SPS Commerce, Inc. (SPSC) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the SPS Commerce fourth quarter and full year conference call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ellen Davis [ph], Investor Relations.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's Fourth Quarter and Full Year 2014 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 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; 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 at spscommerce.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 website, 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, Ellen, and welcome, everyone. We are very happy to share with you today our 2014 results. We enjoyed a strong finish to another great year for SPS Commerce. We experienced momentum in all areas of our business, as we continued to expand our network by adding new customers and expanding wallet share. For the full year, revenue grew 23% to $127.9 million and adjusted EBITDA grew 32% to $18.2 million. Recurring revenue grew 24% in 2014. Customer count grew 12% and wallet share with our customers grew 12%. This year, our efforts were focused on taking advantage of the multibillion-dollar market opportunity in front of us, by harnessing growth opportunities as the retail industry moves towards omnichannels. As you've heard us say repeatedly over the past year, the shift to omnichannel is the game changer in the retail industry. The need to build collaborative strategies in order to provide customers with a consistent experience across channels is increasingly top of mind for retailers and suppliers. Our analytics offering is recognized as one of the most comprehensive and efficient ways for suppliers and retailers to collaborate to address this transformation to omnichannel. In 2014, we continued to expand our network, adding new customers and deepening retailer relationships due to the viral nature of our network. Our broad-based network enables us to work as a trusted advisor to both retailers and suppliers. This places us at the center of the retail ecosystem, sharing our extensive knowledge and best practices to guide them through the rapidly changing industry. Our network drives incredible scale and enables a powerful lead generation engine that we continue to benefit from. This year, we receive leads from over 600 retailers and 140 channel partners and we now have over 60,000 customers. The evolution is moving us up market as larger suppliers and retailers are driving increased collaboration throughout the industry. We saw an increase in larger customers this year, which is a testament to our leadership position in the retail ecosystem. Last year, we said that the number of customers that pay us 3x our average price had doubled in the last 2 years. That number continued to grow another 30%. This year, new revenue from channel sales increased 40% over last year and contributed 17% of all new business as we're seeing more and more suppliers and partners integrating to RSX. As retailers and suppliers continued to realize the strategic importance of collaboration, the sharing of point-of-sale data continued to gain momentum. In order to stay ahead of the competitive curve, while continuing to meet growing consumer demands, retailers are increasingly sharing POS data with suppliers. Adidas is one example of a multibillion-dollar supplier whose ramping their omnichannel strategy. Just recently, Adidas Europe introduced SPS to their most strategic European retailers at the executive level to educate them on the benefits of collaboration in the omnichannel world. Foot Locker Europe was the first European retailer to sign on and share point-of-sale data with Adidas through the SPS Commerce network. Now that Foot Locker Europe is sharing their data, our team can reach out to those other suppliers to educate them on the benefits of our robust analytic solutions. This year, new revenue from our analytics products grew more than 50% over last year and contributed 18% of our new revenue. We also expanded our global presence this year by opening an office in London and acquiring Australia-based Leadtec. We continue to build out our international customer base and partnerships through our viral network, with offices now in Beijing, Hong Kong, London, Melbourne and Sydney. The Leadtec acquisition allowed us to secure our position in the New Zealand and Australia markets. Due to the acquisition, we added key retailer relationships to our network and approximately 500 new customers to our platform. In closing, 2014 was another important year of growth for SPS Commerce. We experienced momentum across all areas of our business and continued to take advantage of evolution in the retail industry. We've further strengthened our foothold internationally, while laying the foundation for the next phase of growth through a robust business intelligence solution, channel strategy and continued enhancements to our platform. The shift to omnichannel has provided a tailwind to our success over the past 2 years, and we believe we are well positioned to further advance our position as an industry leader in the supply chain world in 2015. 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 $35.4 million, a 27% increase over Q4 of last year and represented our 56th consecutive quarter of revenue growth. Recurring revenue this quarter grew 28% year-over-year and 24% organically. The total number of recurring revenue customers increased 12% year-over-year to approximately 22,000. For Q4, wallet share increased 16% year-over-year to approximately 5,900. For the quarter, adjusted EBITDA was $5 million compared to $3.8 million in Q4 of last year. Before turning to guidance, I'll recap the year. Revenue in 2014 was $127.9 million, a 23% increase year-over-year and adjusted EBITDA grew 32% to $18.2 million. Recurring revenue grew 24% for the year. We ended the year with total cash of approximately $130 million. Now turning to guidance. For the first quarter of 2015, we expect revenues to be in the range of $35.7 million to $36.2 million. We expect adjusted EBITDA to be in the range of $4.5 million to $5 million. We expect fully diluted earnings per share to be $0.02 to $0.03, with fully diluted weighted average shares outstanding of approximately 17 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.16 to $0.18, with stock-based compensation expense of approximately $1.6 million and amortization expense of approximately $800,000. For the full year, we expect revenue to be in the range of $155 million to $157 million. We expect adjusted EBITDA to be in the range of $21 million to $22 million or approximately 14% adjusted EBITDA margin in line with what we guided to on the October earnings call. We expect fully diluted earnings per share to be in the range of $0.16 to $0.20. We expect fully diluted weighted average shares outstanding of approximately 17 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.75 to $0.78, with stock-based compensation expense of approximately $6.7 million. We expect amortization expense for the year to be approximately $3.2 million. For the year, you should model approximately 40% effective tax rate calculated on GAAP pretax net earnings. We expect to pay nominal cash taxes in 2015 due to our NOLs. In summary, we had a strong 2014. As we enter 2015, we'll continue to execute against our growth strategy to take advantage of the large market opportunity we see in front of us. And with that, I'd like to open the call up to questions.

