SPS Commerce Inc (SPSC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce fourth-quarter and full-year 2013 earnings 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 Nicole Gunderson. You may begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's fourth-quarter and full-year 2013 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 publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

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

Thanks, Nicole, and welcome, everyone. We are very happy to share with you today our 2013 results. We experienced momentum in all areas of our business, capping another great year for SPS Commerce.

For the full year revenue grew 35% to $104.4 million and adjusted EBITDA grew 53% to $13.8 million. Recurring revenue grew 37% in 2013, customer counter grew 10% and wallet share with our customers grew 24%.

This year we focused our efforts on growing our channel, developing our platform and expanding our analytics offerings. First and foremost, we continue to add scale to our network. Our vast network enables a powerful lead generation engine that we've been taking advantage of for years.

This allows us to work as a trusted advisor to both retailers and suppliers and places us at the center of the retail ecosystem, sharing our extensive knowledge and best practices to guide them through the rapidly changing industry.

This year we received leads form approximately 600 retailers and 100 channel partners and we now have over 55,000 customers. We also increased wallet share by adding new trading partners to our existing customers and outselling customers with additional functionality such as our robust analytics solutions.

Additionally, we continue to move up market as we saw an increase in larger customers, which is a testament to our leadership position in the retail ecosystem. We now have over 1,000 customers that pay us more than three times our average selling price, which is more than double from two years ago.

Our channel sales strategy has been key to our success in moving up market as ERP systems, value added resellers and systems integrators are increasingly recognizing the value of connecting their customers to our network. This year new revenue from channel sales increased 50% over last year and contributed 16% of all new business.

We also continue to enhance our platform, making R&D investments that will lay the foundation for future growth. This year we introduced RSX, a standard data format to enable frictionless expansion of trading partner relationships. Third parties can now bill directly to our standard, making integration even easier.

Our fourth focus this year was around the integration of Edifice, an expansion of our analytics offering which has been very successful. All aspects of the Edifice business have been fully integrated into SPS Commerce and the product is now part of our business intelligence solution.

We now have a roster of Fortune 1000 customers and analytics now makes up 15% of our new revenue compared to 12% last year. We've had tremendous success cultivating these relationships and becoming an integral part of their supply chain ecosystem.

One trend that is becoming more prevalent is the sharing of point-of-sale data. Although less than 20% of retailers in our network are currently sharing their point-of-sale data, the number has increased over last year and we expect this number to grow over the next several years.

Sharing POS data benefits both the supplier and the retailer and makes for a more collaborative relationship between the two. With our robust intelligent solution and large amounts of data captured through our network retailers are turning to SPS to have strategic discussions on how to best partner with suppliers to share and utilize this data.

This past year the retail industry has been moving toward an omni-channel approach with e-commerce as a forefront to this evolution. We are at the very early stages and retailers and suppliers are just beginning to recognize the need to build collaborative strategies in order to compete effectively to provide customers a unified experience across brick-and-mortar, e-commerce, social and mobile.

With our broad-based network and robust functionality SPS Commerce is recognized as one of the most comprehensive and efficient ways for suppliers and retailers to address this transformation. It has provided a tailwind to our success in 2013 and we are well positioned to continue to improve our leadership position in 2014 and beyond.

To help fuel our efforts going forward we successfully completed a follow-on offering which strengthened our balance sheet and enables us to continue to improve upon our offerings and make strategic acquisitions to further augment our position as an industry leader in the supply chain world.

2013 was an important year for SPS Commerce. We experienced momentum in all areas of our business and continue to take advantage of the evolution of the retail industry. We also set ourselves up for the next generation of growth through our robust business intelligence solution, channel strategy and RSX industry standard. We are very excited about our business and our prospects as we enter 2014.

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

Thanks, Archie. We had a great fourth-quarter. Revenue for the quarter was $28 million, a 24% increase over Q4 of last year, and represented our 52nd consecutive quarter of revenue growth. Recurring revenue this quarter grew 24% year over year. The total number of recurring revenue customers increased 10% year over year to 19,690. For Q4 wallet share increased 13% year over year to $5,101.

