Q2 2019 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the SPS Commerce Q2, 2019 earnings Conference call.

At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at the time.

If anyone should require assistance during the conference. Please press star and the number zero on the telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host.

We see them either plastic you may begin the conference.

Thank you Christine good afternoon, everyone and thank you for joining us on Sps Commerce second quarter 2019 conference call.

We will make certain statements today, including with respect to our expected financial results go to market strategy and efforts designed to increase our traction and penetration with retailers and other customers.

These statements are forward looking and involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward looking statements reflect our opinions only as of the date of this call and we undertake no obligation to publicly update or revise any forward looking statements, whether as a result of new information future events or otherwise.

Please refer to our SEC filings, specifically, our Form 10-K as well as our financial results press release for 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 that the Fccs website at <unk> Dot 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 call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings per share in our press release and our filings with the SEC each of which is posted on our web site you will find additional disclosures regarding these non-GAAP and adjusted EBITDA 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 in the second quarter of 2019, we continued to deliver strong performance ahead of our financial targets.

For the second quarter revenue grew 12% to $68.5 million recurring revenue grew 14% and adjusted EBITDA grew 36% to $16.4 million.

In a recent report by Capterra, Our Gartner Company Sps Commerce was again raised the most popular EDI I software.

Our position Sps has helped every year since the report launched.

Capterra ranks technology providers based on a company's customers reviews and social presence.

The insights we gain from customer reviews fuel innovation and help shape the product roadmap that earns Sps commerce is full service the highest popularity regime year after year.

Good drop ship continues to be top of mind for many of our customers and partners and Sps has decades of experience working with retailers and suppliers at expanding direct to consumer operations.

For example, Wal Mart engaged with Sps commerce several years ago as they were rapidly expanding their ecommerce business.

Since 2015, Walmart Dot com has relied on Sps to programmatically onboard dropship vendors through an ongoing community enablement campaign.

To date Sps has enabled to help several thousand Walmart vendors across all Walmart business units, including dropship vendors for Walmart Dot com.

We're also excited to announce a new addition to the Sps Commerce analytics retail network.

Our YY and American retail and outdoor Recreation Services Corporation.

Recently completed and analytics analytics community enablement program.

Covering over 80% of their vendor network are you guys successfully leveraging Sps is leading collaboration analytics product to provide some suppliers visibility in the key sales and inventory data metrics.

Enabling them to easily identify important insights that improve seasonal planning sell through and help manage inventory levels more effectively.

In summary, I would like to congratulate all Sps commerce employees on our significant accomplishments in the quarter.

With decades of experience working with retailers and suppliers at all stages of their ecommerce journey.

SPS Commerce continues to empowers customers to capitalize on e-commerce trends that are revolutionizing the retail landscape.

With that I'll turn it over to Kim to discuss our financial results.

Thanks, Archie we had a great second quarter of 2019 revenue was $68.5 million, a 12% increase over Q2 of last year and represented our 74th consecutive quarter of revenue growth.

Recurring revenue this quarter grew 14% year over year.

The total number of recurring revenue customers increased 14% year over year to approximately 29900.

For Q2 wallet share was flat year over year at approximately $8700.

For the quarter adjusted EBITDA was $16.4 million compared to 12.1 million in Q2 of last year. We ended the quarter with total cash and marketable securities of approximately $199 million, we also repurchased $6 million of Fscs shares in the quarter.

Before turning to guidance I'd like to mention the stock split we announced today, which reflects the company's strong performance today, we believe the stock split will provide greater liquidity and allow the staff to be more accessible to a broad range of investors.

The additional shares are expected to be distributed on August 22nd and trading is expected to begin on a split adjusted basis on August 20 Threerd.

Now turning to guidance.

For the third quarter of 2019, we expect revenue to be in the range of 69.7 million to $70.2 million.

We expect adjusted EBITDA to be in the range of 16.9 million to $17.4 million.

