SPS Commerce Inc (SPSC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the SPS Commerce Q4 2011 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Stacie Bosinoff with Investor Relations. Please begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's fourth 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 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 at our website, SPSCommerce.com, and 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 and comparable GAAP measures.

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

Thanks, Stacie. And welcome, everyone. We're happy to share with you today our fourth quarter results, which capped an outstanding year for SPS Commerce, where our revenue growth accelerated as we continue to gain market leadership.

As we look back at the last 12 months and even more notably over the last two years since our IPO, there's been a rapid evolution in the supply chain market that is creating dynamic change and is very evident in our financial results.

First, there's a growing need for quality based EDI solutions and a cloud-based network that connects the most trading partners to better facilitate global trade.

Second, the rise of eCommerce is forcing many traditional brick-and-mortar vendors to rethink their EDI strategies as they are forced to compete on an unfamiliar playing field.

Third, the distribution needs of all retailers are changing, creating an immediate need for more cost effective and easier to deploy solutions.

And, fourth, consumer expectations have dramatically increased, and companies are being forced to compete on the basis of customer experience. [Oddest dock] items and delayed shipping used to be customer inconveniences. Now they are leading reasons why customers take their business elsewhere.

These trends have changed our business, as well, for the positive. In 2009 and 2010 our recurring revenue grew 18% and 22%. In 2011 recurring revenue grew more than 30%. The key metrics we provide also have continued to increase rapidly. Our customer count grew 30% this year, and has increased nearly 50% since our IPO. And our wallet share with those customers has increased nearly 20% since the IPO.

This growth has come from many factors and is the result of executing against our core strategy. We have successfully added new customers, adding scale to our network, and driving revenue growth. We have upsold new products and new connections to our existing customers, growing our recurring revenue per recurring revenue customer.

We successfully grew our partner strategy, leveraging the value-added resellers who are constantly selling and deploying new supply chain solutions, introducing SPS Commerce to new prospects and broadening the reach of our network.

We have introduced solutions, like Trading Partner Intelligence, deepening our relationship with our customers and increasing the revenue per customer. We have reinvested profitably in the business, driving innovation and distribution, while staying focused on profitable growth.

We have begun to consolidate our industry, as evidenced by our successful acquisition of Direct EDI. We see many other opportunities to continue consolidating smaller competitors.

And in a very positive development we are seeing more penetration with larger enterprises. While our core customer base continues to be the small to midsized company, our solution meets the needs of larger enterprises without having to change the product and we will continue to focus on expanding that element of our customer base.

So, as you can see, we are very bullish about our business and our future prospects, and I expect to continue to execute against our goals. The fourth quarter marked the successful conclusion to 2011, and our results reflected these points I just outlined.

Fourth quarter revenue increased 33% to $15.9 million, and adjusted EBITDA was $1.6 million. Recurring revenue grew 37% in the fourth quarter. For the full year revenue grew 30% to $58 million, and adjusted EBITDA grew 4% to $5.4 million.

Those results reflect our core approach to growing SPS Commerce. 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 30% over Q4 last year to a record 16,129 customers. 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 our 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. Recurring revenue per recurring revenue customer increased 5% year-over-year in the fourth quarter, and increased 8% for the full year over 2010.

These two metrics work in concert. While they have both been growing it is not unusual to see one grow faster than the other. If we have a quarter with faster customer comp growth even driven by an acquisition, the growth in wallet share might be lower as we take on newer customers with fewer trading partners. Conversely, a slower growth in customer additions could lead to a faster increase in wallet share. Together these two metrics are driving acceleration in our recurring revenue growth.

Also in the quarter we launched Retail Universe, a social network application that facilitates relationships and communications with all members of the retail ecosystem. Businesses within our platform create a free online profile detailing their company type, industry, items, and technical capabilities. They can then search the community to find new trading partners that make sense for their business needs. The community also makes recommendations by matching businesses and trading partners through their needs and integration capabilities.

Although Retail Universe was just launched in Q4, we're seeing early signs of success as thousands of companies have created their online profiles and are already leveraging the network to find new trading partners. As the community continues to gain momentum the long-term focus is to provide a layer of services that leverage social networking technologies to help players in the market to work better with each other.

So as we look out to 2012 our focus is to continue executing against our strategy with the same success that we saw in 2011 and to continue taking advantage of the favorable market trends that are providing a tailwind to our growth. Our business is growing. We're investing in sales and marketing and product development to fuel that growth. And we see additional opportunities to create inorganic growth through M&A.

I thank our entire Company for their hard work and success in 2011, and I look forward to a successful 2012. With that, I'll turn it over to Kim.

