Q4 2019 Earnings Call

That's a question answer session interest instructions will follow with to time.

If anyone should the court assistance during the conference. Please press Star then zero on your Touchtone Thomas Allen.

Let me turn to conference over to your host leasing that's actually ma'am. Please go ahead.

Thank you Jonah good afternoon, everyone and thank you for joining us on Sps Commerce fourth quarter and full year 2019 conference call, we will make certain statements today, including with respect to works like the 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 could differ materially.

Please note that these forward looking statement reflects 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 where it says he filings specifically or form 10-K, as well as our financial results press release for a more detailed descriptions of the risk factors that may affect our results.

These documents are available on our website Sps commerce dot com and not that used to seize website at <unk> Dot Gov.

In addition, we're providing a historical data sheets for easy reference on our Investor Relations section of website, that's pure strongest dot com.

During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share in our press release in our filings with the FCC 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 for me at all and welcome everyone.

2019 was a year of significant accomplishments for Sps commerce.

We continue to deliver on our strategic goals and financial targets as we expand our community of trading partners and leverage the unique lead generation engine fueled by the power of Sps Commerce network.

In 2019, the number of recurring revenue customers reached approximately 30800.

Nearly three times a number of customers since we went public in 2010.

We acquired map of dock to expand our leadership in full service CDR.

And successfully completed the integration of two acquisitions made in 2018.

Hi, admin and Cobra feeling worse.

We remain committed to shareholder value and repurchased 418000 shares at an average price of $49.38 per share.

For the full year revenue grew 12% to $279.1 million and adjusted EBITDA grew 36% to $69.8 million.

Our consistent focus on profitability resulted in adjusted EBITDA margin of 25% in 29 team up from 21% in 2018 and 16% in 27 team.

Throughout the year, we have seen retail dynamics continue to stabilize the need for optimizing fulfillment and increasing collaboration positions Sps to capitalize on ongoing growth opportunities.

As industry evolution that omni channel retail continues to fuel growth Sps commerce experience another year of strong enablement campaign activity.

Early in the year Aeolus limited, a leading testing inspection certification and verification company became a Sps commerce customers to the acquisition of called me a lot worse Aeolus Wanda globally consolidate easy I providers and chose to work with Sps and leverage our best trading partner network.

Now with products hardware manufacturer need to overhaul, they're easy I environment. During an ERP system upgrade and chose Sps is fully outsourced solution over their current provider due to the additional automation capabilities, we acquired through the EDI admin acquisition.

Shields, one larger sporting goods retailers in America has partnered with Sps to leverage our fulfillment solution followed by assortment. This is an ACA partnership generating ongoing vendor onboarding opportunities for Sps assortment and fulfillment solutions.

Dropship continues to be top of mind for many of our customers and partners and Sps has decades of experience working with retailers and suppliers at Ics spanning direct to consumer operations.

SPS has enabled several thousand Walmart vendors across all of Walmart business units, including dropship vendors for Walmart Dot com.

We added our yard and American retail and outdoor Recreation Service Corporation to the Sps Commerce's analytic retail network covering over 80% of their vendors.

Grocery outlet is a high growth extreme value retailer quality name brand consumables on fresh products.

With more than 300 stores across the U.S. and growing the grocer was undergoing a large merchandising transformation project in partnership with Pwc, one of the world's largest consulting services companies.

Yeah, I was identified as a top priority for gross you out, but the more effectively manage their trading partnerships, including inventory management and product delivery and improve order fulfillment accuracy.

Given the scale the project gross you out let chose to outsource EDI, I'd, Sps commerce, including Onboarding of new and existing suppliers.

In Europe, Sps is leveraging strong partnerships and a coordinated effort just enticed retailers to share their point of sale data with suppliers to the Sps analytics network.

As a result, we've seen the number of European retailers and asbestos analytics network more than tripled since 2015.

As a result of strong year of enablement campaign in 2019 fulfillment grew 15 for 15% year over year and our analytic solution grew 8%.

To advance and expand our product leadership across all retail channels and deliver the easiest to use most automated EDI I solutions, we leveraged partnerships with leading ERP and 80 I systems providers.

