SPS Commerce Inc (SPSC) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2014 SPS Commerce earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's program, Stacie Bosinoff. Ms. Bosinoff, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on SPS Commerce's first-quarter 2014 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 measures.

With that, I will now turn the call over to Archie.

Thanks, Stacie, and welcome, everyone. We had a great start to the year. Total revenue grew 22% to $28.9 million, and adjusted EBITDA was $3.9 million. Recurring revenue grew 23%.

The trend in the retail industry toward omni-channel continues to create a huge opportunity for SPS Commerce. Many retailers are now selling products through multiple channels, combining physical commerce in their stores with digital commerce across Web and mobile platforms.

The ability to provide a seamless shopping experience for all consumers across all these channels has made the retail ecosystem more complex than ever. Consequently, suppliers and retailers need to work strategically to meet the needs of omni-channel consumer, whether it is helping to drive traffic to websites, executing fulfillment needs, or making pertinent product details accessible to consumers across all touchpoints.

To give you some perspective as to the magnitude of these trends, Forrester expects online retail sales in the US will increase from $231 billion in 2013 to $370 billion by 2017. Suppliers and retailers who adapt to omni-channel and crack the code first will have a significant competitive advantage.

SPS is at the forefront of this evolution and in the unique position to help suppliers navigate these new waters. We have been able to take the priorities of both suppliers and retailers and develop one solution, creating a genuine partnership between suppliers and retailers.

Given our leadership in the retail ecosystem, we've spent a lot of time and resources innovating around our platform. Last year, we developed an industry standard called RSX in which suppliers can integrate to their trading partners quickly and easily, enabling faster expansion throughout their trading partner network as their business grows.

For example, Brooks Sports, an international supplier of high-performance running shoes, apparel, and accessories, needed a solution that could implement their trading partners quickly as well as accommodate their needs as a growing company. They chose our RSX standard and started with implementation of approximately 40 trading partners. And because RSX easily scales, they continue to add trading partners as they grow.

We are also seeing momentum across our analytic products as retailers and suppliers are beginning to collaborate more closely than ever before. With our analytic services, retailers and suppliers can jointly drive higher sales, reduce inventory levels, and enhance loyalty across all their consumer shopping channels.

One of our analytics products, Shared View, allows a retailer to share a common view of POS and inventory analytics with each of their suppliers. This enables retailers and suppliers to view the same data in the same format as the retailer, to help drive their business, enhancing sellthrough, optimizing product assortment, and improving forecasts.

Shared View is sold through enablement campaigns in which we partner with retailers to onboard their supplier community to the service. These enablement campaigns feed our viral network, providing us warm leads into new customers and upsell opportunities to existing customers.

For example, this quarter we launched the Shared View enablement campaign with Advance Auto. Advance Auto was looking to increase sales and improve margins and inventory turns by sharing POS data with their strategic suppliers.

So, we hosted an enablement campaign on behalf of Advance Auto; and now buyers and their suppliers are able to utilize the same analytics application, ensuring they are on the same page in their discussions. This is part of a broader supply chain initiative to bring more transparency and vendor accountability within their supply chain.

We also have our enterprise analytics service, which enables suppliers to apply POS and inventory analysis across multiple retail customers. By aggregating and analyzing data across multiple retail relationships, suppliers are better positioned to optimize sales and inventory performance across products, geographies, and sales channels.

While the omni-channel movement has opened the door and created more opportunity for change in the retail ecosystem, our solution and powerful network effect gives us a competitive advantage over other solutions. Because we sit in the middle of the retail ecosystem and capture large amounts of data through our network, retailers and suppliers are turning to us as industry experts.

We believe we are in the first inning of this movement, and there are a lot of exciting things to come as retailers and suppliers work together to meet consumer needs. To help shed more light on how these changes will affect the retail ecosystem, we will be hosting our first Analyst Day on June 3 in New York, taking a deeper dive into the omni-channel trends and the key role SPS expects to play in the industry. We hope to see you all there.

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 $28.9 million, a 22% increase over Q1 of last year, and represented our 53rd consecutive quarter of revenue growth.

