Q3 2022 SPS Commerce Inc Earnings Call
Good afternoon, and welcome to the SPS Commerce third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Ermina bus Chip Investor Relations for Sps Commerce. Please go ahead.
Thank you Gary.
Afternoon, everyone and thank you for joining us on Sps Commerce third 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.
Statements are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially.
Please note. 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.
Release for a 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 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 our COO.
Today, we will discuss adjusted EBITDA financial measures and non-GAAP income 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 and with that I will turn the call.
Over to Archie.
Thanks, <unk> and welcome everyone S.
<unk> continues to deliver strong results as retail dynamics and increasing supply chain complexity amplified the need for automation.
With double digit revenue growth in fulfillment and analytics total revenue grew 17% to $114 $5 million and recurring revenue grew 18%.
Suppliers and brands of all sizes are benefiting from automating their processes with trading partners to improve efficiencies throughout the order fulfillment workflow enable scale and international expansion and an increase assortment.
For example, automation enables vendors to outsource fulfillment and inventory management to partners like Shopify, Amazon or Etsy, and take advantage of their bass market reach as well as their scale to enjoy discounted shipping rates and faster delivery.
According to a survey conducted on behalf of where to go.
At UBS company, 42% of consumers expect two day shipping on their online orders.
A separate survey from Lin works well, it's at 61% of consumers want to purchase from businesses that offer next day delivery.
Brands are learning that there are many benefits to digital transformation not the least of which is to help create a positive customer experience.
Jim plus coffee, one of Ireland's largest and fastest growing active and at leisure brands needed to streamline increased order volumes as they expanded internationally.
With E D. I N automation, they were able to synchronize inventory across all channels and prioritize order fulfillment based on warehouse locations.
Jim plus coffee is now able to offer fast and efficient delivery to a global customer base and scale the business further.
Pet culture is a joint venture between Woolworths and pet share in Australia.
As a fast growing startup retailer they knew the supply chain is a critical part of their business.
Their goal was to provide a superior online customer experience by offering the right assortment and having inventory readily available to ensure timely order fulfillment.
Had culture.
<unk> 85 per cent ATI compliance with an onboarding process set to bring on new vendors within 48 hours.
<unk> remains one of the most common automation methods in the grocery supply chain.
Help groceries stay competitive ensure they meet changing consumer shopping experiences.
Many retailers are standardizing, how they exchange information across the supply chain.
Most large retailers require adi compliance and for suppliers like twin Cups automation was necessary to scale and remain lean, while finding new customers such as Safeway and target.
SBS continues to expand its network across industries to strengthen our competitive advantage.
We recently acquired inner trade a provider of technical solutions for product information and transaction data exchange between retailers and suppliers across North America, including marquee retailers and brands and apparel and general merchandise.
We are excited to have inner trade employees and customers join our growing community of trading partners.
As we strengthen our leadership position to become the world's retail network.
For suppliers and retailers alike, regardless of the industry, how the orders placed where it's fulfilled and its final destination.
Automation is key to improving efficiency.
S. P S commerce, but facilitates automation enables integration with a range of ecommerce platforms.
And future proof against new process and technology requirements.
We continue to believe that increasing complexity and omnichannel retail will continue to fuel the need for automation between trading partners and throughout the supply chain.
With that I'll turn it over to Kim to discuss our financial results.
Thanks, Archie we had a great third quarter of 2022 revenue was $114 $5 million, a 17% increase over Q3 of last year and represented our 87th consecutive quarter of revenue growth recurring revenue this quarter grew 18% year over year.
The total number of recurring revenue customers increased 12% year over year to approximately 39550 and wallet share increased 5% to 10900.
As a reminder, in July we announced the acquisition of G Commerce, which added approximately 500 customers to our network.
For the quarter adjusted EBITDA grew 31% to $34 $7 million compared to $26 5 million in Q3 of last year.
We ended the quarter with total cash and investments of approximately $237 million and repurchased approximately 12 million of Sps shares.
Now turning to guidance, we recognize that ongoing dynamics of inflationary pressure and uncertainties in the global economy may impact the retail industry and our customers.
However, we have limited exposure to foreign exchange rate fluctuations and our pricing structure is primarily driven by the number of trading partner relationships in our network as a result, our operating model and our short and long term growth expectations remain unchanged.
For the fourth quarter of 2022, we expect revenue to be in the range of 120 million to $121 million, which represents approximately 17% to 18% year over year growth. We expect adjusted EBITDA to be in the range of $32 8 million to $33 $5 million, we expect fully diluted earnings per share to be in the range of 29 to 30.
