Q2 2021 SPS Commerce Inc Earnings Call
[music].
Hello, and thank you for standing by and welcome to the SPS Commerce Q2, 2021 and earnings conference call at this time all part.
And so we're in a listen only mode. After the speaker presentation. There will be a question and answer session. The basket question. During the session you will need to press star 1 on your telephone. Please be advised the today's conference maybe recorded the require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today for me and a black Jack.
Part of just please go ahead.
Thank you Josh good afternoon, everyone and thank you for joining us on Sps Commerce second 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.
With retailers and the 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.
Whether as a result of the new information future events or otherwise.
Please refer to our SEC filings, specifically our form 10-K, that's the.
1 of our financial results press release for a more detailed description of the risk factors and they affect our results.
These documents are available on our website, Sps commerce dotcom and not the.
SEC's website, SEC dot com and other.
And we are providing a historical data sheet for easy reference on our Investor Relations section of our website Sps Commerce Dotcom Julien.
During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share and.
And our press release and our filings with the SEC.
And then each of which is posted on our website you will find additional disclosures regarding these non-GAAP and adjusted the 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 the and welcome everyone.
We are pleased to report another outstanding.
And quarter, driven by strong demand for Sps as fulfillment solution.
The acceleration of E Commerce, we have witnessed since the pandemic began.
Tenuous to drive the digital transformation as retailers and suppliers can form.
For the omni channel customer experience.
Total revenue grew 25.
And to $94.5 million and recurring revenue grew 22 per cent.
We continue to see strong momentum and fulfillment, which grew 24% year over year.
Adjusted EBITDA grew 34% to $27.3 million.
And a recent study by the economist.
Percent intelligence unit, 72% of enterprises have significantly accelerated the pace of digital transformation.
And <unk> is an integral part of the digital transformation initiative.
Our growing network of e-commerce services, and retailers and suppliers vendors and distributors are leveraging.
Sps is industry, leading edr solution.
The adapt their businesses to the demands of omni channel and retail.
Osborn the world's largest surface treatment and finishing provider faced several challenges with its <unk> system.
Many SAP and <unk> solutions require.
Part of significant ongoing maintenance from ITE teams to meet Adi requirements or the AD trading partners.
Some require making changes of the SAP system itself, which can be difficult and costly.
Osborn and deploys Sps fulfillment for SAP.
And was able to avoid hiring staff to support <unk>.
The operations improve the order fulfillment performance.
And freed up resources to focus on the company's strategic initiatives.
Our full service solutions also help suppliers manage orders from all retail channels, including retailers and wholesalers distributors marketplaces.
And e-commerce stores like Shopify.
For example businesses using shopify for the online stores can leverage the Sps capabilities to manage the orders from the Shopify E Commerce platform and.
It makes shopify integration fast easy and affordable and most merchants are ready to electronically receive.
The first order from thousands of retailers within 48 hours.
This brings the simplicity and power of Sps fulfillment to 800000 companies using the shopify platform.
Shield, 1 of the largest sporting goods retailers in America and of longtime Sps.
C burner recently boosted its supply chain automation with electronic order fulfillment, making.
Making adi a requirement for all of their vendors.
Working with Sps to quickly onboard the suppliers today over 95% of Shields purchase orders are received via EI and products are stocked on the store for.
Part and 48 hours of delivery instead of weeks, despite a reduction and labor hours.
With approximately 17.100 brands present and stores at any given time.
It's been a win win for both Sheila and their vendors to automate their trading partner relationships with Sps fulfillment.
For the EDA software integration is a proven tool that unlocks digital transformation of potential for trading partners across all industries omni.
And the channel and retail continues to fuel the demand for Sps solutions, while growing our addressable market.
This is a very exciting time for Sps commerce the strict.
Okay investments, we have made and our platform and our people have positioned us well to capitalize on existing and new opportunities around the world.
With that I'll turn it over to Kim to discuss our financial results.
Thanks, Archie we had a great second quarter of 2021 revenue was $94.5 million.
The 25% increase over Q2 of last year and represented our 80 <unk> second consecutive quarter of revenue growth recurring revenue. This quarter grew 22% year over year. The total number of recurring revenue customers increased 10% year over year to approximately 34550 and wallet share increased 11% per practice.
Proximately 10150 for the quarter adjusted EBITDA grew 34% to $27.3 million compared to $24 million and Q2 of last year.
We ended the quarter with total cash and investments of approximately $233 million.
Now turning to guidance for the third quarter of 2021, we expect the revenue.
Range of $96.7 million to $97.5 million, we expect adjusted EBITDA to be in the range of $25.3 million to $26 million, we expect fully diluted earnings per share to be and the range of 21 to 'twenty 3.
With fully diluted weighted average shares outstanding of approximately 37 million shares.
And the van GAAP diluted earnings per share to be and the range of 40 to 41 with stock based compensation expense of approximately $7 million.
Depreciation expense of approximately $4 million and amortization expense of approximately $2.7 million.
For the full year, and we expect revenue to be in the range of $380.6 million to 382.
We expect $1 million, representing 22% growth over 2020, we expect adjusted EBITDA to be and the range of $104 million for $105.3 million, representing 20% to 21% growth over 2020.
We expect fully diluted earnings per share to be in the range of $1.1 to $1.3 with fully diluted weighted average shares outstanding.
Standing of approximately $36.9 million shares.
We expect non-GAAP diluted earnings per share to be and the range of $1.68 to $1.71 with stock based compensation expense of approximately $27.6 million.
Depreciation expense of approximately $15.6 million and amortization expense for the year of approximately $10.5.
And to <unk>.
For the remainder of the year on a quarterly basis, the investors should model of 30% effective tax rate calculated on GAAP pretax net earnings.
Beyond 2021, we expect the E Commerce dynamics Archie described will fuel strong momentum in fulfillment for the for.
Receivable future.
As the results, we're increasing our annual revenue growth expectations for 15% or greater and.
In addition, we expect adjusted EBIT dollar growth of 15% to 25% as we continue to invest and the business to capitalize on market dynamics and support current and future growth.
