Q2 2022 SPS Commerce Inc Earnings Call
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Good day and thank you for standing by welcome to S. P. S comments Q2, 2022 earnings conference call.
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Amenable as Chet you may begin.
Thank you to Wanda.
Good afternoon, everyone and thank you for joining us on Sps Commerce second quarter 2022 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 date of this call and we undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.
Please refer to our SEC filings, specifically, our Form 10-K as well.
As our financial results press release for any more detailed description of the risk factors that may affect our results.
These documents are available on our website Sps commerce dot com and the SEC's website at SEC Gov. In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website Sps Commerce Dot com during.
During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share in 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 financial measures, including reconciliations of these measures with comparable GAAP measures.
With that I will turn the call over to Archie.
Thank you Remy and welcome everyone to Sps as 50, if earnings conference call.
Solid performance in the second quarter was driven by ongoing momentum in Adi adoption.
For fulfillment and analytics remains strong with 17% and 12% year over year growth respectively.
Total revenue grew 15% to $109 2 million and recurring revenue grew 16%.
Adjusted EBITDA grew 13% to $39 million.
SBS continues to capitalize on the retail industry's ongoing investments and supply chain management efficiency.
Digital transformation and cloud migration.
Retailers and suppliers are more motivated than ever to overhaul their systems to accommodate the demands of omni channel retail and to address ongoing supply chain disruptions.
Since the pandemic trading partners have been under pressure to implement agile seamless and resilient workflows to ensure business continuity and that need has been amplified by ongoing macro challenges.
Sps is uniquely positioned to support our customers with full service CDI, which includes access to resources to help manage increasingly complex trading partner communications and help retailers and suppliers across various industries successfully navigate challenging supply chain dynamics, while they focus on.
On achieving their business objectives.
Taken industries, the world's number one indoor comfort solutions company and largest HVAC manufacturer has over 90 production sites worldwide.
To support their growth plan. They can is tackling costly and time consuming redundancies to get products to customers faster by eliminating all manual processes.
They partnered with Sps to successfully accomplish Adi onboarding of all of their suppliers.
Garnet Hill, and online boutique retailers specializing in fashion and home goods chose to replace an existing order fulfillment process and adopt AI to improve the customer experience with efficient inventory management order tracking and increasing speed to shelf.
PV industries, a leading farm and ranch supply retailer in Canada offers a unique product mix that differentiate the company in the marketplace with an assortment of 45000 skus for more than 4500 vendors.
PV worked closely with Sps and vendor outreach to communicate how critical automation is the companys growth and today close to 93% of the retailers purchase order volume is automated through Adi.
<unk> also leverages Sps's analytics solution sharing point of sale data with vendors for greater visibility into its inventory position to drive sales performance and to develop vendor partnerships that support its ongoing success.
With the help of Sps commerce retailers are recognizing the importance of sharing data to drive business decisions and expand globally.
Only our pizza oven company expanded operations beyond UK, and now partners with Sps across North America and Europe .
Global companies, such as Crocs are leveraging sell through data across their sales channels to help drive visibility profitability and predictability to mitigate inventory pressure across their supply chain.
Sps continually strives to help trading partners work better together as we expand our network and build on our leadership position.
Earlier this month, we acquired GE Commerce, a software solution provider known for its expertise in the automotive aftermarket industry.
We're excited to welcome the GE ecommerce team and customers to Sps Commerce.
In summary, increasing complexity, and omnichannel and retail and supply chain management continue to fuel investment in digital transformation as.
As trading partners strive to improve collaboration and successfully deliver on today's consumer expectations.
With that I'll turn it over to Kim to discuss our financial results. Thanks, Archie we had a great second quarter of 2022 revenue was $109 $2 million, a 15% increase over Q2 of last year and represented our 86th consecutive quarter of revenue growth recurring revenue this quarter grew 16% year over year.
The total number of recurring revenue customers increased 12% year over year to approximately 38650 and wallet share increased 4% to 10 $5 50.
For the quarter adjusted EBITDA grew 13% to $39 million compared to $27 3 million in Q2 of last year.
We ended the quarter with total cash and investments of approximately $259 million and repurchased approximately $15 million of Sps shares.
In addition, the board of Directors has authorized a new program to repurchase up to $50 million of common stock, which becomes effective on August 26, 2022 and is expected to expire on July 26 2024.
