SPS Commerce Inc (SPSC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the SPS Commerce Q1 2012 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 follow at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Todd Friedman, Investor Relations.

Thanks, operator. Good afternoon, everyone, and thank you for joining us at SPS Commerce's first-quarter 2012 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 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. But 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 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 at SPSCommerce.com. During our call today, we'll 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, comparable with GAAP measures.

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

Thanks, Todd, and welcome, everyone. We had a great start to the year with both revenue and EBITDA ahead of guidance. Revenue for the quarter increased 31% to $16.5 million and adjusted EBITDA was $1.9 million. Recurring revenue grew 37%.

We were once again successful in executing against our growth strategy. We expanded our customer base and captured more wallet share from our existing customers.

Over the last year, we have been talking about the ongoing evolution in the supply chain market that is providing a tail wind to our growth, the growing need for cloud-based EDI solutions, the need to meet the changing distribution demands of retailers, the need to meet increasing consumer expectations and the need for new and innovative EDI strategies to accommodate the rise of e-commerce.

E-commerce continues to fundamentally change the way retailers connect with their customers and manage their supply chains. Done well, e-commerce is a strategic advantage, providing a way for retailers to increase sales and reduce inventory costs while meeting consumers' demands and increasing customer loyalty. The speed of the shift from traditional brick and mortar retail to e-commerce has put enormous strains on the traditional supply chain.

A recent Forrester report said that five years ago roughly 1/3 of consumers were shopping online monthly. But by 2010, that percentage had almost flipped completely and is certainly higher today. That means that only five years ago, large retailers could still succeed by mostly focusing on their traditional factory to warehouse to store distribution model.

Now Forrester estimates that online shoppers will spend $963 billion globally by next year.

If you consider the impact of that shift on the market, you can narrow your focus to two things that are driving the supply chain evolution forward. The first is that traditional brick and mortar vendors need to rethink their complete EDI strategies as they are forced to compete online with large e-tailers and smarter traditional retailers who are making the jump to e-commerce. Forrester calls this agile commerce, and we agree.

It is not about being smart online or being smart in the stores. It is about having a truly multi-platform approach to selling products and meeting your customer needs in any channel and in any location.

The second is that this evolution is affecting suppliers of all sizes just as much as the retailers. Suppliers have to be able to meet the fulfillment requirements of e-tailers and multi-channel retailers. And in order for suppliers to compete effectively it is even more radical that they are EDI-compliant and integrated to their retailer and trading partners, eliminating inventory challenges and enabling drop shipping capabilities.

Many of these smaller suppliers are not using any EDI solution and, in fact, rely on manual faxing. In today's competitive market, they simply won't survive without the necessary solutions in place to keep up with the global pace of business. The SPS Commerce platform enables both larger and smaller suppliers to compete on a global level by building up the necessary integrations, increasing their inventory visibility and capturing newer capabilities such as drop shipping, a collection of e-commerce that is becoming more critical for retailers to compete with one another.

We believe we are well-positioned with suppliers from all sizes and our solutions are at the forefront of these trends as evidenced by our results this quarter, and we are excited about the opportunities ahead. To help capture this growth, we have been ramping our investments in sales and marketing and we are beginning to see the benefits.

For example, we have invested in channel sales and as we gain momentum through the channel, our solution is increasingly being positioned up market with larger enterprises. These deals typically are larger than our average deal size and our driving force behind our increasing recurring revenue per recurring revenue customer.

One benefit of the SPS Commerce solution is that we are able to meet the needs of both small and large enterprises with the same offering. So, while the bulk of our customer base consists of small/medium businesses, we are able to move up market to sell to these larger suppliers without any major additional product development.

We are excited about these larger opportunities and will continue to invest in channel sales, a core element to our growth strategy.

We are also investing in lead generation to take advantage of the thousands of leads that exist within our viral network. Enablement campaigns are critical to our growth strategy, and we see a lot of opportunity to capture new customers within our existing network. When we test and certify a supplier through an enablement campaign, they are now part of our network and we are well-positioned to connect them to other trading partners and convert them to recurring revenue customers.

When we think about enablement campaigns as a whole the timing is depending on retailers, with Q2 and Q3 typically being seasonally higher. As our investments in this area continue, we plan to drive an additional customer growth and recurring revenue growth from enablement campaigns.

Other investments are paying off as well. We launched Retail Universe, a social network for trading partners, at the end of last year. The value of Retail Universe comes from the actual connections and increased business that stems from trading partners locating each other based on certain requirements or criteria residing on our platform. The feedback we received from trading partners has been great so far and we are looking forward to growing the network over time.