As you look at these two metrics it's important to remember that they work in concert with each other and it is really the mix of the two that we focus on.

Total operating expenses for the quarter were $18.7 million and represented 67% of revenue. For the quarter adjusted EBITDA was $3.8 million compared to $2.6 million in Q4 of last year. Before turning to guidance I will (technical difficulty).

(Operator Instructions). Ms. Nelson, you may begin.

Great. Sorry about that technical difficulty. Before turning to guidance I will recap the year. Revenue in 2013 was $104.4 million, a 35% increase year over year, and adjusted EBITDA grew 53% to $13.8 million. Recurring revenue grew 37% for the year.

Now turning to guidance. For the first quarter of 2014 we expect revenue to be in the range of $28.4 million to $28.9 million. We expect adjusted EBITDA to be in the range of $3.6 million to $3.8 million. We expect fully diluted earnings per share to be approximately $0.01 with fully diluted weighted average shares outstanding of approximately 16.9 million shares.

We expect non-GAAP diluted earnings per share to be approximately $0.13 with stock-based compensation expense of approximately $1.3 million and amortization expense of approximately $720,000.

For the full year we expect revenue to be in the range of $125 million to $126.5 million. We expect adjusted EBITDA to be in the range of $16.75 million to $17.5 million. We expect fully diluted earnings per share to be in the range of $0.13 to $0.15. We expect fully diluted weighted average shares outstanding of approximately 17 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.61 to $0.64 with stock based compensation expense of approximately $5.6 million. We expect amortization expense for the year to be approximately $2.7 million.

For the year you should model approximately 40% effective tax rate calculated on GAAP pretax net earnings. We expect to pay nominal cash taxes in 2014 due to our NOLs.

In summary, we had a strong 2013 with recurring revenue increasing 37%. As we enter 2014, we will continue to execute against our growth strategy to take advantage of the large market opportunity we see in front of us. With that I would like to open the call up to questions.

(Operator Instructions). Tom Roderick, Stifel.

This is Gur on for Tom. So we've seen organic recurring revenue per customer accelerate this year versus the last two years. I was hoping you could dig in a little bit on that, kind of what has been driving that, and sort of the sustainability of that improvement?

Sure, Gur, I will answer that. So as it relates to that recurring revenue per recurring revenue customer, what we refer to as wallet share, this year that has been anywhere between sort of 13% to 15%. And that is just one component that ultimately drives to our organic recurring revenue, which is sort of in that 20% plus range.

Just as a reminder, we really focus people on the combined between the two, but I do appreciate your question was specific on the wallet share. So some of the drivers within the wallet share specifically would be product upsell, so think about the analytics offering as an example of product upsell.

Also the size of customer tends to have a larger impact on the wallet share versus number of customers when we are moving more upstream through channel sales to our larger customers. And then anytime we have an existing customer and that customer adds trading partners from our network, that also is additional revenue that we get per customer.

Got it, got it, very helpful. And then with the recently completed follow-on offering, maybe you can expand a bit on how you are thinking about future M&A spending over since you acquired Edifice and before that direct EDI. How are you thinking about the use of cash going forward?

Our M&A has been fairly consistent since we went public. We are focused first and foremost on the very large organic growth opportunity that we have in front of us and we do believe we can achieve our long-term objectives organically. Having said that, we've obviously made acquisitions and are very interested in making acquisitions.

We look at acquisitions as long as it is in our sweet spot and it is doing -- in our strategy of what we want to do as a business. As long as it does not deter us from our organic growth objectives and we can pay right we'll make those acquisitions.

So consistent since they went public, we're always active and looking, but are not willing to just settle to make acquisitions. We don't feel like we have any major product holes, we don't feel like we have any major threats that we need to shore up to make acquisitions. So I think we are and a pretty enviable spot.

Got it. And then, Kim, one last question for me. Can you give us the sales headcount for the end of the year? And then also if you could maybe talk about your sales hiring plans for next year? Thank you.