<unk> known the long term, we maintain our target model for adjusted EBITDA margin of 35%.
In summary, Sps Commerce continues to deliver strong results driven by accelerating demand for our fulfillment solution as retailers and suppliers adapt the new norms of consumer shopping preferences with that I'd like to open the.
And for questions.
Okay.
Thank you.
As a reminder to ask a question and you will need to press star 1 on your telephone to withdraw your question press the pound Keith Please standby, we feel part of the Q&A roster.
Our first question comes from Scott Berg with Needham and company.
Carl We proceed with your question.
And our.
And Tim Congrats on the fantastic quarter.
And I guess I'd like to start with Kim's last comments about your share.
Our expectations around growth rates stepping them up to 15% or greater and the ecommerce environment.
Archie kind of a 2 part question.
Company. There is the first of all and obviously as well.
And what's driving the confidence and that 1 and that growth metric versus the we'll call. It lower teens that you've reported and general of last 2 to 3 years and then 2 I know you and I spoke after the last quarter about some sales changes that you've made thats increased your customer acquisition and the last couple of quarters and stepped that up.
Up meaningfully above historical trends, maybe talk to us a little bit about what's kind of driving that.
Confidence and then is that customer acquisition and kind of thought process sustainable here.
Yes, I think of couple of things on the.
The confidence 1 we have significant momentum.
<unk> seen and the.
Question duration and revenue growth were not ready to state to state the claim and that will continue to accelerate.
We think the effects of our growth.
Are no longer just because of the because of the pandemic for effects thereof, we think.
Mostly through that and I. Thank all of the things we've done we're really.
Ex all of the fruits of those labors that we are expanding our Tam by going after accounts that are non Adi add on products different ways to really add value to our customer base and that is allowing us to.
Not only win more but keep more and.
And we think Thats, we think we.
We have a lot more run room. So we publish of $5 billion Tam, we think its substantially above that and.
And we'll do some work and work on that as far as the sales force.
We really haven't made any significant changes, obviously, you're always making moves but any significant changes and since.
Since 2018, but the I think the changes we made in 2018 just continue to.
Accelerate our performance of that team.
The team got very focused on the retail on different segments, I think that allowed them to work better with the customers I think of it gave them clear talking points and.
And they've also.
And really really.
Have a targeted go to market strategy and messaging, which is much stronger. So I think that is allowing us to have.
For success on the retail side, which will ultimately drive customer ads.
Got it helpful. I guess, if I parse of your comments, there Archie and the pre scripted comments.
Local lot about fulfillment and the EI, but I didn't hear anything about analytics, how does the analytics or the opportunity there figure into this 15% organic growth profile here.
I think right now it's being led by fulfillment again, we continue to see a huge opportunity with analytics.
We are starting to see.
Increased growth and the analytics.
Still trailing fulfillment, so it's still being driven by fulfillment so with the comments were not.
Not reliant upon a big rebound in the analytics, but we feel very confident.
In the long term growth aspects of analytics, what we've always struggled with is when and what the timing is and.
Just a little skeptical about predicting when the timing is and.
If you have a couple of good quarters, we feel really good but we've had a number of great quarters and fulfillment. So that just starts giving you a lot more confidence.
Excellent and then I'm going to just sneak a third 1 and here Kim your preferred outperformed by <unk> and the quarter on the earnings side at least the.
<unk> consensus the only raised your full year earnings by <unk> <unk>.
Did you pull and push them hiring or some of the other expenses I just pulled it forward excuse me and push them into the back half of the year just trying to understand maybe the delta between those 2.
Sure so the second half expectations for EBITDA.
It does take into account and hiring we are doing on both the customer success side as well as the sales side based on our performance we've already seen to date and our expectations going forward. So it would be correct.
I think that in the back half of the year of the.
Spend is higher than the front half of some of that just naturally.
Timing of when hires occur.
Well the small jump in the acute congrats again on the great quarter.
Thank you and our next question comes from Jason <unk> with Keybanc capital markets. You May proceed with your question.
Hi, Archie and Kim.
And on for Jason.
And the Tonight, Thanks for taking my questions.
Just first 1 I have is looking at new customer additions and suddenly acceleration allows you to add the last quarter, and which is encouraging and sort of building off of the strong momentum from the past few quarters.
Just wondering if you could provide any sort of details on kind of the profile with the reduced cost.
The women and.
In terms of like the size and like where they're coming from partners, where he can add anything out of the.
The ordinary debt Youre seeing and do those who can provide would be helpful.
Sure Devin as it relates to the net customer adds we added about 700 in the quarter, a similar amount to last quarter and to your point.
And we've now seen multiple quarters, where that number is higher than where it had historically been a lot of that is related to the community activity that we have and just as a reminder of the majority for a quantity of net customer adds tend to come from those community enablement campaigns we.
Run the size of those customers can vary although they are going to skew the smaller sized customers and that over time or the value of those customers do grow with us that's not to say that we didn't also have I'll call it out.
Normal or good corner as it relates to.
And with.
Some larger customers, but as it relates to the quantity of the net customer adds and it's going to be primarily driven.
The relationship we have on the community enablement campaigns.
Got it got it that's helpful. And then 1 more question for me.
Archie and your prepared remarks, you mentioned, 72% of companies of accelerated.
The digital transformation and <unk> being 1 of them, but as the economy and I guess offices reopen and I was wondering what have you been hearing from the customers in terms of the investment priority and the Adi among kind of the broader retail Archie projects has there been some sort of a reshuffle of priorities on the or E. R.
For the high priority.
Yes from the retail side, we're seeing strong demand and I think it's really driven by.
The new omni channel experience that customers are expecting and I think when you look at.
Our market space our competitors.
And as you hear just uniquely situated to handle e-commerce, the handle brick and mortar and more importantly to really do Inc.
Omni channel and we're seeing just.
They're everywhere right, you're thinking more and more of E. Commerce is coming from stores store delivery store pickup.
So we continue to see very strong demand from the for.
From the retailers and and.
Anticipate that tier for for the foreseeable future.
Great. Thanks, so much.
Thank you and our next question comes from Matt <unk> with.