Recurring revenue grew 23% year over year. The total number of recurring revenue customers increased 9% year-over-year to just over 20,000. Wallet share increased 13% to $5,220. As you look at these two metrics, it is 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 $19.1 million and represented 66% of revenue. Adjusted EBITDA was $3.9 million, compared to $2.9 million in Q1 of last year. We ended the quarter with total cash of approximately $135 million.

Now, turning to guidance. For the second quarter of 2014, we expect revenue to be in the range of $30.3 million to $30.8 million. We expect adjusted EBITDA to be in the range of $4 million to $4.2 million.

We expect fully diluted earnings per share to be in a range of $0.02 to $0.03, with fully diluted weighted average shares outstanding of approximately 16.8 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.14 to $0.15, with stock-based compensation expense of approximately $1.3 million and amortization expense of approximately $720,000.

For the full year, we are raising the lower end of our guidance. We expect revenues to be in the range of $125.5 million to $126.5 million. We expect adjusted EBITDA to be in the range of $16.9 million to $17.5 million, keeping with our approach of investing any upside back into the business.

We expect fully diluted earnings per share to be in a range of $0.13 to $0.15. We expect fully diluted weighted average shares outstanding of approximately 16.9 million shares.

We expect non-GAAP diluted earnings per share to be in a range of $0.62 to $0.64 with stock-based compensation expense of approximately $5.5 million. We expect amortization expense for the year to be approximately $2.7 million.

For the remainder of the year, you should continue to model a 40% effective tax rate calculated on GAAP pretax net earnings. With that, I would like to open the call up to questions.

(Operator Instructions) Michael Huang.

(technical difficulty) to Shared View and maybe some of the enablement campaign activity around that. Could you share what you are seeing out there in terms of interest around running enablement campaigns for Shared View, and ultimately how that drives the number of retailers to share more POS data with you? If that has any relationship to it.

Yes, thanks, Michael. It has a real strong correlation. We are seeing a general trend in the retail industry, for obvious reasons, for retailers to start becoming more collaborative with their suppliers and also want to hold them accountable. You need to actually collaborate to be able to hold them accountable.

We are seeing great interest in being able to use our analytics tool. The way it works is we are able to -- if a retailer gives us all of their point-of-sales data, then we give them Shared View for free, and then the supplier purchases it. We are seeing tremendous opportunity and more and more retailers willing and able to share data.

Okay, got you. Is there a way to just ballpark what the incremental pricing would be if you're a supplier who wants to take advantage of Shared View?

Well, the pricing is by trading partner by dollar volume. So it is much more dollar volume-driven than anything else.

So it depends on the size of the retailer -- a larger retailer is going to have more sales -- and the larger size of your relationship with them. But it is a meaningful upsell to an existing customer.

Okay. And then last one, final question for me. Just in general terms of the general amount of enablement activity that you are seeing out there, are you seeing anything that suggests that we could have a better enablement campaign activity year, this year versus last? Is there anything in the environment that is perhaps driving more of the activity versus what you have seen historically?

Well, I think the one trend we are seeing is we have been pushing the omni-channel trend, and we are doing multiple product enablement campaigns. For instance, when we talk about Advance Auto, we actually did not only point-of-sales enablement but also an integration EDI enablement campaign at the same time.

So we are seeing more multiple product enablement campaigns. So we are seeing a strong amount of enablement campaign activity.

Thank you, guys.

Tom Roderick, Stifel.

Hey, guys. Happy spring. So first, let me ask the first question. Michael just sort of hit on it a little bit with the question around enablement campaigns. Maybe looking at the numbers here in a little bit more detail, so the recurring revenue stream seems to be remarkably consistent with where it has been organically over the last several quarters at 23%, 24%.

It looks like the one-time revenues dipped here as far as the growth rate goes to maybe half of what they were last quarter, which could be either amortization or could be testing or enablement campaigns. Anything unusual going on within that number? And how would you encourage us to think about the one-time, given that recurring has been so consistent?

So one thing to remember, Tom, is that on our analytics service, there is either no or very little one-time fee. And in an analytics enablement campaign, there is no testing option, so there are no testing fees. They either sign up for a recurring revenue solution or they don't sign up.

