SPS Commerce Inc (SPSC) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the SPS Commerce First Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, I would now like to introduce your host for today's presentation, Ms. Nicole Gunderson of Investor Relations.

Ma'am, please begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's First Quarter 2017 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 historical data sheet for easy reference on the Investor Relations section of our website, spscommerce.com.

During our call today, we will discuss adjusted EBITDA financial measures as 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 turn the call over to Archie.

Thanks, Nicole, and welcome, everyone.

We had a strong start to 2017.

Our solid Q1 performance was driven by the continued growth of the SPS Commerce network and demand for our comprehensive cloud-based platform.

For the first quarter, revenue grew 14% to $51.9 million.

Recurring revenue grew 15%, and adjusted EBITDA grew 43% to $8.5 million.

Today's retail economy is driven by a generation of consumers who expect a consistent personalized omnichannel experience and retailers are being challenged to continuously address their ever-changing demands.

The retail environment is more complex than ever, and retailers need to exceed that merchandising and operations across a growing number of channels.

Consumers continue to shop both in-store and online.

They don't see the difference between online or in-store channels, but they do expect an engaging shopping experience, whenever and however they shop.

For further context, last year, total retail sales in the U.S. grew 4% to $3.5 trillion.

In-store sales grew 3% and represented 89% of total sales.

Online sales grew nearly 16% and represented 11% of total sales.

Drop-ship represented about 10% of online sales.

Consumer shopping habits are increasingly complex.

While all retail channels continue to grow, services such as Amazon Prime have led consumers to expect fast and free fulfillment with an endless selection of goods, and the in-store experience must equal or exceed the digital experience for retailers to remain relevant.

In 2016, 53% of in-store sales were web-influenced.

It is no longer sufficient to have an online strategy or a drop-ship strategy or an in-store strategy.

It is imperative that retailers and suppliers have a truly omnichannel strategy and achieve real-time collaboration to be able to adapt to the always-on retail environment.

Omnichannel and retailer is working.

A recent HBR studying found that within 6 months of an omnichannel experience, customers logged 23% more repeat shopping.

As the importance of having an omnichannel business strategy continues to increase for the retail ecosystem, the need for retailers and suppliers to partner with world-class technology providers is becoming even more significant, and this continues to drive demand for our platform.

Red Wing Shoes is an example of a company which developed an omnichannel strategy to be able to address consumer demands now and into the future.

Founded over 100 years ago with just one store, Red Wing now has 500 of its own retail stores and also sells its shoes at over 4,000 stores.

Best known as a maker of work boots, Red Wing has worked to continually evolve its brand beyond industrial footwear to tap into the consumer market and engage more shoppers.

To keep pace with the rising expectations of today's consumers, Red Wing needed to grow their online business and align their strategy with their brick-and-mortar stores while continuing to support their retail partners.

They were quickly outgrowing their legacy EDI system and turned to SPS for both fulfillment and analytics to draw their operations online and in-store.

Through our fulfillment solution, Red Wing can now onboard a training partner in weeks rather than months.

They are also using our analytics solution to make fact-based decisions about product performance and inventory, ensuring that the right inventory is in the right place at the right time.

Retailers are increasingly adopting omnichannel strategies to remain competitive, and suppliers must follow suit to grow their businesses.

Legacy processes are no longer sufficient to achieve the agility that is needed to address ever-changing consumer demands.

The need to have an end-to-end solution that enables real-time collaboration between trading partners is more important than ever before.

Fulfillment enables retailers and suppliers to communicate quickly and efficiently, while analytics provides the visibility necessary to optimize inventory at the store level.

Additionally, analytics allows trading partners to collaborate to track product performance and identify opportunities to grow sales while enhancing fulfillment performance.

Due to our broad-based solutions, retail expertise and leadership position, we continue to grow our network.

A recent example is Reinhart, one of the largest Tier 1 food service distributors in the U.S. With $7 billion in annual revenue, they deliver more than 170 million cases of food and products.

They recently hired a new CIO, whose ultimate goal was to move away from legacy EDI software and automate their supply chain across the entire enterprise, enabling real-time communication with their suppliers.

In partnership with SPS, Reinhart ran a successful community enablement program.

Holiday Stationstores is a recent retailer addition stemming from the ToolBox acquisition.

One of the largest convenience store chains in the U.S. with over 500 locations, Holiday prides themselves in utilizing data to optimize their performance, but much of their internal solutions they developed were resource-intensive and couldn't easily integrate multiple data sources and be shared in real-time across the organization or with strategic partners.