William Blair you May proceed with your question.
Hey, guys. Thanks for taking my questions and great quarter.
Wanted to ask on the adjusted EBITDA growth expectation longer term.
You know a decent size range that you guys provided.
<unk> there so wanted to know 1 where do you expect the leverage to come from and then 2 what sort of drive you being at the upper end or lower end of that range.
Sure. So prior to this earnings call. We had said that we're a company that can deliver around 20%.
Well the EBITDA dollar growth on average and any given year and to your point, we now have a range of 15% to 25% that range for the foreseeable future and that range takes into account as we have some acceleration in the top line, we want to make sure that we're investing back in the business for.
For the.
For SAP customer needs as well as future needs and so having a little bit larger range allows for that additional investment.
And so that explains some of sort of I'll call. It the the.
Putting the range down to the 15 as it relates to the other side and to the 25, we certainly are of SaaS business model, we are still.
And lots of opportunity for us to expand our margin and.
So that takes that into account as well longer term our belief is still about a 35% adjusted EBITDA margin and with that there is based on where we're currently at compared to the 35% there's still room in each of the areas with the caveat of.
The current likely not and R&D, we think of the Tech company, we are investing appropriately as a percentage of revenue.
So youll see over time longer term expansion and gross margin.
<unk> and net G&A as a percent of revenue and they are still has some room, albeit smaller than a few years ago as it relates to the sales and marketing spend.
And as a percent of revenue as well.
Got it and the last 1 for me just on Microsoft dynamics 365 upgrade cycle.
And your investment with data Maisons to take advantage of that how is that playing out relative to your expectations.
I would say on every.
Every account everything's at or above expectations.
I think the team has done a fantastic job the team is executing extremely well the Microsoft dynamics and.
<unk> is extremely strong for Microsoft itself is executing well and we're seeing more deals.
And <unk> and larger deals the larger deals is I think the factor of 2 things 1 of our ability to.
More effectively go after the large customers and to Microsoft's ability to service larger and larger accounts. So I mean.
This was.
Perfect timing perfect acquisition, and I have to say.
Sounds great. Thanks, guys I appreciate it.
Thank you. Our next question comes from Parker Lane with Stifel. You May proceed with your question.
Yeah, Hi, Kevin Archie Thanks for taking my question.
It is the go back to the point you made at the beginning of Archie which is how much easier it is to and trading partners through use of Sps platform.
Can you maybe talk about the last year with such a disruptive environment and place. If you think about sort of long term customers, who had how much of an acceleration and expansion of the number of trading partners that they were managing.
On the Sps platform took place because that's the thing that really accelerated or.
Is it more of just about the efficiency of of those trading partner relationships the Sps.
Thanks, Parker and I think it's both.
Clearly we have seen over time that when we land the customer we can continue to grow grow.
Grow that customer over and over time.
And 1 of the things that E Commerce does do for the industry.
Is it increases the total addressable market because ultimately if you think about our business. It's about number of trading partner relationships and in general most retailers have and increase the.
The number of trading partner relationships as opposed to the decreased so that that does expand the continued to expand the opportunity I think the fact that we're working with retailers and we can onboard suppliers, so much faster and so much better than anybody else because of those deep retailer relationships and.
And that coupled with.
About our solution and the marketplace I think it's just a win win win and then if we can get it to the fact that now we have added value services that we're giving the the suppliers. It just adds another layer of.
Of differentiation between us and the competitive landscape.
Yes.
And then if we.
Think about the annual growth targets, you've put out there. Thank you for that.
And sticking back from the history of Sps there have been instances with the brick and mortar stores and the past that of.
Don and the weight of bankruptcy and that's caused a little bit of disruption of the model do you think theres enough activity and sort of drop shipping and some of more of these omnichannel approaches to offset.
Offset any potential impacts of that going forward just as we think about such a transformative environment that we're in and the retail sector as a whole.
Sure. So when we think about of some of the bankruptcies lens.
And the retail space there are always going to be some companies that don't make it but we have not seen.
And.
And acceleration there. So our belief is there's so much change happening really do the omni channel. So a lot of what Archie discussed earlier on this call. There's a lot of lots of change events happening and lots of opportunities for suppliers to work with retailers and different ways and I think that's really a lot of what's driving.
Giving the fulfillment growth, we're seeing and momentum and we really have not seen and up to air and increase in bankruptcies.
Got it very helpful. Thanks again.
Thank you and our next question comes from Mark Chappell with the benchmark Company and proceed with your question.
Hey, guys.
This is actually Joe Bernardo on for Mark Chapelle. Thank you for taking my question and congrats on a great quarter.
And just to begin with respect to database and database and the revenue contribute database of <unk> revenue contribution and the quarter track in line with the $5 million per year per quarter that you expected when it was acquired.
And.
Joey It was trending about 10% ahead of that pretty similar to what we also saw in Q1.
Awesome. Thank you and then Archie could you comment on what Youre seeing with respect to the part of your business tied to ERP system migration is this part of your business is accelerating.
Yes, I would say that business continues to be.
With strong and steady.
I don't see an acceleration and that but you continue to see upgrades and new ERP system movements and I would say it would be.
Very similar to the quarter before.
Great. Thank you and if I could just sneak 1 more and Kim you may.
The very much on this a bit and an earlier question, but with respect to margins and the past you'd say to that 1 places that you expect it to drive further EBITDA margin leverage was from the gross margin line. What is the driver for the higher gross margins and it just scale or the other cost initiatives and the works.
Sure so longer term and we believe we have and opportunity.
And actually they have gross margins and the low seventies.
The biggest driver of how we get there over time it really is a lot of.
Leveraging higher revenue with investments that we've made so we'll continue to add resources of course, but David and get some scaling and the model over time now that is of longer term view.
Moving to as it relates to gross margins.
Currently when where and.
Time period, where we're seeing some acceleration happening on the top line.
And do keep in mind that we are going to be adding.
Resources and customer successes sort of.
And obvious area there.
And so that does in the shorter.
And that pressure as it relates to gross margin that has all been taken into account as it relates to our EBIT for guidance for the remainder of this year, but again nothing changed relative to our long term view and what gets us to that long term view is really about scaling.
