Q2 2023 SPS Commerce Inc Earnings Call
Good day and welcome to the SPS Commerce second quarter 2023 earnings Conference call.
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.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
Draw. Your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Romina plastic Investor Relations for Sps Commerce. Please go ahead.
Thank you drew good afternoon, everyone and thank you for joining us on Sps Commerce second quarter 2023 conference call.
We will make certain statements today, including with respect to where I expect the financial results.
The 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.
Undertakes 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 a more detailed description of the risk factors that may affect our results.
These documents are available on our website, let's be as Congress dotcom and not the SEC's website SEC Gov.
In addition to providing historical data sheet for easy right.
And on the Investor Relations section of our website Sps Commerce dotcom.
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.
With that I will turn the call over to Archie.
Thank you Jeremy and welcome everyone.
Before I proceed with my prepared remarks, I'd like to mention the CEO announcement, we made earlier this month.
In October I will transition to the role of executive chair of the board as we welcome our new CEO Chad Collins give.
Given chad's leadership and industry experience I believe he is uniquely qualified to lead Sps to its next chapter of growth and innovation capitalizing on Omnichannel retail dynamics.
We look forward to introducing Chad to you all on our third quarter earnings Conference call.
Turning to our second quarter performance, we continue to see investments in organizations across retail fueling ongoing demand for Sps fulfillment and analytics products total revenue of $134 million grew 19% in the quarter, while recurring revenue grew 20%.
In today's omni channel World the average consumer expects to purchase exactly what they want from where they want and looking for a consistent experience across all channels. They are pushing the limits of retailer.
Retailers operations enforcing suppliers to embrace an omnichannel strategy.
Since the pandemic the increased pace and complexity fulfillment exposed inefficiencies, which are now, forcing suppliers to revitalize their supply chain.
According to the 2022 M. A tri annual industry report a survey of over 1000 supply chain and manufacturing leaders, 74% of respondents plan on investing in inventory and network optimization tools over the next year.
For example, Moose toys, a large manufacturer in Australia has been a sps fulfillment customer since 2016, expanding their network across Asia Pacific North America and Europe .
To effectively manage their inventory they use sell through data from retailers for forecasting and planning.
However, they were receiving the data in many different formats and had a process of manually which caused delays in their ability to extract meaningful insights.
S. P S as analytics with the right solution for most toys to begin aggregating normalizing and integrating the vast amount of data feeds from there many trading partners.
They can now leverage the strategic insights derived from the data to capitalize on significant growth opportunities around the world.
As trading partners strive for automation ERP integration is another key component to solving supply chain challenges.
For example, our partnership with Microsoft has been mutually beneficial over the years and Microsoft has recently chosen to highlight Sps commerce as the featured solution on their App store.
Microsoft has been focused on migrating our customers to the cloud and with their strong presence in retail distribution and manufacturing the need for fully automated and scalable supply chain operations is a pivotal factor of these ERP migrations.
SPS Commerce has deep Microsoft integration technology, multi tenant cloud based retail network and full service model is allowing Microsoft sellers and vars to leverage best of breed technologies, when trying to migrate customers and win new business.
Just as retailers and suppliers are investing in new technologies to optimize their supply chain Sps commerce remains committed to delivering world class products and excellent customer experience.
By capitalizing on artificial technology intelligence technologies, we're already driving efficiencies throughout our organization to serve our customers and improve our product offerings.
S. P S as the world's largest retail cloud network, which gives us access to the depth and breadth of data necessary to leverage AI and reduce the requirements for suppliers to connect to retailers, making it much easier to implement trading partner connections.
We see many opportunities to enhance our products in the future as we use AI to increase the intelligence of Sps network, which in turn will make joining and operating within the network increasingly more efficient.
We also continued to expand our portfolio and global footprint and yesterday, we announced our planned acquisition of Ty kinetics.
We believe ties E invoicing capabilities will enable us to capitalize on the opportunity presented by mandatory E. Invoicing regulations in Europe , while expanding our European presence to serve our growing network with access to international markets.
