SPS Commerce Inc (SPSC) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce first-quarter 2016 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 first-quarter 2016 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.

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

Thanks, Nicole, and welcome, everyone.

We had a strong start to the year.

Total revenue grew 23% to $45.6 million, recurring revenue grew 25% and adjusted EBITDA was $6 million.

We experienced solid business momentum as the team executed across all fronts, and the pipeline remained strong.

Our business success continues to be driven by the ever-expanding adoption of omnichannel strategies as we work as a strategic advisor to both retailers and suppliers to help them grow their businesses and stay ahead of the competitive curve.

Retailers are increasingly focused on growing their digital channels and rethinking the role of the store to align with their e-commerce initiatives, as today's consumers expect a nearly endless selection of products across all channels.

This pressure has left many retailers scrambling to keep up with the pace of assortment expansion.

Our recent industry survey highlighted that industry survey highlighted that 75% of retailers listed e-commerce growth as their top priority in the coming year.

Additionally, 80% of suppliers indicated streamlined fulfillment as their number one priority.

Our broad-based network places us at the center of the retail ecosystem and enables us to work as a trusted advisor to both retailers and suppliers as they adapt to the needs of today's consumer.

A recent example of this is the community program we ran for THE ICONIC, a high-growth leading online fashion retailer in Australia and New Zealand.

The company is setting the standard for Australian online retail by offering same-day delivery and overnight shipping to customers, and chose SPS to help them implement a new supply chain strategy.

Using our fulfillment product, the company has streamlined their ordering, receiving and invoicing process with suppliers.

By partnering with SPS, THE ICONIC was able to move their suppliers to electronic order fulfillment, resulting in the end-to-end visibility and agility they need to meet the consumers' expectations.

Today, the only way to meet the demands of the consumer and build their loyalty is through a more agile supply chain.

In order to align their organizations with the needs of the digital consumers, retailers must deploy e-commerce strategies such as drop-ship and buy online/pick up in store.

It is imperative that retailers work with suppliers to enable rapid fulfillment to consumers to remain competitive and maintain the integrity of their brand.

SPS commerce enables suppliers and retailers to quickly adapt and collaborate to address consumer demands and remain competitive while growing their brands.

An example of our work with customers on these initiatives is Shop.com.

Shop.com is one of the world's top 100 Internet retailers, providing robust product selections and comparison shopping from over 2,000 retailers such as Best Buy, Gap, Macy's and Overstock.

As increasingly price-sensitive customers came to its website looking for the best deals, Shop.com found itself becoming more of a retailer aggregator than a household name, often sending consumers to other retailers' sites.

They quickly realized that they need to increase their own brand awareness in order to continue to grow.

Since Shop.com does not carry inventory in warehouses, this meant accelerating drop-ship capabilities to broaden their product selection across strategic categories.

Shop.com turned to SPS to tap into our large network of suppliers and identify new suppliers who were willing to ship directly to consumers while providing a seamless brand experience.

In partnership with SPS, Shop.com has deployed a successful drop-ship program from the ground up.

Overall orders and revenue jumped 45% since launching with SPS, demonstrating the power of the SPS retail network.

Collaboration between suppliers and retailers further enables trading partners to address consumer needs and drives growth and efficiency.

Through analytics, suppliers can provide strategic suggestions on inventory to improve margins and sell-through, driving growth and efficiencies for both retailers and suppliers.

As SPS Commerce grows, we continue to invest in building a world-class management team to go after the multibillion-dollar market opportunity in front of us.

Last month, we announced the hiring of Dan Juckniess as our Chief Sales Officer.

In this newly created position, he will manage the sales strategy for all SPS Commerce products across the full spectrum of customers in the SPS retail network.

Dan brings deep, varied experience in enterprise cloud sales at high-growth companies.

As we discussed on our last call, we have expanded our sales hiring efforts and added recruiting resources.

During the quarter, we added 10 net new sales reps and are tracking to our plan of adding 25 to 35 new salespeople in 2016.

We are confident in our ability to continue to grow the sales organization to attack the large global market opportunity in front of us.

In summary, I'm pleased to report a great start to 2016.

We continue to execute on all fronts.

SPS remains a primary beneficiary of the omnichannel trend, and we remain well-positioned to extend our market leadership.

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

Thanks, Archie.

We had a great first quarter.

Revenue for the quarter was $45.6 million, a 23% increase over Q1 of last year, and represented our 61st consecutive quarter of revenue growth.

Recurring revenue this quarter grew 25% year over year and 20% organically.