And then I would just continue to focus, as relates to recurring revenue, our [practice], two components that are nonrecurring in nature. There is the amortization of set-up fees, and longer-term our philosophy is we want to actually charge as little as possible on a set-up fee.

We want to minimize that point with the customers. We obviously need to cover our costs, but there is an amortization of set-up fees; and then you are correct, there is a testing.

And depending on the type of enablement campaigns will determine how many customers simply test with us and we get a one-time fee, or in many cases we have an existing customer that we end up getting more revenue from them via an enablement campaign. But that will show up in the recurring revenue versus a one-time testing fee.

Got it. okay. In the past, Kim, and I apologize if I missed it on this call, but you have given the data as to what percentage of new bookings or new revenues are coming from both analytics and the channel. Can you give those numbers again?

Sure. That is a metric we share on an annual basis. Last year, 16% of all the new business came from channel and 15% came from the analytics. We are seeing very nice traction in both of those areas, continued traction in both of those areas into 2014.

And pricing-wise, are you still seeing roughly a doubling of ASPs on the analytics front?

I think the pricing has been very consistent, yes.

Okay. Last question for me. If you are willing to share number of sales heads that you finished at, at the end of the quarter, that would be really helpful. Thanks.

Sure; 197, so up seven sequentially.

Wonderful. Thanks, guys. Nice job.

Richard Davis, Canaccord.

Hey, thanks. It was probably more towards Kim, but when I look at your business model, it feels to me like you are generating, is it price, 60% incremental margins on the new dollar of sales? If you just look at the gross margins, it is 70%, but you might have some salesmen involved in it.

So my point is, if that number is close, why won't this put big upward pressure on your operating margins as you scale? I know you have investments and stuff like that, but if this thing's -- if you ever decided to slow this business down, wouldn't the margins just explode upwards? Or am I missing something in the model? Thanks.

As it relates to EBITDA margin, you are correct; there is a lot of leverage and scaling in the model. We are consciously focused on reinvesting back and adding as much as we can back in sales and marketing, to go after the very large top-line opportunity.

So where that translates to is the concept of just an incremental margin expansion, back to the investor on average, on an annual basis. But longer term, we believe those margins are sort of low to mid 20%s.

Great. Okay, good. That's what I thought. Thanks.

Pat Walravens, JMP Group.

Oh, great. Thank you. Archie, can I start very big picture and just ask if you noticed any changes at a macro level in the quarter?

I did not. I think there is a continuing trend towards retailers and suppliers really working through the new world order of e-commerce and omni-channel. We are seeing more multiple-product enablement campaigns. That's probably the biggest things that we are seeing.

Yes. One of the questions I got a number of times during the quarter, and I just didn't know how to address it, was whether the weather would have any impact on your business.

It does not, especially on an ongoing basis, other than it doesn't make a lot of people in Minneapolis real happy when it is super-cold for long periods of time (laughter).

Yes. And then the follow-on to that that I got, and I wasn't sure exactly what the right answer was, was: so how do they price, exactly? Like how much of it is transactional and how much of it is subscription?

As a relates to the integrated product, roughly about 75% to 80% of it is a fixed fee, primarily based on the number of connections or trading partners; and roughly 20% to 25% is more transaction or variable based.

But you don't ever seem to have the overage issue that we've seen with other stocks that have that transactional. So is there just less variability in the total number of transactions, or why is that?

So as it relates to the transactions, just to be clear, the transactions are not based on GMV or dollar value of goods. The transactions are based on a purchase order, an invoice; each of those would be a document or a transaction. So that is one thing to keep in mind as the way we price.

The other thing is we purposely have set up our model so that we scale as companies scale. So for example, if their business grows and they end up getting more purchase orders from a retailer, for example, there is a natural pricing model where our dollars will increase but the dollar amount per transaction will decrease as their volume grows.

Interesting. Okay. Then, Kim, I think I just missed it. What was the organic growth rate in the quarter?

23% recurring revenue growth.

Okay, wonderful. Thank you very much.

Scott Berg, Northland Capital.

Hi, Archie and Kim. Congratulations on another nice quarter. I guess my first question, Archie, is: have you seen any change in the buying environments, maybe over the last one to two quarters, in terms of how customers in different segments are looking to buy your different solutions?

