SPS Commerce Inc (SPSC) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q4 2010 SPS Commerce earnings conference call. (Operator instructions.)

I would now like to introduce your host for today's conference. Mr. Friedman, you may proceed.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us in SPS Commerce's fourth quarter 2010 conference call. This is Todd Friedman from The Blueshirt Group. Joining me on the call today is CEO and President, Archie Black, and Chief Financial Officer, Kim Nelson.

Before turning the call over to the Company I'll read our Safe Harbor Statement. We will make certain statements today including with respect to our expected financial results, go-to-market strategy, and efforts designed to increase our traction and penetration with retailers and our customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings, as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available on our website, spscommerce.com, and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website, spscommerce.com.

During our call today we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share. In our press release and our filings with the SEC, each of which is posted on our website, you'll find additional disclosures regarding these non-GAAP and adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures.

And, with that, I'll turn the call over to Archie.

Thank you, Todd. And welcome, everyone.

We had a great end to our first year as a public Company. In the fourth quarter revenue was $11.9 million and EPS was $0.04. Adjusted EBITDA was $1.1 million. These results mean that for the year revenue grew 18% to $44.6 million, adjusted EBITDA grew 61% to $5.2 million, EPS for the year was $0.25, and non-GAAP EPS was $0.31.

The past year has been an exciting time for SPS. We've been able to continue our solid top line growth while delivering strong bottom line results as we increased investments for growth, particularly in sales and marketing. In fact, the fourth quarter marked a full decade of sequential revenue growth, a remarkable show of success driven by execution.

We continue to see momentum in our business, driven by increases in two major important metrics -- number of new customers and the total dollars our customers spend. And with the viral nature of our lead generation we continue to penetrate new sales opportunities through leads generated across our ecosystem.

In many ways, 2011 will look a lot like 2010. Our growth will be driven by continuing to add new customers and grow our wallet share. I'd like to take a few minutes and expand on a couple of key areas that we're focused on in terms of growth opportunities.

Some investments we're making today will have some impact on 2011. However, many of our investments are focused on creating a foundation to provide a growth platform for 2012 and 2013 and even beyond.

First, our total addressable market is extremely large, and our viral platform is the key to growing the business. Remember that our addressable market is comprised of the trading partners within the supply chain ecosystem as those are our recurring revenue customers.

However, the retailers are just as important as year in and year out they provide thousands of supplier leads directly to us. In North America we have most of the retailers already in our platform, approximately 1,500 of them. This has taken many years of perseverance and is an important competitive advantage. We have connected customers to nearly all the retailers in North America. While our viral platform will remain a critical source of growth, we remain focused on generating the supplier leads directly from these retailers in order to turn more suppliers into recurring revenue customers.

Let me give you a few statistics that demonstrate our progress so far. In 2010 approximately 350 retailers gave us at least some of their leads, and approximately 70 of those retailers gave us all of their leads. Three years ago a little less than 200 retailers gave us some of their leads and approximately 50 retailers gave us all of their leads. As you can see, we've been able to prove-out this growth strategy over the past several years.

There is tremendous opportunity to penetrate more trading partners within our existing platform, and we're confident in our ability to increase the number of new recurring revenue customers, as well as increase the revenue per customer every year.

To put this in context, the number of customers has doubled in the past five years while average revenue per customer has increased 50%. The investments we will make in this area have to do with adding sales personnel and to continue to build relationships with retailers and sell to suppliers, as well as further expand our business development opportunities, particularly with logistics providers and value-added resellers.

A second area of growth for us is the international opportunity. In Asia we will expand, we will further expand our presence and services primarily around the North America supply chain. We're just beginning in Europe, and it will take a longer time to produce tangible results, simply because a viral platform takes time to gain momentum. As our international platform matures retailers will provide leads in much the same way as in North America.

We currently are connected to approximately three dozen retailers in Europe so although we're still in the early stages we're making progress and we're focused on building out the platform. In addition, we believe the addressable market is similar to that in North America and we can have a significant presence internationally as SMB markets in both regions are vastly underserved.

