SPS Commerce Inc (SPSC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q2 2011 SPS Commerce earnings conference call. At this time, all participants are in a listen only mode. Later, we will have a question-and-answer session, and instructions will follow at times. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Todd Friedman of The Blueshirt Group. Sir, you may begin.

Thanks, operator. Good afternoon, everyone, and thank you for joining us on SPS Commerce's second-quarter conference call. Joining me on the call today is CEO and President, Archie Black and CFO, Kim Nelson. Before turning the call over to the company, I will 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 other 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.

But in addition, we are providing an 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 will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures, including reconciliations of these measures with our comparable GAAP measures.

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

Thanks, Todd, and welcome, everyone. We had a great second quarter with continued momentum in the business and solid customer additions. This was bolstered even further by the acquisition of Direct EDI, which increased the number of recurring revenue customers and strengthened our position as one of the industry's largest and fastest-growing providers of SaaS supply chain solutions.

In the second quarter, revenue was $13.9 million, adjusted EBITDA was $1 million, and non-GAAP diluted earnings per share, which excludes stock-based compensation and amortization, was $0.04. The growth we are experiencing validates a two-pronged strategy that has made SPS Commerce so successful in the past -- building our customer base from the thousands of leads that exist within our viral platform and capturing more wallet share from our existing customer base.

Let me address each of these in the context of the growth we are seeing within our business.

First, we build our recurring revenue base from existing leads within our viral platform. This growth has accelerated. For historical context, 2009 recurring revenue growth was 18%. And in 2010, recurring revenue growth was 22%. For the first half of 2011, recurring revenue growth was 24% organically and 27% when you include Direct EDI. We attribute this acceleration to two things.

First, the additional investment in sales and marketing we've been making over the past year is paying off. And second, the viral nature of our platform is working. As we add more retailers and suppliers to the platform, we have more customers to sell to.

The second prong of our growth strategy is to increase our revenue per customer. We do this by up-selling and cross-selling within our install base. For example, one supplier can be doing business with multiple retailers in our network, in which case we generate additional revenue from each of those touch points.

We also are developing new products to sell to our customers, such as trading partner intelligence, which create the opportunity to drive additional wallet share growth in the future. Since TPI was first introduced, we have gradually been up selling that solution to our current customer base. For the first half of 2011, TPI now accounts for 9% of all new business sold.

To fully illustrate the growth potential with TPI, let me give you an example of just how compelling this product can be for our customers.

One of our retailers, [El-Treck] recently purchased trading partner intelligence. Their shipments go directly to the end customer and our TPI visibility reports enable them to watch orders closely and ensure they are being filled in a timely manner. By using our solution, El-Treck is able to hold their vendors more accountable, driving on-time shipping and improved fill rates, two factors that can greatly reduce operating inventory costs and improve customer satisfaction.

Another area of growth for us is M&A as we see an opportunity to lead the consolidation of our fragmented market. In May, we acquired Direct EDI, a provider of cloud-based integration solutions well known in the industry for its leading edge, easy-to-use technology and strong customer focus.

This acquisition allowed us to add 1800 new recurring revenue customers, which delivered a significant boost to our network and instantly created more viral opportunities to grow our recurring revenue per customer. With the addition of Direct EDI's customers, the growth opportunity within our platform is vast. And although we've only just begun to expand our presence into Direct EDI's install base, the customer feedback has been great.

For example, Lenovo was a Direct EDI customer who, shortly after the acquisition, expanded their deployment to include TPI. Lenovo now has a complete solution touches more points of entry into their supply chain network with better visibility into inventory and point-of-sale data.

In addition, they added more retail connections to SPS Commerce's network, enabling them to remain compliant and keep costs down. This is just one example of how we've been able to quickly integrate our newly acquired customers and increase recurring revenue per customer.

