SPS Commerce Inc (SPSC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce Q3 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Todd Friedman, Investor Relations. Please go ahead.

Thanks, Operator. Good afternoon, everyone, and thank you for joining us at SPS Commerce's third-quarter 2011 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'll read our Safe Harbor statement. We'll 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 results and 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 or invest 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 and 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.

Thanks, Todd, and welcome, everyone. In the third quarter SPS continued to execute and deliver strong results. We are seeing momentum with new and existing customers throughout our target markets, as more and more companies recognize the value of our solutions and join our viral network of trading partners.

The supply chain is one of the last areas to fully embrace software as a service, and as the largest SaaS solutions provider in this very large market, we believe we will capture a significant share of the market opportunity in the years to come. Our SaaS leadership also allows us to be a consolidator in the space, as demonstrated by our acquisition and integration of Direct EDI.

We continue to look for additional acquisition opportunities. On today's call, I'm going to talk about the factors driving our success and look back at how this business has grown in the short time since our IPO.

I'm also going to spend a few minutes on the macro environment, which was a frequent topic of conversation in our recent investor meetings and where SPS has a strong business model that insulates us from some potential economic swings.

Looking briefly at the financial results, in the third quarter revenue was $15.5 million and adjusted EBITDA was $1.5 million. We have delivered nearly 11 years of consecutive quarterly revenue growth, a track record that illustrates the strength of our business model and the focus of our go-to-market strategy.

What is more interesting when you look at SPS Commerce is that we have taken a business that was known for its reliability and consistency and added a layer of accelerating growth on top of that strong foundation to create a more dynamic business model and a more exciting investment story.

Our approach to growing SPS Commerce is to expand our customer base by leveraging the thousands of leads that exist within our viral platform and capture more wallet share from our existing customer base. Once again, we delivered success in the quarter against both of those objectives.

We grew the number of recurring revenue customers 31% over Q3 last year to a record 15,896 customers. That total number of recurring revenue customers is 40% higher than six quarters ago when we went public. As we have described in the past, as we add more customers to our network they bring additional trading partners and additional customer leads, driving a highly efficient viral marketing engine that keeps our cost of customer acquisition low and allows us to focus on sales and marketing investment on expanding distribution and extending our reach.

The second prong of our growth strategy is to increase our revenue per customer. We do this in a number of ways, by adding more solutions than we can sell to our customers and by helping our customers connect to more of their trading partners. These two metrics have driven an acceleration in our recurring revenue growth which has increased 56% since we went public.

For reference, recurring revenue was growing around 18% year over year when we went public. We are seeing a number of factors drive this growth. One is the widespread adoption of product solutions to solve mission critical business needs.

As I mentioned earlier, the supply chain is one of the last software spaces to adopt the cloud, and we are squarely positioned to disproportionately benefit from this trend. Our IPO certainly helped as it gave us a larger profile in the space, helped raise our awareness and cement our market leadership.

Second, new products like Trading Partner Intelligence are driving higher revenue streams throughout our customer base. Third, over the past year we've been able to increase investments in sales and marketing to continue to capture future growth. As our viral platform expands, so does the number of leads that come through the network. We're also heavily focused on our retailers, building those relationships and capturing enablement campaigns and supplier leads directly.

And fourth, we are seeing greater traction with larger companies. We have long described ourselves as an SMB focused company, but we are seeing growing success at the higher end of the midmarket and even into some large enterprises; we believe from having a solution that doesn't need to change much as you move along the spectrum of companies within the supply chain.

We are also seeing increasing success with partners who help build pipeline and extend our sales and marketing reach. This quarter we engaged in a sales cycle with a consulting company specializing in Oracle and SAP called Solution IT. After just a six-week sales cycle, we were able to close a new customer called [Euromax], which involved ripping out their old software provider and connecting Euromax to approximately 40 trading partners.

Before I turn the call over to Kim to review our financials, I would like to spend a few minutes talking about the macro environment. As many of you have heard us say, we are not a good bellwether for the economy and there are a number of characteristics in our business that provide some protection against an economic downturn.

First, as you know, we have almost no customer or revenue concentration. Churn has been remarkably steady, even during past economic headwinds. Recall that we have grown every quarter for 43 straight quarters, through strong and weak economic times. And lastly, one consequence of weak retail economies is that we see higher lead generation activity from retailers as they move aggressively to make their supply chains more efficient.

