Q4 2022 SPS Commerce Inc Earnings Call
Good day and welcome to the SPS Commerce Q4, 2022 earnings Conference call.
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Check Investor Relations for SP X.
Please go ahead.
Thank you Sarah good afternoon.
And thank you for joining us on Sps Commerce first quarter and fiscal year 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. 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 framework 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.
We are providing a historical data sheet for easy reference on our Investor Relations section of our website Sps Commerce Dot com.
During our call 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, Jeremy and welcome everyone.
2022 was another strong year for Sps commerce.
The ongoing transition to omnichannel retail and increasing complexity in supply chain management continued to fuel the need for automation.
Q4 of 2022 represented our 88th consecutive quarter of revenue growth driven by our network effect community go to market approach retail expertise and execution.
All of which culminated an excellent customer experience and underscore Sps commerce's competitive differentiation.
But for the full year 2022 revenue grew 17% to $459 million recurring revenue grew 18% led by fulfillment growth up 19% and analytics, which grew 10%.
In 2022, the number of recurring revenue customers reached 42300.
Sps commerce offer solutions to address supply chain challenges and make trading partner relationships more collaborative and profitable for.
For some of our customers, gaining EDI I or API capability enables them to outsource fulfillment and inventory management to partners like Shopify, Amazon for Etsy and take advantage of their vast market reach as.
As well as their scale to enjoy discounted shipping rates and faster delivery.
Other customers leverage our full suite of solutions, which are designed to simplify omnichannel fulfillment for brands and suppliers of all sizes and across many industries.
We help those customers achieve scale supply chain efficiency.
And international expansion.
Jim plus coffee, one of Ireland's largest and fastest growing active and at leisure brands used E. D. I N automation to synchronize inventory across all sales channels and prioritize order fulfillment based on warehouse locations to offer fast and efficient delivery to a global customer.
Base.
Bunni a pizza hut.
Pizza oven company expanded operations beyond U K and now partners with Sps across North America and Europe .
They can industries the worlds number one indoor comfort solutions company and the largest HVAC manufacturer has over 90 production sites worldwide to support their growth plan taken partnered with Sps to drive E D I compliance across all of their suppliers.
Pet culture, a joint venture between Woolworths and pet sure in Australia achieved 85% E D. I compliance with Sps Commerce, Onboarding program and set up a process to bring on new vendors within 48 hours.
Yeah.
To help grocery stay competitive and meet changing consumer shopping expectations. Many are standardizing, how they exchange information across supply supply chain and E. D. I remains one of the most common protocols.
Most large retailers require E D I compliance and for suppliers like twin Cups automation was necessary to scale and remain lean, while signing new customers such as Safeway and target.
P. T V industries, a leading farm and ranch supply retailer in Canada worked closely with Sps to automate nearly 93% of the retailers purchase order volume through Adi.
P. B also leverages sps's analytics solution.
Point of sale data with vendors for greater visibility into its inventory position to drive sales performance and develop vendor partnerships that support its ongoing success.
Global companies, such as Crocs are leveraging sell through data across all their sales channels to help drive visibility profitability and predictability to mitigate inventory pressure across their supply chain.
Lastly, S. P. S continually strives to help trading partners work better together as we expand our network and build on our leadership position.
In 2022, we acquired G Commerce, a software solution provider known for its expertise in automotive aftermarket industry.
We also acquired enter trade systems to strengthen our leadership across apparel and general merchandise markets.
Yeah.
Over the years Sps has consistently executed on our mission to connect all retail trading partners do the easiest to join and use network.
Since 2017, we have realigned our sales force increase.
Increase our focus on digital marketing and launched a new fulfillment solution and add on products.
We also remain laser focused on improving customer experience as we significantly enhanced full service omnichannel supply chain solutions and system integrations through internal development and targeted acquisitions.
These strategic investments are consistent with our core value.
Wednesday when tomorrow.
Which helped us build the world's largest cloud retail network and positions us for continued success.
With that I'll turn it over to Kim to discuss our financial results. Thanks, Archie we had a great fourth quarter revenue for the quarter was 122 million a 19% increase over Q4 of last year and represented our 88th consecutive quarter of revenue growth recurring revenue this quarter grew 20% year over year.
Adjusted EBITDA increased 26% in the quarter to $35 million for.
For the year revenue was $459 million, a 17% increase and recurring revenue grew 18%.
Total number of recurring revenue customers increased 13% year over year to approximately 42003 hundred and wallet share increased 4% to 10500.
As a reminder, in July we announced an acquisition of E Commerce and the addition of approximately 500 customers trying network and in October we announced an acquisition of intra trade and the addition of approximately 2500 customers.