[Operator Instructions] And the first question is from Jeff Houston of Barrington Research.

Just start off with, looking at the 2015 guidance, how much of that is from Leadtec? And could you update us on the integration efforts with Leadtec as well?

Sure. As it relates to what we're guiding to, we're guiding on a consolidated basis, so it includes our existing business prior to Leadtec as well as Leadtec. So we just give one number that's consolidated. When we announced the Leadtec acquisition earlier in October, we had given some numbers there as it relates to the size of Leadtec in our 2015 numbers.

And as far as the acquisition integration, we're very pleased with where we are. We're about 3.5 months in. The team is fully integrated. We are selling one set of products. We've had some wins together, so we feel very good about where we are. And I can't imagine that it could have gone any better than it has so far.

Great. And then, second question is, looking at the metric that you shared -- took the share once year. If you look at the retailers that provide you leads, I think you said there's 600 now. What is the mix of -- that provide some leads versus all leads? That's -- it's a pretty helpful stat to show how your relationship grows over time with those retailers.

Sure. For the year 2014, there was approximately 150 retailers that gave us all their leads.

Your next question is from Bhavan Suri of William Blair. Bhavan Suri - William Blair & Company L.L.C., Research Division: I guess the first question, just on Europe, it's pretty encouraging to see the analytics being opened up, Foot Locker, et cetera. Is Europe sort of behind on sort of accepting that ability to share or want to share analytics with suppliers?

Well, I would make this comment is that the world is behind. The retail world is behind on sharing analytics. And -- again, we're at 20% or less. And that's one of the reasons we're so excited about the analytics opportunity is that we're so early. And so I think the same struggles in Europe are happening in North America, are happening in Australia, and I think we're just early. And it's retailer by retailer. Some retailers have been doing this for a period of time. Some, it's not even on their radar. But having a partner like Adidas that can talk about the benefits for the retailer is very powerful. It allows us to use that network that we already talked about, to actually help us gain business. Bhavan Suri - William Blair & Company L.L.C., Research Division: Yes. Yes. And then, when you look at sort of the share of wallet, that's been sort of stable growth kind of in that low double-digit range and it ticked up nicely. Obviously, clearly, the assumption is analytics. But was there anything specific there? Was there a large win there? Or how should we think about that rate there?

Sure. How I would think about it is, first the combination of both is what translates to that roughly 20-plus-percent organic recurring revenue. In the quarter itself, do keep in mind that, that number does include the Leadtec acquisition. If you were to adjust that out organically for the year, that revenue per customer for the year was 13% organically. Bhavan Suri - William Blair & Company L.L.C., Research Division: Got it. Got it. That's helpful. And then as you look at the overall enablement campaigns, and you think about your largest retailers and the target suppliers that you want to target, some of the largest of large, even though as you are definitely moving up market. If you were to look at average penetration, that 1,500 sort of set of their suppliers, where would you say you were today?

Well there's 150 that give us all their leads. And so that's not a -- so very, very small. And again, remember that enablement campaigns also include analytics products, which 80% of those retailers we do have relationships with today don't share point of sales data. So it's a very, very small number. That's why we believe we can grow 20-plus-percent recurring revenue for years to come.

