SPS Commerce Inc (SPSC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce Q2 2015 earnings conference call. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to turn the conference over to [Ellen Davis] with The Blueshirt Group. Ma'am, please go ahead.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's second-quarter 2015 conference call. 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. And with that, I would like to turn the call over to Archie.

Thanks, Ellen, and welcome, everyone. We are very happy to share with you today our results for the second quarter of 2015.

Total revenue grew 25% to $38.8 million. Recurring revenue grew 26%, and adjusted EBITDA was $5 million.

We had a great first half of the year as we remain focused on the multibillion dollar-market opportunity in front of us by addressing consumers' demand for an omnichannel buying experience. We continue to broaden our channels program, enabling us to move upmarket and connect larger suppliers to their trading partners, and we are seeing more suppliers and partners integrate to RSX. We are also experiencing growth across our Analytics suite as retailers and suppliers further realize the strategic importance of collaboration.

Consumers are calling the shots, demanding faster and more convenient services from their shopping experience, and the information they need to make a buying decision is quite literally in the palm of their hands. Widespread mobile adoption is driving consumers' expectations for omnichannel retail.

In 2013, more than 195 million tablets were sold, and to date smartphone sales have surpassed 1 billion. With Internet influencing 50% of all retail sales and social media now not only connecting people but also informing, validating, and driving purchases, it's no surprise that the pace of omnichannel adoption is rapidly accelerating among retailers as the quest to build collaborative strategies to support seamless customer experience remains top of mind.

A recent example is Pet Supplies Plus, a leading specialty pet retailer in the US, who partnered with SPS to implement a new supply-chain strategy. Using both our Fulfillment and Analytics products, PSP eliminated many manual processes and improved collaboration with its suppliers.

Through our Fulfillment product, PSP is now able to electronically exchange purchase orders, invoices, and advance ship notices with suppliers. Adding this functionality resulted in improved order accuracy, increased visibility of product flow within the supply chain, and enhanced receiving efficiencies in stores and the distribution center.

Using our Analytics product, PSP now provides its suppliers with POS data, allowing those suppliers to make real-time inventory recommendations. The sharing of POS data resulted in improved product availability and increased sales. By partnering with us, PSP can more effectively collaborate with its suppliers to fulfill orders at the speed expected by today's omnichannel consumers.

Our platform exists to deliver the technology to source items, manage those items, fulfill delivery as fast as the consumer wants it, collaborate as part of a community, and utilize analytics for a global competitive advantage. With the help of more than 400 technology partners, we now deploy a more agile omnichannel solution around the world using our commerce platform.

SPS has the largest network, with more than 60,000 trading partners, including over 2,000 retailers. We continue to expand our network, adding new customers and deepening retailer relationships.

The viral nature of our network drives incredible scale and enables a powerful lead-generation engine that we continue to benefit from. Additionally, retailer enablement campaigns continue to be an important part of our lead generation, driving thousands of leads with hundreds of retailers every year.

One of the key topics among our customers at this year's annual Omnichannel retail conference was how cloud-based retail business networks are now enabling organizations to fully harness the hyperscale requirements for success in today's retail environment. Furthermore, when organizations look to make the transition to a cloud-based retail business network, the speed of implementation and the collaborative capabilities of their partners are critical.

Del Monte Foods recently completed a one-year transformation to the cloud following the Company's split into two divisions. The execution timeline was incredibly short, and Del Monte needed an experienced partner who could quickly implement a new system, swiftly onboard their trading partners, and integrate with all of their other system partners.

In a matter of months we successfully integrated over 150 trading partners into their new ERP system. By choosing SPS Commerce, Del Monte was able to leverage our robust network while also taking advantage of our deep expertise within the retail industry. Furthermore, by transitioning to a cloud-based network, Del Monte made a valuable investment in their future capabilities, allowing for plenty of room to scale their business.

