SPS Commerce Inc (SPSC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SPS Commerce Q2 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Ms. Irmina Blaszczyk.

Ma'am, you may begin.

Thank you, Crystal, and good afternoon, everyone.

Thank you for joining us on SPS Commerce Second Quarter 2018 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 opinion 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 will turn the call over to Archie.

Thanks, Irmina, and welcome, everyone.

SPS Commerce continues to deliver on its financial targets as it strengthens its competitive position in the retail market that continues to evolve to address the demands of today's consumers.

We posted a strong second quarter of 2018.

Revenue grew 13% to $61.1 million.

Recurring revenue grew 13% and adjusted EBITDA grew 53% to $12.1 million.

SPS has grown to be a leader in cloud-based supply chain management solutions by establishing and growing its network of strategic and consultative relationships with retailers and suppliers.

As consumer shopping habits and expectations continue to drive the need for retailers to evolve their omnichannel strategies, SPS leverages its platform and its network to deploy efficient and comprehensive solutions.

As retailers continue to automate order management, suppliers must meet new compliance requirements.

During the second quarter, SPS ran a community enablement campaign with Walgreens' suppliers based on updated order management requirements.

Walgreens is just one example of many retailers that partner with SPS for new vendor onboarding and to ensure existing vendors comply with new rule book enhancements and specifications.

SPS' vast network of retailers and suppliers is a testament to the relationship we establish and solutions we deliver.

Along with our customer SIM Supply, we were recently honored by Supply & Demand Chain Executive, a business technology magazine, to their top 100 supply chain projects for 2018.

The annual list showcases recent projects that advance a company's supply chain to deliver growth and new efficiencies that position them for long-term success.

When SIM Supply experienced increased demand, they created an urgent need for automation.

They chose SPS based on a recommendation of one of its largest customers.

SPS has been pioneering innovative technology solutions that make retailer and supplier relationships more collaborative and profitable.

And we continue to advance our strategy to leverage the industry's most broadly adopted retail cloud services platform.

We now power more than 350,000 trading partnerships, making it easy for retailers, suppliers and logistics companies to work together.

Our newly redesigned website highlights how SPS can help our customers work more effectively, collaboratively and profitably with their network of trading partners, underscoring how uniquely we are positioned to address their business challenges.

As retailers progress along their journey to become EDI and API capable, SPS can support them in the supply chain, in streamlining fulfillment and shipping and inventory management.

As the industry's only provider with an end-to-end solution, we are excited about the many opportunities ahead of us, which represents a multibillion-dollar market opportunity.

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

Thanks, Archie.

We had a great second quarter.

Revenue for the quarter was $61.1 million, a 13% increase over Q2 of last year and represented our 70th consecutive quarter of revenue growth.

Recurring revenue this quarter grew 13% year-over-year.

The total number of recurring revenue customers increased 4% year-over-year to approximately 26,200 and wallet share increased 8% year-over-year to approximately $8,700.

For the quarter, adjusted EBITDA was $12.1 million compared to $7.9 million in Q2 of last year.

We ended the quarter with total cash and marketable securities of approximately $178 million and we repurchased approximately $6 million of SPS shares.

Now turning to guidance.

For the third quarter of 2018, we expect revenue to be in the range of $61.2 million to $61.7 million.

We expect adjusted EBITDA to be in the range of $12.2 million to $12.7 million.

We expect fully diluted earnings per share to be approximately $0.22 to $0.24 with fully diluted weighted average shares outstanding of approximately 17.6 million shares.

We expect non-GAAP diluted earnings per share to be approximately $0.39 to $0.41, with stock-based compensation expense of approximately $3.3 million, depreciation expense of approximately $2.4 million and amortization expense of approximately $1.1 million.

For the full year, we expect revenue to be in the range of $243.7 million to $245.1 million, representing 11% growth over 2017.

We expect adjusted EBITDA to be in the range of $47.4 million to $48.5 million, representing 39% to 42% growth over 2017.

We expect fully diluted earnings per share to be in the range of $0.94 to $0.98.

We expect fully diluted weighted average shares outstanding of approximately 17.5 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $1.65 to $1.69, with stock-based compensation expense of approximately $12.7 million, depreciation expense of approximately $9.5 million and amortization expense for the year to be approximately $4.4 million.

For the remainder of the year, on a quarterly basis, investors should model a 30% effective tax rate, calculated on GAAP pretax net earnings.

In summary, we are well on our way to reaching our 2020 goals, proving efficiency in our business model, while continually evolving and executing our go-to-market strategy.

We look forward to expanding our market leadership and remain confident in our ability to achieve our long-term financial targets.

