Q3 2020 SPS Commerce Inc Earnings Call

As expansion and growth resulted in operational complexities colborn's engaged with SPS Commerce to implement electronic order fulfillment across their network of vendors to increase efficiency wage receipt expedite payment terms and increase speed to Shelf.

Increasing order volumes also prompted Lily's sweets a chocolate producer to implement order automation to keep up with the demand the company's business more than doubled in two years and there's a products and I'll be found at a growing number of national retailers and Grocers with SPSS fulfillment with QuickBooks Louise was able to scale without needing the update or swap out their current systems. They can also modify the solution as their Logistics strategy changes.

Over the past several quarters. We have seen an acceleration in demand for EDI the SPs Commerce full-service EDI solution integrates with any system and software to enhance automation speed up processes and improve data analysis.

SPS fulfillment Sports 3pls shipping Solutions, like shipstation and offers carrier service for companies who book shipments themselves. We connect our customers to cash a thousands of retailers and Distributors allowing them to scale their business quickly and cost-effectively.

In summary trading partners across the retail supply chain continue to rely on SPS Commerce to streamline streamline their order fulfillment.

As consumer preferences for omni-channel shopping accelerate. We are well-positioned to help our customers increase efficiency and Automation in a rapidly changing environment.

I'll turn it over to Kim to discuss our financial results page and represented our 79th consecutive quarter of Revenue growth recurring Revenue this quarter grew 13% year-over-year driven by strong momentum in fulfillment which grew 15% year-over-year of the total number of recurring Revenue customers increase 5% year-over-year to approximately 34% year-over-year at approximately $95 a month for the quarter adjusted ebitda was 23.2 million or 29% increase compared to Q3 of last year. We ended the quarter with total cash and Investments of approximately 263 million months. Now turning to guidance for the fourth quarter of 2020. We expect a revenue between the range of 80 million to 80.5 million dollars. We expect adjusted ebitda to be the range of 21 million to 21.5 million dead.

We expect police.

Diluted earnings per share to be approximately $0.20 to $0.21 with fully diluted weighted average shares outstanding of approximately 36.5 million shares. We expect non-gaap diluted earnings per share to be approximately $33.34. These compensation expense of approximately 5.1 million dollars depreciation expense of approximately 3.5 million dollars and amortization expense of approximately 1.4 million dollars.

We continue to monitor the uncertainty around the duration and magnitude of the 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 and analytics. However, we expect the full month remain strong for the full year. We expect Revenue to be in the range of 309.3 million dollars to 309.8 million dollars representing approximately 11% growth over twenty nineteen month respect to just see the dog to be the range of 85 million to 85.5 million dollars representing 20 to 23% over 2019. We expect fully diluted earnings per share to be about $5 nine to a dollar ten with fully diluted weighted average shares outstanding of approximately 36.2 million shares.

We expect non-gaap diluted earnings per share to be approximately a dollar forty eight to a dollar Forty Nine who stock-based compensation expense of approximately 19.3 million depreciation expense of approximately 13.5 and amortization expense of approximately 5.4 million dollars for the remainder of the year on a quarterly basis investors should model a 30% effective tax rate calculated on gas pre-tax net earnings off for 20 21 will provide detailed guidance on our earnings conference call. However for modeling purposes, we expect to deliver $93 million to $95,000 in annual adjusted ebitda in 2021, given our history of strong operating leverage and the resilience of our staff business model. We remain confident in our ability to achieve our long-term adjusted ebitda margin Target of 35% in summary recent Trends and Retail have accelerated the pace of the EDI adoption. We expect this trend to continue as retail job.

And suppliers adapt and embrace e-commerce driving demand for our fulfillment solution. Would that I'd like to open the call to questions.

Thank you as a reminder to ask a question. You may need to press star one on your telephone. That's star one on your telephone keypad to be dry a question, please press the pound key. We send by we compiled the Q&A roster.

We now have our first question comes from the line of Matt from William Blair your line is now open.

Taking my question. So when we entered endemic and and you guys have your your earnings call in in April, it seemed like that you could expect or that you were expecting perhaps somewhat of a negative impact from from higher turn and and bankruptcies to to your growth rate. And then you know, when you reported your second quarter results, it it seemed like maybe you were thinking that it was going to be more new truck from the growth perspective. But but now the commentary kind of seems like it the Cove it could ultimately be providing a Tailwind to your growth for for twenty twenties. So maybe you could just sort of walk us through you know, how you're thinking on the impact from from COVID-19. SPS Commerce has the bed over the past seven months.