The Companys November 'twenty, one program. The previously authorized repurchase of up to $50 million will terminate when the new program goes into effect.
Now turning to guidance.
We acknowledge the evolving dynamics of inflationary pressure and the uncertainties in the global economy, which may impact the retail industry and our customers.
However, given our limited exposure to foreign exchange rate fluctuations, our pricing structure and the role we play in supporting trading partners across all retail channels, our operating model and growth expectations remain unchanged.
For the current third quarter of 2022, we expect revenue to be in the range of $113 4 million to $114 $4 million, which represents approximately 16% growth year over year, we expect adjusted EBITDA to be in the range of 32 million to $32 $7 million, we expect fully diluted earnings per share should be the range of 29 to 31.
With fully diluted weighted average shares outstanding of approximately $37 2 million shares we expect non-GAAP diluted earnings per share to be in the range of 51 to 52 with stock based compensation expense of approximately $8 5 million depreciation expense of approximately $4 5 million and.
And amortization expense of approximately $3 million.
For the full year, we expect revenue to be in the range of $446 4 million to $448 $4 million representing.
Representing approximately 16% growth over 2021, we expect adjusted EBITDA to be in the range of $128 2 million to $129 4 million, representing $20 to 21% growth over 2021.
We expect fully diluted earnings per share to be in the range of $1 25 to $1 29 with fully diluted weighted average shares outstanding of approximately $37 1 million shares.
We expect non-GAAP diluted earnings per share to be in the range of $2 13 to $2.15 with stock based compensation expense of approximately $34 2 million depreciation expense of approximately $17 3 million and amortization expense for the year of approximately $11 1 million.
For the remainder of the year on a quarterly basis investors should model, a 30% effective tax rate calculated on GAAP pretax net earnings.
Beyond 'twenty, two we maintain our annual revenue growth expectations of 15% or greater and we continue to expect adjusted EBITDA dollar growth of 15% to 25% as we invest in the business to capitalize on market dynamics and support current and future growth in the long term, we maintain our target model for adjusted EBITDA margin of 35.
Percent.
In summary, Sps commerce is well positioned for long term growth as macro dynamics digital transformation and the growing need for trading partner collaboration continue to fuel demand for Sps as full service EDI I.
With that I'd like to open the call to questions.
Yeah.
Thank you as a reminder to ask the question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
Again, Thats star one to ask the question.
Yeah.
One more.
Question.
Our first question comes from the line of Matthew Pfau with William Blair. Your line is open.
Great. Thanks for taking my questions guys wanted to just start off I think it would be helpful. If you could can you mentioned the pricing model has been a positive for Sps, but maybe it would just be helpful to dig in a bit in terms of how much changes in volume or retail sales impact that the pricing model that you have with your.
Customers.
Yes.
Matt I'll take that I think theres a couple of things one remember that we're completely omni channel in other words as E. Commerce goes down if it is going into brick and mortar that's the first thing.
Thing is very little of our revenue comes from actually transactions and we don't have any revenue coming from GMB what we.
We've found in the past is even if overall retail sales drop.
What we're what we've seen historically is that transaction volumes tend not to fluctuate in fact in times of uncertainty sometimes will actually go up as instead of ordering 100 shovels they'll buy 45 twice.
And Thats. The way were paid were paid by trading partner relationships, primarily trading partner relationships and then a small portion from transaction volume.
We don't as GM vehicles up as it has in the past youre not going to see a boom for Sps commerce and the flip side is also true.
Got it and then just a follow up.
More difficult.
Times, what would you expect to see from a churn perspective within your customer base.
Sure. So our churn has remained constant at around that 12% on an annual basis. If I look back historically on time periods, where it has been a little bit more difficult economy, we have seen that churn historically go up by about a percent, but that is not something that we're currently seeing the same could be said.
When you look at overall revenue.
Again, there have been times in the past, where there's been sort of more difficult.
Economy, and even during those time periods the amount of impact that has had to our overall revenue has been quite nominal again a percent or so.
Yeah.
Great. Thanks, guys I appreciate it.
Thank you.
Please standby while our next question.
Okay.
Our next question comes from the line of Jeff Banbury with Craig Hallum. Your line is open.