The total number of recurring revenue customers increased 6% year over year to approximately 23,800.

For Q1, wallet share increased 17% year over year to approximately 7,000.

For the quarter, adjusted EBITDA was $6 million, compared to $4.7 million in Q1 of last year.

We ended the quarter with total cash and marketable securities of approximately $133 million.

Now, turning to guidance.

For the second quarter of 2016, we expect revenue to be in the range of $46.7 million to $47.2 million.

We expect adjusted EBITDA to be in the range of $5.1 million to $5.6 million.

We expect fully diluted earnings per share to be approximately breakeven, with fully diluted weighted average shares outstanding of approximately 17.3 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 $2.2 million, depreciation expense of approximately $1.9 million and amortization expense of approximately $1.2 million.

For the full year, we expect revenue to be in the range of $192.1 million to $193.6 million.

We expect adjusted EBITDA to be in the range of $25.7 million to $26.5 million.

We expect fully diluted earnings per share to be in the range of $0.18 to $0.21.

We expect fully diluted weighted average sales outstanding of approximately 17.3 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.93 to $0.95, with stock-based compensation expense of approximately $8.5 million.

We expect depreciation expense of approximately $7.5 million, and we expect amortization expense for the year to be approximately $4.8 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 2016 due to our NOLs.

In summary, we had a strong first quarter.

Looking to the rest of the year, our new business pipeline remains robust as the retail industry increasingly adopts omnichannel strategies.

We look forward to expanding our market leadership, and we are confident in our ability to achieve our long-term targets.

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

Tom Roderick, Stifel.

I know you've been getting questions all quarter on the sort of sales hiring plan and the retention.

And you added 10 in the quarter, so a good start to the year.

Can you talk a little bit more about some of the changes you put in place from a attention standpoint -- how you feel those are impacting what you're doing to keep folks around there.

And as we get into sort of the heart of college graduation and recruiting season, maybe talk a little bit more about how much you are putting in the way of additional resources towards recruiting as opposed to how you might have treated it last year.

Thanks.

Yes, we made significant changes over the last three months as far as compensation.

And then we've also really looked at who we are hiring in our hiring processes.

And I will tell you that the first quarter is one quarter, so you've got to take it in perspective.

Our hiring -- we've clearly added recruiting capacity.

So our hiring was up.

And our retention was at historical levels, what we've experienced in the past.

So we feel very good about all fronts.

We will be going into the season of college graduation.

We'll hire -- I would expect hiring to be strong then.

And it sometimes is in Q2, sometimes in Q3.

So, depending on when we decide to have them start will affect that.

But we are -- again, what we are trying to reiterate to people is that we are taking a long-term view and that we think we will be back to the historical levels of 25 to 35.

And I think the first quarter was a good start to the year on that front.

Great.

Another follow-up question, another topic I suppose you are probably getting a lot of questions on, is just the idea of the addressable market and where the market might be in its evolution and maturity and penetration.

How do you guys look at that TAM today?

And what are the metrics that you track that gives you a sense that it's still well-underpenetrated?

I don't know if that is leads, lead gen, conversion rates.

But maybe you could share with us some of the metrics that you track to give us a sense that the market sort of remains as healthy and as open as you've conveyed in the past.

Sure.

As it relates to the TAM, we still believe it's a multibillion-dollar opportunity.

We conservatively put that at about a $4 billion total addressable market.

Relative to where we will be this year, there is obviously -- we still have ample opportunity and runway in front of that.

The way I look at it is there really are two components.

There is a customer aspect to it, and then there's the revenue-per-customer aspect to it.

When we look at how we determine the TAM, we believe globally the customer side of that is about $200,000, of which through the first quarter we have a little over $23,000.

So, still lots of opportunity to add customers.

As it relates to the revenue per customer, we believe that TAM is about $20,000, of which through Q1 we are at about $7,000.

So on those metrics, still lots of opportunity for us to go after that.

The way we have conservatively looked at the TAM, it's really focused on two products: the fulfillment product and the analytic product.

And as it relates to our approach to go after that, we really believe we have that in place.

We have two very strong lead-generation sales engines, and we have a very large direct sales force that helps convert those new sales either with a new customer or upselling an existing customer.

So we believe we have what is necessary in place to go after that TAM.

Great.

Kim, last one from me.

Either of you guys can this.

But the number I thought that stood out in terms of exceeding expectations is probably on the recurring revenue per customer, up 17% year on year.

And I was wondering if you could talk a little bit more about what the drivers were in that and what the role of analytics played within that up-17%.

Thanks, guys.

Sure.

