Q2 2020 SPS Commerce Inc Earnings Call
Ladies and gentlemen, thank people standing by and welcome to the S.P.S. Thomas Q2, 2020 earnings Conference call.
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I would now like tend to compensate over to your speaker for today a minute Lasik you may begin.
Thank you to London.
Good afternoon, everyone and thank you for joining us on Sps Commerce second quarter 2020 conference call, we will make certain statements and projections today, including with respect to works that could financial results go to market strategy and efforts designed to increase our traction and penetration with retailers another customers.
These statements and projections or forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially. We note in particular that uncertainty regarding the impact of cobot 19 pandemic on our performance could cause actual results could differ materially from our projections. Please note that these forward looking statements reflect their appear.
Hands only as up to 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 the wise.
Please refer to our FCC filings, specifically, our form 10-K as well as our financial results press release, we furnished to be a form 8-K to the FCC earlier today for a more detailed description of risk factors that may affect our results. These documents are available at our website Sps commerce dot com and not the Fccs website.
I see see dotcom.
In addition, we're providing he has to <unk> historical data sheet for easy reference on our Investor Relations section of our website Sps Commerce dotcom.
During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share in our press release on her 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 it out and welcome everyone before I review, our second quarter performance I would like to address two important topics.
First I would like to reflect on the tragedy that took place two months ago in our home counted in Minneapolis.
And the senseless murder of Georgia for wireless please call city.
Mike sympathy and condolences, our with George Sports family friends and communities.
My Heart goes out to everyone that has been impacted in effect by the violent private buyers that follow this tragic event.
It is time to stop turning start stop turning a blind eye and ignoring the systemic issues the plank our society I.
I would like to thank all Sps commerce employees for their commitment could be part of the solution as we all take action against racial bias in justice and an equity.
Sps has always embraced diversity, but we recognize that more needs to be done and we began with a falling stops.
During the past two months I hosted discussions with employees and listening intently to their feedback on how we move forward as a company and community.
Also formed in advisory group that meets regularly to discuss how Sps can make them huh.
In recognition of June team, all Sps employees received $100 each towards supporting their local black on businesses.
Together with more than 80 members of the Minnesota business partnership I signed a letter verging lawmakers to pass policing reform.
Special session.
We are working with federal reserve precedent and you'll catch Carrie and Justice page two of men, Minnesota Constitution to get all children are right Ted quality education.
I'm personally committed to addressing the in equities and Minnesota's education system and that's an immediate steps Sps Commerce has started the process to establish a scholarship program for students of color wishing to pursue a career in technology.
The systemic and justice in our country underscores the need for change. The real work is ahead of us making sure. We don't we turn to what was considered normal.
Sps is focused on making that change [laughter]. The second issue. We continue to face is ongoing pandemic and Sps commerce remains committed to customers can sure they're able to deliver everyday essential we all need.
The dynamics impacting the retail industry, which we outlined on our last earnings call continue to play out as we expected.
Across our large network of trading partners across diverse end markets, we continue to see a steady volume of transactions.
Enablement campaigns are driving ongoing momentum and fulfillment.
Which is offset by softness in analytics.
For the second quarter revenue grew 10% to $75.6 million recurring revenue grew 11% and adjusted EBITDA grew 25% to $20.4 million.
The current situation requires retailers to navigate the retail industries new normal.
The Colbert 19 crisis means a shift from common brick and mortar stores with many shoppers nervous about purchasing products in store.
We're seeing an evidence shift to E commerce sales with many E commerce business is experiencing sizable growth.
Helped the brands, who ship on behalf of retailers in their ecommerce retail stores Sps Commerce, joining forces with our partnership fusion.
We believe the right partner can make or break a retailers logistics customer service and repeat purchases.
Sure fusion has multiple fully managed and operated fulfillment centers across the U.S. in Canada, keeping brands the best tools possible for building a successful ecommerce operation.
Both retailers and suppliers are seen the need for increased the efficiency in automation underscoring the mission critical nature of the service we provide.
For example, Drake supermarket, a leading grocery retailer in Australia pivoted from being supplied by a wholesaler to directly supply it's 40 stores.