Awesome. Thank you does some of thats going to be all for me.
The term thank you and our next question comes from Joe <unk> with Baird. You May proceed with your question.
Yes.
Great Hi, everyone. A quick 1 to start does the 15% assume any acquisition contributions.
So Joe you may recall that.
Prior to this we were saying we're a company that we believe we can grow 10% or greater and we've now increased that number to say, 15% or greater and we think about acquisitions. The comment would be the same and both were making that statement and sometimes of the company. We do acquisition and sometimes we don't but we're confident with our ability to grow that 15% or greater and can.
And sort of think of it sort of with the with or without because it's 15% or greater.
And.
Okay, Great and then.
I'd be curious just to get kind of and update on what you see in terms of the competitive landscape and and I'm wondering.
Does the scale of and that work advantages that Sps has at this point.
We think you are seeing a stronger growth opportunity and thats, maybe a bit different than even your peers. In this category might be seeing or do you think that's the case, where just the broader imperative that you are now seeing and customers expressing demand for me and the overall solution both for you.
So most of your peers is also stronger than it has been.
Yes, we definitely think that we continue to.
Outpace our competitors and our solution and our solutions on a number of different fronts. The network has always been a significant competitive advantage and our network continues continues to grow.
ROE and strengthen so that's the first part I think the second part really is.
Our solution is just continued to mature continues to get better as you recall 2.3 years back we rollout of brand new fulfillment solution.
That is allowing us to just have a.
Better.
Solution and the marketplace that and then our acquisitions and investments and technology over the last 3 or 4 years you.
You take the EDI admin that acquisition, we bought map of dock, which really gave us a clear leadership and the sage data maisons.
And the Microsoft.
Resource space, our own development and the net suite space. So we now consider ourselves of the leader in that space and then the last part is just and adding value added services.
To our customers to just make it easier to work and do their work work with Sps Commerce, we think ultimately that makes it.
The sales process more efficient and it also makes.
Another reason yet another reason for our supplier to stay with Sps Commerce. So we think we continue to outperform and competitive landscape and.
We will continue making those investments and hopefully in a year or 2 I'll say, it's even further.
Differentiated from the competitors.
That's great and then maybe just 1 more for me.
Yes, thinking about some of the things that at the start of the year might have had a potential the impact the growth rates and and obviously youre not seeing that.
Thank you address supplier bankruptcies.
Alrighty, what about some of the potential changes and modes of fulfillment and just getting a normalization and things like drop ship or even.
Even as maybe of retailers choose to do more of ship from store them into some of these things are influenced potential growth for you.
And maybe relative to your views at the start of the year and and why you see going forward.
Yeah, I think they do and I think 1 of the things the highlighted since the pandemic is Sps commerce again is very well suited to deliver on the pure ecommerce to deliver on key commerce coming from stores to deliver on brick and.
Currencies are.
And our solution, we're just differentiated and the fact that for.
The retailers are.
Truly omni channel and they need of truly omni channel partner, and that's where we that's where we play and.
So the shift anytime there is a shift.
Regardless of what direct.
And more of it is we think that's an advantage for Sps commerce, because that's the change in somebody's environment. When there's change they have pain when they have pain and we can solve that pain. So we think any shifts are positive to us and whether dropship accelerates are we do more in store delivery, we think each and.
And every 1 of those is the.
The net positive for Sps commerce, some of the competitive landscape.
If they have if they're really only and 1 world.
They might have and acceleration during 1 period of time and then the deceleration, but we just feel like it.
We're figuring out which pocket, it's going into for Sps commerce.
<unk>.
That's great. Thank you very much.
Thank you and as a reminder to ask the question you will need to press star 1 on your telephone. Our next question comes from the haul trucks. He was.
And some capital and proceed with your question.
Yes.
And congrats on the very strong results definitely I think.
It suggests that the the momentum is much more and the pandemic driven here great to see that.
And it looks like a part of this is our fulfillment could you say what percent of customers now have the fulfillment module.
Yes. It does the majority of our customers are and use fulfillment. There is a small percentage of that just use us for analytics, but the vast majority of our customers our fulfillment customers.
So what percent of IRR does fulfillment represent now.
And so if you look at it.
The amount of revenue when you look at it as sort of a recurring revenue our subscription revenue over 80% of our revenue and stuck on that.
The recurring revenue.
Got it okay understood.
And then the can you give us an update on any international traction.
Yeah.
A couple of areas that are.
Our focus to us for.
First of the Asian marketplace is really we can sort of that part of the North America supply chain and so we primarily have those offices to support the north American supply chain and it's an extremely important part of supporting the North America supply chain and I think it would be very very challenging the support the north American supply chain without.
Australia, we're actually seeing some nice momentum.
A little tougher 2020 are off to a very very strong 2021. So we're seeing nice momentum there and then Europe and primarily led by our analytics solution and we're seeing some momentum there as well.
Without it for very very small base as you recall, we had highlighted that at the end of 2019 going into the pandemic of and area, we were going to really lean into and invest and again off of a very small base and.
And obviously with the pandemic analytics, we've discussed that had it was kind of on pause.
That's all of it we're starting to see some nice momentum in that area and pretty optimistic again not enough data points on analytics too.
Stake a claim yet, but we are seeing some momentum there.
Okay, and if I can sneak 1 more and you.
You mentioned that you think of the 5 billion of long term revenue target.
Pause because the way too low.
Whatsoever in terms of the 200000 part of your customers and 25000 and average revenue per customer is likely Austin.
I think both I think if you look at the marketplace. The Shopify has 800000 and customers and they don't have every customer right. Those are all selling.
Monarch 2 of consumer so not all of them are ultimately going to be Sps commerce, but as we lean in and say that we're going to work with your trading partners, whether or not they have Adi. That's that's 1 opportunity and then the second opportunity is.
How else can we support our customers.
A positive way add value and consequently increase our revenue wallet share. So we think there's opportunity on.
On both sides.
You need to move up.
Great. Thank you very much.
Thank you and I'm not showing any.