In summary, I am pleased to report another great quarter as we continue to experience momentum across our business. We are benefiting from the industry's rapid shift towards omnichannel, and our push upmarket is tracking well as larger suppliers and retailers drive increased collaboration throughout the industry.

Bottom line, if you want to succeed in retail you must meet the expectations of the consumer by delivering an interactive, connected, and seamless buying experience. Our broad-based solution enables us to work as a trusted advisor to both retailers and suppliers and places us at the center of the retail ecosystem, and we believe we are well positioned to continue as the industry leader in the supply-chain world.

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

Thanks, Archie. As Archie mentioned, we had a great second quarter. Revenue for the quarter was $38.8 million, a 25% increase over Q2 of last year, and represented our 58th consecutive quarter of revenue growth.

Recurring revenue this quarter grew 26% year-over-year and 22% organically. The total number of recurring revenue customers increase 10% year-over-year to approximately 22,700. For Q2, wallet share increased 14% year-over-year to approximately $6,200.

For the quarter, adjusted EBITDA was $5 million compared to $4.5 million in Q2 of last year. We ended the quarter with cash and marketable securities of approximately $131 million.

Now turning to guidance. For the third quarter of 2015, we expect revenue to be in the range of $39.6 million to $40.1 million. We expect adjusted EBITDA to be in the range of $5.4 million to $5.9 million.

We expect fully diluted earnings per share to be $0.04 to $0.05, with fully diluted weighted average shares outstanding of approximately 17.1 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.19 to $0.20, with stock-based compensation expense of approximately $1.7 million and depreciation expense of approximately $1.8 million. We expect amortization expense to be approximately $850,000.

For the full year we are raising revenue guidance to the range of $156.9 million to $158.4 million. We expect adjusted EBITDA to be in the range of $21 million to $22 million.

We expect fully diluted earnings per share to be in the range of $0.15 to $0.18. We expect fully diluted weighted average shares outstanding of approximately 17.1 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.73 to $0.77, with stock-based compensation expense of approximately $6.6 million and depreciation expense of approximately $6.9 million. We expect amortization expense for the year to be approximately $3.4 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 2015 due to our NOLs.

With that, I would like to open the call to questions.

(Operator Instructions) Scott Berg, Needham.

Hey, Kim and Archie, congrats on a good quarter. I have two questions.

The first one, Archie, now that you're six months into the Leadtec observation, any additional color in terms of the opportunities that you're seeing in the Australian or Asia-Pac market that might be subtly different than your expectations when you initially closed the transaction?

Yes, Scott. When we closed the acquisition in October, we obviously believed there was a big opportunity in Australia, albeit size, comparable to North America it's about 10%. Again, we remind everybody that on day one we started selling one unified solution set.

I'd say the biggest difference that I found after spending time with over a dozen retailers was although they have some retailers ahead of us and some behind us, just like everything else, the threat of Amazon is not quite as clear in Australia, so there is a large market opportunity. I feel like they're probably 24 to 36 months behind where the market is in the US on that front.

Great. Then a last question for me is, as you look back to the first half of 2015 today, are there any incremental changes in terms of the overall buying patterns amongst customers today versus the first half of 2014? You certainly called out Analytics, but wanted to see if there's any other major differences that you're seeing in the market today.

No, I wouldn't say there's a major difference. I think it's just a continual evolution.

Obviously as we continue to move upmarket, that's an evolution. I think the omnichannel challenges for retail is very similar. Retail challenges for around analytics and collaborating is the same.

So I'd say it's more of an evolution than a change, but it feels like at a natural pace.

Great. That's all I have. I'll return to the queue. Thank you.

Matt Pfau, William Blair.

Hey, guys. Thanks for taking my questions, and nice quarter. Kim, when you look at the outperformance in the quarter, can you maybe give us a little more detail on what drove that? Were there maybe some enablement campaigns that you weren't anticipating that got pulled forward, or are there other components of that outperformance?

Sure. We ended up beating by about $300,000 on the top line, and that really wasn't from one particular place. It was really across the board, just nice, solid performance of the business.