In summary, increasing complexity and Omnichannel retail is fueling investment in supply chain revitalization.
Sps is well positioned to capitalize on new technologies, such as AI, which are proving necessary for automation and optimization of trading partner relationships and amplify our ability to bring our network to more retailers and suppliers faster and easier.
With that I'll turn it over to Kim to discuss our financial results. Thanks, Archie we had a great second quarter of 2023 revenue was $134 million, a 19% increase over Q2 of last year and represented a 98th consecutive quarter of revenue growth recurring revenue this quarter grew.
One 2% year over year.
The total number of recurring revenue customers increased 11% year over year to 43000 and wallet share increased 8% to 11350.
For the quarter adjusted EBITDA grew 24% to $38 $2 million compared to $30 9 million in Q2 of last year.
We ended the quarter with total cash and investments of approximately $270 million.
Now turning to guidance.
The following third quarter and full year 2023 revenue and adjusted EBITDA guidance does not include the impact from the pending acquisition of Ty kinetics.
For the third quarter of 2023, we expect revenue to be in the range of $133 6 million to $134.4 million.
Which represents approximately 17% year over year growth.
We expect adjusted EBITDA to be in the range of $39 3 million to $40 million.
We expect fully diluted earnings per share to be in the range of 37 to 38 cents with fully diluted weighted average shares outstanding of approximately 37 6 million shares.
We expect non-GAAP diluted income per share to be in the range of 65 to 67 cents with stock based compensation expense of approximately $11 7 million depreciation expense of approximately $4 9 million and amortization expense of approximately $3 $7 million for.
For the full year, we expect revenue to be in the range of $528 5 million to $530 million, representing approximately 17% to 18% growth over 'twenty 'twenty. Two we expect adjusted EBITDA to be in the range of $155 8 million to $156 $9 million representing growth of approximately 18% to 19%.
Yep.
We expect fully diluted earnings per share to be in the range of $1 60 to $1 63 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 69 to $2 72 with stock based compensation expense of approximately $46 two.
Dollars.
<unk> expense of approximately $19 $4 million and amortization expense for the year of approximately $14 $7 million.
But the remainder of the year on a quarterly basis investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings.
As noted in our press release announcing the planned acquisition of Ty kinetics, we expect it to have a nominal impact on Q3 financial results with the exception of approximately $1 million of certain one time deal related costs.
In the fourth quarter, we expect high kinetics to contribute approximately $3 9 million of revenue and expect adjusted EBITDA of the acquired business to be approximately negative $500000.
Beyond 2023, we maintained our annual revenue growth expectation 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 margin of 35%.
In summary, ongoing investments across the retail industry continued to present tremendous opportunities for S. P. A with the only full service EDI ice solution, we are well positioned to help our customers optimize their network as we capitalize on our multibillion dollar addressable market to deliver sustained profitable growth.
With that I'd like to open the call to 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 youre using a speakerphone. 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.
Just press Star then two at this time, we'll pause momentarily to assemble our roster.
The first question comes from Matt Pfau with William Blair. Please go ahead.
Hey, great. Thanks for taking my questions first wanted to ask on the Thai kinetics acquisition.
Better help us understand you know what this brings to the table is this E invoicing product different than what you currently have and how does it help you gain more traction in Europe . Thanks.
Yes. Thanks for the question, Matt a number of things one that the company is at roughly 60% European revenue and 40% U S revenue.
And those businesses are relatively separate as far as go to market et cetera.
U S business.
Think of that is much more consistent with a customer acquisition play so meaningful revenue there.
The amount of our platform. They can have more more offerings that we can upsell our customers like we've done in the past the European business I think gives us a couple of things one it gives us a larger platform to go after fulfillment and really just think about learning about the market. We're in the market all on a much smaller basis, we're in the market.
Analytics, but but.
Not much there and then the E invoicing product is.
Think of it as a in Europe , it's a government reporting almost regulatory compliance where you need to report that tax et cetera. So in.