And the third area for growth is through M&A. In the SMB market we are the clear market leader and there is significant opportunity for consolidation. We're focused on finding the right opportunities from an M&A standpoint. However, with the growth opportunities within our existing platform we can afford to be particular in this area. While we are first and foremost focused on organic growth and our strategic plan does not need M&A the right deals can accelerate our growth.

So, in summary, we're extremely focused on generating continued growth [straits] in the business. We ended this year with 22% recurring revenue growth over last year, and we're excited about the opportunities for 2011 and beyond.

We continue to foster the relationships within our ecosystem, as well as build new relationships internationally. We have a proven value proposition with the SMB market, and we are focused on driving higher revenue streams across our products.

Kim, over to you.

Thanks, Archie.

As Archie mentioned, we had a great fourth quarter. Revenue for the quarter was $11.9 million, a 19% increase over Q4 of last year, and represented our fortieth consecutive quarter of revenue growth. Recurring revenue this quarter grew 22% year-over-year.

The increase in revenues was a result of two factors -- an increase in recurring revenue customers and an increase in annualized average recurring revenue per recurring revenue customer. The total number of recurring revenue customers increased 13% year-over-year to approximately 12,400 recurring revenue customers at the end of the quarter.

For Q4 the annualized average recurring revenue per recurring revenue customer increased 9.5% to $3,249. Trading partner intelligence was approximately 2% of that increase year-over-year.

Total operating expenses for the quarter were $8.1 million, and represented 68% of revenue.

Operating income was $442,000.

Net income was $441,000 or $0.04 per fully diluted share. And non-GAAP diluted earnings per share in the fourth quarter, which excludes stock based compensation, was $0.06.

For the quarter adjusted EBITDA was $1.1 million compared to $706,000 in Q4 of last year. We increased our investments as planned, primarily in sales and marketing, to capture the growth in the marketplace.

Cash generated from operations was $847,000 for the quarter. We ended the quarter with total cash of $40 million.

CapEx for the year was $1.8 million or 4% of revenue.

Before turning to guidance, I'll recap the year. Revenue in 2010 was $44.6 million, EPS was $0.25, and adjusted EBITDA grew 61% to $5.2 million. Recurring revenue grew 22% for the year with trading partner intelligence delivering 200 basis points of that growth.

Now turning to guidance. For the first quarter of 2011 we expect revenue to be in the range of $12.1 million to $12.3 million or an 18% to 20% increase year-over-year. We expect fully diluted earnings per share to be in the range of $0.03 to $0.04 with fully diluted weighted average shares outstanding of approximately 12.9 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.05 to $0.06 with stock based compensation expense of approximately $325,000. We expect adjusted EBITDA to be in the range of $1.1 million to $1.2 million.

For the full year we expect revenue to be in the range of $51.9 million to $52.7 million, or a growth of approximately 16% to 18% over last year. We expect fully diluted earnings per share to be in the range of $0.16 to $0.20 with fully diluted weighted average shares outstanding of 13.1 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.29 to $0.33 with stock based compensation expense of approximately $1.8 million. We expect adjusted EBITDA to be in the range of $5.6 million to $6.1 million.

In summary, we have delivered forty consecutive quarters of top line growth. This consistent performance is largely driven by our 100% SAS subscription model, which provides visibility and recurring revenue streams. We increased both our number of recurring revenue customers and the average recurring revenue per recurring customer. We continue to execute and focus on a unique viral platform that gives us the competitive advantage in the supply chain world.

With that, I'd like to open the call up to questions.

Thank you. (Operator instructions.)

Our first question comes from Michael Huang of Needham & Company.

Thanks very much. Just a couple of questions for you guys. So, first of all, as the retail environment has shown some signs of life I was wondering if you could walk us through whether it might make it easier or tougher to get retailers to sell and enable campaigns on your behalf? And maybe you could just talk about how the retail environment impacts the model?

