SPS Commerce Inc (SPSC) 2018 Q3 法說會逐字稿

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

Welcome to the SPS Commerce Third Quarter 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, good afternoon, everyone, and thank you for joining us on SPS' Third 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, these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Please refer to our SEC filings as well as our financial results press release for a more detailed description of the Risk Factors that may affect our results.

These documents are available on our website, spscommerce.com, and at the SEC's website, sec.gov.

In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website, spscommerce.com.

During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share.

In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures.

And with that, I will turn the call over to Archie.

Thank you, Irmina, and welcome, everyone.

Over the years, SPS Commerce has evolved to lead the industry in cloud-based supply chain management solutions, helping retailers progress along their journey to evolve their omnichannel strategy.

We posted a strong third quarter of 2018.

Revenue grew 12% to $62.9 million, recurring revenue grew 13% and adjusted EBITDA grew 70% to $14.4 million.

While we continue to make great progress towards our 2020 financial goals, we are committed to offering our customers technology-leading solutions that will position them competitively in a changing retail landscape.

As retailers and suppliers work together to adopt an efficient omnichannel strategy, we strive to make the process as seamless as possible and improve the customer experience across the SPS Commerce network of more than 75,000 customers worldwide.

To expand our capabilities, we recently acquired EDI Admin, a leading provider of supply chain integration technology.

Based in Minneapolis, EDI Admin is a longtime partner of SPS Commerce and shares our vision of helping trading partners work better together with end-to-end automation and integration solutions.

We believe bringing this technology in-house accelerates our industry leadership by delivering additional automation capabilities for our products.

We're excited to welcome the talented EDI Admin team to SPS Commerce.

In addition to providing new automation capabilities to streamline order fulfillment, we continue scaling a multi-tenant offering for vendor communities who are faced with evolving technology requirements across the retail landscape.

Over the years, SPS Commerce has grown its network and portfolio of comprehensive supply chain management solutions to help our customers scale their businesses by enabling them to connect efficiently and seamlessly with various retailers and logistics providers.

For example, Circle Media, an electronics vendor, became a SPS Commerce customer to meet Walmart's EDI requirements.

Leveraging the SPS Commerce network, they then connected to additional retailers, including Target and Bed Bath & Beyond, as well as a third-party logistics provider to streamline all trading partner relationships.

As the vendors scale their operations and their order volumes increased, they were be able to once again turn to SPS for our NetSuite fulfillment integration solution to save time and avoid risk associated with manual entry.

With SPS Commerce providing a full service solution across their business, we are able to easily add the vendor's connection to Shopify.

This customer now has seamless automation with all of their trading partners, whether they use EDI or APIs.

Adding Shopify to the SPS Commerce platform aligns with our core service value of growing our network to meet the needs of increasingly complex supply chain requirements.

With the latest technology enhancements to our industry-leading fulfillment solution, SPS Commerce continues to lead in end-to-end automation and integration solutions.

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

Thanks, Archie.

We had a great third quarter.

Revenue for the quarter was $62.9 million, a 12% increase over Q3 of last year and represented our 71st consecutive quarter of revenue growth.

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

The total number of recurring revenue customers increased 6% year-over-year to approximately 26,900 and wallet share increased 8% year-over-year to approximately 8,800.

For the quarter, adjusted EBITDA was $14.4 million compared to $8.5 million in Q3 of last year.

We ended the quarter with total cash and marketable securities of approximately $194 million, and we repurchased approximately $2 million of SPS shares.

Now turning to guidance.

For the fourth quarter of 2018, we expect revenue to be in the range of $63.4 million to $64.1 million.

We expect adjusted EBITDA to be in the range of $13.5 million to $14 million.

We expect fully diluted earnings per share to be approximately $0.27 to $0.29, with fully diluted weighted average shares outstanding of approximately 17.8 million shares.

We expect non-GAAP diluted earnings per share to be approximately $0.44 to $0.46, with stock-based compensation expense of approximately $3.3 million, depreciation expense of approximately $2.4 million and amortization expense of approximately $1.2 million.