In 2019, we acquired map a dock a strategic partner that we have worked with for over 15 years to jointly deliver EDI I insist that expertise in the sage and actually medical markets.

We believe VDI is an essential business function.

Quantify the benefits of EDI I, we commissioned the total economic impact study conducted by Forster consulting to provide an independent perspective.

The study quantified EDI I cost savings experienced by Peter Gram, a leading supplier has some fashion accessories.

The November 2019 study concluded the Sps commerce's fulfillment delivers an already I.

Our reliable up 372% and a payback period of fewer than three months.

Savings resulted from avoiding costs, primarily associated with matching retailer rulebooks.

Through our fast network of multi tenant integrations Sps has a unique ability to capitalize on the efficiency of a centralized change management.

This translates into economies of scale for Sps and its customers.

In summary, retail dynamics, an industry evolution continued to drive growth across ecommerce.

Our ongoing focus on sustained growth and profitability is inherent in our business model and our ability to scale is unique to the retail network of over 90000 customers. The fuel the lead generation engine with every new engagement.

With our vast trading community and leading product offerings that span all retail channels Sps.

Commerce is positioned to become the worlds retail network.

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

Thanks, Archie we had a great fourth quarter revenue for the quarter was $72.7 million, a 12% increase over Q4 of last year and represented our 76 consecutive quarter of revenue growth.

Recurring revenue this quarter grew 13% year over year, and adjusted EBITDA increased 35% in the quarter to $18.9 million.

For the year revenue was $279.1 million, a 12% increase and recurring revenue grew 14%.

The total number of recurring revenue customers increased 5% year over year to approximately 30800 and wallet share increased 4%.

As a reminder, in December 2018, we announced the acquisition a couple it works at the time, we stated that we expect our customer count to increase by approximately 2000, and our wallet share to decreased by approximately 500 due to cabana work smaller average customer size.

In Q4, 2019, we lapped the customer ads and we will have lapped the full revenue impact in Q1 up 2020.

Adjusted EBITDA grew 36% to $69.8 million.

We ended the year with total cash and investments of $214 million.

Now turning to guidance for the first quarter 2020, we expect revenue to be in the range of 73.6 million to $74.2 million for the full year, we expect revenue to be in the range of 306.5 million to $308.5 million, representing approximately 10% to 11% growth over 2019.

For the first quarter 2020, we expect adjusted EBIT document a range of 19.2 million to 19.8 million.

The full year, we expect adjusted EBITDA to be in the range of 83 million to $84.5 million, representing 19% to 21% growth over 2019.

For Q1, 2020, we expect fully diluted earnings per share could be in the range of 19 to 20 cents with fully diluted weighted average shares outstanding of approximately 36.2 million shares.

We expect non-GAAP diluted earnings per share to be in a range of 31 to 32 cents.

Stock based compensation expense of approximately $4.6 million depreciation expense of approximately 3.3 million and amortization expense of approximately $1.4 million.

For the full year 2020, we expect fully diluted earnings per share between the range of 85 to 88 cents, we expect fully diluted weighted average shares outstanding of approximately 36.3 million shares.

We expect non-GAAP diluted earnings per share to be the range of $1.34 to $1.37.

Stock based compensation expense of approximately $19.8 million.

We expect depreciation expense of approximately $13.9 million.

We expect amortization expense for the year to be approximately $5.7 million.

And for the year, you should model approximately 30% effective tax rate calculated on GAAP pre tax net earnings.

Beyond 2020, we're confident in our ability to deliver 10% or greater annual revenue growth as we capitalize on global retail industry dynamics, the viral lead generation nature of our business model and the opportunity to upsell and cross sell industry leading products.

We also expect to see continued margin expansion with strong operating leverage driving 20% annual adjusted EBITDA dollar growth and targeting long term adjusted EBITDA margin of 35%.

In summary, Sps Commerce continues to deliver on its financial targets capitalizing on the evolution of the retail industry and leveraging the power of our network to deliver profitable and sustained growth.

And with that I'd like to open the call to question.