In their continuing effort to improve insight and collaboration with their strategic partners, they selected our analytics solution with its robust capabilities such as item performance, assortment and promotion opportunities to deliver sales growth while improving efficiency.

Comprehensive cloud-based platform and broad-based retail network enable thousands of trading partners to communicate real-time and adapt quickly to ever-changing consumer demands in the complex retail environment.

SPS sits at the center of the retail ecosystem, which allows us to act as a strategic adviser to retailers and suppliers on their omnichannel strategies, and we continue to grow our market leadership.

We had a successful first quarter, and we continue to believe we have a multibillion-dollar opportunity in front of us.

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 $51.9 million, a 14% increase over Q1 of last year and represented our 65th consecutive quarter of revenue growth.

Recurring revenue this quarter grew 15% year-over-year.

The total number of recurring revenue customers increased 5% year-over-year to approximately 25,000.

For Q1, wallet share increased 9% year-over-year to approximately $7,700.

For the quarter, adjusted EBITDA was $8.5 million compared to $6 million in Q1 of last year.

We ended the quarter with total cash and marketable securities of approximately $157 million.

We ended the quarter with approximately 275 quota-carrying sales headcount, in line with our expectations.

As we mentioned last quarter, due to the increased sales force productivity we expect to realize in 2017, we anticipate adding approximately 15 salespeople by the end of the year.

Now turning to guidance.

For the second quarter of 2017, we expect revenue to be in the range of $53.4 million to $53.9 million.

We expect adjusted EBITDA to be in the range of $7.3 million to $7.8 million.

We expect fully diluted earnings per share to be approximately $0.06 to $0.07, with fully diluted weighted average shares outstanding of approximately 17.7 million shares.

We expect non-GAAP diluted earnings per share to be approximately $0.18 to $0.20 with stock-based compensation expense of approximately $2.5 million, depreciation expense of approximately $2 million and amortization expense of approximately $1.2 million.

For the full year, we expect revenue to be in the range of $220 million to $222 million, representing 14% to 15% growth over 2016.

We expect adjusted EBITDA to be in the range of $31.8 million to $32.5 million, representing 19% to 22% growth over 2016.

Our philosophy on margin expansion remains the same, and we expect to invest any additional upside back into the business.

We expect fully diluted earnings per share to be in the range of $0.36 to $0.39.

We expect fully diluted weighted average shares outstanding of approximately 17.7 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.83 to $0.85, with stock-based compensation expense of approximately $10.1 million, depreciation expense of approximately $8.3 million and amortization expense for the year to be approximately $4.9 million.

For the remainder of the year, on a quarterly basis, investors should model a 40% effective tax rate calculated on GAAP pretax net earnings.

As a reminder, we have begun tax effecting non-GAAP income to conform to the May C&DI issued on non-GAAP measures in 2017.

Non-GAAP income now reflects the tax adjustments of the add-back of stock-based compensation and the amortization of intangibles to non-GAAP income.

A reconciliation of the impact of historical periods can be found on the financial data sheet we have posted to the IR section of our website.

In summary, we have a strong start to the year, and we look forward to expanding our market leadership and remain confident in our ability to achieve our long-term targets.

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

(Operator Instructions) Our first question or comment comes from the line of Scott Berg from Needham.

I have 2 questions.

First, Archie, your customer adds were, remind me, the sort of math is right 196 in the quarter, and you've talked about the reasons why they would be lower this quarter on the last call.

But can you try to help us understand, how much of that is the result of the changes that are happening to these retailers that are delaying the enablement campaign versus the change in your skin in your sales go-to-market strategy in some of those disruptions that may or may not be positive?

Yes.

So I think as far as our change in go-to-market strategy, I don't think that's had, really, an impact.

Fairly marginal.

I mean, somewhat, but fairly marginal.

And the deals in retail tend to be longer sales cycles.

So it is somewhat in the enablement campaigns, which is a large driver of our growth rate.

And from a customer account standpoint, it's through the retail enablement campaigns where you're going to get the largest number of customer accounts.

So it is more reflective of enablement campaigns.

Great.

And my follow-up question would be, Kim, your earnings to beat was significantly larger this quarter.

It looks like your R&D expense was down sequentially from Q4, a pretty substantial amount for you.

Can you kind of tell us what the puts and takes were of having that so much lower?

And what should we expect moving forward?

Sure.

So first, as it relates to the EBITDA, we have reiterated what our expectations are for the year, and our expectation is that we will make sure that we are reinvesting appropriately back in the business to hit that EBITDA.

As it relates to the favorability in the quarter, most of the favorability of the EBITDA in the quarter just was related to timing of hires and investment in the business.

Specific to your question on the R&D side, you are correct.