For the full year, we expect revenue to be in the range of $246.5 million to $247.2 million, representing 12% growth over 2017.

We expect adjusted EBITDA to be in the range of $50.9 million to $51.4 million, representing approximately 50% growth over 2017.

We expect fully diluted earnings per share to be in the range of $1.22 to $1.24.

We expect fully diluted weighted average shares outstanding of approximately 17.6 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $1.84 to $1.86, with stock-based compensation expense of approximately $13.3 million, depreciation expense of approximately $8.7 million and amortization expense for the year to be approximately $4.3 million.

For Q4, investors should model a 30% effective tax rate calculated on GAAP pretax net earnings.

For 2019, we will provide detailed guidance on our Q4 earnings conference call.

However, for modeling purposes, we expect to deliver approximately 20% EBITDA dollar growth in 2019, continuing to make great progress towards our 2020 EBITDA dollar and margin goals.

And we remain confident in our ability to achieve a revenue run rate of at least $300 million exiting 2020.

Beyond 2020, we expect to see continued margin expansion, with a long-term target model for adjusted EBITDA margin of 35%.

In summary, while the retail environment continues to shift to embrace omnichannel dynamics, SPS Commerce continues to expand our leadership, and we remain confident on our ability to achieve our 2020 goals and long-term financial targets.

And with that, I'd like to open the call for questions.

(Operator Instructions) Our first question or comment comes from the line of Matt Pfau from William Blair.

I wanted to ask about enablement campaigns and what you saw from those in the quarter, and it seems like based on the one-time revenue, that they were relatively healthy.

But some commentary there would be helpful.

Sure.

As it relates to enablement campaigns, you're correct.

We had a really nice quarter of those community enablement campaigns.

One thing that we noticed in the quarter, we actually had a handful of campaigns really focused around grocers, more midsized grocers.

And what that did is that ended up translating into higher net customer adds this quarter than you've seen in some previous quarters.

What you need to think about there is by getting in front of some of those more midsized grocers that allowed us to get in front of some albeit small suppliers, but suppliers that weren't previously within our network, that we are able to add into our network.

Great.

And last one for me just on the gross profit margin in the quarter.

There was a nice uptick there.

Maybe just what drove that and how should we think about gross margin going forward?

Sure.

I continue to think the best way to look at gross margin is really on an annual basis.

Not look too much one quarter versus another quarter.

So what -- you did see an uptick slightly in the quarter.

But overall, we think longer-term, there is a great opportunity for improvement in gross margin.

That is an area [how] we continue to look at and invest appropriately in the overall customer experience.

Our next question or comment comes from the line of David Hynes from Canaccord.

Archie, in the past, we've talked about how you guys have kind of a trimodal customer distribution, right?

You've got a couple of really large -- couple of thousand really large customers, kind of chunk around the average and then, a long tail of smaller suppliers.

As you think about those 3 cohorts, where does it feel like you have the best opportunity to drive same-store sales?

And if you can talk about some of the new things that you're thinking about that will help you get there?

Yes, I think the logical answer, DJ, is that you're going to be able to drive same-store sales, if you will, on all 3. The largest ones it depends the way they buy.

To the extent they buy for a division or a portion of their business, and they're trialing it with perhaps, their backlog retailers, people they're struggling with.

That in those specific cases, there's really nice upsell.

Otherwise, there's not as much there.

The midsize, it tends to be -- they tend to buy what they need upfront, and you're going to kind of grow along with their business.

The smallest companies we found when we look at them, when we do sell them, we have pretty substantial upsell opportunity over the first 18 months or so.

That's kind of more across the board.

On the bigger ones, it's more specific.

It's either -- there either is a ton of upsell opportunity in that specific account or there's -- you're going to just grow as fast as they grow.

Yes, okay.

Well, good.

Well, maybe it sounds like some of these smaller suppliers to the grocers that you did some business within the quarter will lead to some incremental growth.

Our next question or comment comes from the line of Koji Ikeda from Oppenheimer.

