SPS Commerce Inc (SPSC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce third-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Nicole Gunderson, Investor Relations. Please begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's third-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 on 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 will turn the call over to Archie.

Thanks, Nicole, and welcome, everyone. We are pleased to share our results for the third quarter of 2015. Total revenue grew 24% to $40.4 million; recurring revenue grew 26%; and adjusted EBITDA was $6.2 million. Omni-channel retail continues to expand and evolve, and is driving the need for collaborative supply chain practices at a faster pace than ever before. We continue to take advantage of this trend as we go after the multibillion-dollar market opportunity in front of us.

Consumer empowerment continues to grow as smart phones, smart watches, and other wearable devices are enabling consumers to research products, compare prices, and educate themselves while shopping in-store, from their device, or online. In order to address this, it is imperative that retailers and suppliers are able to integrate and collaborate easily and efficiently. Also, as consumer expectations are expanding, the time frames for collaboration are contracting.

Not so long ago, an acceptable time frame for a retailer to bring on a new supplier was 2 to 6 months. Today, in order to keep pace with consumers, retailers need to source and start fulfilling new products in a matter of weeks. Additionally, retailers used to receive inventory information from suppliers on a weekly basis, if at all. Today, retailers need real-time inventory data to ensure that whenever a consumer orders a product, it is readily available.

An example of this is Regis Corporation. Regis is a global leader in beauty salons with thousands of locations, and they have been a fulfillment community partner since 2008. Recently, Regis was looking to drive increased product sales in their salons by customizing their product assortments based on consumer demand in each division. Previously, Regis had an ad hoc reporting system that gave them some visibility into their supplier sales. But that system did not allow them to strategically collaborate with their suppliers in a fast and repeatable manner.

We worked with Regis to run an enablement campaign for our Collaboration Analytics solution, which enables Regis and their suppliers to review and analyze sales data on one common platform. Regis is now able to quickly identify strong-selling items in each division, and ensure that the right product is in the right place at the right time. And their suppliers can now quickly spot trends and measure the success of promotional programs, and provide Regis with fact-based purchase order recommendations that improve the ROI for both Regis and their suppliers.

This is the value of our retail network. SPS enables suppliers and retailers to integrate and collaborate quickly, easily, and efficiently to source items, manage item information, and deliver products as fast as the consumer wants it. This was an important theme at Gartner's recent supply chain conference, where industry leaders examined how supply chains could improve both retailers' and suppliers' connections with the digital consumer, as well as increase efficiency and overall profitability.

One of the key topics of the conference was the importance of end-to-end visibility. In order to fully understand demand, inventory levels and the ability to fulfill the demand for products, the industry is increasingly embracing the concept of the network. Additionally, the use of analytics is maturing, as suppliers and retailers are increasingly realizing the capabilities of analytics to drive operational efficiencies and growth, as well as optimizing the consumer experience.

We sit at the forefront of these important trends. SPS Commerce has the largest retail network, with more than 60,000 trading partners, including over 2,000 retailers. Trading partners can also deploy more agile omni-channel solutions through our integration with more than 400 technology partners. And our analytics suite enables further strategic collaboration between suppliers and retailers.

In summary, we continue to experience momentum across our business in the third quarter, as omni-channel has become the new normal for the retail industry. Our broad-based network enables retailers and suppliers to keep pace with the rapidly changing demands of the digital consumer, and allows them to strategically collaborate to drive growth. The viral nature of our network drives incredible scale and enables powerful lead generation engine that we continue to benefit from, and we believe we are well positioned to continue as an 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 third quarter. Revenue for the quarter was $40.4 million, a 24% increase over Q3 of last year, and represented our 59th consecutive quarter of revenue growth. Recurring revenue this quarter grew 26% year-over-year and 22% organically. The total number of recurring revenue customers increased 9% year-over-year to approximately 23,100. Wallet share increased 15% year-over-year to approximately $6,400. For the quarter, adjusted EBITDA was $6.2 million compared to $4.7 million in Q3 of last year. We ended the quarter with cash and marketable securities of approximately $135 million.