We expect fully diluted earnings per share to be approximately 37 cents to 39 cents with fully diluted weighted average shares outstanding of approximately 18.1 million shares for 19 to 20 cents on a split adjusted basis with fully diluted weighted average shares outstanding of approximately 36.2 million shares.

We expect non-GAAP diluted earnings per share to be approximately 55 cents to 56 cents.

Or 20 728 cents on a split adjusted basis.

We expect stock based compensation expense of approximately $3.2 million depreciation expense of approximately $2.9 million and amortization expense of approximately $1.3 million.

For the full year, we expect revenue to be in the range of 276.6 million to $277.7 million, representing approximately 12% growth over 2018.

We expect adjusted EBITDA to be in the range of 67.2 million to $68.3 million, representing 31% to 33% growth over 2018.

We expect fully diluted earnings per share to be approximately $1.62 to $1.67 with fully diluted weighted average shares outstanding of approximately 18.1 million shares.

Or 81 to 84 cents on a split adjusted basis with fully diluted weighted average shares outstanding of approximately 36.2 million shares.

We expect non-GAAP diluted earnings per share to be approximately $2.30 to $2.35.

Or $1.15 to $1.18 on a split adjusted basis.

We expect stock based compensation expense of approximately $14.7 million depreciation expense of approximately $11.2 million and amortization expense for the year of approximately $5.2 million.

For the remainder of the year on a quarterly basis investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings.

We are pleased with our second quarter performance and we'd like to congratulate all employees for helping STS execute on its financial targets and earning recognition from customers and industry peers for our leading products and solutions.

With that I'd like to open the call to questions.

Ladies and gentlemen at this time.

If you have questions. Please press Star then the number one on the telephone keypad again, if you have questions. At this time. Please press Star then number one on the telephone keypad.

Our first question comes from the line of Scott Berg from need have your line is open.

Hi, Archie and Kim Congrats on a very good quarter and thanks for taking my questions I guess the two.

Jim What's your thoughts on the stock split I guess why now why stock split maybe help us understand I guess why you're undertaking just now versus maybe acquire period.

Sure. So the two for one stock split is really is in recognition of our strong financial performance that we've had to date and we also do believe that it will provide greater liquidity.

And really allowing us soc to be more accessible to a broader range of investors.

On top of that when we compared how we work compared to some other SaaS companies with similar market cap. We realize there was a bit of a difference between the number of shares relative to that stock price. So this puts us more in line with other SaaS peers as well.

Got it Thats helpful and then from a follow up perspective Archie fee.

Hi, example, that you brought up I thought was interesting with the completely.

Assuming the athletes and the analytics space in your enable the campaign there I guess what drove our year to date two to bring this.

Or did undertake this initiative and given that analytics wage growth in that space. So it's been a little bit slow for the company recently is this maybe a new opportunity to help accelerate growth in the analytic space.

Yeah.

Let me take on the why companies by collaboration analytics I think it really is to truly partner with their suppliers and allow them to make product recommendations help manage inventory levels. So I think.

As we talk to retailers.

We think theres a incredibly large total addressable market in the case of our yard now this has become.

Mind for them. So in my mind Theres already ice to be had out there. It's just a matter when it becomes a priority. So that's why we believe in the long term total addressable market analytics.

And I think are you guys going to see a significant benefit.

From this.

As far as the overall market, we really see if I would characterize it I would see say that retail is clearly stabilized and so we feel we feel much better about the environment I don't know if I'm ready to project anything else beyond that and I think on the analytics I'd still think while there is a lot of long term huge opportunity I still think its kind of were a month ago.

Chris.

Great. Thanks for taking my questions and congrats again.

Our next question comes from the line Koji Ikeda from Oppenheimer. Your line is open.

Hi, Thanks for taking my questions and congrats on the quarter, Yeah, I just wanted to dig in a little bit more on the ARIA analytics, new customer win I'm just thinking about the sales cycle was this was already I'm looking at analytics for a while and maybe the time was finally right for our you ought to go ahead with purchasing analytics or was there any sort of technology enhancements analytics that help push them to the finish line or was it really just a new a new sales cycle for Ferrari I altogether that would be helpful. Thank you.