I had a question on the sales and marketing spend in the quarter.

It looked like it down-ticked in the quarter on a year-over-year basis.

And I'm just curious what's the best way to think about sales force capacity here and overall sales force productivity, as the business really starts to head into 2019?

Sure.

So as it relates to sales and marketing, a couple of dynamics in the quarter.

One, if you look back historically, Q3 tends to be a bit lower than Q2.

That being said, what we also have seen and is reflected within our financial statements, we are actually having really strong sales execution, and we're in a position that we're actually getting more output or productivity per rep than we had even anticipated that we would be entering this year.

So what that means is we're in a position where we don't actually need to backfill as many positions as we historically have had to.

So of course, we continue to hire, and there is a more normalized level of attrition as any company would have.

But we're in a position that, based on the output we're getting from our reps, we don't need to backfill as many of those positions, and therefore, you'll also see that reflected within the results for the quarter.

So said another way, we feel really good about the sales capacity that we have in order to hit our revenue goals.

Got it.

Got it.

And just one quick question on adjusted EBITDA margin.

This quarter, it looks like you did right around 23%.

And I know the 2020 target is low 20%.

So it sounds like you're pretty much there right now.

I mean, what's the best way to think about margin expansion from here.

And I guess, where I'm really going with this is could we potentially see that long-term target of 35% EBITDA margin start to materialize a little bit sooner than previously thought?

The way I would think about that Koji is long term, we sort of reiterated that mid-30s.

That's roughly 35%.

We also have mentioned that we're making great progress towards those 2020 goals as it relates to the EBITDA margin 2020 goals.

We said we'd be at least in the low 20s percent.

We also did give a little bit of color to help folks as it relates to how to think about 2019.

Again, we're not giving complete guidance until our Q4 earnings call in February.

But we have said that our expectation for 2019 is that the EBITDA dollars will increase approximately 20% year-over-year.

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

I guess I'll kind of go back to the last question and talk about sales and marketing a little bit and dive in a bit more on that, because I can't help, but sort of think you guys are doing more with less.

Looking at the customer account edition that's accelerating.

And as was pointed out Kim, you kind of commented on some seasonality.

But this Q3 sales and marketing number non-GAAP is -- you've got to go all the way back to '16 to kind of find a level.

So I'd love to hear more about what you think is driving the productivity?

Is it moving upstream and focusing on slightly larger customers?

Is it just broader activity and enablement campaigns pushing through some better leads and converting on those?

Can you talk a little bit more about why you are seeing that productivity and what enables you to kind of continue to do that?

Yes, Tom.

As you recall in early '17 and '18, we made various changes to the sales organization, the biggest one being in '17.

And some of it was territory alignment, some of it was management changes, et cetera.

And I think that is starting to pay off along with customer success really teaming more proactively with sales.

So I think it starts with the retail engine.

They've done a fantastic job this year.

So hats off to that team and their production and that always helps our whole business.

And then I think the whole structure, as we laid out as we talked about over the last couple of years, it takes longer than people want to hear for these things to really start getting some action.

And I think, we've settled into a pretty good spot.

So I think the sales team [also has helped with] that aspect.

Good, okay.

Archie, I'll go back to you with the next question here.

I think as if you guys already didn't have the Minneapolis EDI market covered, you've now sort of wrapped around the entire city here.

I'd love to hear a little bit more about EDI Admin, the acquisition.

Looks like they've been around almost as long as you guys, but doesn't look like, from what I can tell, they've raised significant amount of money or maybe not even any money over time.

Is this a pretty lean organization?

How many people are you taking on?

How many customers?

And any incremental technological benefits?

I see from their website, they tout a CHIP iPaaS technology, but it's not immediately apparent to me exactly what that is and how that layers into you guys.

So maybe you could talk a little bit more about the acquisition.

Yes, they have been around for a long time.

They've been owner, individual owner, own the business, has accumulated a fantastic team.

And we partnered with them.

So we worked with them, which -- it's so much easier to make an acquisition if you've either competed against somebody or you partnered with them because you just get to see them in action as opposed to doing due diligence and the board meetings.