Any further questions at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Hello, and thank you for standing by and you and welcome to the SPS Commerce Q2, 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there.
It'll be a question and answer session. The basket question. During the session you will need to press star 1 on your telephone. Please be advised the today's conference maybe recorded the require any further assistance. Please press star zero and I would now like to hand, the conference over to your speaker today or mean of Black Jack. Please go ahead.
Thank you Josh.
Afternoon.
And thank you for joining us on Sps Commerce second 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 on the penetration with retailers and the other customers.
These statements are forward looking and.
And every member of risks and uncertainties that could cause actual results to differ materially. Please.
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 other.
And then both please.
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 and they affect our results.
These documents are available on our website of Sps commerce Dot com not the.
The SEC's website SEC Gov and addition, we will provide.
Your line of historical data sheet for easy reference on our Investor Relations section of our website Sps Commerce Dot com joining our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share and.
The press release, and our filings with the SEC each of which is posted on our website you will find additional disclosures.
And 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 and welcome everyone.
I'm pleased to report another outstanding quarter, driven by strong demand for Sps's fulfillment.
And pollution.
The acceleration of E. Commerce, we have witnessed since the pandemic began continues to drive the digital transformation as retailers and suppliers conform to the omnichannel customer experience.
Total revenue grew 25% to $94.5 million and recurring revenue.
<unk>, 22%, we continue to see strong momentum and fulfillment, which grew 24% year over year adjusted.
Adjusted EBITDA grew 34% to $27.3 million.
And a recent study by the economists and.
Intelligence unit, 72% of enterprises have siggi.
The <unk> accelerated the pace of digital transformation.
And <unk> is an integral part of the digital transformation initiative.
And our growing network of E Commerce services, and retailers and suppliers vendors and distributors are leveraging Sps is industry, leading edr solution.
The adapter.
GAAP their businesses to the demands of omni channel retail.
Osborn the world's largest surface treatment and finishing provider faced several challenges with its <unk> system.
Many SAP and <unk> solutions requires significant ongoing maintenance from ITE teams to meet <unk> requirements.
<unk> or to add trading partners.
Some require making changes of the SAP system itself, which can be difficult and costly.
Osborn and deploys Sps fulfillment for SAP and.
And was able to avoid hiring staff to support <unk> operations improve the order fulfillment performance.
Freed up resources to focus on the company's strategic initiatives.
Our full service solutions also help suppliers manage orders from all retail channels, including retailers and wholesalers distributors marketplaces and e-commerce stores like Shopify.
For example.
<unk> businesses using shopify for the online stores can leverage the Sps capabilities to manage the orders from the Shopify E Commerce platform.
It makes shopify integration fast easy and affordable and most merchants are ready to electronically receive their first order from thousands of retailers within 48 hours.
And this brings the simplicity and power of Sps fulfillment to 800000 companies using the shopify platform.
Shield, 1 of the largest sporting goods retailers in America, and a longtime Sps partner recently boosted its supply chain automation with electronic order fulfillment.
Film and.
Making adi a requirement for all of their vendors.
Working with Sps to quickly onboard the suppliers today over 95% of <unk> purchase orders are received via EI and products are stocked on the store for within 48 hours of delivery instead of weeks despite a reduction.
The reduction in labor hours.
With approximately 17 of 100 brands present and stores at any given time.
It's been a win win for both Sheila and their vendors to automate their trading partner relationships with Sps fulfillment.
Adi software integration is a proven tool that unlocks digital.
<unk> transformation of potential for trading partners across all industries.
And the channel and retail continues to fuel the demand for Sps solutions, while growing our addressable market.
This is a very exciting time for Sps commerce the.
The strategic investments, we have made and our platform and our people have positioned.
Well to capitalize on existing and new opportunities around the world.
With that I'll turn it over to Kim to discuss our financial results.
Archie we had a great second quarter of 2021 revenue was $94.5 million of 25% increase over Q2 of last year and represented our.
The second.
And consecutive quarter of revenue growth recurring revenue this quarter grew 22% year over year. The total number of recurring revenue customers increased 10% year over year to approximately 34550 and wallet share increased 11% of approximately 10150 for the quarter adjusted EBITDA grew 34.
What percent of $27.3 million compared to $24 million and Q2 of last year we.
We ended the quarter with total cash and investments of approximately $233 million.
Now turning to guidance for the third quarter of 2021, we expect revenue to be and the range of $96.7 million to $97.5 million.
8 we expect adjusted EBITDA to be and the range of $25.3 million to $26 million.
We expect fully diluted earnings per share to be and the range of 21 to 'twenty 3.
And with fully diluted weighted average shares outstanding of approximately 37 million shares we expect non-GAAP diluted earnings per share to be and the range of 40 to 41 with stock based compensation.
And of approximately $7 million depreciation.
Depreciation expense of approximately $4 million and amortization expense of approximately $2.7 million.
For the full year, and we expect revenue to be in the range of $380.6 million to $382.1 million, representing 22% growth over 2020.
We expect adjusted.
<unk> EBITDA to be and the range of $104 million of $105.3 million, representing 20% to 21% growth over 2020.
We expect fully diluted earnings per share to be in the range of $1.1 to $1.3 with fully diluted weighted average shares outstanding of approximately $36.9 million shares.
We expect non-GAAP diluted earnings.
And expire to be and the range of $1.68 to $1.71 with stock based compensation expense of approximately $27.6 million depreciation.
Depreciation expense of approximately $15.6 million and amortization expense for the year of approximately $10.5 million for.
For the remainder of the year on a quarterly basis the investors.
Should model of 30% effective tax rate calculated on GAAP pretax net earnings.
Beyond 2021, we expect the E Commerce dynamics Archie described will fuel strong momentum in fulfillment for the foreseeable future as.
As the result, we are increasing our annual revenue growth.
Expectations for 15% or greater and.
In addition, we expect adjusted EBIT dollar growth of 15% to 25% and we continue to invest and the business to capitalize on market dynamics and support current and future growth.
And the long term, we maintain our target model for adjusted EBITDA margin of 30.
5%.