More multiproduct sales on the front side; it certainly seems like you are getting some traction from the enablement campaigns. But any real differences there, maybe from the smaller customers up to the large customers? Any trending differences?

I think the big trending is on the retailers doing more multiproduct enablement campaigns, which obviously translates into customers then consequently buying multiple products. But outside of that, I think the buying is very, very similar to the past.

Obviously, for us as a business, we continue to move upstream, so we are seeing larger and larger opportunities and that ends up being a slightly different buying scenario than a smaller customer. But that has been pretty consistent over the quarters.

Okay, great. Then I guess the last question for me, Kim, your gross margins in the quarter were solid; but they are down I guess versus my model and down over the last 12 months or so. With the lower portion of one-time fees and set-up revenues in the quarter, any reason why they were down maybe more than expected?

As it relates to in the quarter, it is primarily driven by hiring. So personnel-related costs.

When I think about gross margin with our business, I think it is one that it's best to look at on an annual basis. So if you look at last year, we exited at about 69.5% was our gross margin last year; and as I think about this year, I would expect our gross margins this year to be similar to last year.

So the impact you saw in Q1 was more just driven by the timing of hires versus anything else.

Got it. All right. I will jump back into the queue. Thanks for taking my questions.

Bhavan Suri, William Blair.

So just a broader-based question, first, on the analytics offering and the Shared View here. There is a ton of data there, and it feels like to me that there is a whole host of analytical applications, especially stuff that is more predictive, prescriptive-type stuff that could be built here.

I would just like to get your thoughts on where you guys think you are headed in that direction and how you view the broader analytics opportunity here. Because obviously you have one focused on analytics, and there is just so much -- it is a very data-rich environment. So just how you think about that and maybe build-versus-buy as you think about it.

So I think there is a lot of opportunity. We have an awful lot of data. Capturing, normalizing, weighing, queuing, and storing the data is not a minimal feat, especially when you are doing it across hundreds of retailers, all who define things differently, all who you need to fully understand their business. That is not a small portion of the task.

The way we look at it long term is that we have an analytics platform which will have the data; and we will have applications, which we have today, on top of that platform. And we will longer-term allow people, if customers want them to, to be able to build applications on top of SPS Commerce, because there are so many different ways they want to look at the data, and there are so many different things they want to augment the data with.

So that is our longer-term strategy so that we can fulfill all the needs of all the customers, which we just would not be able to do on an internal basis. So much like Apple would not be able to build 34 different weather apps that you can buy on their iTunes Store, we feel the same way. We will own and control the meaningful and the most core applications that allow partners and other people, including customers, to build on top of our platform.

So -- and that's great, Archie. So I guess my next question around that is, so the SIs come with a ton of domain experience, and you guys have started working with the SIs.

Have you exposed this at all to them? Are they starting to work on this? Or are we still pretty early on this?

We are exposing at on integration product, and it is one of the things that is driving channel momentum. We are not yet on the analytics side, but would expect that to be an occurrence that would happen in the 2015 year, that that would be -- start gaining momentum.

Okay. And then just a more tactical question, I guess. GXS was acquired there; have you seen less of them competitively at all? Or has that been relatively consistent with historical patterns?

We have not seen a significant change at this time.

Okay, okay. And then internationally, just an update on how that is coming along. Obviously, with existing suppliers generally, but just some update on how you are seeing the international expansion in Europe and in other areas come long.

Yes, so I think internationally -- we look at two different marketplaces, primary marketplaces, that we focus our time and energy on. The first is Asia, and we look at that primarily part of North America supply chain and European supply chain.

Don't see yet at this time a lot of activity out of the retailers. I think longer-term we will have that opportunity as the retailers start to look at their own supply chains. And so that area and region continues to have momentum, and we continue to invest and grow the number of suppliers there.

The one thing about the number of suppliers there, it is a little misleading in our financials, in the fact that there are North American suppliers that have components of our offering in Asia but it gets counted as North America. So we are seeing nice momentum in Asia.