As we look out to the rest of 2012, we will continue to invest profitably in the business to capture the growth opportunity and take advantage of the supply chain evolution. We will continue to nurture the thousands of leads within our viral platform and through our channel partners. We will continue to innovate around our platform through value-added solutions like Retail Universe, and we will continue to look for additional opportunities to create inorganic growth through M&A.

With that, I will turn it over to Kim to discuss our financial results.

Thanks, Archie. As Archie mentioned, we had a great first quarter. Revenue for the quarter was $16.5 million, a 31% increase over Q1 of last year, and represented our 45th consecutive quarter of revenue growth. The increase in revenue is a result of 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 26% year over year to 16,433 at the end of the quarter. For Q1 annualized wallet share increased 7% to 3,529 up from 5% growth in Q4. As you look at these two metrics it is important to remember that they work in concert with each other as really the mix of the two metrics together that we focus on.

As Archie pointed out earlier, we had a nice uptick in wallet share this quarter due to our success with larger deals through channel sales. Total operating expenses for the quarter were $11.6 million and represented 70% of revenue. Looking at the individual line items, sales and market was $6.4 million. G&A expense was $3.2 million. R&D was $1.7 million. Operating profit was $459,000.

For the quarter, adjusted EBITDA was $1.9 million compared to $1.2 million in Q1 of last year. We ended the quarter with total cash of $33 million. CapEx for quarter was $630,000 or 4% of revenue.

Now, turning to guidance. We are continuing to see overall strength in the business. In particular we have a strong enablement pipeline in Q2. To reflect this for the second quarter of 2012 we expect revenue to be in the range of $17.4 million to $17.7 million. We expect fully diluted earnings per share to be in the range of $0.01 to $0.02 with fully weighted average shares outstanding of approximately 13.2 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.09 to $0.10 with stock-based compensation expense of approximately $700,000, and amortization expense of approximately $260,000. We expect adjusted EBITDA to be in the range of $1.9 million to $2.1 million.

For the full year, I am pleased to announce that we are increasing our revenue guidance. We expect revenue to be in the range of $70.3 million to $71.3 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 the approximately $1 million.

For the year, we are expecting an effective tax rate of 38% calculated on a GAAP pretax net earnings. We expect to pay nominal cash taxes in 2012 due to our NOLs. We expect adjusted EBITDA to be in the range of $8.6 million to $9 million.

In summary, we had a great quarter. Recurring revenue was up 37% year over year. We continued to deliver profitable topline growth while incrementally increasing our adjusted EBITDA margin. 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 would like to open the call up to questions.

(Operator Instructions). Laura Lederman, William Blair.

Thank you for taking my questions and congratulations on a lovely quarter, particularly on the metric standpoint. A quick question. When you talk about recurring revenue growth of 37% [effect] take out acquisition on an organic basis, can you give me a feel for what that was? Because I think direct EDI we were assuming about $1 million in revenue for the quarter so I am just trying to organicize the recurring revenue growth.

Sure. The 37% is the reported number on an organic basis meaning excluding direct EDI that was 27%, which is an acceleration from where we have been in recent quarters.

Fair enough to say. Thank you so much. Can you talk a little bit more about going up market? In other words why selling through channel partners allows you to sell higher. Because usually when you sell through channel partners and other software businesses it is usually a lower market. So I'd love an understanding or a better understanding of that.

So, when we are looking at the channel partners it is typically a larger deal where you are integrated to maybe five to 50 different trading partners. And the best time we are seeing to hit those customers is actually when they have an ERP system change or an upgrade, and the person that is in the most unique position and know that that company is going through a change is the value-added reseller for systems integrated or the ERP system [itself].

In enablement campaigns, we tend to get more of the they're new to it or they're smaller and they're not doing anything and we are their first entree into it. We will sell them over time, upsell them overtime but brand-new customers tend to be larger in the channel side.

And one final question from me then I will pass it on. When you look at the channel what percentage roughly of the bookings is it now generating and what are your expectations for that going forward?

As it relates to the channel sales, it is approximately 10% of the new business sold is the channel sales. We like what we have seen. Over time, we certainly do expect that that number will increase. But today it is about 10% of new business.

Once again, thank you for such a nice quarter.

Thank you.

Michael Huang, Needham & Company.

Thanks very much. Just one question. So from a product roadmap standpoint what are some of the major innovations that you are working on now? I mean, obviously, your analytics products out there maybe if you could give us an update on that as well. Thanks.