In summary, Sps Commerce continues to deliver strong results driven by accelerating demand for our fulfillment solution as retailers and suppliers adapt the new norms of consumer shopping preferences with that I'd like to open the call for questions.
Okay.
Thank you.
As a reminder to ask a question you will need to press star 1 on your telephone.
The other question Crystal. Thank you. Please standby we thank all of the Q&A roster.
Our first question comes from Scott Berg with Needham and company. You May proceed with your question.
And our.
And Tim.
Congrats on a fantastic quarter.
I guess I'd like to start with Kim's last comments about your ex.
Expectations around growth rates stepping them up to 15% of greater than the E. Commerce environment, I guess Archie kind of a 2 part question. There is the first 1 obviously is what's driving the confidence and that 1.
And 1 in that growth metric versus the we'll call it lower teens that you've reported in general the last 2 to 3 years and then 2 I know you and I spoke after the last quarter about some sales changes that you've made that has increased your customer acquisition and the last couple of quarters and stepped that up meaningfully above historical trends, maybe talk to us a little bit about what's kind.
Jim.
And.
The confidence and then as the customer acquisition and kind of thought process of stakeholders.
Yes, I think of couple of things.
And the confidence 1 we have significant momentum.
As you've seen and the acceleration and revenue growth were not ready to state to state the claim and that will continue.
<unk> to accelerate but.
But we think the effects of our growth.
And are no longer just because of the because of the pandemic of effects thereof. We think we're mostly through that and I think all of the things. We've done we're really seeing the fruits of those labor that we are expanding our Tam by <unk>.
Going after accounts that are non Adi add on products different ways to really add value to our customer base and that is allowing us to do.
And not only win more but keep more and.
And we think Thats, we think we have a lot more run room. So we publish of $5 billion Tam.
And we think it's substantially above that and.
And we'll do some work and work on that as far as the sales force.
We really haven't made any significant changes, obviously, you're always making moves but any significant changes and since 2018, but the I think the changes we made in 2018 just.
Just continue to.
Accelerate our performance of that team.
<unk> got very focused on the retail on different segments, I think that allowed them to work better with the customers I think of it gave them clear talking points.
And they've also.
Really really.
Have a target.
Target and go to market strategy, and messaging, which was much stronger. So I think that is allowing us to have.
More success on the retail side, which will ultimately drive customer ads.
Got it helpful. I guess, if I parse of your comments here Archie.
Pre scripted comments you spoke a lot about fulfillment and the EI, but I didn't hear anything about analytics, how does analytics or the opportunity there figure into this 15% organic growth profile here.
Yes, I think right now it's being led by fulfillment.
And then we.
And continue to see a huge opportunity with analytics.
We are starting to see.
Increased growth and the analytics.
Bill trailing fulfillment, so it's still being driven by fulfillment so with the comments, we're not reliant upon a big rebound in the analytic.
But we feel very confident.
In the long term growth aspects of analytics, what we've always struggled with is when and what the timing is and im just a little skeptical about predicting when the timing is and if you have a couple of good quarters, we feel really good but we've had a number.
Analytics for 8 quarters and fulfillment so that just starts giving you a lot more confidence.
Excellent and then I'm going to just sneak a third 1 and here Kim your outperformed outperformed by <unk> and the quarter of the earning side at least versus consensus the only raised your full year earnings by <unk> <unk>.
Did you pull and push them hiring or some of the other expenses I just pulled it forward excuse me and push them into the back half of the year just trying to understand maybe the delta between those 2.
Sure. So the second half expectations for EBITDA and does take into account hiring we are doing on both.
Number of some of our success side as well as the sales side based on our performance, we've already seen for games and our expectations going forward and so it would be correct.
Think of that in the back half of the year the.
Spend of higher than the front half of some of that just naturally as the timing of when hires occur.
Okay.
The small.
Jump in the queue, congrats again on the great quarter.
Thank you and our next question comes from Jason <unk> with Keybanc capital markets. You May proceed with your question.
Hi, Archie Hi, Kim this is actually <unk> on for Jason and Tonight. Thanks for taking my questions.
Just first 1 I.
I have is looking at the customer additions slightly acceleration allows you to add the last quarter, and which is encouraging and sort of building off of the strong momentum from the past few quarters.
And I'm just wondering if you could provide any sort of details on kind of the profile of <unk> customers that you're winning.
In terms of of the size and like where the coming.
And from partners versus direct because anything out of the 2.
The ordinary debt Youre seeing any details you can provide would be helpful.
Sure Devin as it relates to the net customer adds we added about 700 in the quarter of similar amount in the last quarter and to your point I would now seen multiple quarters, where that number is higher.
And where it had historically been a lot of that is related to the community activity that we have and just as a reminder of the majority for a quantity of net customer adds tend to come from those community enablement campaigns, we run the size of those customers can vary although they are going to.
Due to smaller sized customers and that over time.
And the value of those customers do grow with us that's not to say that we didn't also have I'll call. It of a normal or good quarter as it relates to with some larger customers, but as it relates to the quantity of the net customer.
And then that is going to be primarily driven.
With the relationship we have on the community enablement campaigns.
Got it got it that's helpful. And then 1 more question for me.
And your prepared remarks, you mentioned of 72% of companies of accelerated digital transformation and <unk> being 1 of them, but as the economy.
And I guess the offices reopen.
And then what have you been hearing from the customers in terms of the investment priority and the <unk> mhm.
And of the broader retail Archie projects has there been some sort of a reshuffle of priorities on the then or is the E. R. R E.
Yes.
And the high priority.
Yes from the retail.
And the side, we're seeing strong demand and I think it's really driven by.
The new omni channel experience that customers are expecting and I think when you look at.
Our our market space our competitors.
We're just uniquely situated to handle e-commerce.
And the handle brick and mortar and more importantly to really do Inc. To do omni channel and we're seeing just.
It is everywhere right you are taking more and more of E. Commerce is coming from stores store delivery store pickup. So we continue to see very strong demand from the.
From the retailers and and.
For the space that's here for for.
The foreseeable future.
Great. Thanks, so much.
Thank you and our next question comes from Matt <unk>.