Now turning to guidance. For the fourth quarter of 2015, we expect revenue to be in the range of $41.8 million to $42.3 million. We expect adjusted EBITDA to be in the range of $5.6 million to $6.1 million. We expect fully diluted earnings per share to be $0.04 to $0.06, 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 $0.21, 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 expect revenue to be in the range of $158 million to $158.5 million. We expect adjusted EBITDA to be in the range of $21.5 million to $22 million. We expect fully diluted earnings per share to be in the range of $0.19 to $0.21. 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 $0.76 to $0.78, with stock-based compensation expense of approximately $6.5 million, and depreciation expense of approximately $6.5 million. We expect amortization expense for the year to be approximately $3.4 million.

Also, for the year, you should model approximately 40% effective tax rate, calculated on GAAP pre-tax net earnings. We expect to pay nominal cash taxes in 2015 due to our NOLs.

Before I turn the call over to Q&A, for modeling purposes for 2016, investors should model approximately 14.5% adjusted EBITDA margin. As we look out towards next year, our philosophy on margin expansion remains the same, and we expect to invest any additional upside back into the business.

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

(Operator Instructions). Tom Roderick, Stifel.

I wanted to touch on the Q4 guidance here, real quickly. In looking at the guidance, it looks like you are implying something just under 20%. You've been comfortably growing over that. Of course, you have had some revenues included in that. And I was just wondering if you could break out how you think about recurring versus nonrecurring in the upcoming quarter, and how that should continue to trend on an organic basis. Very clearly, we've seen the recurring pace ahead of the nonrecurring, and maybe you could talk a little bit about that dynamic, as well, here. Thanks.

Sure. In Q4, keep in mind we are lapping the acquisition. So the majority of Q4, the organic and reported are virtually one and the same, which was not the case earlier in the year. As it relates to GAAP revenue versus recurring revenue, historically the recurring revenue has grown faster than the GAAP revenue. And there tends to be a delta, depending on the given year or quarter, anywhere between sort of a 1% to 2% delta between GAAP revenue and recurring revenue. So that guidance is consistent with our philosophy, as it relates to that 20%-ish organic recurring revenue growth and the opportunity we see there.

Great. Let me turn to the international side of the business. You've had Leadtec under your belt for almost a year now. How are you thinking about how that's been integrated, how that's performing? And what's your appetite to think about other geographic regions to expand further to more substantially at this point?

Yes, so we just lapped obviously, a year ago, the acquisition. And to remind everybody, on day one of that acquisition we combined our resources in Australia with the Leadtec team. And we started selling a one combined product into the marketplace, so to not have confusion. So I think we hit the ground running really nicely. I think we have strong relationships with the retailers. I think the execution has been very good. The team is strong in Australia; very pleased with what they have accomplished the first year. And I'd say on all fronts, it's been a huge success. The leadership has done a great job there. And we continue to see a big opportunity in Australia. It's obviously a smaller market than North America, kind of in that 10% range, but continuing to see a significant opportunity there as well.

Great. Kim, last one for you. You talked about next year, just setting a high level bar, 14.5% adjusted EBITDA margins. Can you walk us through some of how you think about the inputs in the sales and marketing side for next year? And if you've got the sales and marketing headcount, or the sales headcount for this quarter, that would be great. But just curious how you are thinking about what the right pace of sales headcount additions, within that 14.5% high-level guidance on EBITDA, would look like for next year. Thanks.

Sure. So as it relates to that guidance, that's consistent with what we've said that historically we tend to grow EBITDA margins -- or we tend to expand that approximately 1% on an organic basis, in any given year. Sometimes it's a little bit less; sometimes a little bit more; but, on average, about 1%. So that 14.5% adjusted EBITDA margin is right in line with that. As it relates to quota carrying or sales headcount, we exited the quarter with 257 heads, which is up about 17% year-over-year.