Yes, we are seeing a stability in the retail environment but, as we've stated in the past, we believe we're somewhat indifferent to the environment within retail. Obviously it affects our tactical sale strategies, but in down times like 2009 and in better times we see different puts and takes. But we think we're somewhat indifferent, and people are focused on slightly different problems and approaching things slightly differently. So while we're excited that our customers are going to be doing better we don't see that as a significant impact for SPS Commerce.

Okay, and I know you had highlighted that 2% of the returning revenue growth in 2010 was from TPI. Could you talk about assumptions for 2011? I mean is it fair to assume 2% again in 2011 or is it -- should be more meaningful than that?

The guidance that we gave is for total revenue. Underneath there there's obviously assumptions that we have as it relates to the product mix, customers, et cetera. But at this point what we've done is just shared the total revenue expectations the Company has.

Okay, and just, finally a last question with respect to what you're seeing out there in Europe. I know it's early but with any other retail partner that you've got out there, have any of them been able to give you a good chunk of their supplier leads or and have you seen any difference in the willingness to share leads versus what you see in North America? Thanks.

We haven't seen a significant difference in Europe. We think that there's an opportunity and we don't see any dominant players out there. We see the marketplace as probably what it looked like a few years ago in North America. And we have had a few, we have two retailers now that give us all their leads in Europe.

Great. Thanks very much.

Our next question comes from Tom Roderick of Stifel Nicolaus.

Hey, guys. This is actually [Gore] on for Tom. I was hoping you guys could give us an update on the competitive environment out there? You've had some competitors that have come out and sort of be a little bit more vocal and mentioned you by name. I just wanted to see if it's gotten a little bit tougher out there for you guys?

We really haven't seen a change in competitive environment. Again, we tend to see the larger legacy players out -- GSX and Inovis, which recently merged, and then Sterling which was sold to IBM. But again they play with the $500 million and above. So we don't see them that often. And then we see a whole host of smaller players. We haven't seen anybody make anything significant, and we just really haven't seen a big change in the competitive environment.

I've got it. And you brought up M&A, the use of -- the potential use of cash. Can you maybe elaborate on who you'd look to perhaps acquire, would it be one of these smaller players in the EDI space in North America? Would you pass them up to go international? Maybe even more complementary solutions?

And so our first and primary focus today is really around customer acquisitions or international, which again is a customer acquisition but gives us a platform to accelerate growth. So it would be around competitors on the smaller end that would look like a small SPS Commerce. And, again, we think that the primary focus for Management Team is organic growth because we have such a large total addressable market. So that's going to be first and foremost. The other acquisition target really is potentially around international. Again, we're primarily focused on organic growth, and we think that we can grow this business to a very significant business without acquisitions.

I've got it. And then just one final question for me. Have you seen any growth in the number of retailers who are pushing all their leads through you? I know you talked about more retailers are pushing some leads to you, but in the past you talked about sort of a couple of retailers maybe pushing all their leads to you. Anything you can add on that metric, as well?

Well, we're really making progress on both those retailers that give us some leads and then those retailers that give us all their leads. And a lot of times they go directly from no leads to all the leads, but a lot of times they stop in between. And as we had mentioned in the call from a few years ago we've grown those retailers that have given us all their leads from about 50 to 70 or about a 40% growth rate and the number of retailers that gave us some of their leads from 200 to 350.

Got it. Thank you very much.

Thank you.

Our next question comes from Laura Lederman of William Blair.

Yes, thank you for taking my questions. I have a few. One is sales headcount, where does it stand today and where do you expect it to be by the end of the year and where is it versus a year ago?

Sure. So our headcount as of the end of 2010 was 84 quota carrying sales reps. That compares to 60 at the end of the prior year. So 60 as of the end of 2009, 84 at the end of 2010. We will continue to add resources, particularly in sales and marketing, as we see the appropriate opportunities based on the total addressable market that is there.

Okay, so there's no plan of like 20% or 15%? It's going to be more ad hoc?

Right. We'll continue to add resources. You shouldn't expect the -- if you look on it from a percentage basis in 2010 off of those two numbers that would be a 40% increase. And you shouldn't think of it in those terms. We usually think of it in terms of we'll continue to add resources where the opportunity makes sense.

