Q1 2023 SPS Commerce Inc Earnings Call
Speaker 2: Good day and welcome to the SPS Commerce first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance please signal a conference specialist by pressing star then zero on your telephone keypad.
Speaker 2: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ermina.
Speaker 2: Blaszczuk, Investor Relations for SPS Commerce. Please go ahead.
Speaker 2: Thank you, Andrew. Good afternoon, everyone, and thank you for joining us on SPS Commerce first quarter 2023 conference call. We will make certain statements today, including with respect to our expected financial results, both market strategy and efforts designed to increase our traction and penetration with retailers and other customers.
Speaker 2: or reverse any forward-looking statement.
Speaker 2: whether as a result of new information, future events, or otherwise. These refer to our SCT filings, specifically our Form 10-K , as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com.
Speaker 2: and at 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, spscommerce.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.
Speaker 3: marks a strong start to the year as macro and omni-channel dynamics continue to drive the need for efficiency across the retail industry.
Speaker 3: We continue to see strong momentum in fulfillment and analytics and achieve total revenue of $125.9 million.
Speaker 3: Both total revenue and recurring revenue grew 20%.
Speaker 3: Before I continue with my prepared remarks, I'd like to acknowledge the announcement we made in early March about my planned retirement.
Speaker 3: The board is in the process of conducting a search for my successor, and in the meantime we continue to execute our strategy to be the world's retail network.
Speaker 3: The expertise and knowledge we gain from working with over 115,000 trading partners worldwide uniquely positions us as a business advisor to existing and potential customers who are looking to improve efficiency and productivity. Over the past three years...
Speaker 3: retailers and suppliers face changing consumer behavior, growth in sales channels, and volatility in the supply chain.
Speaker 3: Coupled with ongoing macroeconomic uncertainty,
Speaker 3: Strain on the retail industry has been substantial, uncovering inefficiencies among the trading partners of all sizes.
Speaker 3: SPS Commerce is proud to work with retailers and suppliers across different industries, helping growing businesses embrace automation.
Speaker 3: SPS Commerce is proud to work with retailers and suppliers across different industries, helping growing businesses embrace automation and position them for success.
Speaker 3: We recently launched a community campaign for the True Value company.
Speaker 3: a wholesaler with over 4,500 independent retail locations worldwide, and one of the largest distributors in the US.
Speaker 3: Our initial engagement to address specific EDI inefficiencies
Speaker 3: led to a full business assessment by SPS.
Speaker 3: Having recognized our ability to improve the quality and adoption of EDI within their vendor community,
Speaker 3: Truevalue decided to partner with SPS to standardize electronic order fulfillment with over 1,000 vendors.
Speaker 3: We believe this will result in improved order and inventory management, cost savings, and trading partner performance across key metrics such as fill rates and ship timelines to deliver a better customer experience.
Speaker 3: SBS's Commerce Network Model, our Channel Partner Collaboration, EDI Expertise,
Speaker 3: and our suite of solutions, our key differentiators, and underscore our competitive advantage.
Speaker 3: Orveon, a private equity-backed collective of premium cosmetic brands, was focused on long-term omnichannel success.
Speaker 3: and was introduced to SPS during an ERP implementation.
Speaker 3: Making EDI a priority.
Speaker 3: Making EDI a priority, Orveon became a fulfillment customer.
Speaker 3: And in an effort to optimize the omni-channel experience, they subscribed to analytics to gain visibility into inventory levels and sell-through across their various sales channels.
Speaker 3: Or, Vian is a prime example of a customer who is successfully navigating the Omni Challenge journey.
Speaker 3: leveraging SPS's fulfillment and analytics solutions to work with trading partners that include blooming dales, maces, and Nordstroms.
Speaker 3: In summary, the ongoing expansion of our network is a reflection of SPS's ability to help retailers, suppliers, and emerging brands successfully and cost-effectively adapt to omnichannel retail while they future-proof their investments in supply chain automation.
Speaker 3: I believe our strategy and our people position SPS Commerce for continued success as we capitalize on the growth opportunities ahead of us. With that I'll turn it over to Kim to discuss our financial results.
Speaker 4: Thanks Archie, we had a great first quarter of 2023. Revenue was $125.9 million, a 20% increase over Q1 of last year and represented our 89th consecutive quarter of revenue growth.
Speaker 4: Recurring revenue to the squatter also grew 20% year over year.
Speaker 4: The total number of recurring revenue customers increased 13% year-over-year to 42,750 and wallet share increased 7% to 11,050.
Speaker 4: For the quarter, adjusted EBITDA grew 16% to $37 million compared to $31.8 million in Q1 of last year.
Speaker 4: We ended the quarter with total cash and investments of approximately $233 million.