Our philosophy as it relates to sales headcount has not changed. We intend to continue to add sales headcount. What we do is we take a balanced approach, so we know where we will be at the end from an EBITDA perspective. And we want to make sure that we're appropriately investing back in the business to support our existing customers, as well as new customers. So that will translate into additional resources, really across the board: customer support; technology; sales, of course, as well. But basically we will continue the philosophy of adding as many salespeople as makes sense for us to do, while still delivering on that EBITDA margin.

Perfect. Thank you, guys. Nice job.

Scott Berg, Needham.

Congrats on another good quarter here. A couple quick ones for me. First of all, Archie, you talked about the Regis example. I assume that's an example of up-selling the analytics solutions into that relationship there. But I just wanted to see if you could talk about what that opportunity looks like today, in terms of driving new sales directly (technical difficulty) analytics versus the integration product.

Absolutely. So this was a classic upsell to analytics, as they are trying to collaborate and work closer with their suppliers. In a typical Collaboration Analytics program, they target between 30 to 60, sometimes as many as 100, strategic suppliers that they are really going to change the way they work with. And then they also make the data available to the other suppliers. But their real focus is on that 30 to 60; which, from our standpoint, we want to drive value for the retailer, and that is where the economic value to us is, as well.

With somebody like Regis, it's a domestic opportunity today. We recommend to customers they roll out a portion, and not do a Big Bang theory. Because what's important to us is that they are able to have the success at once, as a -- and when they try to take on too much, too quickly, they don't have the success. So there's also an international opportunity here, as well. So I think this is a pretty classic Collaboration Analytics story.

Great. And one follow-up for Kim would be, if you look at your operating cash flow this year, it's a little bit lighter than last year. It looks like it's all in some working capital adjustments. There's some additional prepaid stuff that came out in the second quarter. And just wanted to see what that next couple-three quarters looks like, and how those expenses or those prepaid items start flowing out. And can we return to operating cash flow margins where you used to see them through last year?

Sure. We do expect to remain cash flow positive. You are correct. In Q2, you didn't see that. That was as the Company opportunistically took advantage of prepaying for some services that we would be using into the future, so you saw that negative in Q2. And then over time, because that prepayment goes over multiple years, you will see that work itself through. But the philosophy, as it relates to being a cash flow business, remains the same.

Pat Walravens, JMP.

Archie, I was interested at the beginning, when you were talking about how the amount of time that retailers have to onboard suppliers has compressed so much. Do you mind repeating what those stats were, and giving us a little more perspective on that?

The stats?

Sure. So you were talking about how --.

You said two to six months, I think.

Yes, I'm sorry. As you go into more of an endless aisle in e-commerce capability, you used to see people -- it was almost an annual cycle with new suppliers. You decide what you are going to carry for the next year. You'd meet with the suppliers. You'd negotiate. And you had a much smaller supplier base. Now, as you're moving into endless aisle and at least expanded aisle, you have the addition of so many more suppliers and item information.

The number of retailers that we work with that have moved from anywhere from 50,000 items in their SKU count to 1 million, in a period of years, is amazing. And that's that trend that's happening is they're carrying more and more products, and they need to get those products up and running very quickly. Because it's not a -- we decide it in March for our fall clothing line. It's a much more rapid pace.

And then on inventory feeds, sometimes they didn't even need inventory feeds because they would place their orders so far ahead that it was expected that they would have inventory in 3 to 4 months when they needed the product. Now with drop shipping, you are getting the order at 9 o'clock in the morning, and you are expecting that it's going to be shipped that day, if not that morning. So they need to know, for their consumer, that that inventory is there. So the whole pace of the inventory is obviously changing, and changing drastically.