Okay, that's helpful. Also, if you look at '011 and, frankly, beyond would you expect a relatively even split of the growth coming from the addition of new customers? Also from ASPs, should those be equal or would you expect more from new customers? And assuming no acquisitions, you know, just to make the question a little easier.

Right. So both will be very important relative to what drives recurring revenue, and any given quarter or time period sometimes one grows faster than the other. But the key takeaway is both are equally important, both are definitely important relative to what drives that recurring revenue growth.

Okay, and then one other and I'll pass it on. Can you give us a sense of how active you are in looking for acquisitions? Is it a big pipeline, you know, a lot of companies to look at? Or is it really just a few here and there to look at, so there's just not as many opportunities?

So, as Archie had mentioned, first and foremost we think there's a very large organic growth opportunity so that is our primary focus. That being said, should the right opportunity present itself certainly we would look for potential acquisitions, primarily around the customer acquisition side.

Looking at the competition, there's a whole host of smaller software as a service companies that do what we do but just obviously on a much smaller scale. So as we are looking at potential candidates that's where it would be, it would be in the customer acquisition area and the smaller players.

I guess that begs another question which is if you acquire a competitor to get their customers what do you do to their technology? How hard is it to move them to your platform? Would you expect that some of the acquisitions might be a technology that you would actually end up using?

First and foremost, if you do an acquisition it's really important that you have one standard platform, that you're not running multiple platforms. Because that's where you get the customer experience and obviously the leverage in the model.

What we would look to do, which we've done in the past, is you would look to have really a technology [GAAP] analysis to find out what differences there are in the two platforms, that you end up with really a best of breed platform, which is typically an improvement to your current platform. And then over a period of time you migrate those customers to our platform. It will depend on the type of company and the type of customers they have and the sophistication of their platform to determine how easy or hard that is for the customers.

Thank you so much.

(Operator instructions.)

Operator, do we have some more questions in queue? Nancy, are you there?

Yes, sir. Our next question comes from Richard Davis of Canaccord.

Hi. Thanks. So if you guys, Kim, just to kind of follow-up on Laura's question there, line of questions, so if you added 40% to your sales headcount last year is it, therefore, logical to assume that productivity or revenues per sales person will be the primary driver of the 20% organic growth that you expect in 2011?

So, Richard, let me take that question. When we look at adding salespeople to our model typically there's a two to six quarter ramp for salespeople to become productive, and then obviously we're a recurring revenue Company so it takes time again for that to become additive. So when you look at sales productivity and sales add you really have to look at what you were doing two to six quarters earlier is a better indicator.

And also then the other thing that's important is the type of salespeople. One of the things we did in 2010 is we really started to segment our sales staff and we hired a disproportionate number of more junior sales reps.

And then is the -- so what I'm trying to figure out is in 2012, because 2011 the earnings guidance is not that high because of the investment, is the gating issue to some degree on EPS growth operating leverage on G&A because it's relatively high? And I understand public company expenses and stuff like that. Is that the way to think about it? I know you're doing some investment in Europe and that's probably a breakeven initially, at least at best. So because what I'm trying to figure out is it logical, therefore, and I know you're probably skeptical about doing guidance out that far, but why couldn't this be a 25% earnings grower in years 2012, '13, '14?

So, Richard, here's how I would look at it. If you take our Q4 2010 the implied or the actual EBITDA margin in Q4 was 9%. Really you should be using that as your starting point in which you will be seeing margin expansion. And as we've said in the past we anticipate achieving 23% EBITDA margin expansion within five years. What you can't do is look at full year 2010 to compare because that's a bit of an apples and oranges because we didn't have public company costs and we were behind in some of our hiring earlier in the year.

So I think a good way to help you is if you start with the Q4 2010 number of 9% and then you say, well, what was the guidance the Company just gave for 2011. The implied EBITDA margin guidance for 2011 was 11% to 12%. So you'll see that we're demonstrating the pretty steady progress from Q4 2010 to achieving that 23% EBITDA margin within five years.