Yeah, we have a relationship with RDR and fulfillment and Weve.

You know as I mentioned in the past whenever we're talking about roadmaps for retailers, we're talking about our full suite of.

Of all offerings, and we do think that winning the fulfillment having this extremely retail focused set of solutions was a positive.

You know, it's hard to Uh huh.

It's hard to explain but when we talk to retailers.

They do embrace the thought of it as I mentioned, it's just they have an awful lot on their plate. So it's a matter of when they feel like it hits the priority level and they feel like they can do it.

In the case of already I, you know us being in there they've been thinking about it but us being in there and being a strong partner of theirs gives us a competitive advantage and you know it.

That coupled with we do have the best solution and I think that helps too.

Got it that's Super helpful. And then just a quick question here on the net record net new recurring revenue customers. It looks like it was a pretty healthy 400, plus in the quarter is that really attributable to the Ari I side or was there something else going on there I mean, how are you guys feeling about Canadian Neenah T. enablement programs overall in the second quarter. Thank you sure. So we had a nice quarter I can relate to community enablement campaigns. Your 0.0, Gee I hear correctly sequential add with a little bit over 400, I'm, that's a bit higher than what you've seen in some of our other quarters. That's primarily due to the community enablement campaign activity in the quarter. It would be incorrect to assume a large portion of that was specific to our YY as Archie mentioned, we already have a relationship with a lot of the art <unk> with already I as well with our customers I certainly some came from that.

But it's more reflective of the overall community enablement campaign activity in the corner.

Great. Thank you for taking my questions and congrats on the quarter.

Our next question comes from the line of Baby times from Canaccord.

Your line is open.

Hey, Thanks, guys nice quarter, So Archie you talked a bit more about drop ship in the prepared remarks than you have in the past just is there any way.

Qualitatively you can help us understand kind of how prevalent that is.

In your network I mean, I assume it's a different rule book that the retailers have to set up for their supplier customers.

You know how many of these retail partners are you set up to do drop shipped for how many years buyers have done dropship with you just any kind of sense of how often is being utilized across the base.

Yeah. So it's I think yeah.

I think we talked about a number a while back and listen to the lender, there's hundreds and hundreds of retailers I think that's right.

North of 300, and there's thousands of suppliers you are using it and it is a different rule book I think more and more what we're learning as were going into a community enablement campaigns and talking to retailers. Although we do believe as a suite of solutions. There. They are very focused on the drop ship portion, so we're more or less selling that more.

Independently.

Because that is such a big focus if you think long term, we're dropship ship fits.

In my opinion, it's going to be about.

I had a mature retail or about 20%.

Other sales are going to be drop ship and that's going to represent 80% of their skews because what's going to happen in retail is.

Flyer will drop ship a product, but when that product has sale high sales velocity. The retailer is going to start putting in their stores and distribution centers. Yes. So long term, we believe it's 20% of the US retail sales from e-commerce will be drop ship.

Yes, God the virtual inventory right.

Yeah, but I think I think more importantly, it is a driving.

Case for us to really build a relationship with the retailer and then worse, we're set up to be able to take over all of the rule books. If you will yeah right no that makes sense.

And then Kim a follow up for you just gross margins in the quarter, a little bit of pressure, there and any color and how we should think about it going forward.

Sure. So when you think about gross margin really looking at things on an annual basis with our business.

Is more indicative than looking at it on a particular quarter. Our Q1, you had a bit higher gross margin this quarter to your point it was a little bit lower though a way to think about it maybe the second half of the year, it's more probably reflective that's sort of at the first half average of the gross margin. So Q1 pretty high tech was little bit lower part of the reason is that just timing so what's going to be in there going to be two things right personnel related so as we continue to add resources to make sure. We have a great overall customer experience and so there was a bit more of that in Q2 than in Q1. As an example also specific in Q2, we did have some consulting related spend we already have a world class customer experience, but we want to make sure. We are we're always focused on even bettering and furthering ourselves. So we did have some more sort of onetime in nature spend I really focus on enhancing the overall end to end customer experience in the future yeah very good.