Thanks, Archie.

As Archie mentioned, we had a great fourth quarter. Revenue for the quarter was $15.9 million, a 33% increase over Q4 of last year, and represented our forty-fourth consecutive quarter of revenue growth. The increase in revenues is a result of an increase in recurring revenue customers and an increase in what we refer to as wallet share, which is the 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 30% year-over-year to approximately 16,100 at the end of the quarter. For Q4 wallet share increased 5% to $3,412.

Total operating expenses for the quarter were $11.2 million and represented 71% of revenue. This year-over-year increase is due to additional investments in sales and marketing to drive growth in the business.

Looking at the individual line items, sales and marketing was $6.5 million, G&A expenses were $2.9 million, R&D was $1.6 million. Operating profit was approximately $400,000.

In the quarter the Company recorded a reversal of the valuation allowance on its deferred tax asset of approximately $12.8 million. Including this allowance reversal net profit was $13.1 million or $1.02 per fully diluted share. On a non-GAAP basis, which excludes stock based compensation, amortization, and the valuation allowance reversal, net income was $1.1 million or $0.08 per share.

For the quarter adjusted EBITDA was $1.6 million compared to $1.1 million in Q4 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 $32 million. CapEx for the year was $2.6 million or 4% of revenue.

Before turning to guidance I'll recap the year. Revenue in 2011 was $58 million, and adjusted EBITDA grew 4% to $5.4 million. Recurring revenue grew 32% for the year.

Now, turning to guidance, for the first quarter of 2012 we expect revenue to be in the range of $16.3 million to $16.5 million. We expect fully diluted earnings per share to be in the range of zero to $0.01 with fully diluted weighted average shares outstanding of approximately 13.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.07 to $0.08, with stock based compensation expense of approximately $625,000, and amortization expense of approximately $260,000. We expect adjusted EBITDA to be in the range of $1.5 million to $1.7 million.

For the full year we expect revenue to be in the range of $69.5 million to $70.5 million. We expect fully diluted earnings per share to be in the range of $0.10 to $0.13, with fully diluted weighted average shares outstanding of approximately 13.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.39 to $0.42, with stock based compensation expense of approximately $2.8 million. We expect amortization expense for the year to be approximately $1 million.

For the year we are expecting an effective tax rate of 38% calculated on a GAAP pretax earnings. We expect to pay nominal cash taxes in 2012 due to our NOL. We expect adjusted EBITDA to be in the range of $8.5 million to $9 million.

In summary, we had a strong 2011. Recurring revenue was up 32% and recurring revenue per recurring revenue customer was up 8% year-over-year. We continue to deliver profitable topline growth, while incrementally increasing our margins.

As we enter 2012 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 up to questions.

(Operator Instructions)

Our first question comes from Scott Berg with Feltl & Company. Please go ahead with your question.

Hi, guys. Nice performance on the quarter. I guess a couple quick questions. First of all, can you talk about customer growth in the quarter? I have by my count roughly 230 customers were added in the quarter, 233, and that seems to be your I guess weakest quarter in about two years. Can you talk about the environment and why that number was probably a little bit lower than expectations?

Sure. As it relates to the sequential customer adds, keep in mind that Q4 is our seasonally lowest quarter for that. And, as a reminder as it relates to retailer enablement campaigns, they tend to be less than Q4 as retailers are focusing on the holiday season. So if you look back from a sequential add this year to the last year's Q4 to the previous year's Q4 you'll see there that all of those have been the sequentially smallest from an add perspective.

Also keep in mind on our Q3 conference call we had mentioned that we had higher enablement campaigns than we had originally anticipated, and that was due to the fact that some of the retailers that would have been doing their enablement campaigns in Q4 had moved them forward into Q3.

Okay, great. And then I guess my last question is on sales headcount additions. Can you tell us where you exited the year at and what the plans are in 2012 in general?

Sure. We exited the year at 117, which is up 40% year-over-year. As it relates to next year our philosophy is very similar to this year. We want to continue to add salespeople, and we'll continue to do that to the extent that we can meet our profit expectations.

Are they from a linearity perspective going to be weighted in a similar nature, probably heavier adds maybe towards the end of the first quarter into the second quarter around the graduation of a lot of the college people you like to bring in?

That's a good way to think about it. We were, if you look at 2011 you'll see that Q2 was our highest from a sequential add perspective. And you're right on that, that is aligned with when the -- many people are graduating from college.

Great, I'll jump back in queue. Thank you.

Our next question comes from Laura Lederman with William Blair. Please go ahead with your question.

Yes, thank you so much for taking my questions. I guess I have two. Is organic recurring revenue growth in the quarter would that be roughly 25%, does that make the right contribution for that position?