Got it. Then, Archie, you talked a little bit about the opportunity in Australia in Leadtec, but how has the Leadtec business overall been performing relative to your expectations?

It's performing according to our expectations. The staff is absolutely fantastic. I think we've got momentum.

Again, as we discussed when we made the acquisition, a lot of these were going to be long-term sales cycles. Really the thing that they have is relationships with retailers, and that was confirmed as we spent more time with the retailers. And I think it's going to execute at our expectations, which were high, or above over the next 24 months.

Got it. Then a last one for me, on your hiring for this year, how has it been progressing? And when you look at your sales hires, can you give us some idea about the split there between maybe the US opportunity and then also in Europe and Australia?

Sure. As it relates to hiring, we exited Q2 with approximately 260 sales heads; that's up from 240 last quarter. That sequential increase is a little bit larger than what you've seen in some other quarters. Keep in mind that's primarily related to the timing of college hires.

As it relates to the mix between domestic and international, we really believe that there is a very large opportunity in both places and we invest appropriately in both of those areas, not just on the sales side but also capacity needs in all other areas of the Company as well.

Got it. Thanks for taking my questions, guys.

Jeff Houston, Northland Securities.

Hey, guys; thanks for taking my questions. Looking at the Leadtec acquisition, it sounds like it's been a home run or at least tracking in line to slightly above your expectations. What other geographies are you looking at in addition to Australia now, since you have a big presence there now? And how are the valuations in the acquisition front on a geographic as well as a product addition front?

Yes. When we look at our business, we look at the -- the primary geographies we're focused on are North America. Obviously, that's where we're primarily focused. Europe, and then Australia, and China.

And consistent with what we've done over the last really decade, we've let the true viral network nature of our business, viral nature of our business, allow us to expand outside of North America. Asia's really focused on being part of the North America supply chain; we continue to see momentum there.

Australia is more of a standalone ecosystem. So we'll continue to invest in there and think there's an opportunity there.

Europe is right along with the lines of -- we're getting larger suppliers. Larger suppliers are more international; hence we need to support our larger suppliers. So we have European operations, primarily focused on the Analytics opportunity.

So we'll continue to allow the viral nature of our business to grow internationally, and we'll continue to service our customers in that way.

As far as valuations, acquisitions, our acquisition strategy has been the same as it has been for the last five years. We believe we can accomplish our long-term goals organically; but obviously we have capital and will continue to look for opportunities.

Those will be either customer acquisitions, geography expansion, or product expansion. Again, as long as they're in our sweet spot, they're performing well, and valuations are reasonable, we'll pursue those opportunities.

That makes sense. And then separately, I was hoping you could talk about what types of initiatives your new Chief Information Officer has been working on. She did have a pretty impressive background, coming from Target. But just any color on the types of things she's been working on to enhance the product and the infrastructure?

Well, first off, she's -- we hired a Chief Customer Success Officer, Beth Jacob, so she is not running technology. She's running our customer success, which is really the customer experience post-sale, so making sure that continue to have a world-class, strong customer experience.

So that's really what she's focused on and will continue to help us continue to evolve the Company. Again, the customer experience being positive has always been a cornerstone and really important for us because of the viral nature of our business.

Got it. Thank you.

Tom Roderick, Stifel.

Hey, guys. Good afternoon. Archie, I didn't hear you talk too much about the channel on this call. I'd love to hear if you can offer anything quantitative with respect to how the channel is contributing. I know you typically give that out at the end of the year, but just curious for a midyear update.

Then perhaps more qualitatively, any anecdotal wins you can point to where the channel is in fact pulling you into larger deals, midmarket deals? What does the competition look like there?

Yes, so I would say if you look at 2015, it's similar to 2014. We continue to add new partners, we continue to have slightly larger partners, and we continue to deepen our relationships with our existing partners, all giving us momentum into the future. So it is giving us larger deals indirectly.