Okay. Thanks, guys.

Our next question comes from the line of Jason Paulino from Keybanc Capital. Your line is open.

Hi, Thank you for Uh Huh.

Taking my questions today does actually Devon I'm on for Jason.

And I just have a couple of questions. If I may. The first question is regarding guidance. It seems like you have raised the full year 19 revenue and EBITDA guidance and.

I'm just wondering if you can.

Provide any color to Don anything would be helpful.

Oh sure out as it relates to the guidance you're correct. We didn't take up the annual guidance as part of that was based on what we saw in the quarter. So we beat the high end of our guidance in the quarter by about 300 from a revenue perspective about 100 from an EBITDA perspective, so part of that carries forward. The other part is I'll go back to a comment that Archie had made is where we're really beginning to see the retail space stabilize a little bit so that gives us a bit more comfort and confidence in the trends that we're seeing.

That will help address sort of the top line. When you then take that down to EBITDA on the EBITDA is going to be a top but EBITDA raises the combination of the increase from a revenue perspective than the amount that sort of falls to the bottom line and also as we look at our business. We feel when we think about the spend in sort of supporting the day to day as well as the spend and investments were making in the future and we have the ability based on how we've been performing or even demonstrate a bit more efficiencies this year.

And you see that youre seeing that flow through as well.

Thank you that was really helpful. I appreciate it.

Our next question comes from the line of Jeff Van Rhee from Craig Hallum. Your line is open.

Got it. Thank you thanks for taking my questions guys.

A couple a couple from me maybe first just talk about the overall environment with respect to change events at both the retailers and the suppliers I know those you know what they are undertaking within their tech stacks has direct implications for the ability to tend to be interested in buying your solution. So can you talk about each of those just kind of what qualitatively might be changing within the suppliers and the frequency and drivers of their change events in the same on the retail side.

Yeah, I mean, if I were to qualitatively say it was you go back couple of years and.

A lot of uncertainty and around the retail environment and we were looking.

Not real certain where it was going and I would say now we're in an environment, where we feel it stabilize and we feel little more comfortable with where we're going I think we've gone through a lot of Oh heavier consternation. If you will and so I think we're in a in my belief a more normal period of time.

Okay, and then with respect to cohort analysis, and the pace at which existing customers come onto the network.

And then expand can you just talk maybe qualitatively for a minute on what you've observed there in terms of variation to historical norms, just as again as it relates to cohort analysis, how many connections there potentially bringing on features capabilities any any observations.

Yeah, I wouldn't say, it's a significant change I think over the last nine years as a public company one of the themes as we we do have more larger and larger customers are still mid size customers are still.

On a relative basis small and typically a larger supplier you know thats coming in through channel sales might have it might.

We have dozens or even hundreds of retail trading partners, whereas.

A program brought in from a retailer enablement campaign in my view, one to start with and it might.

[noise] grow to 345, so you know the great thing about our business as we have cost we have a big C segment of customers that are on the very low end and we have a segment of customers right around our average customer and then we have a significant number of customers that pay us 20000 enough to hundreds of thousands we've always had a very strong land and expand mindset.

When we do believe that if we can land customers, we can expand them.

And Thats a confidence in the.

In our ability to execute and we've had that both from a retailer standpoint, the land a retailer on a smaller enablement campaign.

And also on a supplier standpoint.

HM Okay.

And then I guess with respect to the sales organization.

How is it different how does the go to market different now than a year ago, maybe just what has changed within that duration.

I think you know first of all we made a lot of changes it's significantly more stable. So some of that some of the changes we made from.

Hi, 18, and 17 are I would call our non <unk> business as normal so I feel like we just have more at bats at that.

I'd say the only thing that's probably different as we rolled out a two and half years ago, two years ago, a new fulfillment product and that that has just made life easier I mean, we have a significantly better product were clearly the best product in the industry. We do a lot more demos. We can have we have the ability to have faster sales cycles because of that.