Great. Thanks for taking my questions.
Two quick ones off the top.
Archie I think in the past you've said a lot of times ERP replacement decisions prompt.
Rethinking of how people are conducting ERP certainly it seems right now those ERP decisions would would likely be delayed or at least starting to be delayed. So the broader question just outside of us and the whole world, telling you things or are getting really bad really quick I mean, what have you seen in your model have you seen any of those impacts from the delayed <unk>.
<unk> it sounds like the answer is no one have you seen any other.
Variations.
Two our business now a couple of things one I think frankly in the supply chain world in retail. This is my personal opinion youre going to continue to see some investments and the primary reason is what what retailers and suppliers did during the pandemic.
As they start fulfilling on our consumers' demands.
They didn't necessarily do that efficiently and what we're seeing over the last year as people trying to figure out how to do what they are doing more efficiently and effectively so I think some of those supply chain.
<unk> are going are going to continue and I think that includes the cloud migrations.
Does <unk> typically.
With the cloud.
Migrations as tends not to be a big capex it tends to be.
Pay as you go so that does help it does help the model we have not seen any slowdown I will tell you what we've historically seen which were not seen today.
We have been.
Not overall affected our minimally affected in a down economy, what we've seen in the past is a lot of puts and takes in those environments, where our retail team actually gets.
Additional.
Business, because we are a very cost effective non capital extensive way for retailers to drive efficiencies in their supply chain. So we've seen strength in that area on the flip side we've seen.
Yeah.
A little tougher sales cycle in analytics and on the supplier side again, we're not seeing that today, but history would tell you.
That has put that as a potential.
Hey.
And then on the E Commerce acquisition, maybe just spend a minute. There I think you may have made a reference but just refresh me on customer count and <unk> impacts and then maybe just a minute on the logic, there and what it brings.
Sure. So the acquisition, which closed in July so you'll see it reflected in our Q3 results added about a net 500.
Additional customers.
<unk> for that 500 net new customers.
Is it around 12000, our average <unk> is about 10500, so all in when we combine the two together, it's a very very nominal impact to that overall combined <unk>. A reminder, when we announced that acquisition. We set in 2022, we anticipated it would add about $2 5 million of revenue and be slightly.
On adjusted EBITDA again, it's about 300000, we also did give our view as it relates to 2023, saying we expected it to add about $7 million in revenue in 2023, and deliver about $2 5 million in EBITDA and I would say, it's a couple of things one they have a strong presence in the automotive aftermarket, which strengthens our leadership position.
There and then the customer base, obviously extremely important and we think we have additional ways to add value to those customers, which.
Would potentially allow us to monetize that and then we also think we've got a very very talented.
Have there so again, just expanding expanding our already.
History, leading network and building on that.
Okay I'll leave it there.
Thank you.
Please standby for our next question.
Okay.
Okay.
Our next question comes from the line of Scott Berg with Needham <unk> Company. Your line is open.
Hi, Archie and Kim Congrats on the deal.
Good quarter and thanks for taking my questions I guess, two theres, probably macro theme to all of us here today.
Touch on the macro a little bit is.
How do you all see the macro today in terms of.
The macro environment, but your space as a whole when you consider.
Consider the secular demand for fulfillment solutions, if you look back in a way it or.
I think you would characterize that as a very strong demand environment, especially for cloud because it was building momentum.
I asked for I'd say 14.
<unk> thousand 14 years till today is the secular strength for your end market as strong as what it was back then or Hasnt changed somehow.
Yes overall, we think it's there is a ton of potential and actually we think what's happened over the last two years should benefit us for some time as again retailers in my opinion really fought to meet the demands of the consumer over the last two years, but they arent doing that necessarily efficiently or effectively.
<unk> so they need to continue to invest and again, we went public off our numbers in 2009, which were very strong and in 2009, what we saw was a weakening or strengthening of our retailer leads as retailers. This became a higher priority for retailers on the flip side, we did see.
See.
Longer sales cycles, and more challenging sales cycles on the supplier side. So.
So net net were somewhat unaffected, but a lot of puts and takes underneath the covers.
Okay.
Got it helpful and then Kim your revenue outperformance in the quarter was one of your.