William Blair you May proceed with your question.
Hey, guys. Thanks for taking my questions and great quarter.
I wanted to ask on the adjusted EBITDA.
Gross expectation longer term.
A decent size range that you guys provided there so wanted to know 1 where do you expect the leverage to come.
And then 2 what sort of drive you being at the upper end or lower end of that range.
Sure. So prior to this earnings call. We had said that we're a company that can deliver around 20% EBITDA dollar growth on average and any given year and to your point we now.
Have a range of 15% to 25% that range for the foreseeable future and that range takes into account as we have some acceleration and the topline and we want to make sure that we're investing back in the business.
For the current customer needs as well as future needs and so having a little bit larger range.
<unk> allows for that additional investment.
That and for that to explain some of sort of I'll call. It the the putting the range down to the 15 as it relates to the other side and to the 25. We certainly are of SaaS business model was still lots of opportunity for us to expand our margin and so that takes that into account as.
As well longer term our belief is still about a 35% adjusted EBITDA margin and with that there is based on where we're currently at compared to the 35% there's still room in each of the areas with the caveat of most likely not and R&D. We think of the Tech company, we are investing appropriately as a percentage of revenue.
And so you'll see over time longer term expansion and gross margin.
Improvement in net G&A as a percent of revenue and there still is some room, albeit smaller than a few years ago as it relates to the sales and marketing spend as a percent of revenue as well.
Yeah.
Revenue got it and the last 1 for me just on Microsoft dynamics 365 upgrade cycle.
And your investment with day to Maisons to take advantage of that how is that playing out relative to your expectations.
I would say on every account and everything's at or above expectations I.
The team has done a fantastic job the team is executing extremely well the Microsoft dynamics environment is extremely strong for Microsoft itself as <unk> is executing well and we're seeing more deals and larger deals. The larger deals is I think the factor of 2 things 1 our.
Our ability to.
More effectively go after the large customers and to Microsoft's ability to service larger and larger accounts. So I.
This was.
Perfect timing perfect acquisition, and I have to say.
That's great. Thanks, guys I appreciate it.
Thank you and your next question comes from Parker Lane with Stifel. You May proceed with your question.
Yeah, Hi, Kim and Archie Thanks for taking my question.
What does it go back to the point you made at the beginning of the shoots of how much easier to do and trading partners.
Through the use of Sps platform.
Can you maybe talk about and the last year was such a disruptive environment employees and if you're picking up some of those long term customers, who had how much of an acceleration and expansion of the number of trading partners that they were managing.
On the Sps platform took place and that's the thing that really accelerated or is it more.
And just about the efficiency of of those trading partner relationships to the rest of it yes.
Yeah.
Thanks, Parker I think it's both.
Clearly we have seen over time that when we land the customer we can continue to grow grow that customer over and over time and 1 of the things that E. Commerce does do for the.
Industry.
Is it increases the total addressable market because ultimately if you think about our business, it's about number of trading partner relationships and in general.
Most retailers have and increase the number of trading partner relationships as opposed to the decreased so that that does expand and continue to expand.
And the opportunity I think the fact that we're working with retailers and we kind of onboard suppliers, so much faster and so much better than anybody else because of those deep retailer relationships and.
And that coupled with having a better solution and the marketplace. I think it's just a win win win and then if we can get it to the fact.
Now we have added value services that we're giving the the suppliers. It just adds another layer of differentiation between us and the competitive landscape.
Yes.
Makes sense and then if we think about the annual growth targets, we put out there. Thank you for that.
Thinking back and the history of of Sps There had.
Been instances with some brick and mortar stores and the past that of.
And the way of bankruptcy and that's caused a little bit of disruption of the model do you think theres enough activity and sort of drop shipping and some of more of these omni channel approach is to offset any potential impacts of that going forward just as we think about such a transformative environment.
Fact that we're in and the retail sector as a whole.
Sure. So when we think about it from of the bankruptcies lens.
And the retail space there are always going to be some companies that don't make it but we have not seen.
And acceleration there so our belief is there's so much change happening.
Really do the omni channel so a lot of what Archie discussed earlier on this call. There's a lot of lots of change events happening and lots of opportunities for suppliers to work with retailers and different ways and I think that's really a lot of what's driving the fulfillment growth, we're seeing and momentum and we really have not seen an uptick and increase.
And bankruptcies.
Got it very helpful. Thanks again.
Thank you and our next question comes from Mark Scheffel with the benchmark Company and proceed with your question.
Hey, guys. This is actually Joe Bernardo on for Mark Chapelle.
For you for taking my question and congrats on the great quarter.
And just to begin with respect of database and database and the revenue contribute database and revenue contribution and the quarter track in line with the $5 million per year per quarter that you expected when it was acquired.
Joey.
Was trending about 10% ahead of that pretty similar to what we also saw in Q1.
Awesome. Thank you and then Archie could you comment on what Youre seeing with respect to the part of your business tied to ERP system migration at this part of your business is accelerating.
Yes, I would say that the business continues to be very strong and steady.
I don't see an acceleration and that but you continue to see upgrades.
<unk>, new ERP system movements, and I would say it would be.
Very similar to the quarter before.
Yeah.
Great. Thank you and if I could just sneak 1 more and Kim you may have actually touched on this a bit and an earlier question, but with respect of margins in the past you'd say the that 1 places that you expect that to drive further EBITDA margin leverage.
<unk> was from the gross margin line what is the driver for the higher gross margins is it just scale or the other cost initiatives and the works.
Sure so longer term, we believe we have an opportunity to have gross margins and the low seventies.
And the biggest driver of how we get there over time it really is a lot.
Of the.
Leveraging <unk>.
Revenue with investments that we've made so we will continue to add resources of course, but you gave and get some scaling in the model over time now that is of longer term view as it relates to gross margins.
And currently when where and tie.
<unk> time period, where we're seeing some acceleration.
Happening on the top line.
And do keep in mind that we are going to be adding resources and customer successes sort of.
And obvious area there.
And so that does in the shorter term put pressure as it relates to gross margin that has all been taken into account as it relates to our EBIT for guidance for the remainder of this year, but.