The next question is from Tom Roderick of Stifel. Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division: So Archie, let me throw the first one at you. I love the anecdotal story you gave around Foot Locker. And I'm going to pronounce it Adidas because I came from Northern Maine, so that's how we knew it. You can have your fancy German pronunciation. But for omnichannel as a whole, what are some of the drivers that are pushing them in that direction? Obviously, everybody's talking about it, but how fast is it actually moving? And then from the standpoint of retailers pushing omnichannel suppliers getting in line, is there anything specific that pins to your model or affects your model? Or is it really just kind of a broader trend of the digitization of the whole channel?

I think it is -- it's a broader trend. The consumer's now in charge. The consumer is omnichannel. I mean everybody on this call I would guess has a smartphone. And the consumer is omnichannel. Now, the retailers need to catch up. Clearly, retailers and suppliers are starting to realize they need to collaborate. Somebody like Adidas realizes that they can effectively increase sales with retailers at share point of sales data. They can effectively deliver more precisely and more on time if they have that data. And if they can articulate that value to the retailer, then we have a really good chance at getting an enablement campaign out of that retailer. But I think, there's general trends in retail. Again, some parts of retail -- some retailers are doing extremely well and some are behind. But I think all of them are feeling the pressure of it now. Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division: And from the standpoint of how many retailers are actually sharing their point-of-sale data, I think, historically, you've kind of talked about that being in the 20% ballpark. Is that still the number? Are you starting to see it finally increase? How much penetration is going on there?

Well, we are seeing it increase, but it's still around that 20% number. Obviously, the enablement campaigns that we've run over the last year, most of those were for retailers that were just beginning to share point-of-sale data and didn't share it a year ago. It's a slow snowball evolution that will take a period of time for it to be fully accepted within the retail world. Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division: And Archie, with the analytics business growing 50%, 18% of new business, are you still seeing that as being predominantly led by certain new logos and new customers on the analytic side? Are you starting to see more cross-selling? We'd love to hear what's driving that, whether that's new or cross-sell.

Well, it's both. Our strategy is to really do enablement campaigns and get supplier started. It really depends on how penetrated that retail ecosystem is. So when we talked about an advance auto early in the year, that's a sector that hasn't done a lot of sharing point-of-sales data. So there was a lot of new logos. When we did Forzani Group, a sporting goods, that was a lot of upselling. Remember that somebody like, Adidas, every time we get a new sporting good retailer, that is an upsell to them. We will get that data and we will charge them more. So we're in a unique position -- one other thing I wanted to point out, we're in a unique position and that basically Adidas is attempting to help us upsell them. They're spending time and energy to help us get the data so that they have a larger bill and they get more value from our product offering. Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. Kim, last quick one for you. You've given now -- 2 years in a row, you'd given the sort of contribution for analytics and channel. Can you give us a broader sense as to how big they are on an absolute basis as a percentage of the business? Are either in that sort of 15% to 20% ballpark for total business at this point? Or still sort of creeping up on that?

At this point, we think providing those metrics of how much of new business are the appropriate metrics to share for both channel, which is certainly a lead generation that goes to our direct sales team and then the analytics business. So what you can see from that is it's more indicative of the future revenue. So at this point, the metrics we share is just a percentage of new revenue versus the absolute amount within our GAAP revenue.

The next question is from Patrick Walravens of JMP.

So first question, digging down into analytics a little bit, Archie. You have 2 analytics products, am I right? There's Shared View and enterprise?

That's correct, Pat.

Can you just quickly tell us what they are? And then, how the trends are for each of them?

Yes, Shared View is really a collaborative tool that allows a retailer and a supplier to look at the same data in the same format using the same tool. So it's really a collaborative product. The enterprise product is exactly the same data, but a supplier is going to use that to look at it across their different retailers and they're going to put it in their product scheme and they're going to use it for internal usage, perhaps to influence and to make recommendations to the retailer, but it's across all. Typically, our sales cycle, the ideal world is to get a new customer on Shared View through an enablement campaign and over time be able to upsell them to an additional product of enterprise and to get them to use enterprise across all of the retailers that share data with them. So they really work together in...

And the real -- the driver of your growth, I mean, are the enterprise deals much bigger? Is that what's really driving growth or...

The enterprise deals are bigger. The Shared View is extremely important in capturing mind share and it gives as an automatic sales event with a supplier because we're calling on behalf of the retailer. So their really in tandem if you said you didn't have Shared View, the enterprise sales would be significantly lower. There is more money in the enterprise, so it's a -- first product is the Shared View and then the enterprise, typically. Not always the case, but typically.