In summary, we've had a great first half of 2011. We saw momentum in the business with acceleration in recurring revenue. We captured additional market share in the SMB market through our EDI acquisition and we're driving higher revenue streams across our products. We continue to make investments in sales and marketing to drive growth, which is reflective of reflected in our results to date. All in all, we had a great quarter and remain focused on executing to our growth plan. Kim, over to you.

Thanks, Archie.

As Archie mentioned, we had a great second quarter. Revenue for the quarter was $13.9 million, a 27% increase over Q2 of last year and represented our 42nd consecutive quarter of revenue growth.

The increase in revenues is a result of three factors -- an increase in recurring revenue customers, an increase in annualized average occurring revenue per recurring revenue customer, and the incremental revenue provided by the acquisition.

Recurring revenue this quarter grew 29% year over year. The total number of recurring revenue customers increased 30% year over year to approximately $15,300 at the end of the quarter, which includes 1800 Direct EDI customers.

For Q2, the annualized average recurring revenue per recurring revenue customer increased 5% to $3,321. For an apples-to-apples comparison, if you exclude Direct EDI, this increase would have been 8%.

Total operating expenses for the quarter were $10.2 million and represented 73% of revenue. This increase is due to the additional costs associated with the acquisition of Direct EDI as well as additional investments in sales and marketing to drive growth in the business.

Looking at the individual line items, sales and marketing was $5.9 million. General and administrative expenses were $2.8 million. R&D was $1.4 million.

Operating loss was $41,000 and includes deal-related costs associated with the Direct EDI acquisition. Net loss was $109,000 or $0.01 per fully diluted share. On a non-GAAP basis, which excludes stock-based compensation and amortization, net income was $501,000 or $0.04 per share. For the quarter, adjusted EBITDA was $1 million, which was at the top in of our range compared to $1.3 million in Q2 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 $566,000 for the quarter. We ended the quarter with total cash of $30 million. CapEx for the quarter was $501,000 or 4% of revenue.

Now turning to guidance, for the third quarter of 2011, we expect revenue to be in the range of $14.5 million to $14.8 million or a 26% to 29% increase year over year. We expect fully diluted earnings per share to be in the range of minus $0.01 to break even, 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 $500,000 and amortization expense of approximately $260,000. We expect adjusted EBITDA to be in the range of $1.1 million to $1.3 million.

For the full year, I'm pleased to announce we are increasing our top-line guidance. We believe the additional investment we are making in sales and marketing is reflected in our results, and we will continue to invest here to drive top-line growth. We expect revenue to be in the range of $56.1 million to $56.6 million, or growth of approximately 26% to 27% over last year.

We expect fully diluted earnings per share to be in the range of $0.03 to $0.06 with fully diluted weighted average shares outstanding of 12.8 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.21 to $0.25 with stock-based compensation expense of approximately $1.8 million and amortization of approximately $650,000. We expect adjusted EBITDA to be in the range of $4.7 million to $5.2 million.

In summary, we have delivered 42 consecutive quarters of top-line growth. This consistent performance was largely driven by our 100% SaaS 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 our unique viable platform that gives us the competitive advantage in the supply chain world.

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

(Operator Instructions). Richard Davis, Canaccord.

Great thanks. Maybe just a little bit more color on the increase in sales and marketing. Are you increasing headcount? And if so, kind of by how much? And are you able to -- and have you felt that you have gotten kind of a better throughput from your existing sales force as well? Just trying to kind of put a band around that side of the equation.

Sure. We did in the quarter add sales and marketing, both shifts, as we've mentioned in previous calls, that we would take that opportunity to do that based on the opportunity that we saw.

As it relates to Q2, we exited the quarter with 115 sales folks or quota-carrying folks. That compares to 93 from prior quarter.

And when you look at the underlying data of the sales force, you are going to see a rise in productivity on the more mature salespeople, those that have been here a year or more. Overall, the productivity is remaining fairly consistent, but that's because of the nature of so many new people. So overall, we are able to keep the productivity consistent even with increased spend. So we are thrilled with how that's worked out so far.

