SPS Commerce, Inc. (SPSC) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the SPS Commerce Q2 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Ellen Davis with The Blue Shirt Group. Ma'am, please go ahead.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's second quarter 2015 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 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'd like to turn the call over to Archie.

Thanks, Ellen, and welcome, everyone. We are very happy to share with you today our results for the second quarter of 2015. Total revenue grew 25% to $38.8 million, recurring revenue grew 26%, and adjusted EBITDA was $5 million. We had a great first half of the year as we remained focused on the multibillion dollar market opportunity in front of us by addressing consumers demand for an omnichannel buying experience. We continue to broaden our channels program enabling us to move up the market and connect larger suppliers to their trading partners and we are seeing more suppliers integrate to RSX. We are also experiencing growth across our analytics suite as retailers and suppliers further realize the strategic importance of collaboration. Consumers are calling these shots, demanding faster and more convenient services from their shopping experience and the information they need to make a buying decision is quite literally in the palm of their hands. Widespread mobile adoption is driving consumer's expectations for omnichannel and retail. In 2013, more than 195 million tablets were sold and to-date smartphone sales have surpassed 1 billion. With the Internet influencing 50% of all retail sales, and social media now not only connecting people but also informing, validating and driving purchases, it's no surprise that the pace of omichannel adoption is rapidly accelerating among retailers. As the quest to build collaborative strategies to support seamless customer experience remains top of mind. Our recent example of Pet Supplies Plus, a leading specialty pet retailer in the U.S who partnered with SPS to implement a new supply chain strategy, using both our fulfillment and analytics products PSP eliminated many manual processes and improved collaboration with its suppliers. Throughout our fulfillment product PSP is not able to electronically exchange purchase orders, invoices and advanced ship notices with suppliers. Adding this functionality resulted in improved order accuracy, increased visibility of product flow within the supply chain and enhanced receiving efficiencies in stores and the distribution center. Using our analytics product PSP now provides its suppliers with POS data, allowing those suppliers to make real time inventory recommendation. The sharing of POS data resulted in improved product availability and increased sales. By partnering with us PSP can more effectively collaborate with its suppliers to fulfill orders at the speed expected by the days omnichannel consumers. Our platform exist to deliver the technology to source items, manage those items for fill delivery as fast as the consumer wants it, collaborate as a part of a community and utilize analytics for global competitive advantage. With the help of more than 400 technology partners, we now deploy a more agile omnichannel solution around the world using our commerce platform. SPS has the largest network with more than 60,000 trading partners including over 2000 retailers. We continue to expand our network adding new customers and deepening retailer relationships. The viral nature of our network drives incredible scale and enables a powerful lead generation engine that we continue to benefit from. Additionally, retailer enablement campaigns continue to be an important part of our lead generation, driving 1000 of leads with 100s of retailers every year. One of the key topics among our customers at this year's annual omnichannel retail conference was help cloud based retail business networks, are now enabling organizations to fully harness the hyper scale requirements for success in the days retail environment. Furthermore when organizations look to make the transition to a cloud based retail business network, the speed of implementation and the collaborative capabilities of their partners are critical. Del Monte Foods recently completed a one year transformation of the cloud following the companies split in the two divisions. The execution timeline was incredibly short and Del Monte needed an experienced partner who could quickly implement a new system, swiftly on board their trading partners and integrate with all of their other system partners. In a matter of months we successfully integrated over 150 trading partners into their new ERP system. By choosing SPS Commerce, Del Monte was able to leverage our robust network, while also taking advantage of our deep expertise within the retail industry. Furthermore by transitioning to a cloud based network, Del Monte made a valuable investment in their future capabilities allowing for plenty of room to scale their business. In summary, I’m pleased to report another great quarter as we continue to experience momentum across our business. We’re benefiting from the industries rapid shift towards omnichannel and our push-up market is tracking well as larger suppliers and retailers derived increased collaboration throughout the industry. Bottom line, if you want to succeed in retail, you must meet the expectations of the consumer by delivering an interactive, connected and seamless buying experience. Our broad based solution enables us to work as a trusted advisor to both retailers and suppliers and places us at the center of the retail ecosystem and we believe we are well positioned to continue as a industry leader in the supply chain world. With that, I’ll turn it over to Kim to discuss our financial results.

Thanks, Archie. As Archie mentioned we had a great second quarter, revenue for the quarter was $38.8 million, a 25% increase over Q2 of last year and represented our 58 consecutive quarter of revenue growth. Recurring revenue this quarter grew 26% year-over-year and 22% organically. The total number of recurring revenue customers increased 10% year-over-year to approximately 22,700. For Q2 valid share increased 14% year-over-year to approximately $6200. For the quarter adjusted EBITDA was $5 million compared to $4.5 million in Q2 of last year. We ended the quarter with cash and marketable securities of approximately $131 million. Now turning to guidance. For the third quarter of 2015 we expect the revenue to be in the range of $39.6 million to $40.1 million. We expect adjusted EBITDA to be in the range of $5.4 million to $5.9 million. We expect fully diluted earnings per share to be $0.04 to $0.05 with fully diluted weighted average shares outstanding of approximately $17.1 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.19 to $0.20 with stock based compensation expense of approximately $1.7 million and depreciation expense of approximately of $1.8 million. We expect amortization expense to be approximately $850,000. For the full year we are raising revenue guidance for the range of $156.9 million to $158.4 million. We expect adjusted EBITDA to be in the range of $21 million to $22 million. We expect fully diluted earnings per share to be in the range of $0.15 to $0.18. We expect fully diluted weighted average shares outstanding of approximately $17.1 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.73 to $0.77 with stock based compensation expense of approximately $6.6 million and depreciation expense of approximately $6.9 million. We expect amortization expense for the year to be approximately $3.4 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 NOL. And with that, I would like to open the call to questions.