Greg's partnered with Sps commerce to deploy an easy I strategy and electronically connect with their suppliers through vendor on board.
Yeah, I provided drakes with the order and inventory visibility they need to manage a diverse vendor community and keep their shelf stock.
In addition to supply chain automation, VDI improves order fulfillment accuracy, which avoids shipment delays and additional costs associated with inaccurate data entry.
Earlier this year Sps surveyed nearly 203rd party providers about data accuracy.
The responses showed a direct correlation between timely and accurate data from customers and their ability to ship accurately and on time.
Suppliers use threepl to take on the logistics and fulfillment aspects of their businesses and without proper data. The threepl cannot perform the task it was harder to do it in the most efficient manner.
Sps ask Threepl what was the one thing they would be doing in 2020 to address Threepl order accuracy.
The response is focused on automation moving clients to either <unk> or working with customers to increase their use of media.
As the world's retail network Sps solutions are responsible for keeping products moving along the retail supply chain for more than 90000 businesses.
We have power retailers suppliers and logistics firms to embrace today's latest retail trends.
Our solutions have received numerous awards and we have recently been ranked number one twin cities largest software development from by the Minneapolis, Saint Paul Business Journal.
I am honored to have our local tech team is recognized for all they do.
They lead the pack not just the numbers, but also in talent and passion.
In summary, the challenge it was the challenges we have entered this year have impacted our communities our businesses and our lives.
I would like to thank Sps commerce employees for their ongoing dedication to our customers and our communities.
We remain committed to take action and make progress in the years ahead.
With that I'll turn it over to Kim to discuss our financial results.
Thanks, Archie we delivered a solid second quarter of 2020 revenue was $75.6 million at 10% increase over Q2 of last year and represented our 78 consecutive quarter of revenue growth [laughter] recurring revenue. This quarter grew 11% year over year. The total number of recurring revenue customers increased 5% year over year or two.
Approximately 31500.
For Q2 wallet share was up 5% year over year at approximately $9100.
For the quarter adjusted EBITDA was $20.4 million compared to 16.4 million in Q2 with last year.
We ended the quarter with total cash in investments of approximately $233 million. We also repurchased 7 million of Sps shares in the corner.
Now turning to guidance.
For the third quarter 2020, we expect revenue to be in the range of 76.6 million to $77.1 million, we expect adjusted EBITDA to be in the range of 20.5 million to $21 million.
We expect fully diluted earnings per share to be approximately 19 to 20 cents with fully diluted weighted average shares outstanding of approximately 36.3 million shares we expect non-GAAP diluted earnings per share to be approximately 32 to 33 cents with stock based compensation expense.
Approximately $5.1 million depreciation expense of approximately $3.5 million.
Amortization expense of approximately $1.4 million.
[noise] as Archie mentioned earlier the dynamics of the current situation continue to impact our business. We continue to monitor the uncertainty around the duration of magnitude of a pandemic and the impact that a second wave of infections may have on economic activity.
We're also taking into account the possibility of continued pressure on retailers prolong store closures and bankruptcies, all of which would negatively impact our business.
For the remainder of the year, we expect to see continued softness in analytics. However, the ongoing need for automation across our network continues to drive momentum in fulfillment.
As a result, given these dynamics them with two quarters remaining in the year, we are reinstating our annual guidance for 2020.
For the full year, and we expect revenue to be in the range of 304.1 million to $305.3 million, representing approximately 9% growth over 2019.
We said, we expect adjusted EBITDA to be in the range of 82.1 million to $83.5 million, representing 18% to 20% growth over 2019.
We expect fully diluted earnings per share to be approximately 99 cents to a dollar with fully diluted weighted average shares outstanding of approximately 36.1 million shares we expect non-GAAP diluted earnings per share to be approximately $1.41 to $1.42. The stock based compensation expense of approximately 19.6 million depreciation expense of approximately 13.
Fourmillion and amortization expense of approximately $5.5 million.
For the remainder of the year on a quarterly basis investors should model, a 30% effective tax rate calculated on GAAP pre tax net earnings.
Given our history of strong operating leverage and the resilience of our status as a smile, we remain confident in our ability to achieve our long term adjusted EBITDA margin target of 35%.