And is the prospective growth in headcount kind of roughly the same pace that you have had over the last few months? So that's kind of how we should notionally think about it? In other words, that 22% to 25% rate?

Sure. We're taking the opportunity to add as many folks as we can. It's still within our profit commitments that we have made as an organization. So what you have seen the last two quarters is we have certainly had the opportunity to add folks.

There's a lot of opportunity out there as we see in the business, and we will continue to add folks to the appropriate level we can while managing the profit expectations for the year.

And then the one quick last question, do you have enough space? As you keep adding folks, will you stay in the Minneapolis area? Do you envision at some point opening up an office elsewhere?

Right now, as far as recruiting is going, we think we're in a really good position in Minneapolis. The majority of the people we hire are right out of college, and this is a world-class education system here, so we are really seeing the candidates. And contrary to where we were really three, four years ago, we are not having any trouble finding the caliber of people we want at this point. And I think the other thing is the going public did help the recruiting as well; it's a little more high-profile.

Got it. That's perfect. Thanks very much.

Laura Lederman, William Blair.

Thank you so much for taking my call. Nice quarter on the revenue line. Can you talk a little bit about why TPI was up so much in the quarter? 9% of new bookings seems to be a lot higher than it was before. I think it used to be roughly 2% of revenue. I realize I'm mixing apples and oranges with revenue and bookings, but can you talk about why the sequential increase and would you expect it to remain at almost 10% of bookings going forward, which I guess is a pipeline question for TPI.

Thanks, Laura. What we're really seeing is we are seeing an acceptance, and we are seeing that continuing to have acceleration. And it's part of the reason our revenue is accelerating.

It really is part of each and every sales cycle today. We pitched Trading Partner Intelligence mainly because we think it's a good long-term value for the customers whether they buy it or not. And two, it's a huge competitive advantage for us. So it's just becoming more and more natural, and people have seen it longer. So there's a whole host of reasons, and I would expect it to continue to perform quite well.

Shifting to another question, this is really more of a housekeeping, can you talk a little bit about internal revenue growth for the year, and internal revenue growth in the quarter and how much do the acquisitions -- I think [we will amount] on what -- what were we battling this quarter? $800,000; was that roughly correct for the contribution from the acquisition in the period?

Sure, Laura. If you look at our results and you're trying to get at more of the organic or excluding the Direct EDI, the recurring revenue growth was the 24% of revenue. That compares to the 29%, which is our reported results, which include Direct EDI. So on just the internal without the acquisition, 24% growth is the recurring revenue growth number.

Okay, thank you. Sorry. I have three reports after the calls, and one of them was not as pretty as yours are, so it was kind of a stressful afternoon.

Final question -- can you talk a little bit about acquisitions and is it something you are actively looking at? Is it more opportunistic? How full is the pipeline? Just kind of the color on acquisitions going forward?

Well, I don't think anything has changed in the past than the fact that we obviously think we have a huge organic growth opportunity and we will continue to focus on that. We would like to make as many acquisitions as we can at the right price and the right assets, so we will continue to actively look. And if we can do that, right price, right assets, we will make as -- we will continue to be acquisitive.

From a process standpoint, we have capacity to make multiple acquisitions per year because of the way these lay out. So we think we have capacity, and if we can find willing sellers, we'll enter into deals.

Product question, actually. Sorry about that. Can you talk a little bit about the EPS guidance and the change, and that was all dilution from the acquisition?

That's correct. So if you look at the EPS change, it is because we now have -- we are -- because of the purchase price allocation, there is amortization now, and I had provided that guidance for the year of approximately $600,000 as the amortization for the year associated with the acquisition.

I just wanted to make sure there was nothing else there. Thank you for a nice quarter.

Tom Roderick, Stifel Nicolaus.

Hey, guys. Good afternoon. So, Archie, just wanted to follow up on the question on TPI; Laura just asked a little bit about that, but maybe if you could provide some apples-to-apples comparison, it would be helpful to us in terms of thinking about that 9% a year ago, what did that look like as a percentage of new bookings?