That is correct.

Okay, great. And then switching, a kind of high level thought, Retail Universe, can you talk a little bit more about how you monetize that community? And I realize it's early days, but I'd like to understand a little bit more, better the type of applications that you would put on (inaudible)?

Well, it's really -- long term it's really meant to be able to leverage our network and really show the power of our network is one. And to drive awareness of SPS Commerce is two. And then over time add retailers, for instance, sign eCommerce suppliers. The goal is that they can -- that they need to integrate, as well, so you are driving relationships, and we're going to be in the best position to capitalize on those relationships. There's other products that we will hang off of Retail Universe to leverage. I don't see Retail Universe, itself, generating revenue, but really being a platform leveraging our already strong network.

Okay, great. A final question for me and then I'll pass it on. TPI, or Trading Partner Intelligence, can you talk about how that did and the contribution in Q4, full year, whatever?

Yes, Trading Partner Intelligence continues to be extremely strong. It continues to be part of every single sales cycle. It continues to be a competitive advantage for us. For the full year it was approximately 8% of overall sales for the year. So, again, a real nice growth year, and when we look forward into the future we consider that to be a very strong growth engine and will continue to grow nicely.

Our next question comes from Michael Huang with Needham & Company. Please go ahead with your question.

Thanks very much. Just a few questions for you guys. So, first of all, so out of the customers that you guys added in Q4 could you share with us how many were larger type enterprises or larger type customers by your standards and what's the average monthly pricing, starting monthly pricing for these guys, and what was the opportunity here, as well?

I don't have the starting average price for you, Michael. But what I will tell you is we are -- we continue to see the trend of more larger enterprises, both -- I would say both from the high side of the small medium businesses and above the small medium businesses, and I would continue to see that to continue to be a very strong segment of our growth.

And would you say as you start seeing more activity in that segment is the type of competitor that you're seeing there changing?

Well, against the larger enterprises we are seeing the legacy software, do-it-yourself, and the legacy software providers offering a managed service. So we are seeing different competitors, and really our comp based multitenant solution, pricing, service, time to implementation is a very strong competitive advantage in those environments when we're head-to-head.

Okay, and then in terms of the partner chain, I mean who are some of the standout partners in Q4 or kind of in 2011, and how much are they contributing to the business? I don't know if it's either by retail revenue contribution or by leads, I mean is there a way that you quantify the impact these guys are having on your business? Thanks.

Yes, from an overall impact it was over 10% of our new business comes from the channel now. And, again, that Division is about two years old, so this is a new thought, it's growing very, very rapidly. We're seeing a wide spread of partners, both from the value-added resellers to the ERP systems. Somebody, like [Exact] or [Net Suite] has been a fantastic partner, and Net Suite customers, obviously, their software is a service, so that becomes a natural for their customers. And the software players are looking for a cloud strategy, and we fit really nicely into that. So I would assume that that's going to continue to be a more and more meaningful part of our lead generation.

Great. Thanks.

Our next question comes from Patrick Walravens with JMP Securities. Please go ahead with your question.

Oh, great. Thank you. Congratulations, you guys. Archie, I have a big picture question, which is on your second point which was the rise of the eCommerce. It's interesting to me that the whole online shopping trend seems to be challenging JDA Software, and that was what they attributed part of their recent miss to. And yet it seems to be accelerating your business. Can you explain what's going on there?

So I can't explain the JDA situation. I can explain our situation. As requirements and need for businesses change that really forces people to relook how they're conducting businesses, business. And when you look at eCommerce there's so many different trends and how retailers need to integrate and collaborate with their suppliers' changes, that gives them -- gives us a very natural entry into being a partner with them.

So if you're a supplier and all of a sudden one of your retailers wants you to directly ship product to the consumer and they're going to want real-time shipping information, they're going to want the type integration and collaboration with you, you are going to look to SPS Commerce. So, in general, we like change at SPS Commerce, any significant change in the industry is always a positive or tends to be a positive for us.

Got it. Thank you.

Our next question comes from Richard Davis of Canaccord. Please go ahead with your question.

Just to follow-up on that, so that makes a lot of sense, but the only question -- it was weird, I had a conversation with a couple of consumer products manufacturers and they said that they sell only to online merchants, and they said these online merchants started to try to create their own kind of effectively [SaS] EDI. Do you see the online merchants as a competitor? I mean I know that's not their focus, and so in theory it shouldn't be an issue, but do you -- is that an issue? Should we think about it, or is it just at this point not relevant?