In order to do business in Europe , you have that we partnered in the past for those capabilities.
It's applicable in Europe , and also we use some of it in Mexico, but don't anticipate using it in the U S. Just because it's it's not really utilize here. So we do not have an E invoicing platts platform.
As we speak so.
So that's you know great capabilities and customer acquisition.
And just one quick follow up on that the U K.
Kim I know you said that the revenue from the acquisition isn't included in the updated guidance that you provided in the earnings press release, but the the $1 million of additional expenses in Q3 as is that factored into the guidance.
No. The guidance, we provided excludes anything related to the acquisition, we announced of a tie kinetics and and the reason for that is we announced it but it has not yet closed so and all the numbers exclude but we have separately in our press release about tie kinetics as well as on this.
Earnings call reiterated the numbers that we believe they will be in 'twenty. Two 'twenty three so that $1 million of really deal related costs. In Q3 is not factored into the the Sps commerce guidance, we provided today.
Okay got it thank you very much.
Yeah.
The next question comes from Scott Berg with Needham. Please go ahead.
Hi, Archie and Kim Congrats on a good quarter and thanks for taking my questions I guess, a couple of things here, starting with the acquisition Archie I'm certainly familiar with it that reporting requirements. There are some nuances I think kind of developing over the next couple of years around real time reporting.
And for that for different vendors.
Can that be a catalyst to maybe drive some outsized growth from that segment going forward knowing that a lot of these countries are kind of you know trying to get some more of this real time almost straight through processing for you know for that reporting.
Well I think the E. Invoicing has an opportunity to grow and you know it has an opportunity right now it's fairly small, but pretty optimistic that it can be a bit of a catalyst into the future, but you know I wouldn't I wouldn't put a lot of weight onto it as we look at 'twenty, four and clearly that 'twenty three but having those.
Abilities.
<unk> will be a positive and you know for us more importantly, we really get to learn that market by being in it. So I think that's a nice size deal that puts us in the market and we can really see.
More firsthand what is happening and what the what the real opportunity is.
Got it helpful and then on business trends in the quarter. It looks like the company added roughly 250 net new customers knowing the second quarter is usually seasonally strong period for customer acquisitions, that's actually lighter not just during the pandemic, but during several years before that.
Thing to read through necessarily on a single quarter snapshot on customer acquisition trends.
Sure. So when we think about the community enablement activity in the quarter. It was it was quite a strong quarter, but what we saw is more skewed towards existing customers that we were able to upsell versus the amount of net new customers. We we don't think that that is at all a trend. It just so happened this quarter that the mix.
A bit more on our existing customers versus new.
Got it helpful I'll jump back in the queue and congrats again.
Okay.
The next question comes from Parker Lane with Stifel. Please go ahead.
Hi, Tim Hi, Archie Thanks for taking the questions here Jim.
Tim I know, it's early to be talking about 2024, but as far as it relates to tie kinetics, you talked about a $16 million revenue benefit.
For next year, and I noticed that I think.
At $8 million of total revenue in their first half of the year can you just give us a better sense of what your assumptions are as you look forward to 'twenty four 'twenty five on you know any any interesting dynamics too.
That revenue growth in that business.
Sure. So obviously, we have not yet acquired the business, but that is our obviously our intent, which we do believe will close later in Q3 as it relates to our expectations for 2024 of the approximately the $60 million that we did that we did mention and that is primarily based on <unk>.
Our view of what we see as the opportunity do you also keep in mind that there is and as a yeah.
Fair portion of their business is in Europe , you. It is subject to fluctuations from FX rates as well, but overall, it's our best view.
Yeah.
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MS Nelson Please continue.
<unk>.
Great.
Allergies I apologize for that Parker, I don't know exactly where I cut off but you were asking as it relates to our expectations for 2020 for and Ah. The acquisition. We believe will close at the end of Q3 and at this point, we put together our best view of what we see as that opportunity in 'twenty two.