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

(Operator Instructions) And our first question comes from Matt Pfau from William Blair.

First, just wanted to start off with the revenue guidance for the back half of the year.

And so it looks like for the first half here, we've come in at over 13% revenue growth, but the guidance kind of implies a deceleration into the back half.

So is there anything that you're seeing that would make you cautious in the back half?

Or I guess, how should we think about the back half guidance for 2018?

Sure, Matt.

So when we think about the guidance, you'll see that we've increased the annual guidance, both bottom line as well as top line over $1 million, reflective of the results that we saw in Q2.

However, keep in mind, as we established guidance for the beginning of the year, from a revenue perspective, there's still a lot of uncertainty in the retail space, and our guidance for the back half of the year remains consistent with what our expectations were at the beginning of the year.

In other words, we're really not seeing a lot of change relative to the retail environment, and we think there is still a lot of volatility there.

Got it.

That makes sense, okay.

And then another question in terms of the guidance.

If I look at, the high end of revenue was brought up by about $1 million for the full year, but EBITDA was increased more at about $3.5 million.

So obviously, EBITDA increased by more than just the revenue drop-through.

So where -- what areas in terms of leverages on expenses are you getting that are maybe better than you had anticipated when you originally gave guidance for the year?

Sure.

So when you look at the annual EBITDA guidance, you're correct.

It takes into account not only what we've seen in the front half of the year, but also our expectations in the back half of the year.

Now our absolute spend in dollars, of course, will increase in the back part of the year, but we're able to spend at a rate lower than the implied revenue growth in the back half of the year.

Part of that is benefits of investments we made in prior years and some of the efficiencies and savings we're seeing associated with that.

We also have evaluated what we believe is the appropriate spend for this year as well as investments we're making into the future.

And all of that has been taken into account in our guidance.

Our next question comes from Monika Garg from KeyBanc.

My first question is like, I think couple of quarters back you had given us like kind of a 2020 view, exiting 2020 view on the EBITDA margins and the revenue side too.

Given we are seeing a pretty significant EBITDA margin improvement in 2018, can you update us on that?

How you're looking at the margins in the next 2, 3 years?

Sure.

So you're correct that we did establish expectations for 2020 earlier this year.

And as I mentioned in my prepared remarks, we're well on our way in achieving those expectations for 2020 as well as the longer-term financial expectations.

The only update we've made at this point is as it relates to the year, where we have the opportunity to take up both the top line as well as the bottom line profit.

Got it.

Then Archie, you talk about multibillion opportunity ahead of you in your comments, how are you thinking about the growth for next 2, 3 years?

Well, we continue to invest in all areas of the business.

And obviously, we are cautiously optimistic in the retail environment and we'll just continue to try to execute on what we have control over and continue to deliver best-in-class products to our customers.

Got it.

Do you think we could see acceleration in top line growth next couple of years?

There is so much uncertainty, that's not our forecast at this time.

Got it, okay.

Then just last question on enablement campaigns.

In previous quarters, you've kind of little bit talked about you had seen some delays in enablement campaigns.

Any update on those?

No, I think in our viewpoint, the environment continues to be pretty much the same.

I would say that I think -- a shout out to the retail team, really had excellent execution over the last 2 quarters, as you saw in the numbers.

So -- but we don't see that as necessarily a change in the environment.

So continue to monitor everything.

And our next question comes from Scott Berg from Needham.

I guess I got 2 quick ones.

First of all, Kim, I think this was your largest revenue beat that I can remember in 8 years of covering the company.

Why such a big beat this quarter relative to prior performances?

Sure.

So in the quarter, one of the large contributors to the beat had to do with our community enablement campaign, and more specifically, as it relates to Walgreens.

So Archie talked a little bit about that in the prepared remarks, but in the quarter, we had an opportunity to reach out to all of Walgreens' current supplier base, as Walgreens was rolling out some new requirements as it relates to different documents, order management, et cetera.

And how that impacted us?

It impacted us more in terms of onetime revenue associated with that, as we're reaching out, again, to their existing supplier base.

But that was highly correlated to the specific beat in the quarter.

Great.

Helpful.

And I guess, the follow-up question is the incremental EBITDA for the year.

Trying to understand which line items you expect to get that additional leverage from.

You have made great strides on a year-over-year basis, but wondering if we should be battling more leverage in sales and marketing versus R&D, et cetera to drive that increase?

Sure.

So we guide in the year, we guide to both that revenue as well as EBITDA and not specific line by line.

You certainly have how we're performing across those different line items for the first half of the year.