Sure. We exited the year with 109 quota carrying sales people, that is up about 20% to 22% year over year. Our expectation going into 2014 is we will continue to add salespeople and the piece in which we add salespeople ultimately depends on also ensuring that we hit our profitability expectations that we have set out.

So really our philosophy in 2014 as it relates to continuing to hire sales heads to go after the opportunity, it's very similar to what you saw the past few years from us.

Perfect. Thank you very much and nice job on the quarter.

Scott Berg, Northland Capital.

Congratulations on the quarter. first of all, Archie, on the metrics around channel partners, which is impressive given where that contribution was a couple years ago. But can you compare from a year-over-year perspective say on the amount of leads you were given from channel partners? And then where would you expect the contribution of net new revenues to come from channel partners maybe over the next two to three years?

So again, it was over 100 different partners. Obviously we are getting more partners than we had a year ago; we're getting more repeat partners as well. I think we are getting stronger partners today than we were a year ago.

It is very broad-based and it continues -- to have 50% acceleration you need a lot of different things to go right and you need to be attacking the market from all angles, because we are not a big elephant company where one or two deals makes that number.

I would anticipate the channel will play a bigger and bigger part in the business. We are not moving away from the retail enablement machine that has made us so successful, I would assume that is going to continue to grow as well. But I think the channel strategy is put into place and I think as the leader and as our scale grows it becomes easier and easier to attract good, solid channel partners.

Great. And then last question for me at the moment is on the point of sale data that you are getting from retailers, obviously that is the amount of data or the number of retailers providing that has improved substantially over the last 12 to 18 months.

But how do you see that progressing maybe in the next 12 to 18 months? What is the real driver for them to provide the data? Because I believe that is still a key to help driving even further adoption of your EDI products the more that they can provide.

Yes. I think there's becoming a more compelling argument for retailers to share their data. Obviously retailers are going to do what is going to be best in their best interest. I think there's a couple things; we have a number of key suppliers that have been able to show increased sales when they are able to obtain the point of sales data and truly be a partner with that retailer.

I think that we also have the very large suppliers who are willing to be very aggressive with smaller and midsized retailers on the data. I think there is just a general acceptance that is happening, it will move slowly, I think it will continue to accelerate -- the pace will continue to accelerate. But this isn't going to be in my opinion an overnight 100%, but we will get there.

That's all I have, I will jump in the queue. Thank you.

Matt Pfau, William Blair.

First one is on the customers added in the quarter. Archie, I believe you said you continue to add larger customers. Are these still primarily coming from channel partners or have your internal sales force been adding any larger customers as well?

It is actually becoming more and more of a combination. The channel sales group is out there and bringing some of the leads, but sales development reps, our name and the fact that we run enablement campaigns and we may test and certify a supplier four or five times, maybe 10, 20 times so they are seeing our name, is becoming more powerful as well. So it is both.

Got it. And GXS was acquired by OpenText a while back. Have you guys seen any additional leads from that, has there been any churn in that base there or has that led to any additional large customer signings?

Most customers will end up with long-term contracts, one to three years. These are not decisions that larger customers are going to overnight because a vendor got sold make a change. If they are contemplating making a change I think when there is uncertainty within a competitor I think that is always a positive. But I think long-term we are set up competitively extremely well against the entire industry.

Got it. And last one for me. There's been a lot of talk about the target breach and that it was suspected to be perpetrated through a supplier portal, not yours. But have you seen any impact on the business from this? Have customers been asking questions about it?

We have not. We have not seen any increased interest from -- a number of customers already are doing security audits and the like, but we have not seen any increased interest in that.

Got it. All right, thanks for taking my questions. Nice quarter, guys.

Michael Huang, Needham & Company.

A few questions for you guys. First of all, as you guys are having success (inaudible) market, was wondering what you are seeing with respect to a length of sale cycle. I mean does it take longer to close these larger opportunities on the margin and maybe kind of drilling into cost of acquisitions and how does the cost of acquisitions compare with these larger customers versus your average one?

A couple things. One, we are not just chasing people that aren't making -- in a decision mode. And we are not going above the $500 million to $1 billion line unless there is truly an event. So we are not just chasing. We have so much opportunity in our sweet spot. We are trying to remain very focused.