We'll call it the smallest that I can remember off the top of my head your customer additions your net customer additions were actually quite strong in the quarter at roughly 750 by my count was there anything different than maybe the linearity of the quarter.
Versus other recent quarters that might have driven maybe a smaller revenue outperformance given what seemed to be a really strong actually.
Net customer acquisition quarter.
Sure. So we feel really good about our results in the quarter and that really goes across our whole product portfolio, but to your 0.1 thing that was a bit different than we had anticipated we actually had a higher net customer adds.
700, plus in the quarter, which is higher than it's been in the last couple of quarters.
And so that part was a bit different than we thought in a positive direction, but do keep in mind.
Typically what happens is when we add more customers through enablement campaigns et cetera, a lot of times those are going to end up being smaller revenue customers. Initially and then we certainly have the opportunity to grow that book of business with those customers over time. So the only thing that really is somewhat different in the quarter is higher number.
Net customer ads and when you look at those customers there certainly is.
An aspect of that that there are smaller than average customers.
Okay.
Excellent Super helpful. Thanks for taking my question.
Thank you.
Please standby for our next question.
Okay.
Okay.
Our next question comes from the line of Mark Chappell with loop loop capital. Your line is open.
Hi, Good evening. Thank you for taking my questions. Just a couple of Archie with respect to the vertical markets that you sell into are you seeing any notable strengths or weakness in any particular vertical.
Okay.
I would say from a selling standpoint, no I think we continue to be pretty broad based.
Continue to see.
Probably a little more momentum in the distribution area than any place, but overall, it's been relatively consistent.
Okay, Great and then on the international front.
Is your international business is relatively small but.
How are you seeing that segment.
Perform.
Yes.
A couple of places in Europe that is where primary primarily attacking Europe with our analytics product and we continue to see really nice momentum, we don't seem to be caught up in the economy or the war or anything else. There now that could be just a factor of where we're off a very very small base, but.
We arent seeing any slowdown on that side, Australia continues to be strong.
No.
With our international presence.
Presence and momentum.
Great and then finally, the carrier service solution.
I think it's been a couple of quarters since it's been in orders I was wondering if you can just give us a sense of what youre seeing in terms of the pipeline.
And maybe when you think that solution may become material to the P&L.
Yes, I think well, it's continuing its contributing as we had mentioned in a very small portion thats a small add on these are examples of ways to continue to add value to our customers and ultimately monetize that value and so we continue to see momentum we continue to see pipelines growing and we're learning how to how to sell it and make it just part of our.
Bundle when you buy so continued momentum and I'm really optimistic about how we do that in other products into the future.
Okay, great. Thank you appreciate it.
Thank you.
Please standby for our next question.
Our next question comes from the line of Parker Lane with Stifel. Your line is open.
Yeah, Hi, thanks for taking the questions Archie just alluded to the strength in analytics in Europe is hoping to if we look at the balance of inflation and supply chain disruption alongside fears of a recession in both Europe and here, which of those factors do you think is a bigger influence on the way that that buyers are thinking.
About that product is it.
Just have for them in this current environment or do you think it could be.
It's squishy here as they sort of prioritize those areas of investment.
Yes in Europe , it's a little bit different story, just because we're coming off a small scale. So again, we got a big place.
Fish and we're not seeing that again I think I think if you go into continued recession history would tell you and we're not seeing that right now history would tell you that the puts and takes under the covers of R. R.
Of our businesses, we would see stronger retail business, we would see.
Longer sales cycles and suppliers.
Tougher tougher time in analytics.
What history would tell you all overall it would look.
More or less the same but a lot of puts and takes underneath.
Yes speaking of history can we go back to 2008, nine and maybe you could remind us about the cadence or the magnitude of retailer bankruptcies and how would you assess the health of the retailers you're working with today versus back in that time.
Yes.
We didn't see that many retail bankruptcies.
And those are always factored in if it's one it might be 1%.
We're always subject to that 1% revenue hit we don't have any concentration. So a lot of times when somebody goes bankrupt theres a small fee from many suppliers that gets.
That gets.
You're bringing the revenue down from from those those suppliers.
I think the biggest quarter, we've ever seen and impact was about 1% or less than 1% is the biggest impact we've seen I would say overall I mean, a lot has been made about bankruptcies in retail over the over the last four or five years, but really when you look at who has primarily gone bankrupt it's companies that had big debt.