With fully diluted weighted average shares outstanding of approximately 37 2 million shares.
We expect non-GAAP diluted income per share to be in the range of 52 to 53 cents with stock based compensation expense of approximately $8 $3 million depreciation expense of approximately $4 $8 million in amortization expense of approximately $3.8 million.
For the year, we expect revenue to be in the range of $448 9 million to $449 $9 million, representing approximately 17% growth over 2020 one.
We expect adjusted EBITDA to be in the range of $130 1 million to $130 8 million, representing approximately 22% growth over 2021 weeks.
We expect fully diluted earnings per share to be in the range of $1 35 to $1 36 with fully diluted weighted average shares outstanding of approximately 37 million shares. We expect non-GAAP diluted income per share to be in the range of $2 23 to $2.24 with stock based compensation expense of approximately $33 $9 million depreciate.
<unk> expense of approximately $16 $8 million and amortization expense for the year of approximately $11 $7 million for.
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 as we expand our network through community enablement campaigns and acquisition.
We will provide detailed 2023 guidance on our Q4 earnings conference call.
But for modeling purposes, we expect to deliver approximately 151 million to 153 million in annual adjusted EBITDA in 2023, or approximately 15% to 17% year over year growth.
Beyond 2023, we continue to expect adjusted EBIT dollar growth of 15% to 25% as we invest in the business to support current and future growth and the long term, we maintain our target model for adjusted EBITDA margin of 35%.
In summary, Sps's, leading solutions and a growing network of trading partners across various industries continue to solidify our competitive position strengthening our ability to capitalize on our large and expanding market opportunity and deliver consistent and profitable growth and with that I'd like to open the call for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question is from Matt Pfau with William Blair. Please go ahead.
Hey, Thanks for taking my questions and nice results guys. Just wanted to ask on terms of the way to think about the macro impact.
Appreciate that it's very sticky solution you need to use it to connect to retailers, but what about on the new customer acquisition side, how would you expect the ability to to add new suppliers to the network to be impacted if if perhaps the retail segment did see some pressure next year.
Yeah, a couple of thoughts one what we've seen historically during more challenging times is actually community enablement campaigns go up because there's more pressure on retailers to make their supply chain efficient and as as you know we don't monetize the retailers. So it's a very fast cost efficient.
Wait for the retailer to add efficiency.
The second part of of really how we look at it is digital marketing that we will continue to be.
We haven't seen a major change in that through different times and then the third.
Is will be about.
Whether ERP implementations slowed down with in the supplier community, we haven't seen that mainly because.
The massive switched our omni channel over the last few years. So we would continue to expect that to be reasonably strong. So there are puts and takes underneath underneath the covers when when times get challenging in retail, but it tends to wash out within a percent or two.
Great and then on acquisitions, so you've made three roughly within a 12 month period here is it just coincidental that these businesses are coming up for sale and in that 12 month period or is there something else going on where you're seeing customers become more willing to sell whether that'd be uncertainty around them.
Macro or something else.
You know many of these are long.
Long cycles, where we've known people anywhere from two to 10 years. So it's a little bit of its timing, but we tend to be we tend to be out there looking and where we're increasing our intensity around finding opportunities. Having said that you know we're going to continue to be disciplined we're going to continue to.
Look for deals that we think makes sense for us, but we have a significant cash balance and we have an appetite to continue to do acquisitions that are right for us.
Great I appreciate it guys.
Did it excuse me. The next question is from Scott Berg with Needham. Please go ahead.
Hi, Archie and Kim Congrats on good quarter and thanks for taking my questions I guess I guess I have two the first one is to follow up on Matt's question on the macro.
We received a data point yesterday, they kind of talked about how global supply chain seem to be loosening up a shipping container pricing seems to be a slash today versus where it was a year ago, but as the global supply chains loosen up is that a I guess, a tailwind for the Sps business or.
Is it any sort of a headwind because I know in the last two years with the tightening of global supply chains and retailers needing more trading partners that seem to be a boon, but as that unwind does does that change the dynamic of your customer acquisition at all.
You know it really doesn't it.
We're seeing different things in the supply chain not surprising that it's shipping rates are coming down as theirs.
It's.
Been well documented excess inventory at retailers, which that seems to be correcting, but obviously then that pushes back to suppliers and our suppliers' suppliers still have excess inventory. So it will take some time for that to work its way out, but it really doesn't because there was a little bit of a pop in Q2 Q3 of 2002.