Sure, Matt, so there's different puts and takes on the Fulfillment side. We've seen an an acceleration there. So our fulfillment growth in Q3 was approximately 15% year-over-year, which is an increase from what that growth rate was in q1 and Q2. A lot of the Dynamics were seeing. There are related to sort of that digital adapter that we're seeing retailers need to take maybe in a faster manner than the other wide otherwise would have with their suppliers So currently we're seeing a positive as a page on the Fulfillment side and adoption analytics were actually seeing a slower growth rate there for the court earlier about a 4% year-over-year growth rate on analytical. So that is an area that we have seen softness and we anticipate continuing to see softness going forward as it relates to bankruptcies and churn. We have not dead.

Yet seen an increase there, but we do think that that is too early to really know what is going to happen there. That is something that you know, potentially Willie would bring that in to potentially that's something after the holidays and two twenty Twenty-One again, just a little too early to know going back to the 2008/2009 time period where there was, you know, dick economy. We were impacted about one to two percent from from Turn and bankruptcies. So again, what we've seen demonstrated coming through is very positive as it relates to fulfillment softness and analytics may have not had an impact at least yet as it relates to turn of bankruptcies.

Very helpful, that's it for me. I'll pass the line. Thanks again.

Thank you. Our next question comes from the line of code from oppenheim Ur. Your line is now open.

Is it hey Kim and Archie. Thanks for taking my questions. Great quarter. Congratulations. Wanted to ask you a question on community enablement campaigns and it look like it was a really nice quarter there on the net customer at about $560. Is there anything particular to note there? And then I guess look it up further. How was the pipeline for Community enablement programs looking for for over the next six to twelve months?

Yeah, I would say in general the the the retail team has done a really nice job and I'm both selling new retail programs, but also implementing, you know in an office environment. And so we feel really good about the performance of that team. They've stayed very focused. They they've really done a nice job executing and we first see that they need to continue to be strong and it's one of the reasons why fulfillment has been so strong.

Thanks. Thanks Archie. And I got one follow-up for either you or him, you know kind of taking a step back here. It really seems like the results here in the third quarter to the shift to digital Commerce is is benefiting that this and I think this is a follow-up to an earlier question format and just thinking about you know, would that imply if the world would back to normal off tomorrow say with just retail stores opening back up fully would that mean this would be a a negative for SPS Commerce or is there something bigger going on here? Really with the way that the supplier and retailers are are thinking about their supply chains for the future?

Well, obviously the move to drop ship and that's created as created some Tailwinds but I would say I would say in general just the whole focus on making a r Supply chains efficient hands-free automated is is been at the Forefront just small things like retailers having to walk to to the early days of touching packing slips. That was a big deal to get rid of that. People are working now from home. Well, guess what if you're wrong mailing bills and your mailing purchase orders, that doesn't work very well. So I think there's just a an overall trend which we did see in tougher retail X 2008 and 2009 towards automating the supply chain, which is a positive for fulfillment.

Thanks. Thanks for taking my question guys congrats on a really great quarter. Thank you, Kochi.

Thank you. Our next question comes from the line line of Scott Burke from medium. Your line is now open.

Hi, I'm Kim congrats on a good quarter. I guess they have two questions here Archie. Look through it with partner impact. Obviously you talk about the tail lens both you and cam about the ship and the digital enablement side and my guess is the endless I'll kind of set that you like to talk about is clearly clearly taking hold today. But within your your your partner ecosystem, what's what's their impact in your business been like over the last two quarters as the pandemic is rolled out, you know, the actually Scott that's been a real positive surprise. I mean, that's uh, I think in the April time. We were very concerned about Erp implementations what was going to happen there that seems to have been moving along fairly. Well now remember that many times were later in the implementation. So it's it's an indication of some of it as an indication of what happened pre-clovis, but that that team has also executed very well.

And and has not been.

Had went to fulfillment whatsoever.