For based on where that company is on its journey to moving over to SaaS fulfillment model as well as the opportunities that we see in Europe .
Understood Okay.
And then on the gross margin side of things you know it's been a few quarters now they're relatively in the same place and I know you've talked about.
Low seventy's being the long term target in this business.
As we March up towards that low 70 target are there things you're doing internally to actually get there or is this just going to be a matter of the business achieving some additional scale and that naturally flows through there.
Sure. So the biggest way that that gross margin will move from where it is now up to the lower seventies is really primarily around efficiencies and scaling them. So you may recall that in prior conference calls in years, we've talked about investments that we've made in the overall customer experience in some years those investments have been larger.
Sure from a growth perspective than our than our revenue or similar in line with our growth as our revenue that you have not seen that improvement from a gross margin perspective as our business continues to grow we believe we will be able to grow into some of those investments will still obviously continue to add resources, but we sure.
Didn't need to do those at the same level that we have historically, we also as Archie mentioned, we will be looking at AI. There's many things we're already doing on the artificial intelligence side, but we certainly do see opportunities on the customer success side, as well, where we'll be able to leverage some of those tools and capabilities to help out with efficiency.
Yeah.
Understood. Thanks, again for taking the questions here.
The next question comes from Jeff Van <unk> with Craig Hallum. Please go ahead.
Great. Thanks, Hi, guys. Thanks for taking the question. So a couple for me I guess, just a high level I guess Archie as you look at the suppliers that are not yet on the platform.
What are the characteristics I mean, you've been at this for a while you know just to talk about the people that haven't jumped yet and these are sort of the defining characteristics.
I think that it's segmented into two different areas. The first I assume we're talking about the fulfillment product. The <unk>. The first is really people that just haven't are doing things more manually email a male and just the the retailers have that forced them to do what theyre small.
And they're just not there yet.
So those are different solutions that we typically get those through our retail enablement campaigns pretty high success rate. There I would say the other is where they have bought legacy software and if they haven't moved erp's and their business isn't moving.
Oh very fast that then they're in the spot where there's they're in legacy software, it's working and they might have 510 20 retailers, it's working at those retailers environment isn't changing much.
It's hard to get them to move once you see start seeing more change in their environment or they start growing or making acquisitions. That's the bigger up that is the biggest opportunity with them or just simply.
Some of these guys.
As we work with the retailers, we're helping the retailers effectively become dynamic in their supply chains, which is putting more pressure on the suppliers.
Yeah.
And then along the lines of the enablement campaigns, if you'll look at the enablement campaigns and what are you seeing that might be the enablement campaign pipeline. What are you seeing that's different with respect to potentially the size of the campaigns.
And specifically as you're implementing the rate at which people are just testing versus signing.
You know the testing versus signing is really just dependent on the mix and where we are in.
The type of retailer.
I would say you know what we are seeing is consistent is automation of warehouse management. So we're seeing more a S N programs advance ship notice where.
<unk> purchased a Manhattan associates or trying to more fully utilize their capabilities in order to do that you need to receive a document called the advance ship notice. So that you know what's being shipped and when it's going to be received and then to be able to receive that product into the distribution center with a barcode label.
That is scanned so we're seeing more of those programs.
Sometimes those will be a little heavier tester testing because it's you know what.
It's a massive change for the retailer.
But for the suppliers, it's adding a couple of documents which are complex.
We are seeing.
We continue to see its amazing multibillion dollar organizations that are for the most part manual still.
And they're getting into the game because they need to they need to have visibility on that.
The advance ship notice in the warehouse management systems and everything that is a lot of that is about inventory visibility, which is becoming a hotter and hotter topic is I don't want to have too much inventory and I need solid visit visibility into the inventory.
Yep Yep, Okay makes sense. Thanks, so much.
Yeah.
The next question comes from Kneehole Chop sheet with Northland Capital markets. Please go ahead.
Oh, yeah. Thank you Christian on a nice quarter here.