We have not seen that as relevant. I'd be interested to follow-up with you, Richard, and find out where that was. We haven't seen pockets of that. We have great relationships with a number of the eCommerce providers. And, again, the problem with a retailer trying to build their own is if you're a typical supplier you're working with 10, 20, 30 different retailers, and the last thing you want to do is work with 10, 20, 30 very distinct, separate retail solutions. You want one point of entry, and that would be SPS Commerce.

Yes, that's what I thought. I just wanted to -- it was just kind of a weird conversation, so thanks.

Our next question comes from Tom Roderick with Stifel Nicolaus. Please go ahead with your question.

Hey, guys. This is actually [Gore] on for Tom. So it looked like recurring revenue continues to grow really nicely, but it looked like that's implying sort of a slightly lower than the previous quarter testing cert revenue. Am I thinking about that right, number one? And how should we think about onetime revenue going forward? Also, is testing cert revenue making you sort of rethink where it's going for the next year? Thanks a lot.

Well, as it relates to the onetime revenue in the testing and certification, as I had mentioned Q4 tends to be the seasonally slowest as it relates to that part of the activity, and that's directly related to the fact that many retailers in Q4 are focused on the holiday season and they are not in a position where they want to be kicking off enablement campaigns. So the way I look at it it it's just inherent, that is one aspect of seasonality on the onetime within our business, so there is nothing atypical as it relates to this quarter to other quarter. Testing and certification in absolutely dollars tends to be lower in Q4 than in the previous quarters.

Got it. Have you had any sort of success upgrading your historical onetime customers, recurring revenue customers, and could that possibly explain maybe just a little bit of the lack of growth in that onetime revenue?

Well, I would tell you that it's more tied to the enablement campaigns. What we -- here's the typical when we upsell them, we tend to sell them a testing and certification process, and then over time win them as a customer. So I don't think that -- there will be ups and downs in quarters, but we've had tremendous success of converting testing and certification vendors to recurring revenue customers over time and, but it's typically not a quick process, it's typically a three-month to three-year process.

Got it. Thanks a lot.

(Operator Instructions)

Our next question comes from Saurabh Paranjape with Craig-Hallum. Please go ahead with your question.

Hey, guys. just a couple of quick questions. First, maybe for Kim. You talked about organic growth being 25%, and if I'm doing the math based on our model that implies Direct EDI was down sequentially. Am I just looking at the numbers wrong or was there something at work here where you transitioned some Direct EDI customers over and so we would see the sequential decline?

It's pretty comparable Q4 to Q3. There's a little bit of a variable from the transaction component, but for the most part it's very similar between Q4 and Q3 from a sequential basis.

Okay, and then just on the TPI, you mentioned it was 8% of revenues in 2011. What was the comparable number in 2010?

I don't have the comparable number for 2010. It was, just to be clear, it was 8% of new sales in 2011.

Okay.

I don't have the comparable, but that's up from 2010.

Got it. Okay, that's all I had. Thank you.

Our next question comes from Jeff Houston with Barrington Research. Please go ahead with your question.

Hey, guys. this is [Scott Zeiss], sitting in for Jeff. Just a couple questions. First, could you update us on the international opportunity, how many European retailers have you built maps for, and are the dynamics different internationally than domestically given your viral approach of adding retailers and suppliers?

The opportunity for international continues to be quite large and I think it's very, very similar to North America. We continue to make progress. We look at this as a long-term investment area. And we continue to make investments, but one of the challenges we have internationally is that we have such a large opportunity right in our backyard here in North America that most of our extra, if you will, investment opportunity we're putting into use in North America. But we'll continue to invest, we'll continue to grow internationally to make sure we have a platform to compete long term and to be able to accelerate when we see fit.

Okay, and then I just have one more question. Just following up on something that was talked about earlier, regarding the potential to move upstream, like to larger suppliers, what do you need to do to focus more on this opportunity or is there anything you need to change in your approach? Just a little more color on that?

I don't think we need to make any major changes to our product offering or our sales process. Really where we're driving the larger enterprises is really an acceptance of the cloud, and you're seeing going back five years ago, the small medium businesses did accept the cloud. And I think we're just like any other software service provider where you start out with smaller enterprises, like [Salesforce] or anybody else did, and you move upstream. And especially as they accept the cloud, as they accept you as a very viable alternative, and as they start seeing you as the leader, I think that all helps. And then that coupled with our channel sales strategy of having our channel sales partners bring us many of those leads.

Okay. Thanks for taking my questions.

I'm not showing any other questions in the queue. I'd like to turn the call back over to Archie Black for closing comments.

Yes, I'd like to thank everybody for all your support in 2011, and we look forward to a fantastic 2012. Thank you very much.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.