And when you look at what's driving those bookings on the TPI side, is this predominantly new customers purchasing TPI in conjunction with the core solution? Or is it predominantly an upsell to the installed base at this point?

Yes, the 9% on an apples to apples, I don't have the number from different quarters and different year periods, but it is an acceleration in the number. And that is part of the reason of the overall acceleration of the revenue. It is really a mix of really three types of sales, I would say is, one, an installed base that existed pre Trading Partner Intelligence that we started selling to and now is buying.

Those customers that were as part of their original sale, we proposed Trading Partner Intelligence as their long-term solution, are now buying. And then also, new customers that are signing up with Trading Partner Intelligence as part of their entire suite of services right out of the start. So it's really all three are driving that number.

Are you seeing any evidence that TPI makes you more competitive as you go into larger deals and move upstream in certain occasions? Or is this still really sort of priced and meant to roll in with the sort of low-end customer base?

I would say this, that it is a competitive advantage in all aspects of the business. I think the higher end of our marketplace is more willing to buy and pay for Trading Partner Intelligence. We have more success at the higher end than the lower end, so they are buying more. But I think from a competitive standpoint, it's an advantage in both marketplaces. It's just more who's compelled at this time to buy.

Okay. I know it's early with Direct EDI, but any feedback you can offer to us regarding how the integration has gone thus far? Any early feedback from their customer base on their willingness to move over to your platform or to be up-sold with additional solutions? Just any feedback you have there.

And Kim, if you've got the number of sales heads that they brought over, I would just be curious; that jumped from 93 last quarter to 115 sales reps. How many of those were Direct EDI?

The early feedback is very positive. Just to remind everybody, this is about a 12-month transition for the acquisition. And the way that rolls out is that the very first phases are where the product management teams and the development teams really do a gap GAAP analysis and find out, are there any features, functions in our platform that the Direct EDI customers are enjoying that they would enjoy if they went onto our platform. So it's really an opportunity for us to make sure that we continue to have the best product in the marketplace. Once that's complete, the product is upgraded. At that point then we start transitioning their customers over to our platform with that taking really about a 12-month process.

Okay, okay.

Hey, Tom, for the second part of your question, the Direct EDI folks, there was around 4 people that joined, so the majority of the increase was as related to recruiting folks right out of college to join the organization.

Any -- what does the international component of those 115 heads look like right now?

It is very skewed to North America. We have presence over in the Asia area. And -- but most of our sales folks are here in North America as you would expect for where we are as a business right now.

Got it. Perfect. That's it for me. Thanks, guys. Nice job.

Michael Huang, Needham & Company.

Thanks very much. A couple quick ones -- so first of all, in terms of the new customer annual pricing, how was that trending given it seemed that you are seeing some TPI at the get go? Is there any notable trends in any direction there?

I'd point you to the metric that we show which is that recurring revenue, per recurring revenue customer. For this quarter, it was 5%. But part of that was a bit skewed with the Direct EDI acquisition. So Direct EDI, the average ASP for those customers was about 25% to 30% less than ours. So for more of an organic or an apples to apples comparison, that ASP was 8% year-over-year growth.

Okay. So is it fair to say that you haven't seen any meaningful change with respect to how new customers are spending with you at the get go?

Well, I would tell you there's more customers that are buying Trading Partner Intelligence today out of the get go than they were a year ago, especially as we gain momentum, and that's one of the reasons why we are gaining momentum within the recurring revenue of growth, is because people are buying it out of the get go. But we're also selling the people the Trading Partner Intelligence that bought a year ago and that bought when we didn't have Trading Partner Intelligence.

Okay. And just kind of drilling into the ARPU gains a little bit, I'm not sure if you ever split this out, but could you help us understand how much of that ARPU growth is coming from either additional product sells or supplier connections? And how much actually is coming from anything else?

