Q1 2021 SPS Commerce Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the SPS Commerce Q1, 2021 earnings conference call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question answer session.

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I would now like to hand, the conference over to your speaker today.

Black Jack Please go ahead ma'am.

Thank you Elaine and.

Good afternoon, everyone and thank you for joining us and Sps Commerce first quarter 2021 conference call, we will make certain statements today, including with respect to our expected financial results go to market strategy and efforts designed to increase our traction and penetration with retailers and other customers.

These statements are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward looking statements reflect our opinions only as of the day 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, specifically, our form 10-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results.

These documents are available at our website Sps commerce dot com and 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 Sps Commerce dotcom.

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

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

Thanks for Mena and welcome everyone. We.

We delivered a strong first quarter and a great start for the year dynamics and the retail industry continue to fuel the accelerated shift to e-commerce.

Apply chain shortcomings that surface during the pandemic have forced the industry to adapt and we have seen numerous examples across various verticals of the efficiencies that can be realized with adi as retailers and suppliers and best and supply chain automation.

According to the U S Census Bureau E Commerce sales for 2020 grew over 30% from 2019 and accounted for 14 per cent of total sales.

Sps Commerce is well positioned to capitalize on this ongoing trend as we help our customers succeed and their digital transformation.

The accelerated adoption of VDI continues to drive strong momentum and fulfillment, which grew 21% year over year, including other databases acquisition.

Total revenue grew 21% to $90 $1 million and recurring revenue grew 18%.

Adjusted EBITDA grew 25 per cent to $25 $5 million.

The number of recurring revenue customers grew by 700 to approximately 33850.

New and existing customers span from e-commerce services to brick and mortar retailers.

Stitch fix is a leading e-commerce personal styling service to enable ongoing business expansion stitch fix needed to completely overhaul their technology landscape there.

And they chose Sps for our ability to onboard vendors and volume provide full service support and offer expertise and vendor and distribution management.

With a goal of eventually having off order fulfillment managed electronically.

Sps help onboard their global vendor community and over the course of only five weeks, we saw more than 90% of all orders committed to electronic trading and with stitch fix.

Williams Sonoma as a multi channel specialty retailer of high quality home products. The company has been focused on expanding its shipped to consumer distribution channel capabilities. Since early 2020, and engage with Sps to onboard over 500 and drop ship vendors for Adi.

We continue to work closely with Williams, Sonoma and to drive efficiencies across our supply chain.

We're also seeing consumer shopping trends driving the need for a retail analytics and stuff.

Studies have already shown that two thirds of consumers consider sustainability prior to making a product purchase.

Some regions across the U S, maybe slightly more conscious and others. So for retailers our suppliers analytics software can help identify which cities are best to target with eco friendly products and make sure. These shelves are always fully stocked.

Ongoing investments and our business have also paid dividends and expanding our addressable market and strengthening our competitive differentiation and the.

The acquisition of databases. For example has already resulted in increased momentum and the Microsoft space with new customer wins, and the U S and Australia.

Our portfolio continues to evolve to support our customers. Our fulfillment product has always had the ability to manage orders center distribution centers stores and directly to consumers.

Over the past year, we launched the add on products like carrier service to support customers, who book shipments themselves.

In March we announced and SPS Commerce fulfillment has expanded its support of e-commerce platforms and marketplaces.

Added capabilities consolidated orders from e-commerce platforms, like Shopify, Big Commerce, and e-commerce as well as popular marketplaces, like Walmart Amazon and ebay into a single fulfillment solution.

This allows suppliers to manage orders from multiple sales channels using a single platform to share data with logistics partners and the great data with AP and ERP systems and manage shipments.

Also within our API environment partners, such as supply Pike and begin to leverage our prebuilt integrations to retailers and develop additional add on services to allow more of our suppliers fulfillment workflow to be centralized on the Sps fulfillment platform.

Since this time last year the world faced unprecedented challenges S.

<unk> Commerce remains committed to provide mission critical and uninterrupted service to suppliers and retailers and.

Sps team continues to work hard to support supply chain continuity and improve efficiencies amid evolving industry dynamics.