Speaker 4: Now, turning to guidance. For the second quarter of 2023, we expect revenue to be in the range of 128 million to 128.8 million dollars, which represents approximately 17 to 18 percent year-over-year growth. We expect adjusted EBITDA to be in the range of 36.4 million to 37 million dollars. We expect adjusted EBITDA to be in the range of 36.4 million dollars.
Speaker 4: We expect fully diluted earnings per share to be in the range of 30 cents to 31 cents with fully diluted weighted average shares outstanding of approximately 37.5 million shares. We expect non-GAAP diluted income per share to be in the range of 62 cents to 63 cents with stock-based compensation expense of approximately $12.8 million.
Speaker 4: depreciation expense of approximately $5 million, and amortization expense of approximately $3.9 million.
Speaker 4: For the year, we expect revenue to be in the range of $525.5 million to $527.6 million, representing approximately 17% growth over 2022.
Speaker 4: We expect adjusted EBITDA to be in the range of $154.2 million to $155.8 million, representing approximately 17 to 18 percent growth over 2022.
Speaker 4: We expect fully diluted earnings per share to be in the range of $1.55 to $1.58 with fully diluted weighted average shares outstanding of approximately 37.4 million shares. We expect non-GAAP diluted income per share to be in the range of $2.67 to $2.70 with stock based compensation expense of approximately $45 million, depreciation expense of approximately $19.8 million, and the stock based compensation expense of approximately $25.3 million.
Speaker 4: in amortization expense for the year of approximately $15.6 million.
Speaker 4: For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAP pre-tax net earnings.
Speaker 4: Beyond 2023, we maintain our annual revenue growth expectations of 15% or greater as we expand our network through community enablement campaigns and acquisitions. 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 dollar growth.
Speaker 4: our long-term targets and sustained profitable growth. And with that, I'd like to open the call to questions.
Speaker 2: We will now begin the question and answer session. Do ask a question you may press star than one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star than two.
Speaker 3: At this time, we will pause momentarily to assemble our roster.
Speaker 3: The first question comes from Scott Berg with Needham and Company. Please go ahead. Hi, Archie Kim. Congrats on the great quarter and thanks for taking my question. I guess to get to, let's start with the revenue off performance in the quarter. It was roughly double what it was in Q1 a year ago.
Speaker 3: What one veteran in the quarter than maybe you expected? Or was this more of a case of, I guess, a changing guidance philosophy, where you're maybe a little bit more conservative on your guidance this year, just giving what the macro backdrop is like?
Speaker 4: Hi, Scott. I'll take that one. As it relates to the outperformance, it was really across the board. So we had solid execution on the fulfillment as well as our analytics product. We also in this quarter did have higher than typical one-time revenue as well. That is not something that you would anticipate or we would anticipate would continue going forward. That was really a mix of some of the community activity.
Speaker 3: and a little bit of other one time revenue. Got it helpful. And then as we think about the macro a little bit, I know we have a chance to discuss this. I think a lot over the last three or four quarters, but if you break down by geographic region on where your presence is are, maybe a deja-pact, obviously with your foothold out of us.
Speaker 5: I think this theme in retail besides Omni's channel and I'm trying to catch up with consumer expectations is it is really challenging for retailers and suppliers to forecast their business.
Speaker 5: Because there aren't any comparable. I mean, you compare against last Q1, you compare against 21, 20. You've just got multiple years that are all one-off years. So that's just continues to be the biggest thing. And so, you know, they're all cautious, obviously, but take the different regions. Europe is really all about analytics.
Speaker 5: filthy strong momentum there. Australia is really an entire ecosystem. We're seeing strong momentum there and then last is Asia which we're really supporting North America supply chain customers and we Frank Barence seeing a lot of chains there either.
Speaker 5: momentum there. Australia is really an entire ecosystem. We're seeing strong momentum there. And then last is Asia, which we're really supporting North America supply chain customers. And we, Frank Barron, seeing a lot of chains there either. I mean, not of significance, that is I can't say any way.
Speaker 3: I know China has opened up over the last 90 to 120 days more from a travel perspective than a supply chain perspective necessarily, but does that kind of loosening of some of their restrictions and I guess borders, does that create an opportunity at all for you maybe as a minor tail end of the business or is it really kind of a...
Speaker 6: for a threat for us.
Speaker 3: God, that's all I have. Thanks for taking my questions.
Speaker 3: The next question comes from Parker Lane with Seafull. Please go ahead.
Speaker 7: Yeah, I think you're taking the questions and congrats on the quarter. Kim, notice that WalletShare was down a touch quarter over quarter. I'm wondering if you could dive into the dynamics of that. I know it's not a terribly large decline. Then just give us a reminder on the balance of WalletShare and met new customer additions that you expect in the growth algorithm this year. Thanks.