Okay, that's helpful. And then my second question is pretty big-picture. As this business scales into the hundreds of millions range, does the growth -- can the growth continue at this 20%-plus? Or as you scale up, should we expect it to slow gradually?

Well, I think what we've been consistent -- we think there's a long-term 20%-plus recurring revenue growth opportunity. And I think that as the trends continue with us, we think that market opportunity is there.

Okay, great. And then, Kim, I might have missed it, but did you give us the organic recurring revenue growth number?

The organic recurring revenue growth number was 22%.

Okay. Thank you very much.

Jeff Houston, Northland Securities.

I wonder if you could talk a bit about how enablement campaigns performed in the quarter, and what you are assuming into fourth-quarter guidance.

Sure. As it relates to enablement campaigns, those are our single-biggest generator of new customers, and a very important part of our lead generation. In any given quarter, there may be more or less than a previous quarter. In general, Q4 tends to be the seasonally softest, and that's simply because of the holiday season. So we still run enabling campaigns, of course, but that tends to be just lighter, based on seasonality.

Do keep in mind, however, as it relates to this lead generation, we have a very healthy amount -- a continued amount of onesie-twosies from retailers that are constantly adding new selection, adding new suppliers for who they are purchasing products from. And so that type of business, we get consistent throughout the year. It's when we're running a larger enablement campaign that really is dictated depending on the retailers' time of what they are trying to accomplish, and under what time period.

So, Q3 was really no different than other quarters. We certainly ran enablement campaigns. We will continue to run enablement campaigns in Q4. But, again, that tends to be the seasonally softest quarter, as it relates to those larger enablement campaigns.

Got it. Great. And then looking at the 23,100 clients added in the quarter, what was the mix of customer sizes? Just wondering if there's anything you can point to that really highlights how you are moving upstream, if there's any customer sizes were a bigger portion than maybe historically.

Sure. So as the business grows and evolves over time, we have demonstrated our ability, and we'll continue to show, that we bring on larger customers than our average customer size. As it relates to just the law of numbers, when you're talking about a 23,000 number, it gets muted there. Where you would tend to see it is in the revenue per customer. So, this quarter, for example, the organic revenue per customer growth was 13%.

And so, that's really where you will -- part of that is dictated by the size of customer. As a Company, we have not disclosed or broken out of the total customers, how many are the larger, or larger specific within the quarter. But certainly the customer size does have an impact on that recurring revenue, per recurring revenue customer metric.

Got it. Thank you.

David Hynes, Canaccord.

So, Archie, where are we in terms of the percent of new ACV that's coming from analytics? And as you look ahead, does the pace of that mix shift accelerate as more and more retailers buy into sharing their point-of-sale data? Or does it just steadily increase as a percent of the mix?

I think it's just evolution of time, as it gets hold. Again, we've talked about our industry evolves, as opposed to is a big hockey stick. And I think you should continue to see that trend over the coming years.

(multiple speakers) to see any radical inflection. We think that there's a lot of opportunity in analytics. But it's a sort of slow-and-steady opportunity, and we will reap the benefits of that for many years to come.

And can you share where we are now? Is it 20% of bookings? How do we think about that?

Sure. So as it relates to that detail, we usually share that on an annual basis. So the last time we gave a metric out was as it related to the end of 2014. So we'll have to hold on till the February earnings call to get an update on that.

Got it. I'll be waiting. Okay. And then, Archie, when a customer replaces a legacy EDI investment with SPS Commerce, what's typically the catalyst for change? Is it ERP replacement? Is it staff turnover? Is it a cost-saving initiative? And then what can you guys do to drive that along? Or is it really more about being there at the right time?

I think there is a whole host of different decisions. Staff turnover is one. The whole inflection of the industry as -- whatever I said is if you have a dozen or 20 retailers you are working with, and those retailers aren't changing and evolving and you're not adding new retailers, there's probably going to be -- that's going to be a tough sales cycle. We can talk about the 50% to 75% lower total cost of ownership, but it's working -- they've got other priorities.