Got it helpful. And then from a fellow perspective Kim. I noticed in the quarter. You're almost touching 70% gross margins again. I think twenty basis points are so away from it. But how can we think about God over the next couple of years, you know, 70% is kind of the first time we've seen that level since 2012, you know, do you think you can get to the mid-70s as you gain, you know the proper leverage over the next couple of years or fifty percent of opportunity. I think helping frame that now that you're getting closer to 70 would be helpful. Thank you. So I'm going back a few years ago. We were in more of that sort of mid ish type in that range and we believe longer-term when we get to adjusted ebitda margin approximately 35% We think gross margin can be at least in the low 70s to get them out again. That's what a mid thirties or 35% adjusted ebitda. Margin the one caveat that I would bring to you, which I I do say anytime this question comes up with our business. It's always better.

To look at some of those measures on an annual basis not as much specific on 1/4 in some quarters. For example, you may see a little bit less on the sort of hiring versus another quarter as an example in to 4, we will be adding customers success resources to meet the needs of our existing customers as well as future opportunities. So again, our expectation is will continue to make improvements to gross. Margin until we get at least for that low 70s. But again looking at it on sort of an annual lens is probably uh long way to look at it versus a specific order.

Got a quite helpful. Thanks and congrats again on the great quarter.

Thank you. Our next question comes from the line of Joe ruling from Barrett. Your line is now open.

Great solo everyone Kim if I heard you correctly just on the initial thinking for twenty Twenty-One. I think ninety-three to ninety-five and I would suggest something less than you know, the the typical 20% ebitda growth and I can appreciate you know, the end of next year is a long way out. So probably makes sense to be a bit discipline than planning, but are there any specific assumptions behind that type of performance or or any discrete may be expenses that need to work back into the fold in 2021 that might specifically be driving that type of number.

Sure, do appreciate the question a couple of things to think about when we're looking for next year. First of all, we're in a position this year. We're we're actually we we've both nicely exceeded relative to what our expectations are for the year. So the implied a guidance we just gave is in excess of uh twenty percent which is at average that we did. So we're a little bit higher closer to all that 22% a part of that is because there are some spends that are not occurring this year because of the pandemic think of it as a canary spend obviously people are not travelling for the most part. Also our attrition levels have been lower this year, which is great because we've been able to have our choice for longer which which is fabulous and therefore you can get more output or more efficiency when we think forward to what we're seeing currently and what our expectations are for next year. We are going to be adding resources wage.

particularly in the sales at

Area and a customer success area again making sure we're meeting the needs of our existing customers as well as future customers. So there will be an increase relative to head count in life to areas and then our hope is hard to predict but hopefully at some point in twenty Twenty-One things will be a little bit more back to normal not certainly off to the levels of pre pandemic but we would anticipate that at some point folks are back to you know, being in the office traveling et cetera again not back to sort of historical but certainly more than what we are seeing in 2020. So those are really the two things that we've taken into account that may be a little bit different than some other years as we think if I had it to the annual twenty Twenty-One, but the dollars

Okay, great that that's helpful and then thinking about your Revenue growth and the quarter and maybe just decomposing it into the wallet share contribution to Thursday the acceleration there. Does that perhaps serve as any sort of leading indicator or point of contrast if you compare the current environment until 9. So by thinking is that the fact that your existing in network customers are really leaning on SPS more. Of course that does that prevent the possibility of turn later on but it would certainly seem to maybe imply that the model is much more durable. In other words. Maybe we don't have to worry about the 100 or 200 basis-point kind of term potential because what you're seeing today is indicative of an environment that ultimately your existing customers could use more of your solution.

But had I don't know if there's a way to contrast that with oh eight or nine. But what what kind of does the wallet share today? Tell you about maybe the next twelve months sure so well think about our fulfillment customers. They're going to fall in a couple different buckets. So there's a a group of those fulfillment customers that are using us think of it more documents with more activity with retailers. Just more volume of how they're using us, uh than than historical and some of those Trends show up in the form of life, you know the increase in Dropship the increase in e-commerce as an example. So we're seeing those Trends which are positive to a subset of our customers and are translating into more revenue from customers. There are however some customers that are in verticals or industries that are are more challenged in light of their pandemic than other areas and so yep.

Is unknown at this point is what happens to some of those retailers or some of those suppliers. Um as we go through sort of the holiday season and into twenty Twenty-One. So again for those customers that are in sections of retail that are performing extremely well as well as sections where they're needing to be more Nimble in a more electronic way. We're seeing a positive and some other sections. I just think it's too early to know what could potentially be the outcome in higher bankruptcies or higher term.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Tom Broderick from Statesville. Your line is now open.