You did see the Q1 R&D down sequentially from Q4.

A portion of that reason is that a portion of our R&D -- a small portion of our R&D, we actually capitalized for product enhancements.

And in our business, we tend to do less of that type of activity in Q4 because we're really focused on the holiday season, and more of that happens in the Q1 time period.

So that's part of the dynamics you see there.

The second part is that more of our hires are now going to be coming in, in the Q2 than we saw in Q1.

So as you're modeling R&D, you should expect to see the R&D spend increase for the remainder of the year relative to where it was in Q1.

Our next question or comment comes from the line of Matt Pfau from William Blair.

First, I wanted to touch on the macro environment a bit.

Obviously, there are headlines out there in terms of store closures, and bankruptcies have been quite negative, but it seems like you guys have gotten off to a strong start to the year.

So maybe you can just help us understand, when we see headlines about these store closures and bankruptcies, what sort of impact does that have on your business?

Yes.

So obviously, bankruptcy is where they don't continue operations and they actually close down.

That is a negative.

We saw that last year, where we had 4 or 5 go bankrupt, and we -- it cost us a point-or-so of growth.

So that does have an impact.

Store closings, for the most part, don't.

What's interesting is, when you look at the underlying retail environment, if you have an omnichannel strategy as a retailer, you are seeing that brick-and-mortar stores are growing 3% last year, and that is 100 outlets.

About 120% of that is because of web-influenced sales.

So store sales are up but you need to be in the right standpoint.

So there's a lot of uncertainty, obviously.

Some of the players just didn't have omnichannel strategies.

Some of the players just -- you need to be very strong operationally and merchandising-wise in today's retailer environment to compete, and some of them aren't doing that.

So one of the things that we've talked about internally and et cetera is one of the things with the uncertainty in the retail environment, I will tell you that it is uncertain when we'll get back to that 20% number, but we see good traction.

We see a huge total addressable market in front of us and a big opportunity.

So with the customers we're helping and surviving, we're really adding a significant amount of that.

Got it.

And then I wanted to touch on the sales force a little bit.

Kim, could you tell us what the number was in the fourth quarter relative to the number you provided us, the 275 number?

And then in terms of the change in the strategy of hiring a little bit more experienced reps, maybe just an update on how that's progressing.

Sure.

So we -- for most currently, approximately 275, that's in line with Q4.

So the way can think about it is in the quarter, there was a pretty typical amount of attrition that we see as a business, and we hired to offset the attrition.

That was in line with what our expectations were for the quarter.

We also did reiterate that our expectation is that we would add about a net 15 by the end of the year.

That amount is lower than what we've added historically based on the efficiencies and the productivity changes that we put in place with the sales force.

As it relates to the mix of hiring of that sort of net 15 people, to your point, there's a portion of that, that are going to be more experienced or seasoned reps or seasoned sales executives to go after some of our larger customer opportunities.

As you would expect on those types of hires, those do take a bit longer to hire those folks, but we are right in line with what our expectations are relative to hiring them during the year.

Got it.

And one last follow-up for me.

With those more experienced reps that you are hiring, what types of backgrounds are you targeting for them?

It's pretty varied.

To the extent they're retail reps, senior retail reps, it helps if they have some background in retail.

They've been an enterprise rep.

And some of them aren't experienced to that extent.

They might have 2, 3 years experience if they haven't in some type of non-commodity type sales, that's -- so it's pretty varied among the sales groups between channel and supplier sales and supplier sales, enterprise and retail.

So it's pretty varied.

It's -- we are still hiring out of college, and we still are hiring.

We've already hired extremely senior sales reps.

So it's pretty varied.

Our next question or comment comes from the line of Tom Roderick from Stifel.

It's actually Parker Lane, in for Tom Roderick.

As we look at the average recurring revenue for customer growth of roughly 9% this quarter versus your mid to high teens figure you posted in quarters past, I was wondering if you could comment on any changes in pricing dynamics in the quarter or what exactly drove that figure.

Sure.

There's really no -- nothing as it relates to the pricing dynamics, Parker.

The growth rate is pretty similar to last quarter, when you look at it on an organic basis.

So just keep in mind, this is the first quarter we're lapping the acquisition of ToolBox last year.

So if you look at it from an organic perspective, we're 9% this quarter, and we're a little bit closer to 10% last quarter.

So pretty similar dynamics within the 2 quarters.

Nothing specific to highlight relative to pricing dynamics.

All right.

And as you look at the macro environment, are you seeing any differences in some of those -- or the newer markets for you guys, like New Zealand or Australia, compared to the United States?