The investments we made over the years have positioned us for long term growth as we leverage the power of the Sps retail network.

Lastly, as a Minneapolis based company, we wanted to comment on the April 20th verdict, finding police officer, Derek shelving guilty of all charges related to the murder of George for it.

The verdict is not lessened and the green felt for the loss of countless victims approach and police brutality, but I hope it helps to heal the community and bring real and lasting change.

There's still a lot of work to reduce systemic racism and Sps remains committed to action at the organizational and leadership and individual levels.

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

Thanks, Archie we had a great first quarter of 2021 revenue was $90 $1 million for 21 per cent increase off of Q1 of last year and represented our 81st consecutive quarter of revenue growth.

Try and revenue this quarter grew 18% year over year.

And the number of recurring revenue customers increased 9% and year over year to approximately 33850 and wallet share increased 9% to approximately 9900.

For the for the quarter adjusted EBITDA grew 25 per cent to $25 $5 million compared to $20 4 million and Q1 of last year.

We ended the quarter with total cash and investments of approximately $211 million.

Now turning to guidance for the second quarter of 2020, one we expect revenue to be and a range of $90 5 million to $91 $5 million, we expect adjusted EBITDA to be and the range of $24 8 million to $25 $5 million, we expect fully diluted earnings per share to be and the range of 20 to 21 cents with fully diluted weighted average share.

Outstanding of approximately 37 million shares.

We expect non-GAAP diluted earnings per share to be in the range of 39% to 40 cents with stock based compensation expense of approximately $7 $2 million depreciation expense of approximately $4 million and Andrew.

Exploration expense of approximately $2 $7 million for the.

Full year, and we expect our revenue to be and the range of $371 1 million for $373 $6 million, representing approximately 19% to 20% growth over 2020.

We expect adjusted EBITDA to be in the range of $102 5 million to $104 million, representing 18% to 20% growth over 2020, we expect fully diluted earnings per share to be and the range of 97 cents to a dollar with fully diluted weighted average shares outstanding of approximately 37 million shares we expect non-GAAP diluted earnings per share.

And to me and a range of $1 65 to $1 68.

Stock based compensation expense of approximately $26 $9 million depreciation expense of approximately $15 $9 million and amortization expense for the year of approximately $10 $5 million.

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

In summary, Sps commerce delivered another strong quarter as the shift to E. Commerce continues to drive momentum and fulfillment our customer focus and product portfolio are aligned with evolving retail dynamics and we're excited about the growing market opportunities ahead of that.

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

And at this time, if you have a question you can press star one.

At this time.

And your first question comes from the line of Matt.

And so from William Blair.

Hey, guys, a nice quarter and thanks for taking my questions first one just wanted to.

I understand is that the U S economy transitions now its much more physical retail.

And open and are getting closer to sort of full capacity, how does that impact you know some of the digitization trends and and the tail ones that you've seen from the shift to e-commerce over over the past year.

You know, Matt I would I would tell you that it's our belief that e-commerce.

And drop ship will continue to be strong, but perhaps not at the same level that they have been over the last year because of the pandemic and.

And that's the great thing about our business model and the fact that we are somewhat indifferent e-commerce brick and mortar omni channel that we are and all spot so.

We're kind of there to service our retailers and our suppliers to wherever it is but we anticipate it to continue a strong strong growth could probably slightly lower.

Got it Okay, and just one more for me and on database and view.

Cited that youre seeing from increased momentum, there and and the Microsoft space, which was obviously your investment thesis there, but by and that maybe just sort of dive into that a little bit is it sort of debt.

Some of the functionality of the skill set that they brought relationships that's helping you.

Gained momentum and and the Microsoft space.

I think it's a number of things one.

And the teams together and having a sale where.

It's just a very easy and and sale with one team.

And it's very obvious that we have on all aspects now the best product, whether youre looking at the retail network aspect of it the integration to Microsoft.

Additional add on add on products, where just a clear leader and all aspects now, but being able to sell as a complete team.

It is a huge advantage one other thing thats happening as well as a deal that perhaps databases would've one we're now winning together, but we're also winning at a higher dollar amount because we are full service as opposed to just the software component they did.

