SPS Commerce Inc (SPSC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce second quarter 2014 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 call over to Stacie Bosinoff, you may begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on SPS Commerce's second 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'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 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 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.

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

Thank you, Stacie; and welcome, everyone. We had another great quarter with revenue growth of 21% to $31.1 million. Recurring revenue grew 23% and adjusted EBITDA was $4.5 million. This quarter, we executed across all areas of our business, as we saw a continued increase in both the number of new customers and wallet share. Driving the increase in wallet share this quarter was our analytics solutions, as retailers and suppliers recognized the need for better collaboration.

We also saw momentum with our RSX solution in which suppliers can integrate to their trading partners quickly and easily as our business grows. This quarter, for example, we signed Jarden Consumer Solutions, a multi-billion dollar company with many well known brands such as Crock-Pot, Mr. Coffee and Sunbeam. They were previously using a legacy software solution, but with their rapid growth and focus on margin improvement, they chose SPS for a standardized and scalable solution to work with over 100 retailers.

This quarter, we also hosted our customer event, Omnichannel 2014, where retailers and suppliers exchange ideas on this successful in a market dominated by the power of the consumer. It was by far our largest event with nearly 500 attendees. Customers heard keynote presentations from top brands such as UrgentRX, Cole Haan, NetSuite, RollerBlade, SHOP.COM, Beyond the Rack and OnTrac, all lending their expertise in collaborative best practices for an omnichannel world. Topics included everything from driving brand engagement to using data for personalization and innovation to building a nimble supply chain.

As retailers and suppliers make the necessary changes across their organizations to stay competitive, they're turning to SPS to help drive new supply chain strategies. For example, SHOP.COM transitioned their business model to work directly with manufacturers and suppliers. This initiative had a profound impact across their entire organization, bringing efficiencies in both cash flow and fulfillment. SPS enabled them to quickly link the suppliers and leverage the network.

Not only did they have to build direct relationships with suppliers, but it also meant changes to their websites such as improving its user interface and getting more consistent product content and greater search functionality. This is a huge transition for any company and today SHOP.COM sells 40 million different products through 3,000-plus worldwide affiliates.

SHOP.COM is just one example of how our market leadership and expertise helps pave the way for businesses to compete in today's omnichannel world. In June, many of you attended our first Analyst Day where we talked about the complexity of the retail ecosystem and the power of our network which enables our customers to quickly scale as their business grows. Our network is also cloud by birth which drives innovation at a much more rapid pace than our legacy competition and encourages greater collaboration between retailers and suppliers through our analytics solution.

As we continue to grow the business, the network effect becomes even more magnified and provides even greater value to our customers. As we look to the second half of the year, we'll continue to use market leadership position to do what we've been doing, acquire more customers and capture more wallet share.

This is an exciting time for the retail industry, with consumer demands and technology innovations driving new strategies and better collaboration. SPS sits at the forefront of these trends. And we believe we have a large market opportunity in front of us.

And now, I'll turn it over to Kim for the financials.

Thanks, Archie. As Archie mentioned, we had a great second quarter. Revenue for the quarter was $31.1 million, a 21% increase over Q2 of last year and represented our 54th consecutive quarter of revenue growth.

Recurring revenue grew 23% year-over-year. The total number of recurring revenue customers increased 10% year-over-year to approximately 20,700. Wallet share increased 12% to approximately $5,500. As you look at these two metrics. It's important to remember that they work in concert with each other and it's really the mix of the two that we focus on.

Total operating expenses for the quarter was $20.5 million and represented 66% of revenue. Adjusted EBITDA was $4.5 million, compared to $3.4 million in Q2 of last year. We ended the quarter with total cash of approximately $137 million.

Now, turning to guidance. For the third quarter of 2014, we expect revenue to be in the range of $31.9 million to $32.4 million. We expect adjusted EBITDA to be in the range of $4.2 million to $4.4 million.