Adjusted EBITDA grew 24% to $132 $3 million, we ended the year with total cash and investments of $214 million and repurchased $43 2 million of Sps shares.
Now turning to guidance.
So the first quarter of 2023, we expect revenue between the range of $123 3 million to $124 $3 million.
For the full year, we expect revenue to be in the range of 523 million to $526 million, representing approximately 16% to 17% growth over 2022.
For the first quarter of 2023, we expect adjusted EBITDA to be in the range of 35 million to $35 $7 million for the full year, we expect adjusted EBITDA to be in the range of $152 5 million to $154.5 million, which is higher than the 151 million to a 153 million previously communicated on the Q3 two.
22 earnings conference call.
And represents 15% to 17% growth over 2022.
For Q1, 2023, we expect fully diluted earnings per share to be in the range of 26 to 27 cents 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 56 to 57 cents with stock based compensation expense of approximately $12 million.
Depreciation expense of approximately $4 8 million.
Amortization expense of approximately $3 $9 million for.
For the full year 2023, we expect fully diluted earnings per share to be in the range of $1 49 to $1 55, we expect fully diluted weighted average shares outstanding of approximately 37 3 million shares we expect non-GAAP diluted earnings per share to be in the range of $2 63 to $2.69.
Stock based compensation expense of approximately $45 million.
We expect depreciation expense of approximately $19 $8 million and we expect amortization expense for the year to be approximately $15 $6 million.
For the year, you should model approximately 30% effective tax rate calculated on GAAP pretax net earnings.
Beyond 2023, we maintained 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.
In the long term, we maintain our target model for adjusted EBITDA margin of 35%.
In summary, Sps Commerce achieved strong fourth quarter and full year 2022 results, we continued to deliver profitable growth and invest in the future to capitalize on existing and new opportunities across our expanding addressable market and with that I'd like to open the call for questions.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Matt Pfau with William Blair. Please go ahead.
Yeah, great. Thanks for taking my question and congrats on the strong end to the year I wanted to start off on analytics and the 10% growth rate that you saw in 'twenty. Two I believe it was around 10% in 'twenty, one as well how are you thinking about analytics for 23 years there.
Potential to see acceleration in and what would drive that.
Sure Matt when we think about analytics for 2022, you're correct. It was approximately 10% similar to the growth rate from the prior year. When we think about the next year or this current year 2023, you should expect a pretty similar around a similar growth rate longer term, we do think that analytics can grow at.
At a rate similar to fulfillment, but when we think about this year of 2023 mm.
Probably more similar in a growth rate of what we experienced in 2022.
[laughter].
Got it and then came on the on the margin guidance I think the EBITDA margin guidance for 'twenty three is essentially flat with.
With 22.
Should we think about that that's driving that to be flat year over year.
Sure when you think of it as really being driven because of the strong EBITDA dollars in 2022.
In 2022, our EBITDA growth was about 24% year over year keep in mind remember, we've given a range of sort of 15% to 25% on an annual basis. So you saw a lot more of that in 2022.
Real driver for that had to do with timing of hires particularly in the customer success and sales area. We were a little bit lighter on that in the first part of 2022 and made great progress in the latter part of the year. So in 2023, you have that full year of expense associated with all those resources that we add.
Added if you were to look at 'twenty, two and 'twenty, three and sort of add it together you're going to get more of a normalized.
EBITDA growth rate, probably more in the mid point, but that's why you saw a lot more of the higher end in 'twenty, two and closer to the lower end or our expectation is for that 15% to 17% in 2023.
Perfect. Thank you appreciate it.
Yes.
Our next question comes from Scott Berg with Needham. Please go ahead.
Hi, Archie and Kim Congrats on the next quarter and thanks for taking my questions I guess I'll ask the obligatory macro question on everyone's mind.
Ask you what the spend we've seen a couple of software companies report over the last week or two that have a focus on smaller kind of SMB sized customers and knowing that still comprises a decent chunk of your customer segments are you seeing any pressure there for spending on software because we're starting to see that at least pop up in other SMB focused vendors.
Yeah. Thanks, Scott typically we're not and part of the reason is because of the level of spend.
You're at a very small level of spend and especially on the fulfillment product, where if you're a small vendor and you are.
I'm going to do business with Costco or loblaw or somebody you've worked really hard to get that relationship.
And it's just part of it is just a part of cost of doing business. So I think theres two things one it's more or less mandatory and two it is.
Typically fairly small.
100, $200 a month.