Ladies and gentlemen, if you have the question at this time piece pressed to start the number one on your Touchtone callous selling and if it crashing has been answered or you wish to remove yourself from the keys faster.

Your first question comes from the line of Brexit enhance your line is here.

Hi, Archie and Kim Congrats on a good quarter here.

A couple of <unk> I guess brief ones for me Kim let's start with your last comment there confident in 10% organic or excuse me, 10% annual revenue growth for the foreseeable future can you help us maybe unpack that a little is that all organic is there some impact of potential acquisitions in that just trying to understand how you kind of sizing up at 10% plus.

Sure. So when we think about the dynamics that we're seeing in the retail space and we recognize that we believe what a clear leader in our product offerings to meet the needs of the retail network. A we see a nice long runway ahead of us that gives us confidence in being able to deliver at that 10 per.

Sense or greater I'm now as a business. We certainly are open to acquisitions should they make both business and financial sense, but we're not compelled to do acquisitions. So regardless of that we are confident in our ability to deliver a 10% or greater.

Got it Super helpful. And then Archie I guess, you're coming up on your 10th birthday as a public company here in April I believe.

But over the last 10 years, you've really only added one major product category to the portfolio in the any analytic space theres been some smaller I know areas of functionality as well, but one major category as you look out over the next two or three maybe four years is there something coming down the pipeline that we can.

Might expect or something that you're looking at that might expand the probably portfolio, maybe a little bit more.

Yeah, I think there's a couple things Scott one is to.

Expand with add on products to the existing capabilities, especially as it relates the fulfillment and possibly analytics, but primarily in fulfillment. So add on functions and features that we can we can add value to our customers in charge more and then the third leg is assortment item information which is.

Oh, you know, we think as you move out into 2020 to 2020 threes action.

We started adding some value some revenue.

Got it helpful. That's all I have thanks for taking my questions.

Your next question comes from the line ask Tom Roderick from Stifel. Your line is open.

[noise] Kim higher Ritchie. Thanks for the questions. So Archie let me just kind of throw a for you on a follow on question there regarding analytics and if I heard you right I think it sounded like analytics grew I think 8% for this year talk a little bit about that in the context of that that line item accelerating a little bit at sea.

Like point of sale data hadn't been something that retailers were sharing as frequently are as as often as you had hoped kind of going back a year ago. Two years ago. So is that starting to pick up a little bit is there a reason to invest more on this analytic side talk a little bit more about that mix and then I'll come back to the fulfillment side. Thanks.

Yeah, we're quarterly feeling better about the analytic side of the business I.

I think there's a couple of things one as we've been.

As we stated in the past its it's really a prioritization.

Oh for the retailers and as as retail stabilizing we feel better about where that is and I think were Oh, we have an opportunity to cross sell as well into our install base. So I think those two things are helping I wouldn't get too far how they had to yourself on on growth, but we feel free.

Very good about that where that products flooring and we've always believed in the long term.

Addressable market for that product.

[laughter] Archie it's not the first time, you've mentioned Europe as an area, where you have some sizable retailers and some sizable customers that are leaning into that point of sale date, a little bit more aggressively is that an area that you'd be inclined to invest more aggressively in are you seeing better things that analytics in Europe or is that just still little anecdotal.

[music].

Oh, well I would say I would say we are investing.

On a relative basis aggressively in that but it's off a very small base. So I mean, when I get excited about the European analytics opportunity I think you know if we can continue making progress like we are in 2020 2021, you get the snowball effect and then it can become meaningful overtime. So we are.

On a relative percentage basis being fairly aggressive in 2020, but it's still very small dollars.

Excellent okay.

Kim quick follow up for you then just in terms of capacity and investment dollars and how you need to invest in the business to support this 10% plus growth.

Historically used to give us a head count of sales I didn't know if that's something you could still provided the yearend or give us a some directional commentary as to what's been happening with your sales head count, but but I guess the question as you know how how fast did you grow that this year and how do you think about how fast you need to grow the sales head count this year this coming year to support the growth you're lucky.

For.