Where there where people were really looking for.
New suppliers to.
Because of extreme shortages, but since then we've been more or less back to back to normal so I don't see that being either a tailwind or a headwind.
Got it helpful. And then on your acquisition of inner trade I found that wouldn't it be interesting for a couple of different reasons, but as I look at their product set today. It looks like they have some customers that are using them for pure Adi, but they also have a product.
And their portfolio I guess, how do we look at that acquisition going forward is this really more of just a customer acquisition, where you go to migrate them to your your fulfillment solutions or does the pin product that they bring you give you maybe a more meaningful cross sell opportunity is to be able to integrate that with your own technology stack.
Yeah, So our COO.
Couple of things one they do have a very similar fulfillment product to ours and when it makes sense for the customer we will move those over to our platform.
A lot of cases, we have a superior platform so that that becomes.
Pretty pretty easy on the what you called pin product its really an item maintenance item, we call. It assortment at Sps commerce. So it's complementary to our assortment product, where what is happening is a supplier to neiman Marcus is putting their item information.
And to the inner trade platform and inner trade can share that information directly into neiman, Marcus or nordstroms or whoever's, they're pym does that really have Pam and it's not meant to be a pin replacement. It's it's sitting in between the retail and the supplier and so that supplier can use that information.
To share with multiple retailers, which is.
As our business model. So we think that product they've done some really nice things with that product. They have a very talented team that understands that product will be very complementary to our assortment product and expect.
Those two teams as they come together to work very nicely together.
Yeah.
Great helpful. Congrats again, and thanks for taking my questions.
Thanks Scott.
The next question is from Parker Lane with Stifel. Please go ahead.
Yeah, Hi, thanks for taking the questions Kevin looking at the adjusted EBITDA Guide for next year $1 51 to $1 53, I'm curious if you could provide some of the big investment priorities for the company.
In 2023, and then how should we think about the impact of the recent acquisitions on the gross margin line in particular next year.
Sure. So on the EBITDA question based on the guidance. We just gave for 2022 did that implies an EBITDA growth of about 22% and you may or may not recall that earlier in the year, our expectations for EBITDA was actually at a lower number in a lower growth rate.
More is dropping to the bottom line this year.
The primary reason for that has to do with our pace of hiring. So you may remember earlier on in Q1 as an example, we did not hire as many people as we had anticipated hiring we have made great progress on that and our expectation is exiting this year, we're gonna be a bright spot relative to our needs and demands that we see going.
Into 2023, however that does they'll put pressure when you're comparing the full year of that expense in 'twenty three compared to the full year of expense in 'twenty. Two so a simple way to look at it is you're getting a bit more from an EBITDA growth in 'twenty two than originally anticipated and therefore that EBITDA growth in 2023 would be a.
Little bit less so set another way higher end of the range in 'twenty, two a little bit lower than the range in twenty-three as it relates to your second question on gross margin.
The inner trade acquisition, you can think about that as similar gross margins to ought to Sps commerce. So we are not expecting a large call it positive or a negative relative to the consolidated gross margin based on that acquisition.
Got it understood. Thank you.
Archie I know last quarter. This was touched on a little bit but have you seen any variance in transaction volumes themselves as the e-commerce and broader retail environment.
Peers to be a little bit more uncertain I know that you know maybe that's something that you saw in the past, but given your pricing model. It doesn't have a huge impact just curious if youre seeing that in the macro.
Yeah, we saw that I would say Q4 Q1, you know obviously a drop ship.
We followed the general patterns of retail the drop ship transaction volume was down as a.
e-commerce growth either drastically slowed or actually declined.
In brick and mortar picked up pace. So we did see that and we're seeing more activity.
And just the brick and mortar, but again you know the great thing for us being truly omnichannel.
Is it just going one place instead of another at Sps Commerce, whereas you know I think when you look at the competitive landscape that is our one of our competitive advantages is that where we are one of the we are really what we believe is the true omni channel solution for suppliers and retailers.
Great I appreciate you taking the question congrats on the quarter.
Yeah.
The next question is from Joe <unk> with Baird. Please go ahead.
Great Hi, everyone.
Just to go back to the gym, plus coffee a customary example, salad it sounded like they were upgrading their supply chain and logistics systems and then.
You were brought in kind of a as part of those process is it possible for you to kind of separate out the activity you see from ERP upgrades and the activity you see from all the adjacent supply chain investment areas like warehouses for transportation and is it the.