Hey Kim, Richey. Thanks for taking my questions. I let go the congratulations clearly clearly weather the storm and come out stronger on the other side and Archie. I think it's been a long time since we've heard you use the phrase acceleration as it relates to the the the demands of your you know, your Retail Partners. So I'd love to hear a little bit more about that Dynamic and Koji ask the question kind of hitting on it. But maybe I'll go just a level deeper. And as you know what gives you the sense that this is left temporary and more sort of secular in their acceleration of sort of transforming their business office and and maybe you could talk a little bit some of the about some of the other things that they're doing with their strategies Beyond just EDI. Are you seeing Erp upgrades? Are you seeing e-commerce upgrades? Are they making, you know long-term commitments that that are really sort of looping you in for a multi-year commitment as opposed to just you know, trying to patch fix it and get things up and running for drop ship or e-commerce or things like that. Talk about the secular Trend here at home.

If you don't mind, yeah, I think overall you know, when we when we segment retailers instead of just segmenting them into Grocery and pet stores Etc. We're really looking at at there's businesses that are retailers that are accelerating through this there's retailers that are performing kind of more normal and then there's retailers. This is been a big negative too, especially on the luxury luxury good side. So they all have a little bit different dynamic, as to where they are. If if if they're on the bridge mode, they're doing things out of completely out of need and they need to build the onboard suppliers quickly. They need to they need to make sure that they're dead tires are automatically and quickly automated they they don't have the capacity to receive product into the distribution center with packing slips and not no barcode labels. They didn't want knowing when it was coming.

How was packed? They need responses real quickly. So in those cases, there's a big retail demand to be able to automate the supply chain. I think that and those are very very interesting and you know, there's increased for instance. We've highlighted in the past. There's increased demand for some like Costco to onboard suppliers even faster than they've had in the past which was 48 hours off. Now we're looking at sometimes hours to make sure that they can receive an order and get going then then the ones in the middle. I think there's just they are needing to adjust wage with dropshipping if they haven't done it. They they need to adapt to that because for the supply chains, they need to add suppliers. They need to go back to their suppliers off in increased efficiency. And there's just an overall I think Awareness on on Supply chains being efficient. There's been so much written in so much focused on the supply chain.

And then there's a little bit different sales cycle for this.

Supply the retailers that are I would say more in the hurting Camp if you can get them to be think past the pandemic then then they are they are also looking at Drop Shipping and it's just a lot of dynamic. So I I think there's just an increase focused on Supply chains and making it more efficient. I think the other Dynamic is that a flyers and retailers are more likely to buy from the industry leader and we're the clear industry leader buy it by a long shot here and it's very obvious to them. That was a strong sheet and 79 quarters in a row of growth profitable growth that we're here for the long term and they they can they can buy their solution set and not worry if SPS is going to be around and what's happening to him that I went on a small private company that doesn't give out Financial. So I think our our sales team has also done a very good job of differentiating SPS Commerce from birth.

Rest of the the rest of that path.

Yeah, that's really good and the momentum I mean so so clearly a ton of momentum on the Fulfillment side, which is fantastic to see when you look at analytics. You've clearly got, you know, one foot on the brake on that even though that's back to growing a little bit this quarter. But what do you think is the sort of circular Dynamic that that changes the the demand level for analytics and sort of reignites that down payment of the business is that is that just the time period that we're in is that the nature by which analytics is consumed because it's a nice to have what changes the demand structure for analytics wage. I think I think the biggest a man thing structure will be confidence that their business is going to remain strong and you know under underneath the covers we have we have customers that back in April look like they were just crushed right? I mean you think about different industries that were that were dead. I mean the golf industry is one that they were dead. There was no birth.

Course is open. They couldn't play golf golf industry just came off an unprecedented year. So we had analytics customers that did actually try to reduce their contract. Look at what they really needed and now they're actually adding so I think it's more of a confidence level of saying are we are we are we done with this? Are we going to remain strong? Are we going to continue to see the demand but things change pretty quickly from when you look back and you say what the world look like in April May and what looks like today there's some industries that were again. We're just completely closed down in April and May and they're actually just can't keep up with demand now and then there's other industries that obviously have stayed down as well, especially in the luxury goods and the Peril is is hurting because people are home people aren't dressing up. I mean, you know buying a new suit, you're not buying fancy birth.

Is it cetera so?

I think it's more confidence that they're that they can do that discretionary spend and then they're going to have time to implement it and get the value.