Sure. So when we think about sales I think capacity is is a great way to look at it and I know you did use that word. So when we think about we we believe that we have done a really good job and sort of optimizing capacity of our sales organization. So what that means is there is an expectation that we will continue to.

Add resources based on the opportunities that we see that has been factored in.

Our guidance for 2020, and we certainly did add in 2019 as well, but weve <unk> based on changes that we've made over the last couple of years and the sales organization.

We've been able to.

Get all very healthy outlets.

Based on heap sales person so feel very good as it relates to the sales organization that we have in place and we'll continue to augment that as necessary based on the opportunity that we see.

[noise] outstanding. Thank you I'll jump back in queue, congratulations on a nice in a severe.

Q.

Your next question comes from the line of <unk> revenue from JMP Securities. Your line is open.

Oh, great. Thank you and congratulations Kevin Archie.

I can ask you to big picture ones. The first one and I know this is going to be hard but.

Can you tell or you have any any thoughts on.

How the krona virus is going to impact retail and retailers and then how that might flow through to you.

Yeah, it's tough to say Pat you know I think there's gonna be some disruptions in supply chains.

It feels a little bit.

Similar on a different skill to the the trade war questions and I'll tell you on that I thought there might be a slight positive because as people shift or add additional trading partners to to be able to fulfill that can sometimes be a slight positive for us.

So I don't I think it could be a slight positive, but I don't think it's gonna have a material change.

Okay got it and then bigger picture you know I mean, you you.

You've been talking about for about a year I thinking correct me, if I have that wrong about things, having stabilized and in.

17, 18, there was a lot of discussion of how the environment was more difficult I would just love you to sort of step back for us and and explain what happens and how much of it was the environment and how much of it was maybe Sps, making some adjustments.

Yeah, I think there's two things pad I think there when you look at it I think the retail environment was in a position of uncertainty who is going to survive how they're going to survive.

Ken Omnichannel retailers really survive what's happening so I think that is.

That has added impact obviously, we did some.

Pretty significant sales restructuring, which is starting to pay off but that that that.

Wasn't easy, but I think the vast majority of it was the environment and as I say, the restructuring, which is now paying off in a number of different ways I'm, probably took their quarter, let's step back because of that and in 17 18.

Awesome alright, thank you for that perspective.

Your next question comes from the line also <unk> than me from Craig.

Your line is open.

Great. Thanks, guys.

A couple from me.

One quick housekeeping I think you give the channels or percent of bookings for the year, usually just that figure and then on the touched customers I'm, particularly interested in 50000 plus that you've tested just talk to me, but what you're doing to cultivate those people stay in touch with them understand their intentions and really how that program has.

Vault and what insights you're gaining from staying in touch or those that have tested but not yet fully adopted Sps solutions.

Sure that as it relates to channels channel still remains a nice healthy lead generation a engine for us and similar to what you've seen historically as it relates to some of that net of the business.

And as far as you know the testing and certification we do a number of different things one the marketing group is odd.

Trying to hit on hit those people up we can also do very targeted marketing campaigns, either against specific competitors and or a specific retailers. A many times, we are seeing a test or multiple times and in those cases then.

Oh, we do have the data as to how they're performing whether they whether they were efficient on their testing so depending on the size of the.

But count the the sales Rep may stay in contact.

With or individual, but it's it's an aggressive marketing push and continual but.

Continue part of our business it isn't meaningful part of our new business. It's there's a leg of it and the customer count isn't large, but they tend to be larger customers and so it's a meaningful part of our lead generation engine.

Got it then just two other quick ones on the acquisition front.

Any change in terms of what you're looking for I think earlier, some questions about product and product innovation.

Just wondering if there's anything different about what you're looking for on the acquisition front and then on the less customer that you mentioned, you said, you're displacing existing infrastructure I'm curious what you disclosed.

You know the it's what we're looking for is exactly the same as as it isn't the as in the path, which is either one pure customer acquisition to product enhancement in other words, something along the road map such as an easy I admin or a map of dock, which also.

Has revenue or geographic expansion.

Don't have my figures exactly what we displaced.