But again nothing changed relative to our long term view and what gets us to that long term view is really about scaling.
Awesome. Thank you guys. So much that's going to be all for me.
Thank you and the next question comes from.
Joe ruling with Baird. You May proceed with your question.
Yeah.
Great Hi, Brian a quick 1 to start does the 15% assume any acquisition contributions.
So Joe you may recall that prior to this we were saying we're a company that we believe we can grow 10% or greater and we've now increased that number to say 15.
Per cent of greater and we think about acquisitions the comment would be the same and both were making that statement and sometimes of the company. We do acquisition, sometimes we don't but we're confident with our ability to grow that 15% or greater and can sort of think of it sort of with or without because of its 15% or greater.
Okay.
Okay great.
And then.
I'd be curious just to get kind of and update on why you see in terms of the competitive landscape and I'm.
Wondering.
Does the scale and network advantages that Sps has at this point do you think you are seeing a stronger growth opportunity and that's maybe a bit different than even.
Our peers in this category might be same or do you think that's the case, where just the broader imperative that you're now seeing and and customers expressing demand for me and the overall solution. Both for you but also your peers is also stronger than it has been.
Yeah, we definitely think that.
Can you too.
The pace of our competitors and our solution and our solutions on a number of different fronts. The network has always been a significant competitive advantage and our network continues continues to grow and strengthen.
The first part I think the second part really is.
Our.
Our solution is just continued to mature continues to get better as you recall 2.3 years back we rolled out of brand new fulfillment solution.
That is allowing us to just have a.
A better solution and the marketplace.
And then our acquisitions and investments and technology.
The over the last 3 or 4 years.
You take Adi admin that acquisition, we bought map of dock, which really gave us a clear leadership and the sage data maisons.
And the Microsoft space, our own development and the net suite the space. So we now consider ourselves to be leader.
And that space and then the last part is just adding value added services.
To our customers to just make it easier to work and do their work work with Sps Commerce, we think ultimately that makes it the sales process more efficient and it also makes.
Another reason yet another reason for.
For our supplier to stay with Sps Commerce. So we think we continue to outperform our kind of competitive landscape and.
We will continue making those investments and hopefully in a year or 2 I'll say, it's even further.
Differentiated from the competitors.
That's great and then maybe just 1 more for.
Yeah.
Thinking about some of the things that at the start of the year might have had the potential to impact the growth rates and and obviously youre not seeing that.
Thank you address the supplier bankruptcies already.
What about some of the potential changes and modes of fulfillment and just.
And Ah normalization and you know things like drops out for even as maybe of retailers choose to do more of ship from store them into some of these things are influenced potential growth for you maybe relative to your views at the start of the year and and why you see going forward.
Yeah.
And I think they do and I think 1 of the things that's highlighted since the pandemic is Sps commerce again is very well suited to deliver on a pure ecommerce to the deliver on e-commerce coming from stores to deliver on the brick and mortar and our solution, where just the differentiated and the fact that.
Retailers are.
Just get a truly omni channel and they need of truly omni channel partner, and that's where we that's where we play and so the shift anytime there is a shift.
Regardless of what direction. It is we think that's an advantage for Sps commerce, because thats, a change and somebody's environment when there's change they.
I have pain, when they have pain and we can solve that pain. So we think any shifts are positive to us and whether drop ship accelerates are we do more in store delivery, we think each and every 1 of those is the.
The net positive for Sps commerce, some of the competitive landscape.
<unk>.
If they have if theyre really only and 1 world.
And they might have and acceleration during 1 period of time and then the deceleration, but we just feel like it is.
And we're figuring out which pocket, it's going into for Sps Commerce.
That's great. Thank you very much.
Thank you and as a reminder to ask a question you'll need the press star 1 on your telephone. Our next question comes from the haul trucks he would.
Northland capital and I and proceed with your question.
Yeah. Thank you and congrats on the very strong results definitely I think.
Suggest that the.
And there's much more and the pandemic driven here great to see that.
And it looks like a part of this is the fulfillment.
What percent of the customers now have the fulfillment module.
The majority of our customers are used fulfillment there is a small percentage that just use us for analytics.
The members of the vast majority of our customers our fulfillment customers.
Got it so what percent of a R. The fulfillment represent now.
So if you look at the.
The amount of revenue when you look at it as sort of a recurring revenue our subscription revenue over 80% of our revenue and stuff.
With all of them on recurring revenue.
Got it okay understood.
And then can you give us an update on any international traction.
Yeah.
A couple of areas that are a focus to us first.
First off the Asian marketplace is really we can sort of that part of the north American supply chain.
And so we primarily have those offices to support the North American supply chain and it's an extremely important part of supporting the North America supply chain and I think it would be very very challenging the support the north American supply chain without it Australia, we're actually seeing some nice momentum a.
A little tougher 2020 off.
Off to a very very strong 2021, so we're seeing nice momentum there and then Europe and spend primarily led by our analytics solution and we're seeing some momentum there as well.
Off of very very small base as you recall, we had highlighted that at the end of 2019.
And going into the pandemic of and area, we were going to really lean into and invest and again off of a very small base and obviously with the pandemic analytics, we've discussed that had it.
With the kind of on pause, but we're starting to see some nice momentum in that area and pretty optimistic again not enough data points.
And on analytics to stake a claim yet, but we are seeing some momentum there.
Got it okay, and if I can sneak 1 more and you met.
And that you think of the 5 billion of long term revenue target maybe way too low.
In terms of the 200000 part of your customers and 25000 and average revenue per customer.
And is likely Austin.
I think both I think if you look at the marketplace. The Shopify has 800000 customers and they don't have every customer like those of all selling a product to a consumer so not all of them are ultimately going to be Sps commerce, but as we lean.
And say that we're going to work with your trading partners, whether or not they have Adi. That's that's 1 opportunity and then the second opportunity is how else can we support our customers.
And of positive way add value and consequently increase our revenue wallet share. So we think theres opportunity.
And in both sides to continue to move up.
Great. Thank you very much.
Thank you and I'm not showing any further questions at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.