Speaker 4: Sure, Parker. So from a year over year perspective, it grew about 7%. But to your point, if you look at the absolute dollars, Q4 to Q1, there was a slight sequential decline. That's driven from an acquisition we made in Q4 of Intertrade. As a reminder, when we made that acquisition, we said that would add about 2,500 customers.
Speaker 4: but their average revenue per customer is much smaller than ours, roughly around 3,000. And so that is why you see that sequential decline because Q1 is the first full quarter where we have all of that inter-trade revenue. Also just a note that has occurred in some other acquisitions as well.
Speaker 4: So if you were to look back at Q421 compared to Q122 based on an acquisition we made in Q421, you saw a similar type of dynamic.
Speaker 7: You got to appreciate that. Can you talk a little bit about gross margin leverage in this model longer term? It's just the impact that some of the recent acquisitions have had to on gross margins where you expect a long-term model to shake out on that front.
Speaker 4: Sure, so if you think about where we're at from a gross margin, we're at call it sort of that mid-ish to maybe a little bit above mid-ish sixties from a gross margin perspective. Longer term we believe that can be in the low seventies. The biggest driver of how that will change over time to get us to the low seventies.
Speaker 4: is really primarily going to be around scaling. Cost of good sold is an area we've made a lot of investments in in the overall customer experience. And over time we believe we'll be able to grow into a lot of those investments. For any acquisitions we've made where the asset that we've acquired has lower gross margins than we do. We do believe that there is no...
Speaker 4: job margin perspective.
Speaker 7: perspective. Understood. Appreciate the feedback. Thanks again.
Speaker 3: The next question comes from Jeff Van Ree with Craig Hallum. Please go ahead. Great, thanks. Thanks guys, and congrats from other great courts. So a couple questions. I'm a bit more about the true value opportunity in terms of...
Speaker 8: Just maybe as a case study. What do they have now? What are they using? What are you displacing? How did they find you? Just a little more backdrop on how you's back here.
Speaker 5: Yeah, so a lot of manual processes, what we typically see in a retailer, a lot, and either A, some of the documents are automated, but not all the documents, but it's really not.
Speaker 5: It's not across the board, so a lot of manual processes.
Speaker 5: And I would say this is a little different type of company, but pretty much straight down the fairway as far as type of enablement campaign. They really are distributed. They sit between them and the retailers. So we will...
Speaker 5: enable their suppliers will do a typical campaign, which is where we record a webcast, we work with their team, we do calling, those suppliers will have the opportunity to either use our solution and or buy a competitor solution and test and certify with them. So and we'll be aligned at the top at true value. So it feels
Speaker 5: Like, you know, obviously that's a pretty decent number of suppliers, but we feel this is pretty down the middle.
Speaker 5: type of retailer, just at the end of the day, they're more of a distributor than an actual retailer because they're independent stores.
Speaker 8: Right, right, correct. I'm the acquisition front, just any update on sort of pricing, pricing expectations from potential sellers, pipeline to future deals that you're looking at for how it's changing.
Speaker 5: Yeah, I mean we continue to be very active and as you as you would expect I mean what it is a challenge at least if they Braves if companies have raised funds in the last two years a lot of times they have real Ridiculous valuation expectations and we're just not gonna pay valuations that were normal 18 months ago, but are outdated
Speaker 5: today. So that does create some headwind but a lot of times I have over time. They do become more.
Speaker 5: I don't know more in check. I think the other thing we're seeing in some of these, if they are funded by investors as a move towards profitability, a lot of them were burning a lot of cash, which creates some problems for us, and we'd rather not do that. So some of them are getting their...
Speaker 8: their houses in order so we continue to be aggressive, we continue to be out there but we're going to stay disciplined. Last for me, in terms of the most recent call it last 12 months give or take cohort of suppliers coming onto the network. Any observations about how this cohort might be behaving differently with respect to the number of...
Speaker 5: You know, over time they do, over time, especially with a community-in-a-naming women campaign, we have great upsell opportunity of those suppliers. It takes time, but nothing unique about over the last 12 months in particular.
Speaker 8: All right, thanks, Jack. The next question comes from Joe Bruink with Robert W. Baird in Companies. Please go ahead.
Speaker 9: Great. Hi everyone. I guess similar to the last question, maybe similar on just the macro topic.
Speaker 9: with a bankruptcy retailer bankruptcy now in the news.
Speaker 9: Is there any change in just that suppliers currently on the network kind of absorb information like that? Like is there a certain immediacy where that connection, that particular connection just goes away or are there sometimes opportunities to actually use it as a re-engaging event and kind of reeducate on what the person.
Speaker 5: you know, you're at risk of losing that supplier. And those numbers tend to be highest when we have a strong retail relationship. In other words, we're doing their onboarding, which in the bed of bath and beyond case, I assume that's what you're referring to. We don't have that. So we don't have.