Got it helpful. And then Kevin I just wanted you to double check my math with janick customer contributions this quarter from the acquisition. It looks like there's roughly 250 that were added organically.
If my math is correct and then.
Wanted to get your all thoughts on customer additions this year, they spiked in 2020 one for several reasons expected normalized a little bit yet you are still driving.
That 15% plus subscription revenue growth target that you are talking about which we suggest you either selling more products are you having more success selling up market. How do we think about that kind of customer mix mix or opportunity mix to trend maybe in the next year or two relative to what you've seen recently.
Sure. So you are correct, we did see in 2021 out for a heightened net customer adds.
That was something that we said you know it was sort of a high watermark not something that we were anticipating going forward 2022, what's back a bit more to sort of if you want to call. It pre pandemic levels, maybe a little bit higher all in but pretty closer to that and that that's really maybe I guess, what you could think about as sort of your.
You're a future view our view of that obviously, we do have some acquisitions and and our stated goal of revenue topline revenue growth of 15% or greater is an all in number right. So that does also include act.
Acquisitions specific to Q4, I do keep in mind that tends to be a seasonally lower net customer add quarter. So if you adjust for the acquisitions, you'll see that that number was and you know that somewhat in line with the prior Q4s adjusted for acquisitions.
We do see however, a continued trend that.
The longer our customers with us we do have the opportunity to get more revenue from that customer really based on how they're using us. So typically they're going to use us for more connections are potentially for additional products and services and so once we acquire that customer typically in the future now that future may be out a year or two.
But you you it will translate into more additional dollars per customer and that side of the equation would show up on that wallet share or that our two number. It's also why we really do think both that customer adds as well as that wallet share both of them combined will continue to be really solid and me.
Full contributors to that overall, 15% stated growth number.
Great Thats, all I have thanks for asking the questions and <unk>.
Congrats on a good quarter.
Oh.
Our next question comes from Jami Rubin with Baird. Please go ahead.
Great Hi, Brian .
I guess, yes.
<unk> capacity is discussed change events at retailers being good for you did for lead generation that have you seen any changes in the composition of those change events.
Guess, where I'm going with my question that I think there has been pretty high activity and ERP upgrade and new supply chain systems. Those I guess are you do you think retailers have maybe neglected there.
Okay mortar footprint a bit over recent years and so as they circle back.
Actually one more channel that you can now address.
I think you're exactly spot on I think the reality is is that.
The retailers really.
Made sure that they met the demands and expectations of the consumer during the pandemic and now they have they have a lot of work to now make that profitable I think that with really it was an E com and brick and mortar game.
Four or five years ago and now it truly is much more of an omnichannel game I know, that's a buzz word, but I think if it if a retailer really wants to opera.
Operate in a true Omnichannel way.
They have a lot of work to continue to make there.
Our business more efficient.
Okay, that's great.
And then Tim one for you just as I think about the EBIT guidance. So is the right interpretation here that the range for 2023, I think that moved higher by pretty much the old bridge.
Your performance year, and <unk> exiting the year or so.
The right way that the base has shifted up a bit.
All of those things you still intend to invest in and layer on that really no changes here. So we're just kind of the baseline of facts in the forecast.
That would be correct, we have not made changes in our views of our investments that we think are appropriate for both the short term as well as the long term and our sort of when do they win tomorrow.
Value that we hold very dear to us.
But we were in a position based on sort of how we exited the year and based on our expectations for 2023 to be able to take up.
The the guidance for EBITDA about a million a half on the low end and high end versus what we said 90 days ago.
Yeah.
Okay, Great I'll leave it there thank you.
Our next question comes from Jeff Van <unk> with Craig Hallum. Please go ahead.
Great. Thanks, guys.
Another real nice quarter, just a couple for me maybe.
And maybe on as it relates to the new suppliers that you're signing any variance in the types of new suppliers that are coming aboard versus historical namely the size of the suppliers. The platforms are on the pain points G. I was just wondering if there's any variance in terms of the new ads outside of obviously the acquired customers.
Yeah, not a significant change obviously as as we move to Omnichannel theres more and more of that activity.
Drifting in art or when we're going after new customers we have.
Customers that are around our average we have customers that are.
You know well below a few thousand dollars a year and then we have large customers and we continue to see success in all three of those types of customers. So it tends to be across the board.
Pretty diverse actually.
Mhm.
Got it and it came on the on the net adds number I'm curious as you reflect back on 22, the gross churn numbers just what you saw and if there was any variance just maybe a refresh on what you typically see insurance if you saw anything different.
Sure, we really did not see anything different annualized churns about 12% and that's 20.
<unk> 22 was at that 12% similar to historical.