Obviously you have a.

A soft.

Our service offering as well, but it wasn't a full service like the Sps So we're able to monetize at a higher <unk>.

Level, because we're bringing more value to the customer.

Makes sense, thanks, guys I appreciate it.

And you have a question from Scott Berg from Needham.

Hi, Archie and Kim Congrats on a great quarter and thanks for taking my question I.

I guess I get to Archie and extending the sales side your customer additions organically I think best quarter ever and the Companys history.

The additions and in the corner and you've had a couple of strong quarters in a row, but are the customers, you're adding and Amy is profoundly different than the historical profile, maybe coming more from partners versus direct or size and trying to understand if there's a change outside of just the sheer volume being better.

I would tell you it's just.

Momentum you use typically if you see large customer adds its momentum and community is the reflection there, but we are continuing to see good momentum and community and we're also seeing more and more larger deals.

That does not necessarily show up as much and the customer count for larger deals.

But I would say that theres strength throughout all segments of our customer base.

Yeah.

Got it helpful and then.

And you start looking into calendar 'twenty, one here relative to calendar 'twenty analytics was a product that had less focused amongst some of your customers last year with that with the calendar slipping and and priorities changing your own kind of reopening and hopefully healthier.

Just for some of these are retail customers are you seeing and increased demand around analytics your or is that maybe something that's more other come as we get through calendar 'twenty one.

I would tell you, we're seeing slight improvement and analytics.

And I would anticipate that to come over a period of time, especially as suppliers and retailers are more confident and the economy I think that's what that'll be the guiding principle. The only thing that Pfizer is that there's so many other priorities.

But we're seeing we're seeing.

It is stronger right now than it has been for the last year.

Great Thats, all I have I'll jump in the queue. Thanks for taking my questions and congrats again.

Yeah.

And you have a question from Joe for Inc. From Baird.

Oh, Great Hey, everyone.

Archie just going back to this dynamic where you're seeing more large deals and I think that also shows up and the acceleration of wallet growth and the corridor.

What's your assessment of the we've heard some.

All other vendors and the supply chain stay is just kind of alluded to the fact that in many ways 2020 and ended up perhaps being a bit of a GAAP year around strategic projects and now that everyone seems to be acclimating, a bit more 2020, one as maybe the opportunity to execute on some bigger transactions.

So here's the Sps kind of seeing that as well and then maybe just any more color or granularity on timing and and what specifically you're seeing.

Yeah, I would say that there's a slight acceleration.

On that side I wouldn't say, it's drastic them one of the things that.

Was better than we thought it was going to be is the whole pushed an ERP system migrations.

What I would tell you that last year. It ended up being similar to what we predicted at the beginning of the year, but come April and April earnings call. We.

And to anticipate that there'd be a weakening.

On that front and there really wasn't a weakening.

So we're seeing a lot of different.

Trends, obviously, the migration to the cloud.

Especially you know one other one of things.

And one of the reasons, we were so excited about database and was <unk>.

Microsoft has been very very successful and migrating things for the cloud as youre seeing and their numbers and so that is a tailwind for us as people are moving to.

ERP systems, and especially if it's to the cloud, but I would say, it's a slight improvement, but not drastic it's not.

And it's not the main driver.

Okay.

That's helpful.

And then second thing just and thinking about your outlook for the full year and kind of what's implied in <unk> and then by consequent and what's implied for the back half and in terms of growth.

Yeah.

You ended up seeing I, suppose a deceleration and some of the elements of your models that are more.

Document transactional oriented because of the phenomenon and you alluded to you know drop ship activity, perhaps normalizing.

Are there other areas, where you anticipate Sps could potentially look to accelerate what has been contributing so far and so ultimately you know maybe the second half and does not see that meaningful a day and they growth deceleration.

So when I when I think about the guidance that we just gave for the year and I compare it to the prior quarter.

And we actually took up the midpoint of guidance on revenue by a little over $9 million and we certainly beat in the quarter, but our beat was two plus million. So what you've seen is based on our results for the first quarter that gave us confidence, particularly on the fulfillment side to be in a position to be able to pretty significantly in <unk>.