Kim you mentioned earlier that some of this upside was driven by strong upsell it was new skus or expanding connection.
And this would be expanding connection so when when we ran a community enablement campaign, where we will end up seeing that impact us is really going to be in three places customer ads I testers or existing customers that are now adding that connection and in this call.
Order. The next just happened to skew a bit more on the existing customers, adding a connection versus adding new customers. We still of course did add new customers, but the quantity of new customers was a bit lower in this quarter than what you would typically see from us with community activity.
Got it Okay. And then you guys also talked about one of the unique capabilities that tie kinetic springs.
E invoicing.
What's the value of this capability relative to your typical they are are that you're able to get from your customers or you know maybe talk about the ASC of invoicing started giving customer size relative to the rest of your products from Citi Your offering.
Yeah. So.
First off we're not going to be using it in the U S. Because it's not a concept of VAT reporting tax tax reporting compliance reporting. So it's it's not applicable to that business. It really is a European and then we see that in Mexico as well, it's really more of a you have the habit.
It's like a document type you have to have it to be able to play we have done that through partnering and our fulfillment business in Europe is relatively small as we've discussed in the past, we've really attacked Europe more with the analytics product, which we're seeing success in being able to now with those analytics.
Have a more robust.
Fulfillment product and having the fulfillment customers from Thai come at it kinetics to be able to have a analytics product. We think over time will also add value, but I think of it more as a capability you just have to have as opposed to an up sell them to get into the game you have to habit.
Great. Thank you for taking my question.
The next question comes from Mark Chapell with loop capital. Please go ahead.
Alright. Thank you for taking my question just a couple of follow up questions on card kinetics.
As such as you know how fast was it growing you know how many employees do they have.
You know do they have a certain targeted industries that they focus on.
Sure So about 100 employees.
And on a they were growing it if you if you sort of look at things from sort of a constant currency perspective, because they obviously have a U S business plus our European business. They were growing in about this single digits when you're when you're adjusting for again for a constant currency.
Okay, Great and then.
You know given that they have more of a European focus because you just remind us what percent of Sps asbestos revenue today comes from international sources.
Sure. So when you look at our overall revenue I think of it as approximately 85% of the revenue is in really more you asked so non international but do keep in mind that our Asia business, which is heavily there to support the supply chain of our North American suppliers that does.
Show up as U S revenue because the.
It's the paying company I is in the United States.
Great. Thank you that's all for me.
Again, if you have a question. Please press Star then one.
Next question comes from Joe <unk> with Baird. Please go ahead.
Okay.
Great Hi, Archie and Kim.
Maybe just one follow up on the a customer account adds this quarter and maybe a revenue question as well was there any impact from retailer bankruptcies on kind of revenue and the number of connections are.
That that might have went away and in response to a retailer bankruptcy.
No. There was not there was nothing unusual as it relates to the bankruptcies that we saw in the quarter.
Okay. Thank you and then.
Archie I wanted to go back to that a tip that you shared at the very beginning I think it was <unk>.
74% of our survey a customer day is planning to invest in inventory and networking solutions.
Do you have the number for our current levels of either yeah, electronic fulfillment or R. E D I.
Just to kind of relate the two yeah I'm I'm wondering if we could compare 74% to that whatever that adoption rate happens to be to get kind of a sense of what the market might be growing at a at this point.
I don't Unfortunately that data was that broken out is what I understand and what we what we see is the more you know it's been the same story all along with the more change in the environment for suppliers kind of back to an earlier question from Jeff as far as you know the people that are sticking with their old software the more.
<unk> they have in that environment that tends to serve us well. So the fact that people are going to be changing environments investing and looking to do things on the supplier side is is a positive for Sps commerce. So that's that's kind of the point how much of that is going to be out of our fulfillment side don't know, but I know if it's on the ERP warehouse.
Management all of those things tend to be a positive for us.
Okay. Thank you very much.
Okay.
I'm showing no further questions in the queue, ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day.
Now disconnect.
Okay.
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