The 17%, that includes the ToolBox acquisition.

So that's the reported number.

The organic equivalent to that is 13%.

So, the customer at 6%, and the organic revenue per customer is at 13%.

So we continue to see nice, strong revenue per customer in sort of that low double-digit.

There isn't anything particular in the quarter that I would highlight different than, for example, the last couple of quarters as it relates to the organic growth in revenue per customer.

It's a continuation of multiple products, size of customer, and existing customers adding more trading partners and connections and how they are doing business with us.

Got it.

That's really helpful.

Thank you, guys.

Nice job.

Scott Berg, Needham and Company.

This is (technical difficulty) in for Scott.

Just a couple of quick questions.

I guess the first one is can you talk about why gross margins fell down year over year?

Sure.

As it relates to gross margin, that is directly related to the acquisition that we made at the beginning of this year.

The gross margins associated with ToolBox were at a much lower gross margin than our business there at closer to a 50%-ish gross margin.

So what you see in the quarter and what the expectations would be for the remainder of this year is there is pressure put on that gross margin.

So, all else being equal, the impact of the ToolBox acquisition into SPS Commerce puts pressure of about a percent on the gross margin in the short term; the short term for this year in 2016.

So for 2017, that should normalize back to, I guess, 68.5% or 69% from last (multiple speakers)?

Longer-term, we believe our gross margins will be in the low to mid-70s, but that is a longer-term number.

You would expect once we have gotten through about 12 months of combining the two entities, the expectation is you would see gross margins improve over time

Great.

Then with the new chief of sales, can you -- I guess, what is potentially the difference that he brings to the Company now and kind of the impact you have seen and what you plan on seeing in the next 12 to 18 months?

Well, yes, he's been here three weeks now, so obviously he's been well-received by the Company and by the sales leadership.

I think it's really a continued evolution of our executive management team as -- we hired a Chief Marketing Officer in 2012; a new CTO in 2013; a head of human resources, chief human resource officer in 2014.

And then last year, we hired a Chief Customer Success Officer.

So it's really bringing the multiple sales groups together and help us drive to the next level.

Great.

I appreciate it.

Thank you very much.

Matt Pfau, William Blair.

Thanks for taking my questions.

The first one, Kim, I don't know if I missed it, but did you give out the organic recurring revenue growth?

Organic recurring revenue growth was 20%.

20%.

Okay, great.

Thanks.

Then also had a follow-up on the sales hiring.

What are you seeing out there in terms of the quality of the candidates that you've hired?

Has that stayed within historical levels?

And then also in terms of the compensation that you've been having to pay out to get new heads on board, has that also been around your historical levels?

Yes, it has been -- the conversation has been around our historical levels.

As far as seeing candidates, I think we are doing a better job on hiring, so as I think we are getting better candidates.

We have the recruiting capacity.

I think the improvements in our whole recruiting process will result in better candidates.

And obviously, it's low unemployment.

But there's a lot of great candidates out there.

It's just a little bit harder to find them.

And once we find them, we tend to be able to bring them and show them the vision of SPS Commerce that we're a long-term, high-growth business in a huge TAM.

And that's the story to the sales team to be able to recruit them, and I think we're able to do that successfully.

So we are seeing great candidates out there, and feel better about the new crop of people that we are hiring than ever before.

Got it.

And then when you guys made the ToolBox acquisition, it sort of gave you a bit of a foothold into the grocery and drugstore space.

So just wondering what sort of progress you have made there.

And is there any update on sort of moving more into that sector?

We've always been in that sector.

We made the acquisition 100 days ago.

So far, I think the transition has been extremely positive from a customer and a prospect standpoint.

And we are very optimistic.

I think we are executing on at least our original 12-month plan according to making progress just as we expected.

And I expect this acquisition to be like the other acquisitions that it's going to be a very positive for SPS Commerce.

So, we are 100 days in and everything is positive and the pipelines are building.

And there will be success there; I'm pretty confident of that.

Great.

That's it for me.

Thanks for taking my questions, guys.

David Hynes, Canaccord.

Jim, maybe just one on revenue growth composition.

The last couple of quarters, it certainly skewed towards the wallet share side versus the customer count.

And I think you've lapped pretty tough compares on the customer count growth.

But as you look forward and you guys kind of think about modeling organic growth internally, how do you see that split between kind of customer count and ARPU?

And do you think the growth in the customer count side could get back up in that high-single-digit range, or is this kind of mid-single digits the new norm?

Both the aspects of the customer count growth as well as the revenue per customer both are very meaningful to get us to what has historically been sort of that 20%-ish organic recurring revenue.