The deal we talked about today was Del Monte, which was indirectly a channel deal, because Dannon was a channel deal and we had executives go from Dannon to Del Monte and obviously had a fantastic experience at Dannon. So indirectly that was a channel sale on a trickle-down from Dannon and then there. But the contribution continues to be meaningful.

Any particular partners in the channel that are ramping their practices or knowledge around SPS Commerce at this point? I know that of course NetSuite and Microsoft and some others have been very important partners. Anyone you'd point to as putting more resources or momentum towards that relationship?

Well, as you mentioned, NetSuite has been a very strong, good, strategic partner. The other practices, I would say it's more fragmented and segmented among the VARs and the systems integrators.

So it's more of a numbers game than one or two big ones. I think there's a host of, as we say, literally now hundreds of channel partners.

Got it. Kim, thanks for giving out the sales headcount number. So 260 people in sales. Can you begin to give us a rough breakout how that salesforce is structured with respect to -- I know you hire a number of inside sales reps to build the funnel and as well as close some of the smaller deals. How is that breaking out now?

And as you're adding incremental heads, are they largely being put into that inside group, with the successful folks from inside moving up to more direct enterprise approach? Or are you proactively recruiting more senior experienced sales reps for the field?

Sure. As it relates from a sheer number or quantity, the largest quantity are going to be those that are a bit more junior that come in here. It's a very cost-effective way to bring in talent that then we can train how to solution-sell on our products.

And from a quantity, the largest number would go into what we refer to as our direct sales team. So they are the ones that are out having the conversations directly with our end recurring revenue customer.

We also do have two sales teams that are lead-generation engines. So we have our retail sales team and then we have a channel sales team.

We do hire and recruit in each of those areas. But from a numbers perspective, in general the largest number goes into that direct sales team.

Perfect. Last one for me, Archie, I'll throw this one back at you. In terms of the behavior from your larger retailer customers and I guess just -- and retailer partners and the retail community out there at large, are you seeing them share more data if you compare this to, say, a year ago or even six months ago? Are they sharing more data with their supplier partners through your Analytics engine on the point-of-sale front and collaborative front these days? Or is that still a little bit of a trickle in terms of getting their behavior to change?

I would say yes, but temper that with -- as we've talked in the past, retail tends to evolve slowly. Some get it, some don't. So I'd say it's a continued slow, long-term evolution and that's what I'd expect it to continue to (technical difficulty)

Got it. Thank you, guys. Nice job.

Richard Davis, Canaccord.

Thanks. Just a simple question I guess. Maybe hard to execute on, but what's a reasonable expectation with regard to percentage of revenues we should see coming from Asia-Pacific in two or three years? I mean, is it double digits? How do you think about that when you're strategizing?

When we think of Asia we really think today as that being part of the North America supply chain. There's deals that you need to just have the Asia component to be able to compete and to support your customer.

So there's well over 1,000 customers we actually support in Asia. Many of those it comes in as North America revenue, because there is a North America hub and there is a component. So it's a meaningful part.

So I think it's going to continue to be from a reported revenue guidance standpoint a relatively small component. Because again, even of the revenue of those 1,000 customers we're supporting in Asia, the vast majority of that is North America revenue.

Got it, got it. Then we've seen -- and I'm sure you have -- some product announcements of late from presumptive competitors. Who are the top two or three firms that you are replacing these days? And just kind of thought process on that. Thanks.

I would say on the fulfillment side, it tends to be legacy software. It's a -- I consider that more of a do-it-yourself. They bought software, they have staff, they have a band. I would say that's the primary, what we're replacing there.

Or on the low end we're replacing -- believe it or not, we're in the retail environment -- manual processes. On the Analytics, I think we're replacing that they didn't do anything before is the vast majority of that.

That makes sense. Thanks very much.

Pat Walravens, JMP Securities.

Oh, great; thank you. So I think that's 21 in a row since I've been covering your stock; congratulations. I guess I have two questions, which is, one, how you guys deliver such consistent results? And, two, how much longer can you keep doing it?