And they really help our end-to-end integration.

I mean, we've built our NetSuite end-to-end integration, that's -- but for the SAP and Oracle, they've really built some really great technology in that landscape, and we think that helps.

And we think that what they built, they've done a really nice job of it, and we can leverage that in other places as well.

So pretty lean, small organization but I think it's going to be a nice contributor.

So no -- I mean, to gather from that statement, no immediate worry that we should consider for this being dilutive to the financial model as you fully absorb it?

As you think about the financials, it's reflected on our Q4 numbers as well as the expectation for next year's EBITDA dollars to be approximately 20% growth year-over-year.

If you think about it in Q4, it's going to impact our revenue a few hundred thousand dollars and it's marginal -- and it's business that's marginally profitable.

Our next question or comment comes from the line of Scott Berg from Needham.

I have 2 questions.

I guess, first of all, Kim, wanted to see do you have any additional commentary on your assumptions around that $300 million revenue exit rate 2 years from now?

Is there any differences in the growth of the different product areas of the business, whether it's on the fulfillment side or maybe on the analytic side versus current sales trends there?

Sure.

So basically, what we're doing is we're reiterating the expectation that we established earlier this year on our Q4 earnings call from February this year, where we said we expected to be at a run rate of at least $300 million exiting 2020.

We still feel confident in that.

As the things -- as you think about what makes up that number, as we've stated in the past, we do think that retailer is on a multi-year journey as they go through their state of transition.

And because of that, those dynamics are reflected in our numbers.

So for example, when you think about some of the dynamics that we've talked about on analytics versus fulfillment, fulfillment has been growing at a rate faster than analytics for a lot of reasons that we talked about in prior earnings calls.

We think long-term analytics, super important and long-term, great opportunity for us.

But with some of the dynamics happening in the retail space, we think that retailers are having that as a lower priority than some of the fulfillment-related activities.

And so we've taken all of that into account, as we put together our expectations for that at least $300 million exiting 2020.

Those dynamics of the state retailers in is taken into account.

Got it.

Helpful.

And then a follow-up question for you, Archie, is I guess I'd be remiss if someone on this call didn't ask something about the kind of trade wars and tariffs that are out there.

And any impact to your business given with the critical role SPS plays in trade or at least in intermediary between your customers and these retailers.

But does that have any impact or are you seeing any potential impact in the way that your customers buy your solutions to maybe, I don't know, somehow mitigate those challenges at all?

Scott, I will tell you we haven't seen any effects of that.

There could be over time a small positive in the fact that, if you have backup supplies, if you have a more robust supply chain and alternatives, obviously, there's the more trading partner relationships somebody has, the more abilities there is for us to monetize.

But to be honest with you, we haven't seen that.

And frankly, I spent a fair amount of time with retailers and talking to retailers.

Believe it or not, you're not hearing a lot of talk yet about what they're going to do.

Our next question or comment comes from the line of Mark Schappel from Benchmark.

Archie, going back to the question -- earlier question on EDI Admin.

In your prepared remarks, you noted that they bring additional automation capabilities to your products.

And I think in your prior answer, you talked a little bit about or addressed the adapters, the SAP and Oracle that they have.

Is that their principal capabilities that they bring to the company?

That's the primary systems.

There is a few other systems, but that's the primary at this time.

But I think they've also built a technology platform that we'll be able to leverage that across different ERP systems.

And for us, it's a matter of choosing best-in-class and in a lot of those cases, it will be a partner because we think a partner has done a fantastic job, and we'll continue to partner.

But it also brings us our own capabilities.

Some of these ERPs, we've built our own capabilities.

But on the SAP and Oracle in particular, they're strong.

Great.

And then the cash on the balance sheet continues to build.

And I just wonder if you could just remind us real quickly what the company's priorities are with respect to cash?

And just also speak just to the outlook for M&A in your space.

Sure.

So as it relates to the cash, we are cash flow positive.

So the cash that we have in our balance sheet, how you've seen the company use that has been either in the form of M&A or in a stock buyback.