Got it. Perfect. That -- yes, I was just trying to gauge it, so that's what I wanted to hear. Thanks very much.

Our next question comes from Scott Berg of Feltl & Company.

Hi, this is [Ben Haynor] on behalf of Scott Berg. I was just wondering if you could provide any color to the adoption of TPI during the fourth quarter relative to prior quarters?

I think really if you look at 2010 it was relatively consistent throughout 2010. We feel good about the progress we made throughout the year and through all four quarters really. And then also, again, I can't underestimate how big a competitive advantage we're seeing Trading Partner Intelligence be as, especially as we compete against both the legacy software providers and the smaller softwares and service providers. We're seeing that as a bigger and bigger competitive advantage, and we're using that competitive advantage even for those that aren't buying it.

Okay, great. And then could you give us the number of new customers or potential customers that were tested during the fourth quarter and how that number relates to prior quarters?

We show the total net customers so that you can see that we added just approximately 300 sequential between Q3 and Q4, so our net customer number was approximately 12,400 compared to just over 12,100 in Q3. In any given quarter we are running a variety of enablement campaigns, so inherent in that number is always going to be a healthy mix of activities that we're doing with particular retailers. As well as if you remember when Archie talked about the retailers, we have certain retailers that give us all their leads and some retailers that give us some of their leads. The combination of that really drives what you see in the net customer add numbers in any given quarter.

Sure. Understandable. All right. Well, that's all I had. Thank you very much.

our next question comes from [Jeff Van Rhee] of Craig-Hallum.

First, maybe just back to the sales adds, I just want to maybe dig a tad deeper there. You've got a lot of different sort of aspects to the sales organization. You obviously are going to be spending in the forward year maybe more so than people had thought. If you look at where you're going to spend can you give us a little more clarity as to which segments within the sales organization you're really going to be putting emphasis on?

Yes, we're really adding in all aspects of our sales organization. First is the Retail Group that is going after retailers and selling, trying to get leads from those retailers. So we've added in that Group aggressively.

The other Group is Supplier Sales, which is taking those leads and then also upselling our existing suppliers. We continue to add in that Group. Again, that Group we've been very aggressive in segmenting the sales organization and hiring more junior people to create a career path and also give them a better ramping experience within SPS Commerce.

And then the third Group we're adding aggressively to is our Business Development Group, which is selling both to the logistics providers and the value added resellers. So we are adding in all aspects of our business.

Okay, so no particular focus. All right. And then just two other brief questions. Just on the pipeline as you look at what's working through the pipeline now any notable changes in where they're coming from or who is starting to filter into the pipeline or anything else that draws your attention or captures your attention?

Well, the trends tend to be somewhat consistent over the last year. There's a number of different things that retailers are looking at initiatives. First, the e-commerce initiatives continue to be there. Also the grocery initiatives because they are trying to become more sophisticated on their supply chain, we're seeing initiatives there.

What's interesting with our lead generation about half of our lead generation, again, is from day in, day out leads from retailers that are not associated with any larger programs. And so we're tending to see the same types of things within retail as we did over the last two, three, four quarters.

Okay, sounds good. And just, lastly, then on the TPI product have you -- you certainly have had it out there long enough, gotten some feedback. And what changes, if any, have you really made in response to the initial customer reaction as it relates to that product or how you present it?

Yes, we've made significant advancements and improvements to the product over the time period since we've first introduced it, as you would expect with any new product offering. Interestingly enough, again, our target market is the small, medium business, $500 million and below. Interestingly enough, I think the first few major releases was really to make it simpler and give them less information.

What they really wanted was some more executive alerts and executive dashboards where you just push information to people once a week, with very, very simple dashboards that they could look at. So it was really around more less sophistication and less data than more. But we've continued to tweak. We've continued to add fields and get feedback from our customers.

Okay, appreciate it. Thanks.

I'm not showing any further questions at this time. Please continue with any closing remarks.

Thank you, everyone, for attending today, and we look forward to speaking with each of you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Thank you, and have a great day.