Well, a couple things. One, first off it's our business model is -- we have a lot of different sources of lead generation. We have a lot of sources of revenue. We don't have large customers.

And I think we understand our business extremely well. We've talked about retail has a slow evolution, and then I think we have good execution. So I think that's it on why the consistency in the results.

The intent is to keep going. We don't have any intentions of attempting to try to miss in the near-term future. So we'll take it one quarter at a time I guess, just like the football coach says.

Yet. Let me ask that last one a little differently, Archie. Which is, increasingly I'm of the opinion that I like stocks that are just going to grow at a certain rate for a long time more than ones that accelerate really fast, and then decelerate, and then eventually find their equilibrium, and meanwhile turn everyone else upside down.

So how long can you keep growing at this sort of 20% to -- I'm not sure what you'd say your range is, but 20% to 25% organic recurring revenue growth rate?

We actually -- we believe there's a multibillion-dollar, at least a $4 billion TAM selling the suppliers on the two main products we have significant momentum on today. So that's a $4 billion opportunity.

We're guiding to a very, very small percentage of that. So we think we can continue to grow organically recurring revenue at 20%-plus for a long period of time.

All right. Got it, great. Congratulations.

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

Great, thank you. Archie, with respect to the cohort analysis, as you look at the adoption patterns of your customer base and you study it over years, I'm sure you pay close attention to the number of connections, how long it takes to add additional connections, the standard channels of expansion of their relationship with you. As you look at that cohort analysis, what have you seen that's different over the last, say, six months that you might not have seen a year ago, two years ago?

You know what? I think it's been a consistent increased connection per customer. It's been an increase moving upmarket. So I think if you look at the underlying data, it's relatively consistent which gets back to the earlier question about why the consistency in the business.

There's multiple levels of it that remain consistent, anywhere from new customers, smaller customers from enablement campaigns, to larger customers from channel, to upselling and to new products. So I think it's more of an evolution. Again over the last six months, it looks a lot like the six months before and just a little bit more of the same.

Your comment earlier in the call and you said this a number of times, that you're moving upmarket, can you quantify that in the context of the typical supplier and how that's manifested in the size supplier that you're dealing with?

Well, we're seeing -- if you go back five years ago a Del Monte would have been a very unusual sale for us. Now it's much more typical.

Again, we're not moving away from the smaller suppliers. We have our salesforce segmented to continue to dominate the small end.

We're going into adding the larger end, so one of the things you are seeing in wallet share going up is because of us getting larger customers. Just the straight math of it, getting larger customers.

So we've given stats in the past and you continue to see the evolution of that, of the number of customers that are 3 times, 4 times, 5 times our average is growing faster than our overall revenue. So that segment continues to have momentum.

Okay. I guess just the last one for me then. As I look at the sales team and consider productivity efficiency, that kind of thing, how -- have you seen even minor changes in ramp times, the path to efficiency and productivity there? And any other trends within that organization along the lines of productivity or efficiency you'd call out?

Sure. As it relates to our approach for the salesforce, we want to continue to add new people because there is such a huge opportunity in front of us and we are capacity constrained. That being said, when we add those people, obviously, they are much less efficient than folks that have been with us for longer.

So overall what we try to do is get to a point where we can hold efficiency levels flat. What that means is, as we bring in new people, those people that are more tenured and have been here longer, they need to get that much more efficient in order to be able to hold the overall efficiency flat.

That has been our philosophy over the last couple of years and that really hasn't changed, Jeff. I would say that we have a very rigorous, fantastic training program in place that really helps people get up to speed and learn our business and learn how to solution-sell.

There is a time ramp associated with that. That's typically sort of the 9 to 12 months, and that's been pretty consistent of the time frame that it has taken.

So unfortunately I can't point you to something that is really different. I would say what we have in place we believe works well and allows us to hold our overall efficiency flat while continuing to expand the salesforce.

Okay, great. Thank you.

Thank you. There are no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.