We saw that happen in 2009, and we saw it again in the third quarter, as our testing and certification revenue was higher from a greater volume of enablement campaigns. In summary, we are very pleased with our results so far in 2011, and we believe we are poised to close the year with strength. We saw momentum in the business with acceleration in recurring revenue.

We captured additional market share in the SMB market through our Direct EDI acquisition, and we are driving higher revenue streams across our products. We continue to make investments in sales and marketing that drive growth, which is reflected on our results to date. All in all, we had a great quarter and we remain focused on executing to our growth plan. Kim, over to you.

Thanks, Archie. As Archie mentioned, we had a great third quarter. Revenue for the quarter was $15.5 million, a 35% increase over Q3 of last year, and represented our 43rd consecutive quarter of revenue growth. The increase in revenues is a result of an increase in recurring revenue customers and an increase in annualized average recurring revenue per recurring revenue customer.

Recurring revenue this quarter grew 37% year over year. The total number of recurring revenue customers increased 31% year over year to approximately 15,900 at the end of the quarter. For Q3 the annualized average recurring revenue per recurring revenue customer increased 5% to $3,376.

Total operating expenses for the quarter were $11.2 million and represented 72% of revenue. This year-over-year increase is due to additional investment in sales and marketing to drive growth in the business. Looking at the individual line items, sales and marketing was $6.4 million; G&A expenses were $2.9 million; R&D expenses were $1.6 million. Operating profit was $270,000. Net profit was $177,000 or $0.01 per fully diluted share.

On a non-GAAP basis, which excludes stock-based compensation and amortization, net income was $924,000 or $0.07 per share. For the quarter, adjusted EBITDA was $1.5 million compared to $1.4 million of Q3 of last year. We increased our investments as planned, primarily in sales and marketing, to capture the growth in the marketplace. We ended the quarter with total cash of $31.5 million.

CapEx for the quarter was $727,000 (technical difficulty) revenue. Now turning to guidance. For the fourth quarter of 2011, we expect revenue to be in the range of $15.7 million to $15.9 million or 32% to 33% increase year over year. We expect fully diluted earnings per share to be in the range of zero to $0.02, with fully diluted weighted average shares outstanding of approximately 12.8 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.06 to $0.08, 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 $1.4 million to $1.6 million.

For the full year, I'm pleased to announce we are increasing our revenue and EBITDA 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 topline growth. We expect revenue to be in the range of $57.8 million to $58 million, or growth of approximately 30% over last year.

We expect fully diluted earnings per share to be in the range of $0.05 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 $0.24 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 $5.2 million to $5.4 million.

One note about modeling progress towards our operating margin goals. We are not providing formal 2012 guidance at this time, but I thought it would be helpful to give a little perspective on how we're thinking about scaling our investments for growth next year. As you've seen this year, our strategy to reinvest revenue upside in sales and marketing to drive topline growth is working.

We anticipate continuing to do this for the foreseeable future, investing for growth while balancing margin expectations. As long as we are able to maintain topline growth, we're comfortable making modest incremental progress on the operating margin. So, as you build your 2012 model, we would recommend EBITDA margins in the range of 12% to 13%.

In summary, we've delivered 43 consecutive quarters of topline growth. This consistent performance is 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 viral platform that gives us the competitive advantage in the supply chain world. With that, I'd like to open the call to questions.

(Operator Instructions) Laure Lederman, William Blair.

Thank you for taking my questions, and lovely quarter. I can always count on you guys to deliver; I really appreciate that. Just a few questions on the upside in the quarter. Can you talk about what the organic growth was and how much was from acquisitions?

And I know that you mentioned that Direct EDI was being integrated more quickly than you expected. So how much of the upside came from that? And also maybe if you'd give a sense of how much came from the enablement of new retailers as well; just give a sense of how to break out the upside, if you would.

Sure. As it relates to the organic growth, so we mentioned the recurring revenue was 37% year over year. On an organic basis that was 25%. So an acceleration from where we have been over the past few quarters.

As far as the Direct EDI implementation and movement, we've seen nice progress there. We continue to see upside there. Again it's about a 12-month process to transfer their customers onto our platform. Our first -- again to reiterate, the first quarter is really a product management and development process to figure out the keys and the differences between their platform and our platform. And then the second phase is to build those differences and enhancements so that their customers have a positive experience when they move to SPS Commerce platform.