In Europe, we now do business with about five dozen retailers. We continue to build out the network. We continue to add suppliers on that network, and we are seeing more and more activity on the analytics side of the business in Europe.

So nice momentum on both sides and continue to make progress.

That's great. Thanks, guys. Thanks for taking my questions.

Jeff Houston, Barrington Research.

Hey, thanks for taking my questions. With the $135 million cash on your balance sheet at the end of the quarter, could you provide an update on your acquisition pipeline? Are you seeing valuations pull back a bit in your target companies? And could you provide a bit of color on the areas that you are most interested in?

So, I think our M&A strategy has been relatively consistent since we went public, in that our first and primary objective is organic growth. We think we have an incredibly large organic growth opportunity, and we think we can accomplish our long-term goals organically.

Having said that, we would obviously like to make acquisitions. What we look at is, when you look at our business, we are looking for things that are in the bull's-eye. Typically customers or competitors, we are acquiring customers from our competitors, or some very close-by functionality, like the acquisitions we have done in the past.

And we will -- we are very selective in the fact that we can't acquire anything that is going to take our eye off the ball of organic growth, and we need to be able to pay the proper amount. Sometimes private companies have grand illusions; they see multiples that are unrealistic for where they are at.

So we haven't seen, when we are out looking, valuation expectations change from private companies. Usually there is a long lag between what private companies think they are worth, because they don't see their stock go up and down every day. But we are actively -- we continue to be actively looking, consistent with what we have done the last four years, and are going to continue to be very selective.

Great. Then following up on the sales headcount, I think you said there was 197 at the end of the quarter. What are your plans to grow that for the rest of the year?

That will be very consistent with what you have seen from us historically, with the approach being we will continue to add as many salespeople as we can, while still delivering on our EBITDA profit expectations that we have established, and in line with that incremental margin expansion on roughly an annual basis. So you should expect that we will continue to add salespeople throughout this year.

Got it. Thank you.

Jeff Van Rhee, Craig-Hallum.

Great, thanks. I think most of mine have been asked; just a couple for you, Kim. Where are we in terms of churn? And how has it changed in the last couple quarters?

Churn stayed very consistent, around roughly 12% on an annual; and the dollar impact being about half of that. So that is not something that really has changed. That has stayed quite consistent at that; again, customer churn roughly 12% annual.

Got it. And then, just in terms of all the layers that make the build for your ARPU, and the same for where your customers are coming from, anything beneath the covers in terms of what is driving the ARPU gains that was notably different than prior quarters?

I would say what we have seen in Q1 2014 is similar to the context that we would have given in 2013. So nothing different from that.

But just to reiterate what that is, there is a concept as the buyers grow they will sell to more and more retailers and require more and more connections. And the way our pricing model works, our revenue by default would go up.

Then, there is the analytics business, so product upsell opportunity, as well as the channel sales team that gets us in front of typically larger customers than our average customer size. Those three areas impacted our ARPU in Q1. And again, those three areas were really what impacted our ARPU growth rate in 2013 as well.

Got it. Thanks. All set, thanks.

(Operator Instructions) Brad Sills, Maxim Group.

Hey, guys. Thanks for taking my question. You have had some real good success, I know, with the SI channel around ecosystems, around different ERP vendors. Can you comment on which ones you are seeing more traction with?

It seems like that part of the business is getting momentum here. Any one ERP ecosystem in particular that you are seeing traction, and why?

You know, it is really across multiple ERP areas. NetSuite continues to be strong; obviously NetSuite has a lot of momentum in this space. Our Oracle practice, our SAP practice are strong. Our Sage practice and our Microsoft practice are the primary drivers at this time.

Okay, great. Thanks. And then just one on analytics. I know the focus has been on working with some of the midsized retailers to get the point-of-sale data integrated. Can you just comment a little bit on your progress there, please? Thank you.

Yes, we are seeing momentum there. We are running enablement campaigns, and we are seeing a definite shift towards retailers being more likely to share that data, and I think we are capitalizing on that. It is a slow shift, but it is a steady shift.

Got you. Okay. Thanks, Archie.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to take the time to thank you for participating in the Q1 2014 SPS Commerce earnings results. This now concludes the program and you may all disconnect. Everyone have a great day.