And this quarter, no different; 20% organic recurring revenue.

To your point, what you have seen more recently over the last couple of years is that the revenue per customer has grown faster than the customer count.

So, as it relates to specific to this year, I -- there is still lots of drivers to that revenue per customer.

So, size of customer, multiple products, for example, those are things that continue to have more of a lever on that revenue per customer than on the number of customers.

So the trends that you saw in Q1 where one of those metrics in the single digits, one of those in the low double digits, you know, expectation would be that probably similar that the customer growth is in a single-digit and the revenue per customer is in the low double digits for this year.

And then, longer-term, I would expect that both of them still remain very meaningful contributors to that overall 20% growth.

Okay.

Got it.

And then Archie, maybe kind of a more strategic question.

Right now, I think of you guys just kind of communication fulfillment analytics hub for suppliers working with their retailers.

As you think about how this evolves, is there an opportunity for you to help suppliers go straight to consumers either through marketplaces or the social channels, which are effectively becoming like retailers with buy buttons and all that sort of stuff?

So how do you think that plays out?

And is there an opportunity for SPS to kind of monetize that side of your supplier relationships?

I think where we are able to monetize things is when there is a trading partner relationship involved in a process.

If there is a trading partner relationship involved, I think that SPS Commerce ought to be involved.

If there is not a trading partner relationship, that feels like a -- an ERP system.

It feels like a NetSuite, an SAP, a Demandware solutions set, something that is sitting behind the firewall.

So that's how we define our space.

If there's a trading partner relationship involved, then we want to be in that space.

If there's not a trading partner relationship involved, we don't want to participate.

We think that's an add-on to an ERP.

So, I don't know if that gives you guidance, but that is a guiding principle for us.

That makes sense.

Okay, thanks, guys.

Patrick Walravens, JP Securities.

Archie, big-picture question for you to start.

Are you guys back on track?

I've never felt off-track, Pat.

But, obviously, we had some issues on the sales front.

But I think I'll reiterate -- I think we have a large opportunity in front of us, and I think we are going to take advantage of it over the next few years.

And, execution on some fronts.

We are less than stellar in the second half of last year, but in a lot of parts of the business they were stellar.

So I feel very, very confident about the future at SPS Commerce.

And I feel like some of the sales issues, why you continue to keep an eye on them, I think we're making great progress on them.

All right.

Perfect.

Kim, where should we expect the organic growth rate to bottom out this year?

We provide guidance for total GAAP revenue, and, from that, you could back into implied organic growth based on our guidance range.

But we do not guide down to the organic level.

So my suggestion to you is if you just look at the implied guidance -- and the guidance that we just provided here is about $600,000 higher than what the guidance was 90 days ago.

Okay.

We'll do that.

And then, lastly, I feel like there's been a fair amount of confusion in terms of competition between you guys and CommerceHub, which is going to be a public company in the not-too-distant future when they get spun off.

Archie, could you talk a little bit about where you compete, but then also how you guys are different?

Because I think, in general, you are pretty different.

Yes, I think there are components that are similar; there are components that are different.

Let's start on the fulfillment side of the house.

They are focused on the direct-to-consumer portion of e-commerce.

So it's not a full suite of e-commerce if the retailer is bringing product into the distribution center or warehouse.

Then they are not involved.

And the primary difference in their offering on the fulfillment side is they really offer an order -- what I consider to be an order management system, which allows the retailer to determine where they are going to buy from.

That is something that we believe belongs within ERP, which, to my earlier comment, does not involve trading partner relationships.

But we do see them from time to time on the direct-to-consumer part of the e-commerce initiatives.

We don't see them at all in analytics.

And then they also purchased a company that looked a little bit like a channel advisor-type marketplace company.

I think they were in a distant second place to a channel advisor, and we don't see -- we don't compete on that side.

So there's a segment of their business we do compete on, but a lot of differences.

Great.

That's really helpful.

Thanks very much.

Jeff Houston, Northland.

I was looking at the Australian market.

Could you talk a bit about how the -- I know it's newer for you compared with the US market.

But could you talk a bit about how the penetration differs both on the retailer and supplier basis?

Well, we are much earlier there.

So, in general, I would consider the marketplace to be about 10% of the US marketplace, maybe slightly lower than the North America marketplace, then.

And so, obviously, our revenues are substantially below that market.

So we think we are -- we have a lot of room there.

And then, what's interesting about the marketplace, it looks very similar to the US without as big a pressure from Amazon.

But there are people doing some phenomenal things like THE ICONIC, who is going same-day delivery.