So, when their environment is changing, their retailers are asking for more. Oftentimes, we're moving in and taking a piece of the business, because they just can't onboard and make the changes for their retailers fast enough. So that's an opportunity. If they are changing ERP systems, so that's where channel is important, that's an automatic that you are going to re-look how you are doing that. And I think it is -- it's educating them on the alternatives, so when and if they are interested in making a move, that we're top of mind. So I think there's a whole host of reasons.

Okay, got it. And then, Kim, maybe on the Q4 guidance, guiding adjusted EBITDA down sequentially. That's not a trend we've seen, at least seasonally, in the last couple years. Is there anything particular in there? Or are we just being conservative? How should we frame that conversation?

Sure. So as it relates to EBITDA, we set what the expectations are for the year. And then we take the opportunity to -- if we are ahead, for example, we will take that opportunity to invest more back in the business, to keep on growing the business. And so really our philosophy has not changed. We hold ourselves to an EBITDA number for the year, and that has remained consistent.

Okay.

So the fact that we're slightly ahead in Q3 is why Q4 comes down slightly. We are remaining the same in what we have said all year, as it relates to the high end of EBITDA guidance.

Understood. Okay. Thanks, guys.

Matt Pfau, William Blair.

First one: maybe get an update on what your acquisition pipeline looks like out there, and how you are thinking about acquisitions, especially in relation to the margin expansion guidance that you gave for 2016.

Yes, so, our acquisition strategy has remained relatively constant since 2010. We believe we can accomplish our long-term goals through organic growth, and so we are primarily focused on organic growth. Having said that, we have $135 million of cash and marketable securities, so we're always out looking. But what we're looking for are high-quality companies that fit right in our sweet spot. So all three of the acquisitions we've made since we became a public company, there was no change in the direction or the strategy of the business, and that we think that can help us accelerate or maintain our 20%-plus recurring revenue growth. So we're going to continue to be very focused on organic growth, and look for opportunity as it's out there.

Okay. And then maybe an update on the channel partner business; what you are seeing there in the quarter, and any notable additions on that side.

It's a very fragmented market. And we go after five primary markets, and they're all very meaningful to us. As we had mentioned, we have over 400 partners, and I think it's just a continual journey for channels. And they've executed in the past, and continue to execute as adding new partners and expanding the relationship with the existing partners. And I think you're going to see a long-term general trend of that.

Got it. Thanks for taking my questions, guys.

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

Archie, as it relates to -- you've talked about the ability to grow ARPU over time in a number of ways: more connections, et cetera. Just looking out, on an apples-to-apples organic price increase, when's the last time you've had a price increase? How do you think about using that as a tool here?

We have been very marginal on any price increases. And we'll continue to do small things here and there, but we don't see any drastic price changes in at least the coming few years. Again, we've done some things where we'll -- maybe a few percentage points and that, but nothing drastic at this time. We do think, long-term, as we become larger and larger and as we continue to add more value to our customers, I think that opportunity is out there.

Yes, okay. What's the number of retailers sharing the point-of-sale data, at this point?

It's still less than 20% of retailers that are sharing that data. So that's also part of the reason why we believe this is a long-term opportunity for us, that we'll get the benefit from it for many years to come. But there has not been an inflection point as it relates to retailers sharing the data.

Yes, got it. Last one, as it relates to customer breakeven time on the customer acquisition costs, any observations there, namely along trends of customer acquisition costs or breakeven times? Specifically, maybe what is breakeven time now as you calculate it? What's it been over the last few quarters? And any variation in those numbers would be great.

Sure. So, it's been pretty consistent around about that year-and-a-half, on average, breakeven. We've been at that point for the last couple of years. It was a little bit longer, prior to that.

Got it. Thank you.

Thank you. Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation. You may now disconnect. Good day.