So we show the number in total, which is the 5%, or the more organic number, which is 8%. Underlying there, obviously, what weighs into that is the number of connections that a customer has. And on an organic basis, that continues to grow the average between 3 to 4 connections. then on top of that, you have the upsell opportunity with Trading Partner Intelligence. As Archie mentioned, that did represent 9% of our new sales in the quarter and has continually been accelerating.

So I would look at that, the Trading Partner Intelligence side as more of an upsell off of our sort of core product offerings. So all of them are relevant and important relative to what's driven that ARPU, as you refer to it, to be increasing year over year.

And last question for you, just in terms of conversion rates that you are seeing on the supplier leads that you have, are you seeing any meaningful trend there? Is it getting easier to convert these leads, or is it getting more challenging? Is it pretty flat with what it's been?

We're actually seeing overall slightly shorter sales cycles, some very quick sales cycles. A lot of that is just as you look at cloud-based solutions, are being more accepted and really hadn't been accepted at all within the supply chain sector. So we are seeing that appears to be helping. And overall, sales cycles are slightly shorter than they were a year ago.

Great. Thanks very much.

Patrick Walravens, JMP Securities.

This is actually Greg McDowell on for Pat. Thanks for taking my questions. One quick one for Kim and then I have one for Archie.

Kim, can you give us the absolute contribution that you expect from Direct EDI for the year in both the recurring revenue line and the non-recurring revenue line?

So, when we give guidance, we give it in absolute. When we did the Direct EDI acquisition, we had provided updated guidance, so by default, you can back into what that guidance was for Direct EDI. And we gave that guidance, at our mid-May conference call, the implied guidance was going to be anywhere between $2 million to $2.3 million for the year as it relates to Direct EDI in total. And at this point now, we're just -- as we provide updated guidance, Direct EDI obviously is part of it, but we've been -- what Direct EDI is doing is in line with what our expectations are.

Okay. So you're not going to break out the -- it was $2.2 million to $2.3 million, but you're not going to break it out for us?

The guidance that we gave on the May conference call was between $2 million to $2.3 million, was the Direct EDI. Now that we have completed the acquisition, it's just sort of part of our business now, so it's reflected within our company guidance that we have given.

Got it. Great. And then Archie, could you just give us an update on what competitive dynamics you are seeing out there in the marketplace? Any change?

We are not seeing drastic changes in the competitive landscape. I think that as we become stronger, as we went public and as we brought out new products such as Trading Partner Intelligence, I think our leadership is becoming more and more evident in a bigger and bigger part of our story.

And especially as we talk about the entire ecosystem, you know we've talked about we have a dedicated sales group to logistics, and we have a dedicated sales group to the channel sales group. As we surround, truly surround, that entire ecosystem, that really is the network, not just the retailer network, but the entire ecosystem network is becoming a competitive advantage for us more and more every day, so that's the biggest dynamic. Otherwise, it's really the smaller Software-as-a-Service players and the old legacy players that we see periodically.

All right. Thanks.

Scott Berg, Feltl and Company.

Nice quarter -- a couple of brief ones here. First of all, on the customer additions for the quarter, I know you had mentioned that Direct EDI brought over approximately 1800. Can you give us exactly what that number is? Just want to break apart what was organic and what came over from the acquisition.

Sure. It's 1,809.

That's pretty close. Thank you.

And your accounts receivable balances were higher in the quarter. I assume that was the result of the customers you brought over from the acquisition?

As the business accelerates, and so by default, and you can tell from our customer adds, both organically and with Direct EDI, it's a nice customer add month, that as your business is growing, that that is going to add, right, to your absolute accounts receivable balance as your overall business grows.

Okay. No real change or we shouldn't expect a change in DSO's necessarily?

That's correct.

And then my last question is on the right level of cash. You spent about 25% of your outstanding cash balance on the acquisition during the quarter. What's the right level of cash going forward given that you are -- have positive free cash flow?