And we've given some color as it relates to longer term what expectations are.

But specific to this year, you have the first half of the year results, and obviously, in each quarter, we'll update you how that looks like by line.

But our EBITDA, we think is reflective of our expectations for the remainder of the year, allowing us still to invest not just in the business for today, but also invest going forward in the future.

And our next question comes from David Hynes from Canaccord.

Archie, I want to ask you, your prepared remarks, you finished with a comment about helping customers be both EDI and API-enabled.

Can you just talk about kind of the difference there?

Are you starting to see a change in the market?

And how does that evolve your solutions?

And what you need to be able to do for your customers?

Yes, I think over time, it's a very, very slow evolution.

I think it's a big opportunity for us over time.

If you think about EDI, it's more batch, not as much real time, which in a lot of scenarios real time isn't of a lot of value.

As you get into more real time, you get into dropship.

You're seeing more on the ERP side of integration and then on some of the dropship marketplaces, et cetera, we use APIs to integrate to Shopify, for instance.

You're seeing more and more of that.

I think that's an opportunity for us in the fact that that's the way we're built.

We're built as an integration company, not as a EDI company.

And I think over time, it's going to evolve, which will force some tougher times if our smaller competitors aren't capable of staying up with the times and also more likely for people to want to have somebody else do that for them.

But we (inaudible) today, and we're slowly seeing that evolve.

But it's just -- it's just very, very small, and I don't think it's going to be that big of a change over the next 1 or 2 years, but it could be.

I mean, it would be a positive, if it was.

But I think it's very slow evolution.

Okay, that makes sense.

Helpful color.

And then second, more strategically than in the numbers, as you think about kind of future investment requirements vis-à-vis the margin expansion targets you have out there, right, obviously, you're taking a bit of a breather on sales hiring this year.

I think it's reflected in the numbers, right?

Sales and marketing is flat year-over-year.

What are the gating factors you look at as you start to think about next year, right?

The demand support, the need for some new sales additions, are you taking more of a wait-and-see approach, how should we think about it?

Yes, I mean, we continue to just monitor where we think where we have demand and where we can effectively hire and add resources.

I think there's still a lot of opportunity in the retail space and retailers, many of them are behind.

I think there is a lot of opportunity.

So we'll continue to invest in there.

I think in channels, I think there continues to be opportunity.

And our focus on product is to make our product easier to use, easier to partnership -- partner with, more intuitive, which as we deliver our world-class solution, it does cost less to support typically.

So that's all positive too and our investments are also not only helping us with creating a world-class customer experience, but it actually helps us in our margin as well.

Yes, for sure.

And then maybe I can sneak in one last quick one for Kim.

Deferred revenue, pretty big sequential jump.

Any color on what drove that?

No, the deferred revenue is just related to the new customers that were signed up in the quarter and the setup fees associated with that, that goes on the balance sheet as deferred revenue and gets recognized ratably over 2 years on the financial statement.

And then for certain customers that pay us for more than 1 month at a time, there is a little bit that goes in there.

But nothing out of the ordinary in this quarter.

And our next question comes from Koji Ikeda from Oppenheimer.

Just had a question on the net new recurring revenue customers metric in the quarter.

And according to my model, that was a pretty good metric this quarter.

And you highlighted that Walgreens in your prepared remarks, and from Scott's question too, that Walgreens contributed to the beat in the revenue line item, but Kim in your answer you said that the Walgreens revenue came in as onetime revenue.

And I believe that means that those customers aren't considered recurring revenue customers, yet that net new recurring customer account was pretty good this quarter, still at over 300.

I was wondering if you can unpack maybe if there was any contribution from Walgreens in that metric.

And if you could, maybe talk a bit about where else you're seeing community enablement campaign successes?

Sure.

As it relates to the customer count, you're right that was a nice contribution in the quarter.

So we added roughly 300.

Compared to last quarter, that was roughly 100 as an example.

The quantity of the net new customer adds is correlated to community enablement campaigns.

The comment when I was talking about Walgreens, as I was correlating that to the total revenue beat, more of that came in the form of onetime revenue specific on Walgreens.

That being said, we certainly are getting new business, new recurring revenue from the Walgreens campaign.

But just more percentage-wise, if you look specific at that campaign, came in the form of onetime revenue versus new.

But overall, the healthy adds in the net customer count is correlated to the community enablement campaign activity in the quarter.

Got it.

And just one quick question, another question for you Kim on the tax.

It came in a little bit lower than what we were modeling this quarter.

Could you walk us through the puts and takes on that tax line that resulted in that lower tax rate?