And then there's some people that are lagging.

So, the marketplace feels a little bit behind the US in the fact that there's not as big of an Amazon effect.

Not necessarily from a how they do business, it's not behind, but they don't feel as much pressure from the Amazon piece.

But as some of these retailers like ICONIC and others ramp up their game, I think it's going to become more and more competitive.

And so, we are excited about the marketplace there as an 8% to 10% of our total market opportunity in North America.

Great.

And then building out the retailer distribution and supplier maps with the different retailers, how many -- I think you talked about it in the US.

You are in pretty much all the major retailers.

How many of the Australian ones have you built out those maps for?

We've built them out to dozens of retailers there, and we continue to build out that network.

And the great thing is we've played this game before.

It's a viral network.

So as we add more suppliers in Australia, we are going to add more retailers.

So we'll continue to build out that network, and that's never been an obstacle for us.

We are ready to invest in building out that network.

Okay.

Great.

And then looking at the cash balances, roughly $130 million.

I know the focus has always been on organic, but you have done a number of acquisitions in the past.

Could you talk about your current thoughts on what your appetite is for acquisitions?

What the pricing is looking like in the private market companies you are looking at, as well as particular areas of interest?

Our M&A strategy has remained relatively consistent since 2010 in the fact that you are correct; we are focused primarily on organic growth.

And we think we can build a significant, meaningful business through organic growth.

We continue to be active and look.

We are going to be very selective.

We are looking for either product expansion, customer acquisition or geographic expansion: our primary targets.

We are going to be very selective.

We're not interested in buying companies that are broken because we think the effort and time to turn them around is -- could be detrimental to our organic growth.

So we are very conscious of that.

From a marketplace standpoint, obviously, private companies -- when SaaS multiples contract, private companies tend to think they are immune to those contractions And after it settles in for three to six months, then reality tends to set in a little bit more.

But, frankly, we are going to continue to be selective, and we have an appetite to do it if we can do the right deal.

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

Couple questions.

I guess first, with respect to the enablement campaign pace, maybe can you just update us what's changed here maybe the last three, six months with respect to the size of the campaigns, the spaces, sub-segments where they are coming?

Maybe a taste of the number that are adopting your solution in those enablement campaigns versus the number that are testing?

Just trying to get a sense of the flow of enablement campaigns, your ability to convert them and even to convert the follow-on testers maybe with just a focus on the delta, things that even if they are, albeit, small that you seen changing over the last three, six, nine months.

I think it's an evolution.

There hasn't -- our closed rates on enablement campaigns, the percentage that choose testing as opposed to recurring revenue has not changed very significantly.

It will bounce around from one quarter to another, but not significant changes.

Obviously, the trend we've seen over the last four or five years is that we are able to get larger and larger, larger and larger customers.

Some of those are the testers that over periods of time we convert, and some of that is through channels.

So that's really the only -- over the last six months it would be a reflection of, frankly, what we've seen over the last three years.

Not drastic changes in close rates.

I think in some geographies -- like ICONIC had very high success rate.

As we get confidence in a marketplace and are really able to sell our best practices, in community enablement, that really changes the game, and I think we are better in that region.

But I think in North America it's remained relatively constant as far as what we are seeing.

Okay.

And then Kim, just briefly on the model.

With the sequential revenues guide built-in but the EPS dipped, obviously you added 10 reps.

I haven't had a chance to work through the model.

But just the EPS dip sequentially, anything you can tell us about the driver there?

I'm sure, like I said, sales is part of it.

But maybe fill in any of the gaps.

When you are talking about EPS sequential, are you talking about Q4 to Q1?

Or what's your time period?

The Q1 to Q2.

So we just posted 22, I guess Q1 and then you are guiding 19 to 20.

Yes.

So as it relates to the sequential from Q1 to Q2, if you look at the EBITDA guide, you will see that's really the driver.

As it relates to that, we established EBITDA dollars for the year.

And then we work to make sure that we are investing appropriately back in the business but still hitting our annual EBITDA guidance.

Specific to how that flows through the year, Q2 is a quarter where there is more significant sales and marketing spend.

One thing to keep in mind, we have our annual customer event in the quarter and the cost associated with that customer event hits in Q2.

Also, we are going to continue to focus very much as it relates to our hiring in the sales pace as well.

So I really look at it is nothing is different for the year.

But, specific to Q2, there's a little bit more cost and investment that you see in Q2, but no change relative to what those expectations would be for the EPS or EBITDA for the year.

Got it.

Okay, great.

Thank you.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Good day, everyone.