We expect fully diluted earnings per share to be in the range of $0.03 to $0.04 with fully diluted weighted average shares outstanding of approximately 16.9 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.15 to $0.16 with stock-based compensation expense of approximately $1.4 million and amortization expense of approximately $650,000.

For the full-year, we are raising the lower end of our guidance, we expect revenue to be in the range of $125.7 million to $126.5 million. We expect adjusted EBITDA to be in the range of $17 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 the 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 the 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 a GAAP pre-tax net earnings.

With that, I'd like to open the call up to questions.

Thank you. (Operator Instructions) Richard Davis, Canaccord.

Hey, thanks. Two questions on the kind of [IND other]. So first is, Archie, when I kind of look at the broader picture of the supply chain market, we talk to supply chain buyers and they're thrilled that firms like yourselves are introducing kind of new technology to old systems, but there is kind of a growing interest in -- a desire for fewer vendors. How do you see the market evolving, is the first question?

And then, the second, which kind of ties into it, when is it logical to think that you guys -- because you're moving up kind of nicely in wallet share, as Kim said, to see some kind of large-scale displacement for some of the big legacy players' customers because we've seen that happen in other industries. So those are kind of two things that fit together. Thanks.

Yes, I think well, a couple of things, Richard. One, we are getting a competitive advantage, because customers do want to have one solutions provider and SPS Commerce can go end to end. Again, you have to be careful of what you define our business as and our business is all about being and playing between multiple parties. That's a very different business model than an ERP system or traditional software providers. So we look at our market anytime there's multiple players involved, a retailer and a supplier involved in a process, that's where we fit.

And today, we are getting a competitive advantage, because people do want for example business analytics and the integration in one provider. But if that is a competitor advantage and we are clearly seeing the ability to continue to move up market. There's fewer change events in those up markets, but we're also making it easier and easier for large companies to transition with RSX and making it -- derisking the proposition and moving over to a cloud-based provider.

Thank you so much.

Tom Roderick, Stifel.

Hi guys, good afternoon. So, Archie, one of the first things you mentioned on your script was the impact of analytics during the quarter, particularly as it relates to driving wallet share. You've mentioned before that analytics doesn't necessarily drive any one-time or non-recurring revenue. So I was wondering if you could address either quantitatively or just qualitatively with some customer examples, how you saw the analytics product impacting the numbers this quarter, impacting what you saw from a bookings standpoint, and why in particular, are you seeing an acceleration in the demand for analytics? Thanks.

I think, Tom, what's driving the analytics product, at least in this quarter and the last few quarters, is enablement campaigns, retailers wanting to collaborate with their key suppliers. So the number of enablement campaigns we've run specifically for analytics has been very strong and that obviously also allows us to over time, not only selling Shared View but also be able to sell them an enterprise solution over time. So we're just seeing significantly more activity and interest by retailers to collaborate as they need to in an omnichannel world, and it's really the enablement campaigns that are driving that for us today.

Kim, can you give us your sense as to how you think we should model the non-recurring piece going forward? It seems as you do more and more analytics, you're building up the visibility in the business, you're building up the bookings at a pace that you can see internally, we can't necessarily see it. What's the best way you think that we ought to model the non-recurring piece going forward?

Sure. So we obviously guide to total GAAP revenue, but every time we announce our results, you do get to see both components. So for example, this quarter, our overall revenue growth was 21% and the recurring revenue was 23%.

As it relates to how to model out the business, I'd say, you have our guidance as it relates to total, and you also know that as a business, we consistently delivered sort of what I'd characterize as 20% plus recurring revenue growth. You have a couple data points from the last two quarters, where this quarter, there was sort of a 2 percentage point difference between GAAP and recurring; and last quarter, it was a 1% difference. If you go back and look at that at any point in time, it's usually been within that range of about that sort of 1% to 2% difference between those two metrics.

Great. Maybe one last question regarding the channel, I know you've spoken about that in the past as being an important contributor to the wallet share gains that you've made. Any further strides with your key channel partners, whether it's NetSuite, Microsoft Dynamics, others out there? And how are you addressing the growth opportunity internally from a sales and support standpoint?