Kris what the expectations are for the year versus where we were just 90 days for now.

Okay, Great I'll leave it there thank you.

And you have a question from Tom Roderick from Stifel.

Hi, Archie and Kim great to hear from you.

Archie Let me ask you. This question and you talked a little bit here about.

Supply chain.

Just challenges that many of your customers have been having I think all of us and the consumer side and felt it whether it's a hard time, finding things and stores are getting things through the mail and it's just it's very clear that some.

Fly chain logistics have been have been tough all over.

So I'd love to hear a little bit more how your customers are adapting with your solutions to sort of solve for that and real time and maybe you know part of that answer is a lot of what they've been doing historically drop ship, maybe it's tighter integrations with with three pls, but.

But maybe there's other things that they're doing also tied to better coordinate between manufacturing facilities and suppliers can you just talk a little bit more about how your customers are trying to adapt to the supply chain considerations and and how they might be leveraging more of your platform to do that.

Yeah, and Theres a couple of things one there are supply chain challenges, just because getting product is difficult and the growth rates.

As it comes to drop ship and e-commerce are so large.

That just puts natural pressure on things, we're seeing a couple of things one people are looking for.

And making sure that.

What they are doing is as efficient as they can make it so the retailers want to make sure like and the Williams. Sonoma example, but they have extremely efficient.

Supply chains as it as it relates to the whole document flow and visibility doesn't necessarily take away the crunch.

But they know where they are and they have high visibility I think that that's really really important.

And then they are and some cases looking for additional sources of product.

And Theyre looking for us to onboard suppliers and are very very timely.

Accelerated fashion and.

And then.

So just the overall they just want to make sure that they have all these other challenges that the places we play we just make it significantly more efficient so that they can spend more time on the other.

And so other supply chain.

Yes that makes good sense. Thank you for that and Kim just kind of a question on the model and the margins here I mean 28, 3% from calculating that right.

EBITDA margin, we've seen a bump.

And for our first quarter ever I guess and nearly at the high of all time, but I'm looking at debt sales and marketing number just barely over 22% as a percentage of sales and revenue.

Of revenue itself.

What do you think that number gets to over time, if you consider it and your long term model how much more efficient can you be and and sort of how do you. How do you make it more efficient because this as you know.

While lower than what we've seen historically and and not yet don't know how you take it down from here. So I would love to hear your thoughts from that.

Sure. Tom So first thing is I think with our business, it's always better to look at whichever line Youre looking at and it can be sales and marketing as a percent of revenue and it could be a gross margin any particular line item. There that you look at our business I, it's always better to look at it on an annual basis, and sometimes you might see movement either positive or.

And our quarter, so and annualized view as always.

I think more reflective of the business longer term, what we've said as it relates to adjusted EBITDA margin of about mid thirties or 35%.

Target in there and we're assuming that sales and marketing is low 20.

Meaning at that point, we're still obviously, adding a bunch of customers, we're still upselling of us and should customers, but to get to sort of and mid thirties, we're assuming sales and marketing is that that that low 20%. It doesn't mean, there's not opportunities for it to go lower but that's sort of what we've penciled out as it relates to what that spend will look.

Like when we're at our mid 30 for EBITDA margin.

Yeah, and so given that you're kind of already and the low twenty's on that front I mean thinking about other ways to sort of create net leverage that gets you that extra seven points up to the 35% level.

Where are the efficiencies that you see potentially around the G&A line, that's one where you where it has stayed at you know kind of roughly the same level for a while.

How does how does how do you create for the leverage from here to get to the target.

Sure. So I think when Youre looking at it I would say the gross margin and G&A are two areas that you will see more leverage over time and gross margin, we expect that it'll be at least low seventy's and on the G&A side Theres a lot of expense and that that's more fixed in nature think of that as you know accounting fees.

<unk> fees et cetera, and so as we continue to scale and grow and accelerate our top line theres, some spend and G&A that naturally.

It does not need to increase at that same level, but the top line does say you will naturally over time see more efficiency and leverage come through that G&A line.