Hey, LSW example.

Got it okay, great. Thanks Nicholas.

Yeah.

Your next question comes from the line of Jason You know from Keybanc capital markets. Your line is.

Hi, guys you hear me okay.

Yes.

On the you person analytics growth this year, how should we think about the strengthening you mentioned from Europe versus maybe like a new customer like our yeah are you able to provide us a little bit more color on where that came from.

Yeah. So the vast majority of it is in North America I think it's it's still off a small base. So it's contributing Europe is can starting to contribute but it's off a very small base.

But like anything as we've seen it when you when you get a small base if you have strong growth.

After 3.2345 years it starts becoming meaningful so at this point, it's more of an optimistic to look then a massive.

Contribution to the girls line.

Got it stuff I think about it tends to follow up.

You know in Europe is maybe just behind where retailers in the U.S.

Yes, we also have.

Some very large influential suppliers that are helping us push the European retailers and opening doors for us. So that's that's one of our primary lead generators in Europe is the large influential suppliers.

Okay, Great. That's all for me thanks.

Thank you.

Your next question comes from the line of Tyler from Northland Securities. Your line is there.

Hi, Thanks for taking a question you mentioned seeing increased interest during the quarter with the drop shipping product could just drill down maybe a bit more on that as far as your expectations for 2020 there.

And then kind of related you've mentioned in the past both selling this bundled and as a standalone product could you.

And Oh lesson there on how you're approaching you know positioning that product for 2020 beyond thanks.

Yeah, I think Oh, you know quite often with a retailer. It's it's a bundling and it's it's completely there they're looking at their entire supply chain and.

Well sell it that way what we've seen as sometimes there are specific we looking for drops to ship solution.

Our strategy as always goes been to build long term relationships with our customers and meet them, where they are out and so the drop ship is.

And event that changes is changing more rapidly so that gives us an introduction to a customer or retailer and to the extent that we land that part of the business and.

We execute extremely well, which we tend to do then that gives us an opportunity expand our footprint.

When I think about drop ship over time dropship is gonna be about 20% of E commerce.

So ecommerce right now is about 13% answer would be 20% of.

Of that so pick your number where you think ecommerce is going and what the trajectory is and if you I My guess would be 20% of that will be drop ship.

Thanks, and then a Walmart quick one any any change in churn during the quarter worth mentioning.

No it stayed consistent.

Alright, thank you.

Hi, Dan Ladies and gentlemen, if you have a crushing and at this time the spreads this far them to number one key on your attached downtown.

Your next question comes from the line as David You haven't seen from William Blair. Your line is open.

Hey, guys. Thanks for taking my question I just had a question around map of Doug I was wondering if.

Anything changed relative to your expectations and kind of how that the integration is progressing so far.

Yeah first off.

The staff.

The employees that came with that acquisition or have been a real positive that the business are extremely qualified extremely engaged so we feel that they're just part of the Sps Commerce family now I would say, what we had hoped for which was.

More business and better customer experience is materializing, so feel really good about acquisition.

Okay. Thanks, guys.

Your next question comes from the line of Stephens Your hard from first analysis Airlines.

Hi, Good afternoon. Thank you for taking my questions I just had one for you going back to the drop ship question, you said drop ship.

Should be 20% of E commerce at some point can you give us some sense of how big drop ship is for Sps commerce as a percent of revenue the kind of give us some idea of how much expansion opportunity remains for that for the company either with existing customers are now.

Well I you know if I had to gas, we probably look somewhat like the marketplace because lot of times. It's just it's all part of a different rule book in different documents in different trading partners. So very infrequently do we have a supplier. This just using us for will drop ship for one retailer that's just not material part of our business. So it is.

It is all part of a bundle typically but I would I would guess the dropship as well below.

The 10% of ecommerce today.

Probably 6% to 10% because.

Only 350 of our retailers today are doing dropship.

An E commerce is about 13% of retail so.

As far as document volume on fulfillment does that would be my.

Yes.

There are no further questions at this time. This concludes today's conference. Thank you for participation you may now disconnect the call.

[noise] Oh.

[music].