In summary, we cannot predict the duration of magnitude of the pandemic and it's growing impact on the economy, but the challenge is the retail industry faces underscored the need for Ian supply chain automation with our cloud native operational model Sps Commerce is well positioned to continue to provide mission critical solutions and support our.
Customers, our partners and our community with that I'd like to open the call to questions.
Thank you.
Ladies and gentlemen, as a reminder to ask the question you would need to press Star then one when your telephone.
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Again, it's Darren.
The question.
Please standby, we compile the culinary roster.
My first question comes from a lot of Matt.
Blair Your line is open.
Hey, guys. Thanks for taking my question, then and nice quarter.
And a challenging environments. So I wanted to just ask on you obviously did better in the quarter than you guided to and you obviously have enough confidence and the business to reinstate your 2020 guidance. So maybe you can you discuss what's giving you the confidence to reissue guidance and obviously you have.
I have three more months of of data points relative to the last time you issued your your earnings release, but maybe you can you sort of discuss what you saw in those those data points, that's making you feel good about the issue in 2020 guidance again.
Sure Matt.
So to your point, we do have three more months of data then from our last earnings call and you may recall a quarter ago. We gave some commentary around different puts and takes and we had said that community enablement campaigns on the fulfillment side. That's an area that we were seeing more.
More occurring there as retailers were working to become more electronic what they were doing as well as trying to source products from different suppliers and moving more online and we did see that carry forward in this past quarter.
In this past quarter. We also said that you know we anticipated that analytics, a would be a bit softer.
And that did all felt carry forward you may recall, we also talked about potential of our bankruptcies in churn that that was something that we just we really didn't know what was going to happen. There I would say on that last one we're still in a we don't know what's going to happen. There. We did not see an increase in churn or bankruptcies in the quarter.
But that is something that still may happen in the future depending on the magnitude or a duration other pandemics and what that means to start closing however, knowing that we're now less than six months left of the year. We have visit we have nice visibility into this quarter and then you're really only predicting for the next nine.
In two days after that point, so because of that we felt like there was enough color in the results that we've seen and our belief of what's in the pipeline and the opportunities that we felt comfortable being able to restate.
The annual guidance as well as give guidance for the next quarter.
Great and just one quick quick follow up on that so on the churn side.
Obviously, if a customer turns in the and the fourth quarter it as a much less meaningful impact and on the overall results for the for the year relative to the be started the year, but.
It sounds like you did perhaps account for some potential pick up in churn or how did you think about that when you put together your guidance.
Sure so to your point because of the way the recurring revenue works shouldn't churn increased in say two for the impact it's a relatively nominal impact in the quarter would be a much larger more significant impact into 2021. So when we established our expectations for the remainder of this year, we took into account what we're seeing.
In the pipeline as well as some uncertainties such as churn Tom. So we would have taken that into account, but to your point, it's a relatively.
Nominal impact this year compared to the impact that that would be in the following year.
Okay, great things like us.
Thank you.
Our next question comes from Milan, Scott Berg with Needham and company. Your line is open.
Hi, Archie and Kim Congrats on the quarter here I guess two questions for me.
Our chief.
Maybe a little bit about you drop ship business in particular, we all know E. Commerce is certainly taken a meaningful step up here in the quarter given the current situation did you see any benefit there in terms of customers seeking to potentially.
Employee or station in that arena [laughter].
I think there's two areas Scott it continues or drop ship volume continues to be two to three acts.
What it was pretty pandemic, so not surprising what you're seeing is is a massive shift to E commerce and we believe a substantial portion of that will stack.
But so we've seen that and we have seen most retailers and suppliers looking for dropship solution. So we've seen that that is as as a continued trend and getting in there.
It's been a tailwind.
Got it helpful and then from our perspective I know on the Q1 call. Archie you had called out enablement campaigns in the month of April being strong, especially with Cosco. I believe was the customer example, but maybe commentary on trends have enabled enablement campaigns throughout the quarter, maybe which saw I mean should where they kind of inline with historical trends.
And with immediately to first yeah, no. We had we had a relatively strong enablement quarter remember the enablement campaigns that you roll out in a quarter were sold.
One or two quarters earlier, so there's a there's a separation between closing enablement campaigns.