Infrastructure's did that investing into their business.
You take like a $5 six years ago Sports authority Big they had invested in their stores they didn't have an omnichannel.
Our presence at all in fact that sold off the rights to their e-commerce. So.
Obviously always a risk, but with over 3000 retailers in the network feel pretty good about the minimal exposure.
Got it I appreciate the color and congrats on the quarter. Thanks again, okay.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Nicole Celski with Northland Securities. Your line is open.
Yes. Thank you.
Nice quarter, especially given the macro backdrop.
Kim you did mentioned that your customer adds were stronger on the small side than usual yet you did have a really nice solid Q2 increase in <unk>. So can you talk through that discrepancy.
Sure. When you think about the comment that I was making is we had a pretty high net adds of approximately 700.
And when you think about what makes up our customer adds the biggest quantity.
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Hello.
Hello, who lab.
This is Kim and Archie we have gotten disconnected.
Yes, you are connected back. Thank you we can hear you.
Are we live.
Yes, you are.
K well apologies for that Meanwhile, the answer you answered. The question that you had you were asking is it related to customer as well as the wallet share. So the comment that I was making is that in the quarter. We had approximately call. It 700 net customer adds a little bit higher than we've had the last couple of quarters.
And just as a reminder, the vast majority of our net customer adds come through community campaigns. So the comment that I was making is typically when we get those customers for the first time through community. They tend to be a smaller than average asps size and then we have the opportunity to grow that business over time.
So that's reflected to that my comment as it related to the 700 customers then as it relates to the wallet share size to your point certainly a wallet share did increase in absolute dollars. If you look at it from a growth rate perspective last quarter. It was a 5% increase this quarter with a 4% increase so that's really the comment that I was referring to.
Got it.
You look at the wallet share increase on a Q O Q basis, and then annualize that.
Even better into the 4%.
What is the driver of what was.
Call a good sequential Q2, increasing the wallet.
Sure. So if you look at the overall results of our business, we had very strong performance on both fulfillment and analytics and all of that gets reflected into our overall recurring revenue and then the output of that is there's also a concept of number of customers that are in the wallet share. So the comment on the wallet share associated with the new customers.
Feel like I've answered that the rest would simply be the overall business. So if you look at the strength of our business and fulfillment and analytics. You can also look on the analytics that increased about 1% sequentially and year over year growth that went from 11% to 12%.
Got it that's fantastic and then on E Commerce, what was there a growth profile prior to acquisition.
Sure so they were growing.
Somewhat similar to our growth rate our expectation is overall the growth rate of the combined companies will remain at what we have stated where which will be 15% or greater for the foreseeable future.
Got it thank you very much.
Thank you.
As a reminder, ladies and gentlemen asked the question you will need to press star one on your telephone please.
Please standby for our next question.
Our next question comes from the line of Joe Goodwin JMP Securities. Your line is open.
Great. Thank you so much for taking my question.
Just curious.
Are you maintaining your.
Same investment path throughout the remainder of the year or have you slowed any hiring on the sales side or is there any changes made at all.
Hi, Joe It's Kim no changes so our expectation we had provided some.
Visibility into this towards the end of last year and it remains through this year, we continue to invest back in the business in areas of hiring although of course, we will hire in all areas will in particular focused on the customer success area as well as sales made nice progress in the quarter in both of those areas and we'll continue to make.
Investments to meet not only our existing customers.
Needs and expectations, but also in the growth opportunities, we see going forward.
Got it okay. Thank you and then on e-commerce.
Is there any more background I guess.
Can you share who engaged who on the transaction.
Maybe when that transaction process actually began and if you could.
Provide a little more color on the on the relation relationship between the two companies prior to the acquisition.
One of the things we've done over a long long period of time is get to know the people in the industry and that the competitors. So Steve Smith, the CEO there I've known for a decade and had different conversations along along the along the time on all of these the seller needs to be.
Be prepared to sell at a reasonable price.
And I don't want to sell and so this I think it all came together for them at this time.
At the right price at the right time. So most of these a lot of lot of these are multi year relationships, where you built trust over a period of time and what's their business.
Got it thank you congrats on the quarter.
Okay.
Thank you.
I'm showing no further questions in the queue.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Bill.
Dan.
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