And people can see it and use it pretty easily.

Maybe one last if I could sneak it in competitive landscape Opentext Ts Johnson.

In potentially Sterling and if there is any anyone you would call out is changes in behavior, either frequency of seeing them win rates et cetera.

No I think it's still the same and we feel very good yeah. When we built the retail network. If you are an on Prem software player or really just a point to point solution. You really don't have a network. So we feel very good about the network and we feel good about our ability to execute.

So much more quickly than they can on the supplier standpoint and then.

You know the retailer enablement campaigns that just gives us a huge competitive advantage, we get the first at that.

By solving a pretty significant problem for the retailer.

Got it great. Thanks appreciate it.

[noise].

Our next question comes from the line of Tom Roderick from Stifel. Your line is open.

[noise] per lane in for Tom Thanks for taking my question.

Archie I wanted to go back to a comment you made earlier about analytics, you mentioned that a lot of the conversations for your sales team tend to include analytics, It's just a matter of timing for whether or not they adopt it I was wondering if you could talk about what they may be doing internally as far as collaboration analytics is concerned if they're not using your product and just how important that is to them. They think about the relationship between the supplier and the retailer.

Well frankly, a lot of just aren't sharing the data.

So.

With the supplier has had their hands is what this what the customers what the retailers ordered and they're managing the out of stocks. Obviously they have all the data the retailer has all the data. So they can manage out of stocks and some of them will get do some forecasting.

For suppliers, saying, here's our forecast on what we think we're going to order. The reality is what most retailers. If you actually asked them they've talked about what we do forecasting instead of giving them point of sales data.

Most of them will tell you they are not that good at port testing because.

That's it you need to spend a lot of time on each individual skew because there's nuances in each skew.

So a lot of that.

It's a new new concept of truly sharing good quality data and having the same format.

There are times when they will be.

Faxing emailing.

Different reports that they get from their system.

But thats not a dynamic live interaction and so it's a facts and that's a email and some pretty rude America mentoring data.

And then as we think about the covalent works acquisition How's the integration process been in that business and have you had any success, so far and sort of up selling those customers. If I'm not mistaken I think there are more of a 2000 dollar ASP versus your own business have you seen any any pull up in your own ability to to grow those customers.

We have had some well first off on the on on the migration the migration were.

Well the majority done it's gone extremely well the feedback in general from the customers is.

Very glad there on the Sps product because it's such a strong product and they're very pleased that they have.

Quality products, so that part has gone extremely well.

Hats off to the team in Houston, they've done a great job with the migration.

The team and Minneapolis, as well supporting them. So I think that's gone extremely well we have had up sell that has really not been our ink a hard push.

If you think about the lifecycle of a customer we owe it to these customers we have an obligation to get them up moved over trained and and having a positive experience with Sps and then the up selling will come I think a lot of that will come naturally because if they're using somebody else.

Well or or thinking about new connections I think now that they are on our product those will come more naturally they'll say well why onetime use Sps commerce.

Thanks again.

Our next question comes from the line of Mark Schappel from Benchmark. Your line is open.

Hi, Thanks for taking my question and a nice job on the quarter.

Just a couple of questions your Archie.

I've a question on the Walmart Dot com customer reference in your prepared remarks, I believe Walmart Dot com has been a long time customer for you, but did they expand their relationship in the quarter is that where you calling out.

No no just another another example, I mean, we worked with them for several years and.

And is it.

We'd like to give customer examples, but it's an ongoing.

We get leads from Walmart each and every day.

And that's the power and another illustration of hardware business, but also that it is very dropship focus, which we think is an exciting way to.

To get into these retail accounts.

Okay, great. Thank you that's helpful and then with respect to a Cobell works just a follow up to an earlier question about what percentage of your customers have been moved over to your two year Sps Your core us PS platform.

It's the majority and we will be.

You know we're we're on the very tail end. So it's it's the majority.