All right. Great. And then Kim, 2 quick ones for you. Can you -- number one -- I'll just put them both out and let you answer them. Number one, can you remind us how you calculate organic recurring revenue growth after an acquisition? And number two, we're not used to seeing you guys beat like this. So is the business becoming lumpier? Is it becoming less predictable?

As it relates to our definition of organic, what we do when we have an acquisition is for the first 12 months, we will share our reported results and then we will adjust out for those first 12 months, the dollars associated with the acquisition. And when you subtract that out for the first 12 months, that gets you to an organic number. Once 12 months have passed, everything then is just sort of your reported numbers. There's no concept of an organic once we've lapped it for 12 months. That's my answer to your first question. As it relates to the second question, if you look at our beat this quarter relative to our guidance, the beat was a combination of the timing of the Leadtec acquisition. Meaning, it was from October 13 through the -- through December 31. So the majority of the quarter as well as, obviously, we had a great solid quarter of overall business as well. So it was really a combination of those 2 that drove the upside.

Is it getting less predictable?

I would say that our business model, there -- not a lot has changed there. The biggest thing that changed in the quarter was the Leadtec acquisition and the timing of the Leadtec acquisition. Outside of that, with thousands of disparate customers all paying us relatively small ASP, that provides a large level of sort of predictability within our business model.

Okay. Great. Because I think that was 18 quarters in a row. So I like that track record. I hope you guys keep it going.

The next question is from Jeff Van Rhee of Craig-Hallum.

A couple for you first, Kim. I didn't catch the sales heads quarter end. And then also on the ARPU, I just wanted to be clear. I think you gave it for the year, what was the organic ARPU for the quarter? And maybe that's what you gave, I'm not sure I heard it right.

The sales headcount was about 230 salespeople. So that's up about 20% year-over-year. As it relates to the organic ARPU, the 13% I gave was the annual, you are correct on that. For the quarter, it was 14% organic.

Okay. Great. And then, I guess, Archie, at a high level, has there been any notable change in who you see as the competition? The frequency of who you're seeing? And then, also, along those same lines, any material changes in terms of the drivers of getting deals -- to getting people to make a decision to move forward?

I think it's really an evolution. Obviously, on the smaller end, we're still seeing the same competitive landscape. We're in the larger deals more often, so we're competing against legacy software quite often. Retailers and suppliers are trying to adjust to an omnichannel world. And there's a lot of pressure on them to catch up and to make investments. So that is a big tailwind that we want to continue to ride.

Okay. Two last ones for me then. The -- with respect to the analytics opportunity, I think you had said some time back that analytics held the likely potential to double ARPUs. Has your thinking there, in terms of what analytics can mean within a customer, changed?

No, it's very similar. And then, obviously, there's significant upside in all of our product lines. But wallet share, over time, I think we have a lot of room to continue to grow that.

Okay. And then could you just take a second and touch on the partner ecosystem? Obviously, partner deals, something you've been very focused on, can be the bigger deals tend to be in fact. Can you just give us a little more clarity what's evolved there in the last 3, 6 months? Maybe some quantification in numbers of partners or any other color you could to help us better understand that?

Certainly. Well, clearly, channel sales had a very strong year of 40% growth. And you're seeing in that growth, there's a number of new partners and there's also a deepening relationship in partners, as you enter the second, third, fourth years of partnerships, there becomes -- they become more educated partners. They become more aware partners. And as we have success with them, they're more likely to bring you into deals. So we're seeing a combination of both. Obviously, in the background with RSX, introduced about 2 years ago now I believe, that is. That's also a tailwind for us. So we're just seeing a lot of interest. We're also seeing that our leadership position in the retail ecosystem is -- we've had a more dominant position than we've had in the past. And I think that really bodes well for channel sales.

[Operator Instructions] The next question is from Mark Rosenkranz of Northland Capital Markets.

Just one quick question for me. We were recently at the NRX [ph] Trade Show last month and it seemed that a lot of the conversations were about the analytics and the drive for more sell-through data for suppliers. I was just wondering, could you talk a little bit about the size and quality pipeline for your POS analytic solutions? And maybe a little bit about how adoption rates have trended recently versus, say, 2013?

Yes. Well, obviously, with 50% growth in 2014, we have pretty strong pipelines and sales activity. And we expect that there continues to be strong interest in analytics. There's an awful lot of pressure from the large suppliers that are seeing the strong value of the product and we're able to let that network work in our favor to have somebody like an Adidas making introductions to the retail partners. Obviously, that makes sales cycles significantly easier when you have strong partners that can articulate the value. So we see a long-term trend that we're just starting with.