Yes. I think there are a couple of things. One, it's not a step function, but I would classify it as contingent momentum in both picking up new partners and also deepening the relationship with our existing customers -- partners. So I think both are happening. And we continue to invest in our channel partner's team. We continue to invest in all areas of the sales opportunities that we have. So I think continued investment, and I think it's continued momentum.

Great, thank you, guys. Nice job.

Michael Huang, Needham and Company.

Thanks very much. Hey, guys. A few questions for you. So first of all, a nice win over Jarden, was wondering if you could provide a little color around that. But was that a channel win or was that sold direct, given the size of Jarden? I would think that it would be channels, I was just curious. And then, from a product standpoint, was that just for integration or is that for integration analytics, maybe you could just provide some color on that? Thanks.

Yes. The first step in Jarden is today they bought integration. It was not a channel win. It was a deal that we've been working on. When we do enablement campaigns, just to remind everybody, we test and certify those that don't go with SPS Commerce, and that gives us an ability to continue to sell the market to those organizations and this is an example of us continuing to sell to those organizations and be able to get a nice win out of that.

Got you and I think you had mentioned that there was 100 retailers that are connected there. I mean could you share the sense of kind of what percentage of their overall retailer connections this represents?

Well, when we're done with this division, it'll be 100% of their retail connections.

Okay. Got you. And then, in terms of -- I just wanted to clarify here. So in terms of the enablement campaigns that are being run right now around analytics-only, can customers just buy analytics or do they have to buy integration as well and maybe you could just give us a sense for, if you can buy analytics alone, kind of what's the trend around that? Thanks.

Yes, both are standalone products. Many, many of our analytics customers are analytics customers only. So it's not just an upsell from integration, it's a lot of times a straight sale into analytics. Sometimes, we're doing enablement campaigns around integration and analytics at the same time; sometimes, we're just doing an analytics enablement campaign; and sometimes just an integration.

The trend has been towards multiple product enablement campaigns over the last year as I think retailers are in more of a sense of urgency and in an enablement campaign for the analytic customers, quite often, it is the mid and larger customers that are choosing the SPS Commerce solution, because that is who a retailer clearly wants to collaborate with is their large suppliers first. So yes, that either can be an entry point to being a customer at SPS Commerce.

Great, thanks so much.

Patrick Walravens, JMP Securities.

Oh, great, thank you. Hey, Archie, can you update us on the sales force expansion? And then, Kim, as I look at the guidance for next quarter if I'm doing my math right, it's 18% to 20% growth. Is there anything about Q3 that would be maybe a little slower? Thank you.

Sure. I'll actually take both of those. From a sales perspective, we did continue to add more salespeople. We exited Q2 with 210 what we refer to as sort of quota-carrying sales folks, and that's up from 197 last quarter. So it was a pretty large sequential increase.

Keep in mind, a lot of those salespeople that we hired particularly in the direct sales team, a lot of those are -- we can get right out of college. So it's somewhat logical from a seasonality that you have the largest increase occurring here in Q2, but we continue to add across each of our sales areas and continue to add resources there.

As it relates to the guidance, you're correct, it's on a GAAP revenue 18% to 20% in Q3. Really the only thing to note is that as it is for enablement activities, still have a lot in the pike for Q3, enablement campaigns are always very -- we have many of them throughout the year.

However, some of the enablement activities that we had initially anticipated would be in Q3, they actually occurred in Q2 -- the latter part of Q2. So part of beat in Q2 was due to that and therefore some of that comes out of Q3. So outside of that, nothing really of note to highlight.

Okay. Thank you.

Jeff Houston, Barrington Research.

Hey, thanks for taking my questions. Just curious with the new recurring revenue customers added in the quarter, what was the mix of those that you'd classify as small and mid-sized suppliers with those with less than $500 million in revenue versus those that are above that $500 million mark? And could you talk about also on your pipeline and how that's trending with between small and mid-sized suppliers and larger ones?