As actual economic effect of them, but you don't early in the quarter, we saw some.
Customers want to accelerate and some were little bit you're in the headlights, and I think as as a pandemic as we got into a rhythm. After 30 45 days people realize we need to move forward and I think things are.
ER positive and people are recognizing again, what we had discussed previously the need to automate.
And that continues to be.
Okay and.
And then you know, we're all trying to add new enablement campaigns and.
Those are longer term cell cycle, but early indications are positive.
Great. Congrats again, thanks for taking my questions.
Thank you.
Our next question comes from the line of coach Akita with Oppenheimer. Your line is open.
Hi, This is Chad changing on for co chief Thanks for taking my question.
Wondering if you could touch on kinda overall resilience of your technology today versus back and you know the 2008 period. Obviously this is a pretty disrupted periods. So.
You're saying you're kind of what has changed from a technology standpoint that couldn't make your tax more strategic for retail are now versus back then thank you well compared to 2008 2009, when we were probably at 20 million dollar business.
Just about everything has has changed I would say.
Our tech was strong but oh.
Are we are world class infrastructure infrastructure team is unbelievable and we are clearly best in class one I think it'll shoulder periods of times like this where we can do a number of things one keep everything going extremely smoothly, but we also have the ability with our technology.
Infrastructure to scale up or down.
Needed infrastructure.
Literally within seconds. So I think the reliability the dependency and then the scalability. The solution is night and day and as as suppliers are looking to make sure. They have companies that can operate during this.
Yes.
Changing in challenging times, I think that can become a strategic.
More strategic advantage in the sales cycle.
Great. Thank you.
[noise]. Thank you.
Next question comes from alone.
Tom Roderick with Stifel. Your line is open.
I can tell Archie thanks for taking my questions and Archie I appreciate your thoughts on on the social issues impacting your community as well done on taking some proactive measures to get involved. So thanks for that I guess kind of picking a big picture type of question as we look at all the supply chain disruption and its taking.
A lot longer to get things from manufacturing facilities factories overtime to install from so much here would love to hear what your retail partners are doing in real time to pivot more towards like you said you E Commerce, and let's even just call it multichannel fulfillment, but when you're having your discussions with those with those retail partners what.
Are they doing proactively as opposed to okay. Now the orders are coming ecommerce and we're just kind of from fall in that regard what are they doing in terms of.
Their own supplier.
Selection pivoting the way that they're working with their partners and then how does that impact the way that you have the opportunity from a full that basis to get ahead of it.
Yeah, I think a number of things Tom some some that affect us and some that don't.
Remember ins and in many cases actions that the retailer takes can greatly affected consumer experience, but it does not affect the way they operate with their supplier for instance.
Delivering from stores doesn't affect how they do business with their suppliers curbside pickup we're seeing more of that that does not affect.
The way they worked with their suppliers were seeing you know a lot of discussion around that a lot of discussion around wanting to know inventory levels a lot of discussion from suppliers.
Figure out how to source in country.
As they're worried about.
The tax repercussions wood with China, and other countries and also the speed and resiliency of that so we're seeing a lot out a lot of that but we're also seeing the ability to retailers really tried to shift and think about their inventory much more hold.
Mystically.
And you they need to think of inventory in their stores in the distribution center and.
At their suppliers. So we're seeing a lot more bad and that's driving the drop ship.
So that allows or a retailer, perhaps not as profitably with a drop ship, but keeping the customers and the customer experience I think is much more front and center right now.
Yes, Fantastic and then just relative to.
Some of the comments and concerns relative relative to the analytics sector. So still hold then they're pretty well and it seems like you know this would be sort of the technology that you might worry a little bit more about churn if in store retail doesn't recover but perhaps you can kind of refresh us as to how you know how the traffic and point of sale analysis.
Impacts.
Your your purchasing decisions and and and where those are coming from because again sort of looks like analytics is holding in there relative to what you would have worried about.
Yeah, I think there's some arguments that you could you could make the argument to suppliers that this is more strategic now than ever before and I think those that are using it heavily that is the case. So we're seeing that I think where we see.
Issues is as people are meeting to make costs.
Adjustments within their business, if they need to do that.