Well, Australia is a pretty good strong market for us, and we're seeing pretty decent growth.

Obviously, Amazon just announced they were going in to Australia.

So I think you'll see the mindset there.

They do have some extremely sophisticated retailers, just like the U.S. does, and some that are

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It feels pretty similar to the U.S., except without the -- it had not had the Amazon impact.

It's had the opportunity of e-commerce but not the threat of Amazon.

But obviously, Amazon

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a big announcement there.

Our next question or comment comes from the line of Tim Klasell from Northland Securities.

Two quick questions.

One, and I'm sure I got on just a bit late, the analytics in your prepared remarks, a fair number of comments on that.

How did that perform -- maybe you can give us a little color on how did that perform quantitatively during the quarter.

And how are you thinking about that going forward?

Sure.

So Tim, we provide update on analytics on an annual basis.

So I don't have an update to tell you specific within the quarter.

You are correct.

We did highlight some examples, one being on the ToolBox side.

So now that we're just about a year into that acquisition, we really are pleased with what we've seen there.

And so we feel very good as it relates to the analytics business.

Do keep in mind, relative to some of the bankruptcies that Archie had referred to that occurred sort of in the latter part of 2016, the negative impact that's having in 2017 is more skewed to the analytics business.

So that's nothing particularly new in the quarter, but that's just sort of a reminder.

Overall, we think there's lots of opportunities to grow both the fulfillment business as well as the analytics business.

Okay.

Great, great.

And then you're having your users' conference this quarter.

What's the impact that you're projecting this quarter as far as expenses or revenues?

If you can remind us on that.

Sure.

So as it relates to the user conference, you are correct.

That's in Q2.

And the dollars associated with that are already reflected within our guidance, very similar to last year.

What you saw last year and what you're also seeing this year is our expectation for EBITDA goes down a little bit sequentially from Q1.

Partly that is to reflect the cost of that user conference.

So nothing really different relative to what you would have seen last year.

Our next question or comment comes from the line of Jeff Van Rhee from Craig-Hallum.

A couple of questions.

I guess, Archie, first, on the sales cycles.

You had commented within the retail food chain that you had seen some sales cycles lengthen.

Could you just -- any incremental color there?

Was this sort of a onetime lengthening, and now you feel like things have stabilized?

And then just one clarification as well.

Has your opinion on the time line to 20% recurring growth changed at all?

Yes.

I think the -- to address the first question on the time lines on the retailers.

Obviously, there's a lot of uncertainty in the retail environment, et cetera.

So I don't know that with the uncertainty, I'm going to project how long it'll stay longer or whatnot, but we are seeing uncertainty.

But obviously, we're seeing a lot of traction as well.

So I don't -- it's not gloom and doom.

We've had significant traction, but we have a lot of great activity going on with the retailers, and we add a ton of value to those retailers.

With that uncertainty, we are pulling any long-term forecast.

I think to be able to give guidance more than a year out just doesn't seem prudent at this time, saying we're going to hit 20%.

Okay.

And just to be clear, that unwillingness to go to that long-term forecast is really just -- I guess sales cycles were difficult last quarter.

They're difficult this quarter.

So nothing's really changed in the cycles or the tone of business, but you've just sort of opted to say, "look, in light of that, we may have previously said end of '18 for 20% or we're just going to take that off the table for now until we get better clarity." Is that sort of a fair read-back?

I think that's right, Jeff.

And just saying, it just seems -- I don't know.

In the retail environment, we feel very optimistic about our business.

We're very optimistic about how the reorg has happened and how the ToolBox acquisition, feel very upbeat about the business.

But the uncertainty looming out there just doesn't feel like to give long term -- to give guidance more than a year out just doesn't seem like a prudent thing to do.

Yes.

No, I totally agree.

Two questions, and last questions for me.

One, any changes worth noting in the enablement pipeline, where they're coming from, size, whether you're going to get all the leads, just any incremental color about the enablement pipeline?

And then secondly, if you would just touch on the drop-ship deals.

I still tend to get a fair amount of questions around CommerceHub, the differentiation in terms of the deals that are right in your wheelhouse versus those that might be more circulatory to what they're trying to bring to the table.

Yes.

First -- the first part of the question, we're not seeing significant changes in who we're going after, how we're doing enablement campaigns.

It's still pretty similar on that front.

From a drop-ship standpoint, we do drop-ship with over 300 retailers today.

So it's an important -- our story is really about the network and supporting you as a supplier regardless of who -- what channel you sell into.

And it's the really the life cycle of the order and the life cycle of the item to able to address your concerns or needs as a supplier.