Sure. So as it relates to the customer adds in the quarter, you'll see we had a pretty nice top end increase of just over actually 700 sequentially. The largest amount of that is directly related to the enablement campaign activities within the quarter. We had a very strong quarter of enablement activities and the mix this quarter actually translated to more coming in as new customers versus -- as a percentage than we have seen in some other quarters.

Enabling campaigns are going to end up hitting you one of three ways, that you're either going to be a new customer, you're going to be an existing customer. Well, we're just getting more revenue from you, or you just test and certify and don't become a recurring revenue customer on the integrated side. So in this particular quarter, we have a larger percentage of new that came in and those that came in through those enablement campaigns are the smaller-sized customers. And so that would be under your definition of the $500 million or below; the majority of the increase came from that group of customers.

Got it, that's great color. Thank you.

Bhavan Suri, William Blair & Company.

Hey, guys, thanks for taking my question. Just a couple ones; first, just on the sales cycles, as you look at the larger customers, the ones especially Jarden that you add yourselves, how do those sales cycles compare to the smaller suppliers?

Well, the smaller suppliers in an enablement campaign oftentimes, those are two-week to six-week sales cycles, because they need to do something at the request of their large customers whereas the larger customers obviously have a solution and they're switching a solution. So those tend to be significantly longer sales cycles. Typically, an average, and it goes all over the place, you're talking about a 90-day sales cycle.

Okay. And then, what's -- maybe I didn't catch it, was the Jarden deal competitive?

Well, it was and the fact that they were really deciding, I think when we got down to the finish line, it was deciding between whether to stay on legacy software and stay with the do-it-yourself model, status quo or go to a cloud-based solution and be able to leverage our network.

Yes, yes. And then, just turning to sort of the competitive environment at large, GXS was acquired by OpenText now quite a while back, have you guys seen any benefit from that -- has there been any churn on that base that you've been able to take advantage of?

I wouldn't say that we have an identified trend of problems or anything there. So, my understanding is it's somewhat of a stand-alone business. But obviously, we compete very effectively against them. But I don't know if there's a change in that environment that I would identify as a change.

Okay. And then, one last one for Kim. Maybe when you look at the quarter came in obviously some of those enablement campaigns happen in Q2. So you sort of pulled a little bit from Q3. But you a nice beat in Q2 and sort of you were a little more conservative on the full year sort of guide.

And given the subscription model, sort of the layering that that has, it's just surprising that you wouldn't raise that low end of the range, maybe a little more. You obviously talked about one-time items. I just want to clarify, was it because of the one-time items or was there something else going on?

Sure. So we did take up the lower end of the range to take into account how we performed, how we came in, in Q2. We also did, however, take into account as it relates to some of the timing of the enablement campaigns and again, on enablement campaigns, the way that impacts us, there is an aspect of recurring revenue, whether it be a new customer or an existing customer that is just paying us more. However, there is also an aspect of testing and testing truly is just one-time in nature.

And so when we run enablement campaigns, if more enablement campaigns came in in Q2 than we had anticipated where we originally had it forecasted in Q3, the part I am talking about is actually really more that one-time aspect of it. It's really that testing, so the revenue -- we got additional testing revenue in Q2 higher than we had anticipated and therefore, it's really that portion that was really the switch between Q3 and Q2.

Perfect. Now, that's helpful. Thanks, guys. Thanks for taking my questions.

Scott Berg, Northland Capital Markets.

Hi, Archie and Kim, congrats on a good quarter. I have two questions. First, for you, Archie. As you guys look at the M&A environment today, your revenue in the second quarter was roughly 50% larger than when you made your last acquisition of Edifice. Would you consider a potential acquisition target to be 50% larger, or twice as large as Edifice, or would you continue to stay maybe in that $35 million range, plus or minus, and lower?

Yes. So here's the way we analyze acquisitions, which has been pretty consistent since we went public is we're looking -- first off, we think we have a very large organic growth opportunity. We think we can achieve our long-term goals organically and any acquisition we do is really important that it's not going to slow down our organic growth. So that's just an end-all rule at SPS Commerce.