And I just wanted to clarify that you said that we should continue to model a 30% tax rate on a GAAP pretax earnings for the remainder of the year.

That's correct.

Going forward, you should model approximately 30%.

You are correct in the quarter, the tax rate in the quarter was lower than that.

That's really driven by a couple of more onetime-type items: one, as it relates to stock transactions that occurred in the quarter; another as it related to a provision to return true-ups.

As we're finalizing our 2017 tax return, we are able to recognize a bit more tax credit in the form of R&D tax credit than we had originally anticipated.

And as we were completing our provision to return, we're able to take that benefit, which gets recorded as an immediate onetime benefit to the tax expense.

And our next question comes from Tom Roderick from Stifel.

So just following up, Kim, on the onetime benefits from this quarter.

I don't know if you want to quantify that or if you can help us think about that, but it's sort of best to think going forward that the mix kind of trends back to this 93% level that we've seen for most of the past few years, so maybe it's like 1 point of benefit this quarter.

How should we think about what that was in this quarter and where the mix goes back to next quarter?

Sure.

Yes, to your point, if you look back over the past several quarters, that the recurring revenue as a percent of total revenue has been around 93%.

To your point, this quarter, that was 92%, that was correlated to the comments I made about that -- specific to that Walgreens enablement campaign.

So 93% tends to be the normal and what you would anticipate as it relates to recurring revenue as a percent of total revenue.

Great.

And Archie, how do you feel about sort of sales capacity, distribution?

Oftentimes, you go through the process of trying to drive a little bit more leverage, you get 6 months down the road and say, "Okay, we were shown the leverage." It's like you guys have shown a lot more than we had expected, which is great.

But do you still feel like you've about the necessary sort of sales capacity and distribution to keep you on that path towards still double-digit growth rate coming out the year 2020?

How do you kind of manage that balance right now?

Yes, Tom.

We think we have the right people in the right spots at this time.

It's a day by day monitoring of that.

And we're very conscious as a business of building a long-term business.

So we're going to do what's right for the long term, both in our investments in our product and -- but more importantly, in our sales force to make sure that we're set up for a strong 2019, a strong 2020.

We're, obviously, looking at the demand out there in the retail environment, trying to rightsize it based on that.

But right now, we think we have the right resources.

Again, we always have open business here and there, but -- and there's monitoring.

In general, pretty much the right capacity.

Okay, great.

The last quick one for you.

I'll let either of you guys decide who gets to answer to this one.

So looking at the average recurring revenue per recurring revenue customer, so kind of a proxy for pricing, which has been pretty steadily in sort of the 10%, 11% range over the last kind of 1 year, 1.5 year.

It dipped down into 8% and sort of understanding that the emphasis is more on fulfillment and less on analytics, or perhaps that may be the direction where the demand is going.

Does that kind of drive sort of a natural drift towards maybe more revenue customer growth, but not as much ARPU growth?

How does that play out?

And maybe you could talk a little bit, if you don't mind, about that 8.5% number on the ARPU lift here this quarter.

Sure.

So as you think about those metrics, first, I'll take you back to the total, which is the total recurring revenue growth of 13%.

And then to your point, there's 2 components that we share that get to that 13%: one is customer and another is that average revenue per customer.

So in this particular quarter, you saw a nice healthy increase in the number of net customers, again correlated to community enablement campaigns.

What we tend to see is, when there is a quarter where there is more community enablement activity, and therefore, more net new customers that join SPS Commerce, that tends to actually depress slightly from the revenue -- average revenue per customer because those customers from a large quantity of customers that we get from enablement campaigns, they tend to be smaller than our average customer and then they grow with us over time.

In a quarter where you have less or fewer community enablement campaigns, you tend to then see higher come in the form of ARPU as it's relating to just more and more revenue we're getting from our existing customers as well as more skewed to the larger customers we get from channel sales.

So sort of a long-winded way to try to answer your question, but specific in the quarter, you saw more of that growth come in the quantity of new customers, which slightly depresses then the average revenue per customer.

And our next question comes from Tim Klasell from Northland Securities.

So my question is around the enablement campaigns.

Now in Q1, you had a nice set going on there and obviously had Walgreens in Q2.

How should we -- what are your plans for the second half of the year?

Will it be continuing at the same pace?

Or what should we be expecting there?

Yes, I think as we've talked about this it's uncertain time and -- I think that we had 2 really good quarters of execution by the retail sales team.

And I think you need to be cautious on taking 2 data points and saying it's a new trend because we don't see the overall environment a whole lot different than it's been in the past.

Okay, great.

And then just a real quick question on the sales and marketing line.