I think when you look at the product roadmap long term and short term, long term we are in the supply chain business for the retail ecosystem. So that is where we are going. Anything within that is fair game.

I think when you bring it down to the shorter term you are really looking at improvements in major innovations in our existing product line. In particular, the business intelligence line where you start using more and more of the information that you are receiving from the retailers and is the suppliers to give them meaningful trading partner intelligent tools back. That is where the biggest short-term innovation is coming.

Obviously, Retail Universe is in the very, very infancy phases. So that product is going to be changing pretty significantly over the next two to three years.

Tom Roderick, Stifel Nicolaus.

Good afternoon. So, maybe I can piggyback off Laura's question earlier. I know Laura asked about the channel, but in thinking about deal sizes getting bigger here, wondering how you -- if you can kind of break that apart as it relates to new customers with bigger deal sizes versus existing customers purchasing upgraded products? And maybe as it relates to that, if you have any data around TPI and what that contributed as a percentage of new bookings or any metrics you can share on the trading partner intelligence product. That would be really helpful. Thanks.

Sure. As it relates to the ASP, what you see in that number of the 7% which is the increase recurring revenue per recurring revenue customer. That is a combination of both of selling existing customers as well as adding new customers. So to specifically answer your question, when you are looking at a customer that comes to us through the channel side, to Archie's point they tend to be a larger type customer. So a smaller customer might pay us $100 (technical difficulty) month maybe a couple of hundred dollars. Customers that come through channel sales they could be paying us $1,000 or more a month. So hopefully that gives you a sense of the different size, relative to the new customer.

As it relates to the trading partner intelligence, very similar to what we said in the past. Very important part of our overall product offering. It is about 8% of the new business is the trading partner intelligence sales.

8% of new business. Great. And then when you look at the total number of new customers coming on, I mean, that is a figure that continues at least on an organic basis looks like it continues to do very well. At least, if not accelerating, you are still in the high 20 percentage range.

So I know the end of the year is a great time for enablement campaigns. Is that continuing to be a big driver and maybe you could just sort of split apart existing enablement campaigns with some of your retailer partners versus sales capacity you are putting in place and where else you have to spend money on the sales and marketing side to keep moving the ball forward on a number of new customers.

Sure. So, I'll talk about the customer number. So, the 26% which is the increasing customer growth on an organic basis -- that is about 14% -- as it relates to enablement campaigns in Q2 of this year, Q2 and Q3, those are seasonally when the majority of the enablement campaigns occur. So that is reflected within our guidance.

Obviously when we run in enablement campaigns there is a mix of new customers that we get from that. Specific to Q1, the 26% number on an organic basis was about 14. As it relates to investments we are making in sales, sales headcount we continue to invest there. We continue to think there is a lot of opportunity. We are investing in each of the areas our direct sales force, our relationship structure with retailers as well as our channel sales organization.

Maybe one last quick one for me on the topic of that salesforce. Archie, I don't know if you want to answer this or, Kim, feel free. But as it relates to your taking your guidance up on the revenues, keeping it I think consistent where we were on the EBITDA and EPS side. Is all of that going to be going into sales and marketing and where do you hope to be on total sales [heads] by the end of the year?

So as it relates you are correct we took up our revenue guidance and we kept the bottom line the same. That is with our philosophy of we want to take the opportunity to be reinvesting and going after the opportunities we see. We do have -- we do add headcount across the organization. But, obviously, with the opportunity we see we want to take the opportunity to be reinvesting more back in sales and marketing, basically invest as much as we can in that area.

As it relates to head count at the end of 2012 we haven't given a specific number. What you should expect is that our headcount does increase but the amount of the increase ultimately depends on what we're able to do and still hit our profit commitments that we have made as an organization.

Got it. Okay. Thanks. Nice job.

Patrick Walravens, JMP Securities.

Can you talk a little bit about whether there's room for price increases here and how you think about that?

Yes. I think that when we have looked back and looked at the marketplace I think there is an opportunity for price increases. But what we are focused on, and we are not feeling significant pricing pressure, what we're really focused on is gathering new customers, upselling our new customers and we think that is the trigger we can pull at any time. But right now we are in a growth phase in gathering and that is something down the road that we can focus on.

Okay and then -- I'm sorry, Kim, I missed -- where did you think your sales headcount will be by the end of the year?

We didn't give a specific number. All we said is that it will increase; the ending number will ultimately depend on how much we are able to do with it and within our parameters of the profit expectations that we delivered.

Okay and so where are you now?