When we're out looking, we're just looking at deals and if they fit into that, if they can help us achieve our long-term goals, and we can pay right, they're in the funnel. If they're not, then they're just not in the funnel. So we're going to continue to be very disciplined, but obviously as you're bigger, you're able to do bigger deals, but again there's not a whole lot of bigger competitors out there. So that's a true statement that we would do something bigger, but -- than we did, but I don't know, there's not a whole lot of add-back for those type of acquisitions.

Okay, great. And then, last question for Kim. You had at least for you a relatively sharp increase in long-term deferred revenues on a sequential basis from Q1. Is that purely related to the large number of customer adds in the quarter and some one-time testing fees that you need to amortize or was there a different dynamic happening with that? Why's that?

It would be the former, not the latter. There is no testing fees that get amortized, that's just a direct to the P&L. The deferred revenue increase that you see on the balance sheet in the cash flow is based on the sort of new business that came in in the quarter and it's the -- so the one-time fees or the setup fees associated with that new business.

Great. That's all I have. I'll jump in the queue. Thank you.

Jeff Van Rhee, Craig-Hallum.

Great, thank you. You said I think quite some time that it really takes change events to get people to reconsider. As you look at the Jarden, can you just circle back to that for a second? Certainly, they went from prem to your solution. Can you give a little more color, was this part of just a broader omnichannel campaign? What was the change event that triggered this?

Yes, I think the change event for Jarden is really all of the change. They recognize and appreciate all of the changes happening in the retail world today. So it wasn't necessarily one event, it was a whole host of events and then they look out, they were forward-looking.

Sad that to stay with on-prem over the next decade with the changes that are going to be happening in retail, just doesn't make sense for them. Everybody is going to hit that at a different point in time. Everybody is going to be willing to listen to that story at a different point in time, and that's where they're at.

So in this case, it wasn't a revisit of an ERP or other major back office system rather just a longer-term planning?

Yes.

Okay. And then, I know you spend a lot of time watching the different cohort groups as they evolve the number of connections and certain behaviors. Anything to call out as you look at those behaviors over this quarter or the last few quarters?

No, I would say that we have our two metrics we show the customers and then the wallet share of the customers. The only dynamic really to note is this quarter, you saw a bit more come through in new customers and we sort of talked the reasons why based on our enablement activity within the quarter, but really nothing to note over this quarter or the last couple of quarters.

Okay. And then, just briefly, any updates on retail universe in terms of any statistics you could provide around adoption usage, etcetera?

I don't know the specific numbers. We're not sharing those on a quarterly basis, but usage continues to grow, it continues to have significant interest from both retailers and suppliers; and today, it's in a significantly different spot than it was a year ago. So we continue to see momentum there.

Got it. Okay, thank you.

Thank you. (Operator Instructions) Brad Sills, Maxim Group.

Hey, thanks, guys, for taking the questions. Just one on the new customer wins, very strong this quarter, you mentioned the enablement campaign is just part of it. But can you comment a little bit on the competitive environment? Are you seeing still a lot of replacements of on a manual point-to-point integration? Are there any particular vendors that you're displacing as well?

I think there's a couple of things. One is, we are just seeing replacement of manual processes. We're seeing new rule books by retailers as they go ecommerce and especially drop ship.

And then, as far as the enablement campaigns around collaboration, is really about they didn't collaborate before. So it wasn't even spreadsheets. The suppliers just didn't get the data and they weren't able to truly collaborate with the retailers. So both are a little bit different, but the collaboration is a recurring demon that's continuing to be -- have momentum.

Great, thanks. And then, just one last one on the wallet share, you mentioned analytics and RSX as two drivers, but did you see the number of connections per customer kind of gap up again this quarter consistent with your move through the ERP channel?

Sure, so in general, what we've seen and it was consistent in Q2 as well is that connection per customer has increased. Yes.

Great. Okay, thanks, guys.

Thank you. Ladies and gentlemen, this concludes our conference for today. You may now disconnect at this time. Everyone, have a great day.