Speaker 5: very many suppliers in that boat. Then you have suppliers that they might have five, 10, 50, or 100 different retail trading partners they use SPS for. And kind of part of typical business for these guys is they're adding and subtracting.
Speaker 5: training partners along the way. I mean our bigger suppliers in particular, they might stay at 50 retailers, they might go from 50 to 55, but they subtract seven and add 12. So it's kind of typical. So from that standpoint, you know, I think it's kind of proof of our business model. It's not going to have a significant impact.
Speaker 5: to us would we like to lose any business? Obviously we don't like to lose any business and along the way our job of our sales staff and our marketing team is to continually be engaging with all of those suppliers so they're fully aware where how else they can use SPS commerce.
Speaker 5: So obviously a little bit of an escalation in those processes when you have something like a Bed Bath & Beyond, but frankly as I talk to retailers we're seeing Bed Bath & Beyond is.
Speaker 5: little bit more of a one-off than a wow look at what's happening to retail. Okay that's all helpful, thanks Archie.
Speaker 9: And then just based on what one of your peers in the supply chain category had to say last night, it seems like kind of rejuvenated investment in the stores, brick and mortar stores is something that's taking place.
Speaker 9: Is there maybe a lagged effect, you know, when you hear about retailers sinking investment into things like point-of-sale or inventory management? Could your analytics product ultimately benefit, but it maybe benefits after those?
Speaker 5: commitments or is there not a relationship at all? Yeah, I think a couple things. One, not all that surprised by the results last night of, I assume you're referring to Manhattan and just you know, one of the big themes we're seeing in retail is they met the demands of the consumer.
Speaker 5: in 21, 22 and now they're really trying to get the back end systems. So there are different leg effects for us. For instance, if a retailer is automating their distribution center, so they're going to start receiving product in with a barcode label, that will typically upon implementation lead to a potential enablement campaign.
Speaker 5: and we have a partnership there. So there are different, different, um, connectivity, and this process behind, example, with Bahnvole.
Speaker 5: You know, legging or leading indicators for us that can be a positive, don't want to overblow it, but they can be a positive, again, like if a retailer is...
Speaker 5: buying Manhattan Associates, that they need to get their suppliers to behave differently. They need to send an advance ship notice. They need to send a barcode label. And that's where we come in. We enable those suppliers. We do an enablement campaign for those documents. So a lot of those things are real positive.
Speaker 5: You know, we are seeing investment.
Speaker 5: from retailers because they have met the needs of the consumer for the most part, but they're not doing it efficiently, effectively or necessarily profitably. So there's a big push.
Speaker 9: And does that relationship hold with the store activity? I think if point of sale just wanting to have more accurate placement of inventory or if you're a supplier visibility into kind of final demand does that kind of follow along?
Speaker 5: It does. Obviously the point of sales is most valuable for the store activity, either the store for the consumer buying at the store, or also one of the trends we're seeing is stores are becoming distribution centers. So having inventory outhand at the stores, what's selling, so that those are positives for us.
Speaker 8: Again, I don't want to overblown, but there are positives for us. Yep, yep. I'll leave it there. Thank you very much.
Speaker 8: Again, if you have a question, please press star then one. The next question comes from Christine Jiang with Northland Capital Markets.
Speaker 8: Again, if you have a question, please press star then one. The next question comes from Christine Zhang with Northland's capital markets. Please go ahead.
Speaker 2: Hey guys, thanks for taking my question and congrats on the quarter. Just wondering if you could talk about a little bit more about the level of activity that you're seeing from channel partners. Are you still seeing strong contributions from them and are there any changes to that relative to maybe 2020 levels?
Speaker 4: Sure, so channel sales and that lead generation engine still remains very important and robust for us. There are some nuances depending on which ERP system, but that still remains quite positive and quite robust. We look forward to seeing what your response will be at that point.
Speaker 2: Got it. Thanks. Very helpful. And then on the revenue guidance provided for Q2 and the full year, I believe there's a slight deceleration embedded for the second half of 23. Can you just walk us through how you're thinking about that trajectory there? Was there maybe some pull forward that you saw in the first half? Or maybe a little bit more.
Speaker 2: you know, consciousness baked into the guidance there.
Speaker 4: Sure. So a couple things I can point you to is one, there was a couple acquisitions that we made in the latter part of 22 that we lap in the latter part of 23. So that has been reflected into the guidance itself. Also just as a reminder, the guidance that we just provided for our revenue expectations for the year.
Speaker 2: part of the business perform.
Speaker 4: Sure, so analytics grew about 10% year over year, and our expectation would be that we would expect to see analytics grow within a couple percentage points similar to that 10% number.
Speaker 4: So stay basically at 10 or plus or minus, you know, a percent or two. Got it. Thank you very much. Thank you.
Speaker 8: I'm showing no further questions in the queue.
Speaker 8: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may now disconnect.