I'd say the biggest difference, CommerceHub is 100% focused on the drop-ship.

It's really not a network play.

It's a drop-ship play a lot of on the order management system for the retailers, for about 40 retailers, I think, is their thereabouts today.

So in those deals, where it's a large retailer looking for the drop-ship component of their e-commerce business, CommerceHub is in those deals.

If they have an order management system and they've solved that problem, we're in really good standings.

If they're looking to purchase CommerceHub's order management system, then they're going to have a competitive advantage.

Our next question or comment comes from the line of Pat Walravens from JMP.

Archie, can you tell us if you were able to increase the number of retailers giving you leads or the number of retailers giving you all your leads this quarter?

That's an -- Pat, we look at that on an more of a -- we think about it like an annualized or a TTM basis.

So we'll provide an update on that on -- as we exit this year on an annual basis, consistent with what we've done before.

Within the quarter itself, we had a nice healthy mix of enablement campaigns and leads coming from retailers.

However, the same comment that we had mentioned on the last earnings call, the expectation in this year, we're not having as many as we had initially anticipated because of a subset of retailers, but the dynamics that we saw within the quarter was pretty much what we're expecting as we entered into the quarter.

So you don't want to say if you've added any?

We don't need a number.

I'm just wondering because you didn't add any at all last year for the first time in your history.

So I think it's an important thing to get a sense of when you start adding them again.

What we do is, on an annual basis, we'll provide how many retailers we do some activity with on its community enablement campaigns and how many we do all with.

And that's a metric that we track on an annual basis.

Okay.

Do you feel good about it?

Archie, I'll let you answer that one.

Yes, we feel good about the tone of the business.

We feel good about the total addressable market.

We feel good about what happened with the ToolBox acquisition.

We don't feel good about the uncertainty in the retail market.

But I mean, we think, Pat, we're set up for the long-term and plan on continuing to execute on that.

Okay.

And then I might have missed it.

Kim, did you give us the organic rate?

And do you mind repeating it if you did?

For recurring revenue or for -- what numbers are you looking for, Pat?

Your -- the organic recurring revenue growth rate that you usually have.

Yes.

Since we've lapsed the ToolBox acquisition, the reported inorganic are one and the same.

So GAAP revenue, 14%; recurring revenue, 15%.

Okay, great.

And then lastly, I mean, being flat on the sales headcount from Q4 to Q1, were you really happy with that?

I mean, don't you want to -- isn't it better to frontload your hires and then they have the year to deliver for you?

Well, this is really, Pat, what we anticipated.

Obviously, we talked about it.

We did a pretty significant reorganization in the beginning of the year.

So to hire into that environment, to be recruiting heavily in December with that out there and then having people come in to that new environment, just -- we anticipated more back end of the quarter hiring.

So January was nonexistent for the most part.

So it is what we anticipated from a headcount standpoint.

And I think you'll see, as we go through the quarters, we'll be on about 15, where we think we'll be.

So I feel pretty confident in that number of 15.

(Operator Instructions) Our next question or comment comes from the line of Mark Schappel from Benchmark.

Archie, could you talk a little bit about some of the indications of success that you're seeing with respect to the changes you made in the sales organization at the beginning of the year?

Yes.

So first off, I think it's extremely early, but I think what we'll take victories on is the turnover has not been significantly different than what it's been in the past.

I think the pipelines are growing and people are past the changes, and they're -- we have a very, very strong sales force with very committed people that I think are embracing the change in the new world.

So -- and I think they're going after some of their territories extremely aggressively.

So early signs of pipelines, et cetera.

I feel very good about the stability in the sales force, the leadership of the sales force, all the -- unfortunately, those are softer things, but the pipeline is growing and the pipeline is strong with the changes.

Okay, great.

And then one final question, building on an earlier question, actually.

I was wondering if you could just talk about some of the success you're having in building out your international network.

And also to what we can expect on that front in the coming year?

Yes.

So from -- we look at it from a couple of different ways.

Australia, we continue to have nice success there.

We continue to expand our sales force there.

We continue to make progress there.

And I think, frankly, Amazon coming in that market will give a more sense of urgency on some of the initiatives for retailers, so very much what we saw 3, 4 years ago at the impact of Amazon more so 3, 4 years ago in the U.S. So I feel Europe has been more around the working with the analytics play, and we continue to expand our network there.

And then Asia is really more around the North American supply chain.

We continue to expand our footprint.

We continue to let the viral nature of our network expand our business, and that's the way we'll continue to execute on that opportunity.

I'm showing no additional questions in the queue at this time.

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

This concludes the program.

You may now disconnect.

Everyone, have a wonderful day.