And then the third phase is really to move their customers over onto our platform, and we have begun that third phase, right on target, and feel very good about that.

Are you expecting similar upside from enablement over the next few quarters, or did that feel like a one-time thing for Q3?

So when you look at just what drove the upside, I would say there's a couple things that are driving the upside. One is our profile within the marketplace and also Trading Partner Intelligence, which is able to give us -- allows us to have more strategic conversations with retailers. Those are longer-term trends and continue to help. So I think you're going to see longer term continued upside in enablement campaigns.

As far as third quarter, we do see some of that due to the economy and retailers attempting to accelerate their supply chains to make them more efficient. So when you look at fourth quarter, fourth quarter historically has been a softer, not soft, but softer enablement campaign quarter. So I think you're going to see fourth quarter back to kind of a more normal level, and then about long-term we feel very optimistic about it.

One more question and I'll pass it on. You talk about acquisitions and that there's interesting things out there. How actively are you talking to companies? What does pricing look like? Are there a lot of interested companies out there or just few and far in between?

In our mind, there's 1000 to 2000 interesting companies. It's always difficult, because these companies are private, to understand how big they really are until you actually have them share information with you. We are very active in trying to call them and engage them. We are their competitor in many cases, which makes that more challenging.

As we've already said, we have a very, very strong organic growth engine. We're going to continue to be focused on that. But we'll do deals as long as we can do deals where we can buy at the right prices and we have a customer base that we think we can transition and retain at SPS Commerce.

Thanks again.

Tom Roderick, Stifel Nicolaus.

So I want to follow up on the comment regarding recurring revenue per customer, in particular the Trading Partner Intelligence product. I think last quarter the number was something along the lines of 9% or maybe it was 10% of new business was reflected from the TPI product itself. Do you have that metric to update us on this quarter? That would be actually really helpful if you have that, thanks.

So we don't have that exact metric. As we're looking at Trading Partner Intelligence if you think about it, the absolute new business and Trading Partner Intelligence was equivalent to the prior quarter, so it continues to make nice progress and good strength. We see nice pipelines. We see a lot of encouraging signs for Trading Partner Intelligence long-term and it's starting to become meaningful.

When you start to look, Archie, at your new customer wins in the quarter, since the number on the recurring revenue side seems really to have been ratcheted up by the total number of recurring customers; how many of those new wins do you see Trading Partner Intelligence at least becoming a part of that discussion on whether or not it's part of the initial sale?

It seems like it's finding its way into the strategic discussions. Do you have any commentary you can offer as far as new sales and how often TPI is ending up in that sales cycle?

It's in almost 100% of those sales cycles. Again, it allows you to talk strategically with your prospects, it allows you to paint a vision, and it's a huge competitive advantage. So it's virtually 100% of our sales cycles it's included in.

As far as how many actually take it up in the first phase, it is a minority of the customers. But it is 100% of every sales cycle to begin on it.

And then last question for me, just in terms of how to think about the inputs into this quarter and as you want to invest for next year. And Kim, thanks for that guidance on the EBITDA targets for next year. Can you give us a handle on how many sales heads you added this quarter, what the total number of sales count might look like, and then where you ultimately want to take that number to in 2012?

Sure. So as it relates to the sales head, we exited the quarter with 116. And if you recall last quarter, we exited at 115. We added a large chunk last quarter, and if you recall the comments we said then was a lot of our hires are coming directly from college. So because of the June being sort of the graduation time period, we added a lot of heads in Q2, but you see the cost reflected in Q3 of associated with it.

So along the lines, our mantra has always been we will reinvest in sales and marketing, to the extent we can do that and still deliver on our profit expectations. So what you saw this quarter is we were able to add an incremental one because the costs associated with the hires were made at the end of last year, you now see fully represented in our costs in Q3.

As it relates to our expectations going forward, there is a lot of opportunity for us to continue to add sales folks. We are by no means near capacity relative to where we see the opportunity. That being said, we are appropriately balancing topline growth with profit and margin expectations.

So what you should expect from us is we will continue to add quota carrying sales personnel. We are by no means tapped out on that front, and we will do that to the extent we can and still hit our margin expectations.

Very good. Thank you, guys, nice job.

Richard Davis, Canaccord.