We have -- the Board has authorized a stock buyback and in this past quarter, we bought back a couple of million dollars' worth of stock, and we have bought back stock the last couple of quarters.

As it relates to acquisition and use of cash that EDI Admin that we mentioned on the earnings call, you'll see that reflected in Q4 as it relates to use of cash of about $7.5 million of cash for that acquisition, and then there's a potential earn-out on top of that as well.

So Mark, the way you can think about it is that cash is there for potential M&A consolidation opportunities as well as, again, you've seen the company repurchase stock as well.

And I think on the acquisition front, we've made it really clear that we have a large total addressable market and opportunities, but we are spending more time on the acquisition front and are looking to be a little more aggressive, but we're going to make sure we have deals that are accretive to us and make sense for our long term.

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

This is actually Joe Goodwin on for Pat.

Just real quick.

I wanted to ask about where you guys are focusing on R&D?

Yes, we're focusing our R&D efforts across all of our product suite, primarily fulfillment and in the analytics.

And I would say, one of our values is win today, win tomorrow.

So we're always investing in the shorter-term customer experience, easier to integrate, easier to use, easier to buy, and then we're in the background always trying to make sure we're building evolutionary, the NexGen, the disruptive technology because every industry is always disrupted, and we want to continue to be the disruptor of ourselves.

So very much like we did last year or about 18 months ago, we came out with our brand-new redesigned web form fulfillment product.

So both from a win today and a win tomorrow.

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

This is Tyler Wood on for Tim.

First off, any update on channel partnerships and the channel sales team?

Maybe what share of sales is coming from that part of the business and how that's trending?

Yes.

We share those numbers on an annual basis, so we'll share those in February, but I think that channel sales group continues to deepen relationships with their partners and then also, look for new partnerships.

And again, we continue to be focused primarily in 5 areas: Oracle, SAP, NetSuite, Microsoft and Sage.

Our primary focus on -- from the channels.

And then also could you talk a bit, I think you mentioned it in the prepared remarks, but could you talk a bit more about the API strategy and API enabled and how that plays into your evolution?

Yes, I mean, we continue to invest in our network is the way we think about it.

And we've never been at the core an EDI-centric business.

We've always been -- really been about perfecting trading partner relationship.

So we just look at it as an another extension.

We think there's going to be a slow evolution to APIs.

And in some cases, APIs make sense.

In some, we don't believe they do, but we'll follow the -- obviously, the requests of our network.

So we think in logistics and dropship, we're going to see more and more APIs and obviously, we're going to see more API [get] integrated back into the ERP system.

So we're going to follow the network on API.

So regardless of what our network, how our network wants us to integrate to them, that's what we're going to do.

(Operator Instructions) Our next question or comment comes from the line of Monika Garg from KeyBanc.

First on the EDI Admin acquisition could you maybe talk about is there any revenue contribution Q4 or kind of how to think about for 2019?

And then you said it provides a good connectivity with SAP, Oracle, ERP systems.

I thought you already have that connectivity too.

So maybe could talk about what it provides on top of that?

Yes.

Depending on the customers' needs and desires, we can either today integrate back into -- or before the EDI Admin, integrate back into SAP and Oracle.

We integrate today to over 110 different ERP systems.

Depending on the level of complexity and the ease and the customers' uses, sometimes there is prebuilt technology, if you will.

And we do, but this allows us a much more seamless end-to-end on the SAP and Oracle.

And as it relates to the revenue, again, the way to think about this acquisition is it's a technology and -- it's primary a technology enhancement, but certainly there are customers.

The way to think about it in Q4, it's a few hundred thousand in revenue in the quarter.

Got it.

And then a question on ARPU of the recurring revenue customers.

It has been growing nicely double digit, except last 2 quarters.

As you were trying to go more up-market, last 2 quarters the growth has been like 8.4 and this quarter 7.5.

Maybe is there some change there, maybe just could you elaborate that?

Sure.