Ladder areas is that still represent representing an important theater for your business.
So I'd say, there's a lot of different feeders for for our solution. If a supplier switches ERP. They are in their current environment integrating from their ERP to the different retailers. So by definition, they're going to have to make either a massive investment into their current solution.
Or buy a new solution, which you know if you bought a 20 year old solution, that's on Prem and now you're going to a.
You know a net suite or a D 365 from Microsoft a hosted solution, you're most likely not to stay with a.
Our software.
So those are that is that continues to be very strong and the challenges suppliers have with their old solutions are real they.
Just can't meet the business needs that they have in today's omni channel world as far as warehouse management systems et cetera that tends to be more on the retail side. So if a retailer.
Goes out and purchases Manhattan, and one of the reasons. They want to do that is they really want to automate their distribution center in order to do that they do need to have their hundreds of thousands of suppliers change their behaviors. They need to start receiving an advance ship notice with a corresponding barcode label they need.
Information from the from the suppliers, so that's where we come in and run in an enablement campaign program, because there's a big change management for all of their suppliers and that's another way another change event.
That is very positive for Sps commerce, essentially anything that's a change in their environment.
Change in that we do business.
Is is going to be a positive for us.
Okay, that's great.
And then I.
Did it anytime that have only gen plus coffee questions, but Ah another one.
So there a shopify merchant.
Just wanted to ask you've added a quite a few new customers over the last couple of years and I think yeah. The shopify platform. It is an example of that there's a lot of potential logos out there.
And maybe those logos initially land and there are smaller customers for you yet over the past couple of years. Your wallet numbers have also kind of steadily tracked higher. So I guess the question is is there anything about this newer cohort of customers that you've on boarded since <unk>.
In 'twenty that would lead you to believe there are any less kind of rich in economics or potential than you would've spoken about its pre 2020.
No I would tell you you know what.
We've done this for 20 years now is onboarding suppliers that sometimes it's their first retailer.
They're needing to do E D I from and those tend to have really nice upsells over the first 30 months now obviously if that.
That retailers stopped doing business with them before we expand it we also have higher churn rate and those those customers because if they only use us with one retailer we're going to lose.
That customer, but those continue to be really strong.
Its supplier by supplier, but as they grow their business.
We can grow right with them and some of those are what we call a sales driven activities and some of them are just customer driven activities that are landing new retailers that are requiring them to integrate to them and that becomes an automatic up sell for us.
Okay, Great I'll leave it there thank you.
The next question is from Jeff Van <unk> with Craig Hallum. Please go ahead.
Great. Thanks for taking the question he can Archie so a couple for me.
Maybe just to follow on somewhat similar to the prior question, but I'm I'm just I'm always interested in the cohorts. So as you're layering in the new cohort of customers. This quarter last quarter any observations about the size of suppliers that are coming into those new cohorts or the solutions. They were on that you're displacing any observations there.
It's Jeff it hasn't changed drastically it's really you know remember that our average supplier pays $10000 a year, but that's that's somewhat misleading theres a bell curve around that 10000, and then we have a significant number of customers that pay us less than 3000, and then we have you know several.
Customers that pay us 20000 up to multiple hundreds of thousands of dollars. So what they're displacing it tends to be more about.
What type of customer they are in the smaller cohort that's less than 3000 quite often we're displacing literally email or fax they've just never done this before they're working with smaller retailers that are arent required to Adi and so this is the first time, they're going to start doing that.
I think on the mid size.
And larger size it tends to be.
Neither some type of change event a.
ERP switch a third.
Third, becoming acquisitive and they can't keep up or they're just their business is growing or changing so quickly that they realize they can't they cannot keep up with the business demands with their legacy software. So it depending on the cohort or depending on the type of customer it really does vary.
Is there is there anything as you look at the remaining Tam I guess two questions. One is your thinking about the peak ARPA per customer changed at all and then two of the remaining Tam is there any observation about just the big pockets that had been hold outs to going to the cloud that you would make.
Hum.
While we continue to just think theres more and more opportunity out there as we go every year. It seems like you wake up and you feel like you've got a smaller percentage of the Tam that you started with even though you had good growth. So I'd continue to think we have a incredible opportunity not only in our existing product line, but additional product lines and <unk>.
You know very often when we're doing community enablement campaigns, we're essentially taking white space.