Plus and we're.

And then there will be a small small tail that has some unique.

Situation that will stay on the on the co mailing words platform, but we expect the vast majority to be moved over and we expect that to be a will be concluded in Q3.

Great. Thank you that's all for me.

Our next question comes from the line of Baby gear hard phone first analyst Your line is open.

Hi, Good afternoon. Thank you for taking my questions. First question is housekeeping can you give us the revenue contribution in the quarter from covalent works and.

Men or at least the organic growth figure.

Yeah, David we we provide everything on its how it all at the time, we had announced those acquisitions. So back in sort of the Q4 time period, we had mentioned that Cumberland works when it represent about four and a half million of revenue for the year and that's a very small amount of our overall business. Obviously fell our results just incorporate its it said that the total sell your data point here looking for is probably back from when we announced the acquisition of about four and a half million for the year got it and then yeah. It's been a while since we've heard an update on the churn metrics either on a customer basis or on a on a dollar basis I just wondered if you could update us on that.

Sure. That's remained very consistent that customer churns, you know between front about 12% to 13% that's consistently have learnt where it's Dan and then the dollar churn is a little less than half from that so about 7% from a dollar churn perspective again consistent with.

Our prior quarters in prior years perfect and then you were talking a bit Archie about Walmart dot com.

And I have been hearing a little bit more about marketplace environments, and I RC and other events.

More specifically around first party.

You know with the marketplaces, taking it into inventory from from suppliers and.

Becoming more to before.

And you know in lieu of manual processes, especially at scale as requirements are rising in terms of volume or dollar commitments. Just wondering is there a way that sps targets marketplace specific entities that sell on on marketplaces that need to use either guy.

I know you guys go to market a lot with community enablement programs, but are you built to go after individual relationships that you want to marketplaces.

Or do those come in.

By by like a target plus or whatnot, saying, we have the suppliers can please connect to Sps can you can you give us some sense of how you can capture those relationships.

Well, if it's a market place.

You know marketplace has a little bit different dynamics as a retailer doesn't necessarily decide to start by.

From the marketplace you get your operations set up and then you can connect to the marketplace. So it's much more of a supplier driven sale.

Is how how we're doing it and frankly, what's interesting is a lot of the market but.

It's just existing.

But then are going marketplaces, and we can do that either directly or we also you know very small customers want to just work with let's say Amazon and they bought shopify for their storefront, we will integrate and we to the Apiay Shopify So shop.

We'll work with that and we look at Shopify as almost a retail connection because somebody is doing.

E Commerce.

Brick and mortar and then marketplaces, probably wants one integration back into the European system.

So that's how we work with.

Those supplies, but it's a much more supplier driven sale as opposed to retail driven sale and with that I mean do you have dedicated resources on the sales side attacking this particular opportunity.

They don't they don't just sell to marketplaces, because most most of the suppliers are going to sell to marketplaces, and brick and mortar and E. Commerce. So their supplier salespeople now there can be within their territory.

Customers that are just selling the marketplaces and they are set up to do that.

Got it. Thank you so much for the color.

Thanks.

Ladies and gentlemen, again, if you have questions at this time. Please press Star then the number one on the telephone keep.

Next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

Hi. This is my first Pat. Thank you so much for taking my questions I have a question for Kim I was wondering.

I guess you raised the full year guidance this quarter and himself Paradise Entente, how should we think about that and it himself maybe adjusted EBITDA and.

Imagine there thank you.

Sure. So that we did raise for the year the expectations from both revenue as well as EBITDA add some color that I previously provided as it relates to the the drivers of that revenue, partly driven by what we saw in the quarter.

Also driven by Hum someone's instead of retail stability that we've seen that then translates partially to an increase in EBITDA as some of those margins slowdown, but that still allows us of course to be investing in both the short term as long as the long term. So a way to think about it is just because we took up the expectations from a revenue and an EBITDA perspective that does not necessarily translate into a radical differences line by line from a margin perspective.

Got it thank you so much.

Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.