Yeah, great, Terry. Thank you. I'll jump back in the queue, but that was fantastic. Appreciate it. Thanks Al.

Thank you or next question comes from the line of Jason Selena from keybanc Capital markets. Your line is now open.

Talk to you again. Thanks for thanks for putting me in here, you know retailers typically typically put off from their bigger projects for keyboard to focus on the holiday season, you know with with any of the strength on Q3, maybe some pull in at all or

You know, it's a fascinating question because you know, I know our Tech Team usually cyber week is just an incredibly busy week and I think because you have things like Dropship at one time, it was our volume. We were seeing triple the normal volume and now it's it's still strong. It's more than double on the on the drop box outside. You're really wondering. Well, what does the holiday season look like? Is there an acceleration? I think some of it though is just out of need and what's interesting is although we've seen that life is sometimes lower in Q4 underneath the covers. We're signing up enablement campaigns and getting work done to be able to kick those off in q1. So when you see a crack in strong numbers in q1 from Community to community enablement campaigns, those are probably deals that were signed September through December 31st. So underneath the

Covers is activity. It's just when the rollout and implementation comes but I I just I don't know. I think I think we're in a more fluid environment of what the holiday season is going to be like and I I do know that many retailers are are very nervous about getting some Supply chains are again under Focus. Can I get product and by the way if I could drop ship, but what's the capacity of the FedEx and UPS is of the world. Can they get it to my customers and in in two days, and if you want product at somebody's house on December 24th, I would recommend that you not place the order on December 22nd. You're probably going to be disappointed in to 20 20.

Yep. Thanks, a lot of times, you know more products than just toilet paper people will need. I think my second question, you know, a lot of talk around the accelerated pace of adoption. No help me understand some of the things are mental spend. Is it just some of these retailers who are doing quite well right now are they they it seems sounds like some of them are reinvesting some of these dollars but in our they standardizing on 1 g e i provider or the upgrading older versions, you know, it sounds like some of our adding Dropship maybe if you've talked about this Dynamic a little bit more. I think there's a really a couple different jobs, which one is they are invested in expanding their footprint others are just expanding their supplier networks. The number of trading partners they have because I am looking for different new Dropship suppliers. They're looking for new suppliers that can drop ship. So they are expanding what we consider to be expanding of our total addressable mom.

Which is really monetized by the total number of trading partner relationships. So I think you see a lot of that and I think you just see.

They're the the suppliers that they are doing business with manually. They are feeling significantly more pain in a work from home or or or have a supply chain that's already stressed. If you have a stress supply chain, you need to automate it and you need to automate it today or you just not going to be able to move product through the distribution center off because you'd either need to build another Distribution Center, which you can't do overnight and is also very expensive. So I think there's a lot of focus there as far as focusing on God, you know, the way most retailers work are all the retailers that we know work is they do build a rule book and they do more or less mandate that the suppliers use that rule book off as far as requiring a certain provider. We don't know of anybody that does that now what we want the retailer to do is have one wage.

And that would be SPS Commerce be the onboarding agent for all other suppliers. So they can either use SPS Commerce or they can use a competitor offer or a legacy software and we would test them certify them. I think that's really the only way for a retailer to be effective because if they try to force their suppliers, they use a specific EDI provider what happens when they have a multi-billion-dollar large supplier that has their own EDI solution to force them to use SPM hours. We would advise them against that so we always do a non-exclusive approach and we think that's the right long-term approach for our customers.

Okay, great. Thank you for the call.

Thank you or next question comes from the line of Pat Walravens from J&B Securities. Your line is now open. Hi, this is Joanne for Pat. Thank you so much for taking her a question. We're just curious around. You know, how you guys are thinking about m&a in the current environment any comments. Are you can provide there?

You know m&a I would say we continue to be very focused on our three main criteria, which is one is pure customer acquisition to is geographic expansion and three is really dead map acceleration. The environment is although different. It's very much the same and the fact that we're going to remain disciplined. There's the valuations are are higher which is making of people think about selling some are doing well some are hurting. So we're approaching it like we have in the past we've continued to be out in the market. We continue to be active we continue to make sure that our small competitors know that we have capital and are ready to deploy it and so we're very much staying the course.

Great. Thank you.

Thank you. Once again is a reminder to ask a question. You will need to press star then the number one on your telephone. Let's star one on your telephone keypad.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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