Sure. So I would say since we are positive cash flow, technically, we do not need cash to run our day-to-day business since we are cash flow positive. So, the right level you need to run the business might be a different answer than from an external perspective, but I would say probably somewhere in the range of around $15 million or so, not needed because we are cash flow positive, but that feels about right level.

Okay. That's very good. That's all I had. Thank you.

Jeff Houston, Barrington Research.

Thanks for taking my questions. To begin with, I wanted to drill a bit deeper into the acquisition. Since Direct EDI didn't have as broad of a solution as SPS, which of your products do you think will be the easiest to cross sell or up sell into that acquired base?

I think it's going to be a host of all the solutions, the overall retail network and then also the other parties within the supply chain, the third-party logistics providers, the sourcing companies, all those will be compelling events. It's really going to be customer by customer and then Trading Partner Intelligence; as we mentioned on the call, we already had, right out of the gates, one customer that was trying to figure out how to solve a specific problem. So I really think it's going to be customer by customer as to which they buy, and I think it's going to be a combination of all. And over time I think it will be -- all three can be meaningful, just like they are in our customer base.

Got it, thinks. And then separately, regarding integration with financial systems such as NetSuite, and I think that you just announced another one with Sage a few weeks ago -- besides integration, how do these relationships work? Do you refer clients to each other? And if so, what is the revenue share? Or is it purely just integration?

Yes, in general, there's two different types of way you work with a different ERP system. Somebody like NetSuite, we have a corporate relationship because that's the way it's sold. In the case of Sage, it's really in with the systems integrators and the value-added resellers. And there's in general, a short-term revenue share for lead generation. And it's really a fragmented marketplace, but it is becoming a bigger and bigger part of our lead generation as the channel sales, and we see that as continuing to be a bigger and bigger part as we will continue to invest aggressively into that group.

I guess that leaves the question, what does the channel represent now, and where do you expect it to grow over time?

Sure. If you look at the quarter and you say how much of that, of the business, the new business that we are received, where did it come from? About 10% came from channel sales this quarter.

Do you have a target for that over time, where you want to get that percentage to?

Well, I think it will continue to grow as a percentage. I want to have the rest of the lead generation continue to grow as well, so hopefully they are chasing a tough target, but I think it will continue to grow. Really it was almost nil two years ago.

Okay. Thank you.

(Operator Instructions). Saurabh Paranjape, Craig-Hallum.

Nice quarter. I'm dialing in for Jeff. I had a couple of questions on TPI and then a couple more follow-ups.

First, on the TPI, do you still feel like you could double the ASP compared to a typical customer that does not have TPI? And then, second to that, do you think that you could -- when do you think that you could hit 10% of revenues on the TPI product?

Yes; the first part of the question is, does the customers that are purchasing Trading Partner Intelligence, it is, and it's consistently approximately double the revenue from those customers. So that continues to be consistent. We continue to have more data points supporting that.

As far as what percentage goals, we're not giving guidance as far as specific product lines, but we think it can continue to be a more and more meaningful part of our revenue stream, and again, it is a reason why our revenue continues to accelerate.

Okay. And then on the supplier front, how many connections on average does a typical supplier have with retailers? And where do you think that number could go in the near term?

The average is between 3 to 4, and that will just -- that -- because we have all different types of customers. Some customers are small and will only have one connection. We have other customers that have over 100 connections, so the overall average is between 3% and 4%, and it tends to trend up over time.

Okay. And then lastly, can you give us an update on the number of suppliers -- I'm sorry, number of retailers that you have exclusive relationships with? I believe the number last you gave was 190?

No, we -- the last numbers, it's in the 70's, the number of retailers where we get all their leads. And that continues to move up.

Okay, so that was 70 before?

Yes.

It was 70 before. I don't have the exact number -- something slightly above that.

Okay. That's all I had. Thank you.

Thank you. I show no further questions in the queue. I would like to turn the conference back to Mr. Archie Black for closing remarks.

Thank you very much for your support this quarter. We're excited about where the business is going and look forward to talking to you in the coming months.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.