Things are very much under scrutiny, so they're heavily using the analytics and it's baked into their operations then we feel pretty good about retaining the customers if they really haven't operationalize the use.
Of the analytics product and that's that's what our I think our analytics team does a fantastic job and has really had a focus over the last.
A few years I'm really making sure we're tracking usage and making sure those customers are trained and using the product as much as they can so that it is a discretionary spend we believe it's a very strategic spend but it's only strategic if if you really are using it one of the things were just fighting enjoy.
General is customers are scrutinizing all.
All of their spend.
I would assume this is across all vendors and saying if we're not really use it using it we shouldn't continue paying for it.
And that's just a normal flight dirt on certain are challenging times and we do that at SPS Commerce, you things go a little bit more under scrutiny in times like this so I think that's a natural trend.
Yeah. One last quick one just if you don't mind eight I think a lot of companies are getting the question of Okay second quarter was better than you had feared but how does the outlook sort of shape up in particular has the pipeline building coming along what do you have for thoughts on that I know you have it typically a shorter sales cycle and a in a highly efficient.
Model, but would love to hear what your what you're hearing for sort of top of the funnel pipeline for generation to reach all the bucket.
Yeah, No. We feel things are again, we do with a community enablement campaigns I would say those those sales cycles continued to be equivalent if not better.
Demand Jan from.
From a search engine.
Optimization or paid search.
That's actually interesting is the fact that leads have shrunk, but the quality has gone up so people only search if they're ready to buy so.
I think thats actually up.
In some ways a positive in some ways a negative the end result is positive.
In the fact that you.
Our or working with us prospects to get the same output and then the bigger deals are starting to come back around.
We saw pretty decent.
On on fulfillment people are realizing that they need to.
Automate their their supply chains.
And make that more efficient.
Fantastic really got appreciate it thanks, guys nice job.
Thank you.
Our next question comes from Milan, Pat Walravens with JMP Securities. Your line is open.
Great. Thank you.
So two questions first of all you know if I look back to the factors that you plan to on the negative side last quarter, Archie and Kim you talked about.
Closures bankruptcies analytics and ERP migration, so we talked about bankruptcies and analytics, but I'm I'm wondering on closures and ERP migrations, what's going on.
And in particular your data on closures must be.
Really.
Interesting. So I mean can you tell what percentage of the stores on your network have not been open for business.
We can be retailer by retailer I don't have an aggregate number pretty Pat.
The biggest thing that affects us is if a retailer actually goes out of business a retailer going from 500 stores the 200 stores.
It's a fairly minimal impact and Lester assortment is going down and less certain number of suppliers. So depending on the category if its grocery which we haven't seen closures that would probably more of an impact because it is regionalized, but but that that is not a significant impact on.
Yes.
Great and ERP migrations or anything there that was worth calling out we I mean, we've seen that slowed down but it it seems.
More it's more similar to the past now remember Theres some times where.
We are getting the deal right when they sign.
To go with a new ERP and sometimes we are trailing so so we're not the best.
Indicator early on its when they when they start to migrate or halfway through the implementation depending on the ERP system, but we haven't seen a major change there yeah, and now whether that will be going down the road.
You, probably know that your p. and how they're doing better than I do.
Yes, well, they've actually been surprisingly they've actually been doing all right yeah.
So then my other question was just sort of practically are you know anywhere in the world you have people back in the office and there is anything happening in person or is everything 100% remote for Sps commerce.
Most of our offices are open.
Because we are critical we are completely work from home optional and and we've made very clear that that is truly work from home optional I would tell you and the Minneapolis office on any given day, there's an average of 2% to 4% of employees are in for some reason.
Perhaps they have a big meeting and they don't have great Internet at their house, they need to print some things they don't have great printing capabilities or that they just want to better work environment.
So it's pretty minimal obviously, the how our helped US which has been phenomenal they come in so if you have a laptop.
Issue you can go to the.
Good so that helped us bar and and get your things fixed so there's a few people and but it's not a collaborative work environment I would say that.
All right great. Thank you Archie Thank you Kim Thanks Bye.
Thank you as a reminder, ladies and gentlemen that star one to ask the question.
Our next question comes from the line of Joe Vruwink with Baird. Your line is open.