When you think about our business, there is a healthy amount about 93% that's recurring revenue and then of that recurring revenue, there's really 2 metrics that we highlight that are both important, relative to what makes up that overall recurring revenue.

It's the amount of recurring revenue customers, and then it's at average revenue per recurring revenue customer.

So if you think about this quarter, the ARPU that recurring revenue per customer, grew roughly 7.5% year-over-year.

To your point, you noted that the customer growth was higher.

So what tends to happen when you think about that community enablement campaigns, when you have a time where there is more of these campaigns and it brings us to more new customers, which certainly did occur in Q3, that tends to actually mute ASP.

So if you think about the comments that I made as it relates to some of the activity in the quarter on some of that midsized grocers and that brought us in front of new customers that were not previously in our network, but smaller size suppliers.

When they get added into our network, their ASP is going to be lower than our average ASP.

So if you think about that in any given quarter or time period, there's going to be different dynamics that impact the number, specific in the quarter.

The ASP is a slightly muted due to the fact of the higher addition of new customers.

Over time, we certainly think that both number of customers or the growth in customers, as well as our ASP and the growth in ASP, the combination of both of those we think are important contributors to our overall recurring revenue growth.

Got it.

And just the last one.

You talked about 12% growth this year.

Is it the fair way to think about growth next year, low-double digit?

So we haven't provided guidance on revenue for 2019.

We'll provide that on our February earnings call.

What we have reiterated is our expectation that exiting 2020, we will be at a run rate of revenue of at least $300 million.

We've also reiterated that we do believe that retail is still in the state of transition.

That's a multi-year journey.

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

On the EDI Admin just, when did it close?

You said a few hundred thousand in Q4.

When does it actually close or did it close?

It closed earlier this month, October.

Okay.

Okay, got it.

And then as you look at the supplier base and you look at the higher end, the larger suppliers that have signed on peer service, how has that breakpoint where people do it in-house versus are willing to give it you changed?

Have you seen any variation there?

Well, it's account by account.

I mean, there is a lot of dynamics.

I think that our capabilities are better.

We're able to keep -- to be more price competitive because of the easier switch and then depending on what's happening.

Not a drastic switch, but we're probably getting a little better at that, a little higher conversion rate.

I wouldn't say significantly though.

Okay.

And then just back, Kim, you were just touching on the ARPU.

But just kind of a follow-up there.

I realize as you add smaller suppliers and others, that can have effect on overall ARPU.

But if you kind of take the bread and butter existing customers, and you tried to normalize for impact of additions of maybe smaller customers, but if you look at just that core base, how has the pace of additional connections and the addition of additional connections -- of more connections, how has that pace changed in the last 6 months versus maybe like 12, 18 months ago?

There really isn't -- if you were to try to dissect that down, there's really not a change relative to the pace.

The way to think about it is, the longer a customer is with us, the more revenue we get from that customer, the more average connections go up from that customer.

So there really hasn't been a change in dynamics that we're seeing this year compared to last year, as an example.

Yes.

Okay.

And last one then, just any comments with respect to the sales, the pipeline but in particular, with respect to enablement campaigns?

Just anything notable about what you're seeing in the forward pipe?

I think the retail team has executed really nicely this year.

So that's really good to see.

But it's a mix of everything.

I wouldn't say it looks that drastically different than over the last couple of quarters.

So not drastic changes at this time.

Our next question or comment comes from the line of David Gearhart from First Analysis.

Just one quick one from me.

It's been a while since you've talked about churn.

Just wondering if you could give us some color what the churn looks like for the company now versus last year, if it's actually improved or gotten worse.

Just some commentary there would be helpful.

Sure.

Yes, the churn, no change.

It's about 13% from a customer churn.

That's an annualized number.

It's a dollar churn number or basis, can you...

Dollars churns, again, no real change.

That's a little less than half of that, so around sort of that oh, 7-ish percent dollar churn.

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

I would like to turn the conference back over to the management for any closing remarks.

Thank you for attending today, and I appreciate you calling in.

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

This concludes the program.

You may now disconnect.

Everyone, have a wonderful day.