The question you mentioned a couple times, virality, and that's a powerful tool in a SaaS company's toolkit. The question I have for you -- so when you say virality, are you at the point where you've actually had retailers say, hey look, this is our preferred SaaS EDI vendor? Or when you say virality you're saying, look, we're much bigger; anyone who wants to deal with us instantaneously gets connected to pretty much the entire ecosystem that is relevant? Just kind of give a -- use a phrase that I was trying to get a more tight definition. Thanks.

Yes, I think it's on a number of levels, Richard. It's first the number of retailers that we have built relationships with, and they're seeing us over and over again and we're able to continue to build out our network and have stronger relationships. As we have more of their suppliers, we become more meaningful to them. So that's a competitive advantage.

I think as you go outside of just the retailer/supplier relationships, you're seeing the viral nature of we do business with their third-party logistics provider. That's a competitive advantage and another point of introduction. The example we used in the call, it was a systems integrator that had sat by and watched us integrate to another SAP customer, and they brought us very quickly a lead that turned into a decent sale within a six-week period of time because they had seen it and they had observed it firsthand, and they wanted to be part of it and they had confidence in it.

So the more times we get to show our wares, the more times we're going to get something coming back to us. So it's not only just the retailer and the supplier, but also the 3PL on the systems integrator. And everybody really in that entire retail ecosystem is part of that viral nature.

So it's multifaceted virality.

It's (inaudible) multifaceted.

There you go. Great, thanks very much.

Michael Huang, Needham & Company.

So just in terms of your commentary around pushing out market or seeing some opportunities with larger organizations, are you guys actively pursuing these type of opportunities; are they just coming to you? Are you allocating some resource specifically to address this, or are these more partner driven?

Well, they're partner driven even through the retailers or through systems integrators, value-added resellers, channel sales or possibly even 3PLs; really through multiple parts of a network. We're not cold calling into these organizations, but many of them are brought to us and they seem to have -- again, many of these larger organizations, they've gone through enablement campaigns 5, 10, maybe even 20 times with SPS Commerce.

So they've become aware of us. It's all these testing and certification customers that we can continue to go after. And as they're accepting the whole cloud solutions and that's where they need to go, it is becoming an easier and easier sales cycle, and they are more willing to listen than they were two years ago. And our profile, it is becoming more obvious than we're in a leadership position here and we're the safe bet.

Is there any -- so let's say that we're successful at getting some of these much larger organizations, like how does that impact the model? Does it change the way that you need to support customers, or are there things that you'd specifically have to build out to be able to support them?

There really are not. Essentially, we built out the support model because we have larger customers now that we give one-to-one support on. They're in that small-medium businesses, but we do have one-on-one support. The technology, there is no change whatsoever. It's just higher volume, more connections, so there's really nothing there.

It's really more just the one-on-one attention that larger companies demand that we're used to anyway. We're built as a company to give very top-notch service and very personalized service even at the lower levels. So we're used to that.

Last question for you. Just in terms of Europe, are there any metrics that you could share with us to help us see the progress that you're making there, either in terms of number of customers there or number of retailers or percentage of revenue or anything? Is there anything that you could share with us today?

It continues to be a very small portion of our revenue. I think you really should look at it as a long-term investment. And we continue to make investments internationally. One of the challenges with our investing internationally is we see so much opportunity domestically that as you can see, we've ramped up our sales force very aggressively.

Yes, we don't feel we have nearly adequate even short-term coverage today with our sales force. So we're reinvesting as aggressively as we can domestically, and then periodically giving some additional investment, making sure that we're laying a long-term foundation for Europe and Asia.

Great, thanks.

Patrick Walravens, JMP Securities.

Congratulations. My question, Archie, is really around the competition. Can you comment a little bit on what's going on with the private equity GSX type plays? I hear it's kind of a mess. I'd like to hear your perspective on that.

And secondly, SAP acquired Crossgate, and they use words that sound like they are in a similar business to you. Are they really and are there any implications from that? Thank you.

Yes, as far as the competition, again we think we are well situated and we are obviously the best solution out in the marketplace. So we think we have a good position. But two companies merge, they have to get through that merger, and then Sterling got sold to IBM. So again, IBM focuses very effectively on very, very large enterprises. So we're seeing them less and less.