Great Hello, everyone I was curious I'm thinking about the composition of your growth going forward, there's clearly a lot of interest and getting a new suppliers qualified and it actually seems like I don't know if you agree.
The end market commentary on that sort of thing it seems to be broadening so industrial distributors grocery is less although surprised but it seems like a lot of end markets are still on the same boats. So that would seem good for expanding the audience, perhaps but I was wondering im thinking going forward. If that's maybe a good for.
Or getting customer accounts up as you look maybe a few quarters out would your expectation be that maybe the wallet share contribution begins to pick up as these new customers began to realize the virtue of but that work and maybe that that comments all all hedge at kind of the fulfilled.
Then product if you can grow wallets and then obviously with analytics, that's maybe a different conversations but just just your thoughts there.
Sure Joe So with our business model, we actually are fortunate and the fact that we have been able to continue to add customers or grow that customer account as well as grow what that wallet share as her that average recurring revenue recurring revenue customer this past quarter. They were both 5% so equal weighted at too.
To our overall in any given quarter or any given year, sometimes one the maybe you know what percent are two different than any other but what is comment is that the both of them are meaningful contributors to our overall recurring revenue growth what tends to have the biggest impact in that customer account, it's highly correlated to.
Those community campaigns community enablement campaigns, and so when we have a quarter, where we have strong amount of community enablement campaigns. You will usually then see I'm at a higher increase in our net customer adds so for this quarter for example, our our customer adds was 458.
So that was up five when you look at it yeah from a sequential basis or if you look at it from an absolute from a year over year basis. It was a very yeah. It was very healthy very nice quarter and what tends to happen is the largest quantity of customers. We get from a community enablement campaign tend to be smaller customers initially I suppose.
Them for example may not have been doing anything any I'd for some may but not a huge amount and what typically that happens is over time that revenue we get from those customers naturally grows over time.
So what's great about our business model is both our solid contributors both are extremely important to our overall recurring revenue, but what you. Sometimes see is if you have a high community enablement campaign quarter, you're going to see more of that and then and the customer count and a little bit less than that wallet share or then the inverse if you have a accorded that has a little bit less on the community enablement.
While our belief is that going forward, both will continue to be very solid strong contributors to our overall recurring revenue.
And we believe that long term, we have a total addressable market. That's at least 5 billion, which translates into ample opportunity for getting more and more customers and getting more and more revenue from those customers.
Okay, and there's nothing about what you've seen over the last couple of months or and thinking about how the second half is forecasted to say that.
Yeah, the basic structure of why you've outlined in the past those gonna be any debt friends and the next quarter to just thinking about the composition of your growth.
Yes, nothing unique as it relates to a particular quarter or the back half of the year that we would think I would be an outlier if we happen to get yeah, a significant increase in churn or bankruptcies.
That would have an impact on the average revenue per customer and then a somewhat of an impact on the customer number.
And then if I could squeeze one more and I did want to ask whether collection activity this quarter.
Was better or worse or about in line relative to expectations I see that the reserves went up a bit sequentially no nothing alarming, but curious on your thoughts there.
Sure. So the accounts receivable balance than the as idea. So did go up a little bit sequentially.
Has some of our customers just taking a little bit longer to pay nothing I'm really of concern or nothing of note there.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of Jeff Van Rhee with Craig Hallum. Your line is open.
Hey, guys. This is really on for Jeff most of my questions have been been answered, but just wanted to circle back to the pipeline for a second I'm just curious if there's anything more you can share in terms of what you're seeing maybe you know up market down market verticals, just relative to where it was maybe pre co. Good I'm just curious what would all its anymore.
You could share in the pipe.
You know I would say not drastically different.
I'd say the only thing that's different is on there can be different dynamics within companies that.
Perhaps they have so much business and so much activity big they don't have time to take a bras.
Ah so they might be slowing down and then somebody like other companies have some capacity, they're more likely to speed up and prioritize things up that's around the edges, though so don't read into that too heavily but there are some things around the edges, but I wouldn't say its drastically different other than as we.
Discussed between fulfillment and analytics.
Oh, great. Thanks, that's it for me.
Thank you.
I'm not showing no further questions and the Q.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
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