Yeah really helpful. Congratulations. Thank you guys appreciate it.

Thanks, Tom.

And you have a question from Jason Celine <unk> from Keybanc.

Hey, guys, maybe just one for me and I'll keep it brief.

And the strength and the corner and they'll look and.

What would you attribute the biggest driver to that.

And we've spoken a lot about how database and this might be performing better than expected, but and <unk>.

I'm curious and one on what's driving the positivity, so early and the ear.

Sure, Jason what I would say, it's really a continuation of what we saw in Q4 was really strong momentum and fulfillment and it's really across the board. When we think about our community and go to market, which is really focused on helping retailers are on their journey and.

And then helping them connect with suppliers and and automated way I. We saw that continue to be quite strong and Q1 I was the day to me since acquisition, we're very happy about that acquisition and very excited about that acquisition. What I would tell you is that the database and slightly over performed versus our expectation.

But more broadly and the biggest driver is just really strong fulfillment across the board.

Great that's actually quite helpful. Thank you.

And you have a question from Pat Walraven from JMP Securities.

Oh, great. Thank you hi, guys.

Got that.

So.

For the question Archie what's your number one.

Priority in terms of what you're spending your R&D dollars on these days.

I would say Pat.

And we're leaning into.

<unk> added additional products.

For the 30000, plus suppliers, we have and our and our strong network to utilize and drawn.

<unk> network and that can either be through partnerships acquisitions, and also R&D and to make it easier and easier for partners to build like a supply tight to build on top.

Our boss, but I would say, it's additional new sources of revenue.

Yeah.

Is that might be.

Breaking up the code and creating a lot more API is that trend that we're talking about it.

It's really more things like carrier service.

Building building towards supply Pike, and just making sure that we have additional one of the things we're focused on as additional services for our supplier customers to make their processes more efficient, which can also drive more revenue tests desk commerce.

Great and then also how are your employees doing what are you are you back to the office what are you telling them.

We're now back for the office work from home optional through June is what we've stated.

I don't think we'll be back in July August and we're working through it.

I jokingly tell people internally.

March 15th of last year.

So and we're work from home Akhil for two weeks. So I don't know if I have and the best predictor of when exactly things are happening and are evolving and so we're just going to continue to make sure. We think about our employees first is we as we come back to work and I think it'll be different as well so and we've told people and it's it's going to be different.

I would say like like everybody's employees I think there's a high amount of stress are poised to have a lot on them and making sure that the supply chain.

For our country continues to operate efficiently and so it's a challenge to whole mental stress is a challenge for people and we're trying to recognize that.

Okay, alright, thanks Archie.

Yes.

And as a reminder, if you would like to ask a question press star one on your telephone keypad.

And you have a question from Neil Chatterji from Northland capital.

Oh, yes. Thank you.

Great quarter and impressive on the incremental air are.

Real quickly you probably gave us a but I probably missed it what was the contribution of our <unk> for the quarter.

Sure. So when you think about database and at the time, we announced the acquisition, we and said that it would contribute about $20 million in revenue to 2021 and based on that business, it's pretty equally spread across the quarters. So you can think of that as roughly $5 million a quarter and.

And as a reminder, that their mix of business is about 50% recurring 50 per cent nonrecurring other.

Results for the quarter were slightly ahead of what those expectations for.

Okay great.

And very impressive increase in recurring revenue customers on the quarter.

<unk>.

It looks like per my calculation, though that the and you are per recurring revenue and customer was down is that because you did have such an impressive and and recurring revenue customers and you know it takes time for them to grow to the.

Average.

So the two metrics for the quarter and B. The total amount of recurring revenue customers was approximately 33850 and.

And the average recurring revenue per recurring revenue was approximately 9900 and both of those for a 9% increase year over year, so and for.

And so it did increase.

Got you okay. Thank you.

Yeah.

Yeah.

Operator are there any more questions from the queue.

Yeah.

Yeah.

It appears there is no more questions and the Q.

And so at that at this point, we will conclude the conference call. Thank you very much for your time.

Okay.

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