases of investments

 

 

(19,927

)

 

 

(4,995

)

Maturities of investments

 

 

17,500

 

 

 

7,500

 

Acquisitions of businesses and intangible assets, net of cash acquired

 

 

(381

)

 

 

(500

)

Net cash (used in) provided by investing activities

 

 

(6,692

)

 

 

706

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repurchases of common stock

 

 

(5,871

)

 

 

 

Net proceeds from exercise of options to purchase common stock

 

 

715

 

 

 

1,037

 

Net cash (used in) provided by financing activities

 

 

(5,156

)

 

 

1,037

 

Effect of foreign currency exchange rate changes

 

 

(81

)

 

 

688

 

Net (decrease) increase in cash and cash equivalents

 

 

(2,580

)

 

 

12,830

 

Cash and cash equivalents at beginning of period

 

 

123,127

 

 

 

115,877

 

Cash and cash equivalents at end of period

 

$

120,547

 

 

$

128,707

 

 

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 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 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 Securities and Exchange Commission 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 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 March 31, 2017

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As adjusted

 

Revenues

 

 

51,932

 

 

 

(53

)

 

 

51,879

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

17,079

 

 

 

(56

)

 

 

17,023

 

Income from operations

 

 

3,376

 

 

 

3

 

 

 

3,379

 

Income tax expense

 

 

536

 

 

 

(11

)

 

 

525

 

Net income

 

$

2,971

 

 

$

14

 

 

$

2,985

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

 

$

 

 

$

0.17

 

Diluted

 

$

0.17

 

 

$

 

 

$

0.17

 

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 three months ended March 31, 2017

 

 

 

As previously

 

 

 

 

 

 

 

 

 

 

 

reported

 

 

Adjustments

 

 

As adjusted

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,971

 

 

$

14

 

 

$

2,985

 

Reconciliation of net income to net cash provided by operating activities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

310

 

 

 

(11

)

 

 

299

 

Changes in assets and liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Deferred costs

 

 

(1,649

)

 

 

306

 

 

 

(1,343

)

Accrued compensation

 

 

(1,508

)

 

 

(362

)

 

 

(1,870

)

Deferred revenue

 

 

4,988

 

 

 

53

 

 

 

5,041

 

Net cash provided by operating activities

 

 

10,399

 

 

 

 

 

 

10,399

 

 

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 Securities and Exchange Commission (“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, “Income Taxes”.

7


 

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 believe the adoption of the new lease accounting standard will materially impact our consolidated financial statements by increasing our non-current assets and non-current liabilities on our consolidated balance sheets in order to record the right of use assets and related lease liabilities for our existing operating leases. We are in the process of determining the financial statement impact and are currently unable to estimate 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 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 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 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 three months ended March 31, 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:  

 

 

 

Three Months Ended March 31,

 

 

 

2018

 

 

2017

 

Recurring revenues:

 

 

 

 

 

 

 

 

Fulfillment

 

$

45,364

 

 

$

38,543

 

Analytics

 

 

8,259

 

 

 

8,235

 

Other

 

 

1,237

 

 

 

1,206

 

Recurring Revenues

 

 

54,860

 

 

 

47,984

 

One-time revenues

 

 

4,232

 

 

 

3,895

 

 

 

$

59,092

 

 

$

51,879

 

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

8


 

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 liability 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 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:

 

 

 

2018

 

 

2017

 

Balances, January 1

 

$

10,031

 

 

$

9,995

 

Invoiced set-up fees

 

 

2,581

 

 

 

2,795

 

Amortized set-up fees

 

 

(2,660

)

 

 

(2,674

)

Balances, March 31

 

$

9,952

 

 

$

10,116

 

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.

Deferred costs were $41.6 million and $39.9 million as of March 31, 2018 and December 31, 2017, respectively.  Amortization expense for deferred costs was $10.8 million and $10.7 million for the three months ended March 31, 2018 and 2017, respectively.  There was no impairment loss in relation to the costs capitalized for the periods presented.

 

9


 

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.

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 consolidated balance sheets.  Realized gains or losses are included in other income (expense), net in the 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 consolidated statements of comprehensive income.

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

 

 

 

March 31, 2018

 

 

 

Amortized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains (Losses)

 

 

Value

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

96,539

 

 

$

 

 

$

96,539

 

Certificate of deposit

 

 

7,680

 

 

 

0

 

 

 

7,680

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

15,226

 

 

 

(55

)

 

 

15,171

 

Commercial paper

 

 

12,459

 

 

 

(1

)

 

 

12,458

 

U.S. treasury securities

 

 

12,381

 

 

 

53

 

 

 

12,434

 

 

 

$

144,285

 

 

$

(3

)

 

$

144,282

 

Due within one year

 

 

$

141,811

 

Due within two years

 

 

 

2,471

 

Total

 

 

$

144,282

 

 

 

 

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 March 31, 2018.  We expect to receive the full principal and interest on all of these cash equivalents, certificate of deposit, and marketable securities.


10


 

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):

 

 

 

March 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

96,539

 

 

$

 

 

$

 

 

$

96,539

 

Certificate of deposit

 

 

7,680

 

 

 

 

 

 

 

 

 

7,680

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

 

 

 

 

15,171

 

 

 

 

 

 

15,171

 

Commercial paper

 

 

 

 

 

12,458

 

 

 

 

 

 

12,458

 

U.S. treasury securities

 

 

 

 

 

12,434

 

 

 

 

 

 

12,434

 

Total

 

$

104,219

 

 

$

40,063

 

 

$

 

 

$

144,282

 

 

 

 

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 three months ended March 31, 2018 are as follows (in thousands):

 

 

 

2018

 

Balances, January 1

 

$

51,613

 

Goodwill acquired during the period

 

 

 

Foreign currency translation adjustments

 

 

(583

)

Balances, March 31

 

$

51,030

 

 

11


 

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 included the following (in thousands):

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Carrying

 

 

Accumulated

 

 

Currency

 

 

 

 

 

 

 

Amount

 

 

Amortization

 

 

Translation

 

 

Net

 

Subscriber relationships

 

$

35,512

 

 

$

(20,828

)

 

$

(111

)

 

$

14,573

 

Non-competition agreements

 

 

2,560

 

 

 

(2,117

)

 

 

(12

)

 

 

431

 

Technology and other

 

 

2,289

 

 

 

(1,697

)

 

 

(19

)

 

 

573

 

 

 

$

40,361

 

 

$

(24,642

)

 

$

(142

)

 

$

15,577

 

 

 

 

December 31, 2017