So they are obviously longer sales cycles. But usually they are in a buying mode. And so, the sales cycles may be longer, but they are not -- these are not typically multiple year sales cycles, these are -- there's typically an impending date, decisions to be made. And quite often when we are invited in they have already made the decision that they want a cloud based solution which bodes very well for SPS Commerce.

Got you. And so, with respect to kind of cost of acquisition is it fairly comparable? But obviously the profitability might be higher on the larger ones?

I would say it is relatively comparable, I think that we've worked with smaller businesses, we've worked with larger businesses, they have different needs, they have different price points. So the larger customers have larger price points but they also typically have higher needs. So in general context it is comparable.

Got you. So now that Edifice is fully integrated into the SPS platform, I was wondering -- from your standpoint does that benefit the adoption around the analyst product area more generally? I mean would you expect to see accelerated adoption as a result of completing the integration itself?

I think a couple things. One, we now know how to sell analytics from top to bottom extremely well. We are also helping drive the innovation in the industry around collaboration. So does two things together will and should help sell cycles. Again data is an important part of it and acceptance of what is happening.

But we can now truly solution to sell what is the right solution, what is it that you need as a Company as opposed to here is what we have; we hope you want to buy that. We can truly become much more that trusted advisor, which is the position as a business we have always wanted to be in.

Great, thanks, guys.

Richard Davis, Canaccord.

Hey, guys, it is D.J. Archie if you had to prioritize kind of three strategic initiatives for 2014, what would they and I guess in what order?

Well, you have different groups within the Company and I would hate to ever hear any of our employees listening say their priority is one, two or three, because they all have big priority.

I think when I look back at 2013 it was an extremely big year for SPS Commerce, there was a lot of change anywhere from really honing in on business analytics to driving channel to defining RSX standard to moving upstream.

As I looked at 2014, we need to make sure that we continue on the momentum we built in 2013. So the priorities are somewhat aligned with where they were in 2013 -- channel analytics, larger customers, platform and making sure that we are the industry leader.

Yes, the one thing I didn't hear you touch on was maybe geographic expansion. Is that beyond 2014? Is there too much greenfield still in what you are doing domestically that is maybe not a forefront of the strategic priorities and maybe we see that in 2015, 2016? How do you think about that?

Well, so, we think about the international opportunities, two different areas, in Asia where we have a pretty decent presence in both Beijing and Hong Kong and that today part of the marketplace that is playing in that is the part of the North America supply chain. And then Europe are the two primary focuses.

We had nice success in both of those areas in 2013. It is obviously off a small base, but both those regions did outperform North America as far as revenue growth, again, off a small base. But I think we are continuing to make momentum.

In Europe where we are starting to see more momentum is really around the point of sales data sharing. And I think that is going to become more and more important. So 2014 you should see us continue to have nice momentum in Europe and in Asia spend on those areas. But not -- within reasonable parameters.

Yes. No, that makes sense. And then, Kim, maybe you could talk about what you have seen from an enablement campaign perspective kind of at the end of the year and any implications on kind of Q1 and the pipeline as you start 2014.

Sure. So enabling campaigns are a very important way for us to get new customers and that is something that we have done for many years and each year we continue to do more and more of those with retailers.

So what you saw in 2013, our expectations in 2014, very similar as it relates doing multiple campaigns for retailers. Q4 tends to be a little bit less just from a seasonal holiday season type. This Q4 we did do more than last Q4, however. And so we expect 2014 again to have a very nice pipeline of enabling campaigns that you will see throughout the year 2014.

Okay. Sounds good. Thanks, guys.

Jeff Van Rhee, Craig-Hallum.

A couple questions. Maybe, Archie, let me start with price increases. You obviously have been able to drive the ARPU up through deeper penetration, but for a while price increases in and of themselves haven't been a primary tool. How do you think about price increases at this point?