As was mentioned earlier, it seems sort of flat.

Where are you getting the leverage?

Is it through the channel?

Is it through getting extra productivity out of your direct sales force?

It seems like you guys are gaining some nice leverage and I don't know if you can sort of point to 1 or 2 things that seems to be driving that?

Yes, I think specifically in the last 2 quarters, as we've discussed, I think we had a really good execution out of the retail team.

And that makes a lot of good things happen at SPS Commerce.

So I think it's really based on that.

And our next question comes from Jeff Van Rhee from Craig-Hallum.

Just several from me.

Just I guess back to that S&M question for a second.

I think the last update you have given is that the expectation was you would leave the S&M headcount flat.

Just want to be clear.

Is that where the head is right now and then -- or where the thinking is right now?

And then secondly, just, Archie, maybe back to that enablement campaign question.

Obviously, good start to the year.

Just can you expand a little bit on what the pipeline looks like at this point with respect to enablement campaigns maybe versus where we might have been 6, 12 months ago?

Yes, I think when we -- obviously, as we look to Q1 and Q2, they were exceptionally strong.

We feel pretty good about the next 3 quarters, but I think we had 2 exceptional quarters there.

As far as headcount, obviously we're not giving that, but you can see from the sales and marketing spend.

We're making investments throughout the business as well.

We're investing -- we've invested in the past in customer [success] which is helping in different areas.

So again, we think we're about the proper area to be able to deliver on our long-term promises.

Okay.

And then just 2 last for me, then the -- has the ratio of those that test versus sign coming out of enablement campaigns changed?

It has not, but in general, if you have a program like Walgreens, where you're testing their larger suppliers and it's really a change to their rule book specifications.

In a program like that, you're going to tend to have much higher testing.

So in that, that's going to be highly skewed towards testing.

As you get into the tail -- if you're having a program where they're looking to onboard their last 300, 400, 500 suppliers, that's going to be a much higher new add or add-on recurring revenue customer.

So in general, the answer is, no.

But it's always been a program by program what's the dynamics of the suppliers you're asking them to onboard.

Got it.

And then just lastly from me.

The dropship impact obviously has been something else you've mentioned on many, many occasions.

What is the impact at this point of dropship versus when you look back 6 to 12 months?

Does it feel like it's increasing as a driver of the overall business, decreasing, sort of steady?

How would you characterize that?

Yes, I would say it's probably market-driven, but it tends to get more and more headlines from the retailers.

We have -- obviously, I think about 1/3 of our suppliers now use us for some form of dropship.

We do dropship with about 350 retailers.

So we think we're well positioned there.

And I think it's just going to continue to be slowly become a bigger part of retail.

But I don't see it as a dominant piece of retail in the short term or even long term.

And our next question comes from Mark Schappel from Benchmark.

Archie, starting with you a quarter or 2 ago, you noted that your analytics product and analytics, in general, was just on the back-burner of most retailers.

And I was wondering if there has been any movement on that front.

No, I think that's continued to be consistent on that.

And I would -- I don't see a change in that happening over the next 1 to 2 years.

I just don't see a big change in that.

Okay, good.

And then with respect to your partner channel, we haven't heard much about any partner initiatives over the last quarter or 2. I was just wondering if you could just give us a little bit of color or update on how that's performing.

Is it directionally positive?

Yes, I think that group continues to post nice results.

I think they're an integral part of our company, our solution, our selling.

I think the relationships they build are extremely important.

We just continue to be focused on our 5 main ERP system areas and also more and more in the larger global systems integrator.

So I think it continues to be an extremely important part of our business and our strategic part of our business.

Great.

And then Kim, one question for you, to the point that you can talk about it, where is the company with respect to customer churn?

If I recall it correctly, it's around 13% around year-end?

Yes, so really no change.

It's approximately 13% annual customer churn.

(Operator Instructions) And our next question comes from Pat Walravens from JMP Securities.

This is Mathew Spencer on for Pat.

What do you view as being the toughest challenge for retailers today?

And when do you think the retail environment will stabilize in the future?

I think the hardest thing for the retailers today is the vast, vast majority of the business, in the high 80% of their business is going to be in brick-and-mortar.

So that's sort of extremely important part of their business, but the future and the highest growth areas are e-commerce.

So you have to do both extremely well.

And it's blending more and more together.

So it's just changing.

And then I think with Internet, not just Amazon, but the Internet, pricing competitiveness in the marketplace is part of the new game.

And I'm showing no further questions from the phone line.

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

This does conclude the program, and you may all disconnect.

Everyone, have a wonderful day.