As far as Crossgate, I know of Crossgate. We really don't compete. For whatever reason, we haven't seen them in a lot of sales cycles. We have a very robust SAP practice, and most of the SAP business we get comes either directly or through the systems integrators, not from SAP. We don't have any leads currently from SAP. So don't see that as typically a short-term issue, as we're really not running into them.

Great, thank you.

Scott Berg, Feltl & Company.

Hi, Archie and Kim. Nice quarter here. First question is can you comment on customer buying trends in the quarter? Did you see anything materially different than you've seen in the last couple quarters?

We really haven't seen any material trends. I think there's been a longer trend as we've talked over the last couple of years that we are seeing the whole acceptance of cloud by larger companies. We're seeing shorter sales cycles because of that acceptance. And we're also seeing that we're winning a slightly higher percentage because of our leadership position and our high profile as a public company now. But nothing from quarter to quarter.

Obviously, it was a good quarter, so customer adoption was strong. And then last question probably for Kim on cash flows. You had a very strong quarter in terms of operating cash flows. How sustainable is that, or at least should we look at that into the fourth quarter and into next year?

So, in general, I would say if you look at -- you can do this more on an annual basis probably than on a particular quarter as you can tell from cash flows. But in general, it's going to be similar to if you were to take your EBITDA, and then that should be similar to what you're going to end up seeing on an operating cash flow in general.

This quarter you had some of the accrued as it relates to payroll, commissions and bonus. And the payroll aspect of it was due to the timing of the payroll between Q2 two Q3. So if you were to simply look at this quarter, there are some things that are an outlier. So you need to look at it more over sort of an annual time period.

Very good, I'll jump back in queue. Thanks.

Jeff Houston, Barrington Research.

Thanks for taking my questions. You mentioned earlier some of the favorable industry dynamics you're facing; following up on that a bit. Since customers pay in part based on the number of transactions, I imagine in a difficult economy there is upside if retailers decide to make more purchases for less quantity rather than fewer purchases for more quantity. If this is something that you monitor or track, do you have a sense of how that has been trending?

It is something we obviously monitor. Just to remind you that 20% to 25% of our recurring revenue is transaction-based. And we haven't seen significant trends during good times and bad times. With the exception of Q4 of 2008, it's been very, very consistent. So I wouldn't assume there's going to be a lot of upside and I wouldn't assume there's a lot of downside.

I think you should think about it being fairly consistent. There will be some orders that don't get placed and there will be some smaller orders. Everybody behaves a little bit differently. There's also seasonality across all different types of customers. So I would not factor in upside, but I also wouldn't factor in downside. I think it's going to stay fairly consistent as it has in the past.

Got it, okay, that makes sense. Thank you.

Saurabh Paranjape, Craig-Hallum.

This is Saurabh standing in for Jeff. Most of my questions have been answered. Just a couple from my end. First of all, can you give us any updates on how the partner channel is going? You announced a nice win earlier with Exact Americas. Can you give us some sense of what that relationship entails, and is there more of those in the pipeline? And then I have a follow-up.

Yes. As far as the channel sales part of our business, really we started this about three years ago. And it's now between 10% to 15% of our new revenue. It's ramping very nicely. We continue to see that having above-average growth into the near-term future, and we see that as a huge opportunity.

As specific to Exact, we have relationships with ERP systems, also with value-added resellers and also with the systems integrators. And this is an example where Exact is looking for their solution. And we will be their preferred solution and be able to have a competitive advantage within their channel.

We continue to work with several different ERP systems. And as you know, we connect to data over 100 different ERP systems. We have hundreds of channel sales partners. So we see this as a long-term meaningful part of our business.

Great. Then just a quick follow-up around the international. Are you seeing any impact from the macro situation in Europe as far as your sales cycles in that region are concerned? And could that slow down your expansion in Europe or your investment in that region in any way?

We have not seen an impact relative to what's happening in Europe. But keep in mind, Europe is a small portion of our business today. As we've mentioned, that's more of a long-term opportunity for us. So you should really think about sort of in the frame of three to five years for meaningful upside associated with Europe.

Right now, we're really just planting seeds and letting the viral aspect take us over to Europe. So that is not something -- the negative that's happening in Europe today is not something that has impacted our business.

Great, that's all I had. Thanks, guys.

I would now like to turn the conference back over to Mr. Archie Black for any closing remarks.

Thank you very much for your attending today, and thank you very much for your support.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.