Yes, I think our thought process is similar to where it was a year ago or two years ago. I mean we will adjust -- do some small price adjustments in some areas, but it is not a primary focus yet. We think we have such a large opportunity. We do want to be as a business a game changer. We want to be radically different from a software solution, from a homegrown solution. We think there is long-term potential there but that is not what we are primarily focused on at this time.

Okay, fair enough. And on the sales side, could you just touch on sort of starting the new year as you look at the sales team, just a broad overview of kind of where we are from a structure, recruiting, comp, quotas -- anything materially shifting and changing that is even out of character from six to 12 months ago?

As we start the year we will continue to recruit, continue to promote people from within, continue to promote recruit talent from outside. And I believe every single area of the business quotas went up as would expect them to continue to over time.

And you feel like within that sales org you have got the right mix of talent at the high end to close the larger deals and potentially working with channel partners and sort of right on down, feels like the balance is there, no areas where you need to put emphasis in terms of hiring?

I think we have the talent throughout the sales organization. Again, I think consistent -- I would love to clone every single one of them and double it tomorrow and I think we have a lot of opportunity we are chasing. So do we have enough? No. Do we have the quality? I believe so.

Okay. And then last one, just in terms of once you have brought a customer user on board and they go to build out their network of connections, if you will, again any pattern, any change in the pattern pace, the way they go about building out their network or is there just same as it has been for the last how many quarters?

Yes, I would say it's very, very similar.

Okay. And last one for me, the channel I don't have it in front of me the channel as a percent last year?

In 2013, 16% of all of our new business came from channel.

Okay. And what was it the year before?

(Inaudible).

14%, okay, great, thank you.

Brad Sills, Maxim Group.

Really just one on where you see this going. Obviously EDI connectivity is a natural platform for other applications in the supply chain and analytics is kind of the first add-on here. Do you see this evolving where you can add other categories of supply-chain applications, things like demand planning, longer-term?

When we look at our business there are a couple of fundamentals -- one, we are in the retail ecosystem. And then two, SPS Commerce is typically involved when there is multiple parties involved in the process. So if something should be functionality within SAP or Oracle or NetSuite or Sage or any other ERP system I don't think that is the right place for SPS Commerce.

If, however, as a company you need to work with either a third-party logistics provider, a warehouse management system, you need to work with other parties, that is where we belong and I think there is significant opportunities as we move forward for us to expand our footprint.

Great, thanks Archie. And then one on just the channel. You guys are having some good momentum there in terms of contribution. Where are you in terms of channel development? Do you feel like you have got the right set of partners, you kind of hit the right mix of ERP vendor ecosystems to kind of go after? And is it just kind of going deeper within those ecosystems or are there others that you think you can recruit?

In my mind we are just starting. I think we have the larger ERP systems covered. Coverage is not where it needs to be for long-term. In other words we can add significantly from a capacity and a number of channel sales executives. And I think we will continue to add more partners. I think there is continued interest. And usually within channel sales momentum builds on momentum as long as you deliver excellence, which is what we plan on doing.

Great. Thanks, guys.

(Operator Instructions). [Alan Delallo], Barrington Research.

This is Alan Delallo in for Jeff Houston. Thanks for taking my questions. To begin with, what percentage of your revenue is international and do you see any unique opportunities abroad?

As it relates to our GAAP revenue, approximately 2% is international, we do, however, have a fair bit of our revenue that we have because of our Asia operations, however, that is really there to support the supply chain, the North American supply chain, so it shows up as revenue for North America. And then, Alan, what was your second question?

Do you see any unique opportunities abroad?

Well I think there are significant opportunities internationally and we are very conscious of it. We are trying to make sure we are setting a foundation for the future and building out to more retailers and making sure we are in the game. So long-term I see it as a pretty meaningful part of SPS Commerce.

Okay. And do you foresee any changes in your competitive landscape within the next one or two years?

Don't see anything on the forefront. Having said that, always paranoid about what is out there and making sure that we are out. Just making sure as the leader that we are the best Company we can be and that makes it as challenging as we can for any new competitors.

Okay. Thanks for taking my questions.

Thank you. There are no further questions in queue at this time. I will turn the call back over for closing remarks.

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

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