Yeah, Okay, and then just last last one and I'll jump off the obviously G Commerce Center trade you referenced the two.
Your observations on them, either particularly standing out as well ahead of expectations or are they both meeting expectations, how would you characterize it.
Yeah, I would say a couple of things one they're both meeting expectations I think we've had very good reaction from the car from the customer sat.
And then I think the talent from both of those teams is very very strong and so thrilled to have them part of the team.
Yeah, good stuff, okay, guys. Thanks.
Our next question comes from Parker Lane.
Please go ahead.
Okay.
Hi, This is Matthew kicker for Parker, Thanks, a lot for taking my questions and congrats on the quarter.
I know a while back you launched the fulfillment solution on the Oracle cloud marketplace.
First how is the traction in that partnership progressed and second what are you looking to expand that Oracle partnership at all or expand other partnerships to gain further market awareness.
Yeah, well first off the the channel part of our business is a very robust and a very important part of our business and youre.
The focus areas on Oracle in that suite.
Sage the Microsoft space and the Intuit space those are all really important parts and so we continue to.
Do a couple of things one make sure we have our.
People in those fields, making sure. We're aware of leads and people are aware of our capabilities, but also making sure that our capabilities are our.
The best in the marketplace that last mile of integration. Obviously, we can we have the best solution. We have we obviously have the biggest network, but I think one thing that's very different from five years ago was we clearly backend integration into whether it's oracle or net suite or SAP we are.
The best foreign away at integrating back into the backend system. So we will continue to drive that forward and continue to invest to make our solutions stand out in the marketplace.
Okay.
Okay. That's great to hear and then secondly, you talked a little bit on the call the kind of implied EBITDA margins sand flat into 'twenty, two 'twenty three but as we move forward.
On the moving toward the 35% EBITDA margin target are there any levers that you have in mind and anticipate on pulling back on in order to get that additional EBITDA leverage.
Sure when we think about long term, 35%, there's multiple components. There when you look at relative to where our where we currently are we would expect to see more improvement in gross margin.
As well as in G&A sales and marketing there could be a little bit but nothing to two large we've already seen a lot of efficiencies gained there and then on the R&D side. We do think that range of you know if you want to call it sort of 9% to 11% to 12 somewhere in there is sort of an appropriate range as a percent of revenue and so in the future.
You would expect to see more come from sort of the gross margin or the G&A side of the world specific to 'twenty three because we're where the EBITDA expectation is sort of that 15% to 17% and our revenue expectation of 16. This is 17% that's why you're not seeing an improvement in March.
And then in 'twenty three 'twenty two you certainly got obviously.
You know you've seen margin expansion in prior years and there will be years in the future, where you would expect to see that as well on our path to 35% overall adjusted EBITDA margin.
Okay.
Okay. That's all for me thank you very much.
Yeah.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Mark Chapell with loop capital. Please go ahead.
Hi, Thank you for taking my question and nice job on the quarter and the year Archie starting with you I was wondering if you just walk us through what you believe are your or the firm's top two or three priorities in the coming year.
Yeah.
First off I think investing in add on products through.
Through acquisitions and.
And building to be able to.
Expand the market opportunity for us with our 42000 recurring revenue suppliers.
And then obviously, we'll get one of the priority as always is to continue to expand the network.
That is that is our <unk>.
Competitive advantage and then I think some of the things you know.
As we look long term to make sure that we can meet our margin expansion continue to invest.
And.
What I would consider our backend integrations to make the processes for our support and implementation.
Teams more efficient.
Yeah.
Okay, great. Thanks, and then.
On the hiring side Kim I was wondering if you could just provide a little color on.
Where the company stands with respect to hiring this year, maybe just talk a little bit about where.
What parts of the business, you'll be hiring in and maybe what parts you won't be.
Sure. So we exited 2022 and.
Being in a great position, we were able to hire a lot of them a lot of talent across the board, but kind of quantity customer success.
It would be the largest we certainly did at also in the sales space technology, and and other areas, but our customer success being the largest when we think about 2023, we're going to continue to invest across the organization and across different areas in the organization as we see that is appropriate not only to meet our existing customers' needs.
But also the future opportunities that we see so in 'twenty two we specifically highlighted customer success with an area or we went over a little bit behind and we needed to catch up on that hiring great that we're able to do it 23 will be more about do you want to call. It a typical year. If there is such a thing as a typical year, where we will be adding resources throughout the organization.
But not maybe at that large.
Part in one particular area of the company.
Great. Thank you.
This concludes our question and answer session and our conference in Boston now concluded. Thank you for attending today's presentation. You may now disconnect.