Space, a group of suppliers that we're using emails and doing nothing and turning it into total addressable market. So that is one of the things our machine does I think the other thing is is that.
You know that we have hundreds of thousands of trading partner relationships, but they're not always his deepest would like they're not doing all the documents theyre not doing our assortment analytics and EI. So.
Continue to be.
Have significant opportunity ahead of us.
Hmm.
Okay I'll leave it there thanks guys.
The next question is from Mark Schappell with loop capital. Please go ahead.
Hi, Thank you for taking my questions.
Archie Cup.
A couple of quarters ago, you introduced your carrier services portion and I'm wondering if you could just give us a sense of what you're seeing in terms of our pipeline for the relatively new product.
Maybe when you think other solution may be material to the P&L.
Yes, so continue to get traction there.
Smaller add on products. So it's not going to be it's never going to be 10% of revenue for a given customer that does. This this is a nice add on that I can add five to 10 points of value. It's an example of a type of add on it makes the customer it makes it more challenging for them.
Supplier to leave Sps commerce, the more things they rely on Sps commerce for the harder it is for us to displace be displaced.
So we continue to like the traction there it.
It's a selling advantage.
It is a revenue advantage so continue to make progress.
Great and then on your analytic solution, maybe you could just provide a little bit of color of what you're seeing in the marketplace with that I think you said earlier it was growing double digits.
Yeah, we should you know for the year will be we believe we'll be at that 10% Mark so compared to where we were 12 to 18 months ago is really encouraging we continue to be extremely optimistic C.
See some signs in the marketplace. It's just really hard to know when it can accelerate.
<unk> from where it currently is but.
The usage is fantastic when it when we're selling it and we're seeing we're seeing it on that side, so more and more retailers are sharing data so feel pretty optimistic but cautiously optimistic is what I'd say.
Great. Thank you.
Again, if you have a question. Please press Star then one.
The next question is from the whole chachi with Northland capital markets. Please go ahead.
Okay.
Yes, Thank you for taking my call.
Yes.
It looks like excluding the one point so no contribution from interest rate for Q4.
<unk> highlighted it looks like Q4 guidance as a few hundred K lesson prior implied Q4 guidance.
Is that correct and then B why is that.
Sure. So when you look at the guidance and you compare it to 90 days ago. When you adjust for the acquisition, it's pretty similar within a couple of hundred thousand.
To what we had thought about 90 days ago. So for the most part not a lot of change from 90 days ago, but our guidance does take into account.
Our view of what we see as it relates to the retail space community enablement activities and opportunities in Q4 going into 2023, so pretty similar to 90 days ago. Once you adjust for the acquisition.
Okay, Great and then 900 incremental customers in the quarter correct.
When you look at the customer number in the quarter do keep in mind that there is an acquisition of G. Commerce in there of about 500.
Okay.
Number is accurate that you stated, but part of that is from our acquisition of E Commerce, which was approximately 500 customers added.
Right. So excluding the E. Commerce, then it's 400 customers acquired organically, which I think is you know the.
Lower than the year lot of quite a bit lower than a year ago period, and what you had been trending at what was the driver of that.
Sure. So you might keep in mind, our comments, we've made about last year, where last year was a record high for the net number of customers that we were adding and seen relative to a lot of the demand and omni channel. So the comments that we've consistently made as 2021, an outlier in a positive way 2022 in general you would.
Expect that net customer adds.
To be similar or slightly higher than pre pandemic levels. If you look at this year Q3, and Q1 pretty darn similar Q2 was actually a bit of an outlier.
And higher than typical are higher than we would've expected and that had to do with the timing of community activity as specific in the quarter.
Got it okay very good and did.
Did you give out the AOR for recurring revenue customer.
Yeah that information, it's about that Oh.
10900.
Yeah.
Okay.
Yeah.
And then final question is that your rate of share repurchases has consistently been about $50 million per quarter. During this calendar year, that's a big uptick from prior calendar year is that intentional or is that just something else going on.
So as it relates to capital allocation and what you've seen the company do as it relates to using that cash because we are cash flow positive and we have the opportunity to buy back stock and we also have the opportunity to put our capital in the form of M&A, you've seen the company do both of those over the years.
And both of those remain opportunities for us from a capital allocation perspective as far as how much or when those may happen. We provide at the end of every quarter, what we did within the quarter and so you'll have that information, but outside of that you should think of it as there's basically.
Two opportunities that the company has a two I use that cash in the form of M&A and.
And our stock buyback.
Okay. Thank you.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
Okay.
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