We are now at 123 so we added 6 within the quarter. One thing to keep in mind if you look at last year from a sales headcount perspective since many of the heads we are adding are more entry-level folks right out of college. Q2 tends to be from a seasonality perspective higher add quarter for us as the candidates are graduating from college.

So but you guys have basically doubled your sales headcount in two years. Is that right?

That's correct.

So those roughly 60 new reps that you have on, how many of them are productive at this point?

Typically what we see is they can start producing within one to two quarters and, obviously, then there is a continual ramp period. A significant percentage of them are and as you see our sales and the size of the Company compared to a couple of years ago is significantly larger. And so we are selling significantly more than we were two, three years ago.

Okay. Great. Thank you.

Scott Berg, Feltl and Company.

Nice quarter. Couple of quick questions here. First of all, your increase in revenue per customer at this quarter was the largest sequential increase in a year but a nice acceleration over the last couple of quarters. Is that a result of mix of more larger customers entering the fray? Or is it more up -- more of a mixture of up sales in the quarter?

I think it is really a mixture of both up sales and larger deals. Again, we are seeing -- we continue to see an acceleration in the larger deals but really in the high end of the small/medium business that we define as zero to $500 million. So we continue to see both but it is a combination of larger deals as well. Or larger than our current average.

I guess my last question is your sequential increase in long-term deferred revenue was the largest jump I think I have seen as far back as my balance sheet's going. Why the large jump? Was there more customers with the testing revenues or implementation revenues for the quarter? Just trying to get some color around that.

So as it relates to what goes in deferred revenue, the deferred revenue is related to new customers. So when they initially sign up with us that is what goes into deferred revenue. If it is testing revenue that we are receiving, that is actually a one-time direct to the P&L. So that the number or the amount that is in deferred revenue is completely related to -- in essence -- new business, new customers that we are signing up and the revenue we receive from then to get them up and running.

All right. That's all I have. Thank you.

Jeff Houston, Barrington Research.

Thanks for taking my questions. To begin with, I think the direct EDI deal, the anniversary of that acquisition is coming up in a few weeks. Just curious about your thoughts about what you learned from that deal and that you will carry forward and apply when selecting your next acquisitions?

I think when we look back at the direct EDI -- first off, we think it was a huge success. I think there was a couple of things. One, they had a solid customer base that was satisfied and our offering was quite similar, pricing was similar. So we had a very successful transition.

And we also saw that they had some really quality key people including a development center in the Ukraine. So a lot of assets there. And obviously, we got some nits and nats on how you do implementations and the more you learn the better off you are. But I think if anything, that gave the us appetite for more because it was a success.

Continuing on that acquisition theme. Could you talk a bit about the pipeline internationally or are you more focused domestically for M&A?

Well, we are focused both -- we are focused on both domestic and international. International has a little bit higher hurdle because if you do buy somebody internationally you are probably going to be building more around that team. So the people are more critical.

We haven't -- we will continue to look both domestically and internationally. We obviously know that competitive landscape significantly better in the US but -- in North America -- but we will continue to look both.

Got it. Thank you.

(Operator Instructions). Jeff Van Rhee, Craig-Hallum.

Just a couple of them left here. As it relates to the ERP connect push, I guess, through the channel. Can you just expand on that push into the channel? Namely, where are we on the curb just in terms of channel partners coming on board and getting productive? Can you -- is this going to be sort of a slow steady stair step? Do you have a significant backlog? Where are we in that game? How should we expect that to progress?

We've basically have gone from almost zero to almost 10% of our lead generation over two, three years. We now receive leads from over 100 -- have received in the last 12 months leads from over 100 different partners. So, I would -- I wouldn't say it is a J curve but I think you are going to see it continue to accelerate and continue to have success.

And I guess, lastly, as you relate to the source of the leads outside of the channel push and you look at the more traditional channels either through the retailers giving you an exclusive or going direct, is there any other notable changes in terms of the pipeline either as sources of leads or types of deals that are flowing through?

Well, with enablement campaigns we are really seeing, obviously, the whole change in e-commerce and the new requirements. We are seeing some of that drive additional enablement campaign and would anticipate the changes in evolution in the supply-chain continuing to drive enablement campaigns. So that is the one thing we continue to see momentum and tailwinds for us.

Okay. Thanks. Great quarter. Thank you.

Thank you.

(Operator Instructions). There are no further questions at this time. I will turn the call back over to management for closing remarks.

Thank you very much, everybody, for participating today and thank you for your support of SPS Commerce.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.