[Operator Instructions] And our first question comes from Scott Berg of Needham. Your line is now open.

Hi Kim and Archie congrats on a good quarter. I have two questions. The first one Archie, now that your six month into the lead tech observations, any additional color in terms of the opportunities that we're seeing in the Australian or Asia-Pac market that might be certainly different than your expectations when you initially close the transaction.

Yes, Scott when we closed the acquisition in October, we obviously believe there was a big opportunity in Australia albeit size comparable than North America it's about 10%. Again we remind everybody that on day one we start selling one unified solution set. And I would say the biggest difference that I found after spending time with over dozen retailers, was there, although they have some retailers ahead of us and some behind us just like everything else, the threat of Amazon is not quite as clear in Australia, so there is a large market opportunity. I feel like there are probably 24 to 36 months behind where the market is in the U.S. on that front.

Great. And then last question for me is as you look back to the first half of 2015 today, are there any incremental changes in terms of the overall buying patterns amongst customers today versus the first half of '14, you certainly call that analytics but wanted to get there any other major differences that you see in the market today.

I wouldn’t say there is a major difference, I think it’s a continued evolution obviously as we continue to move up markets that’s an evolution. I think the omnichannel challenges for retail is very similar, retail challenges for around analytics and collaborating is the same. So I’d say it's more of an evolution than a change but it feels like on a natural pace.

Great, that’s all I have. I’ll join in the queue. Thank you.

Thank you. And our next question comes from Matt Pfau of William Blair. Your line is now open.

Hi guys thanks for taking my questions and nice quarter. Kim, when you look at the outperformance in the quarter, can you may be give us a little bit more detail on what drove that whether may be some enablement campaigns that you want anticipate in that, pull forward, or are there other components of that outperformance?

Sure, so we ended up bidding by about 300,000 on the topline and that really wasn’t from one particular place, it was really across the board just a nice solid performance of the business.

Got it. And then Archie talked a little bit about the opportunity in Australia and Leadtec but how is the Leadtec business overall been performing relative to your expectations?

It’s performing according to our expectations that the staff is absolutely fantastic I think we’ve got momentum. Again as we discussed when we made the acquisition a lot of these were going to be long-term sales cycles really the thing that they have is relationships with retailers and we that was confirmed as we spent more time with the retailers. And I think it’s going to execute at our expectations, which were high or above over the next 24 months.

Got it and then last one from me on your hiring for this year how is it been progressing and when you look at your sales hires. Can you give us some idea about the support there between maybe the US opportunity and then also in Europe and Australia?

Sure those we’re hiring we exited Q2 with approximately 260 sales heads that’s up and 240 last quarter that that sequential increase is little bit larger than what you seen in some other quarters keep in mind that’s primarily related to the timing about college hires. As it relates to the mix between for the domestic and international we really believe that there is a very large opportunity in both places and we have best appropriately in both of those areas not just on the sales side, but also capacity needs in all other areas the company has wealth.

Got it thanks for taking my questions guys.

Thank you. And our next question comes from Jeff Houston from Northland Securities. Your line is now open.

Hi guys, thanks for taking my questions. Looking at the Leadtec acquisition, it sounds like it’s been a whole driver or at least tracking a lines slightly above your expectations what are the geographies are you looking at in condition to Australia now since you have a presence a big presence there now and how is valuations in the acquisition front on a geographic and as well as product condition front?

Yeah, so when we look at our business we look at the primary geographies we’re focused on our North America obviously that’s where we’re primarily focused Europe and then Australia and China. And consistent with what we’ve done over the last really decade we’ve let the true viral network nature of our business viral nature of our business allow us to expand outside of North America. Asia is really focused on being part of the North America supply chain we continue to see momentum there. Australia is it more of a standalone ecosystem. So we’ll continue to invest and I don’t think there’s an opportunity there. Europe is right along with the lines of we’re getting larger suppliers larger suppliers are more international hence we need to support our larger supplier. So we have European operations primarily focused on analytics opportunity. So we’ll continue to allow the viral nature of our business to grow internationally and we’ll continue to service our customers in that way. As far as valuation as acquisitions are acquisitions that has been the same as it has been for last five years. We believe we can accomplish our long-term goals with organically, but obviously we have capital and we’ll continue to look for opportunities and those are both those will be either customer acquisitions, geography expansion or product expansion. Again as long as they’re in our sweet spot they’re performing well and valuations are reasonable we’ll pursue those opportunities.

That make sense and then surplus I think you could talk about what types of initiatives you knew Chief Information Officer has been working on she did have a pretty closer back on coming from target, but she got and touch the things she is been working on to enhance the product and then infrastructure?

Well first of she’s we hired a Chief Customer Success Officer Beth Jacob so she is not running technology she is running our customer success, which is really the customer experience post sale. So making sure that we have a continue to have a real fast strong customer experience so that’s really what she spoke of then and will continue to help us continue to evolve the company. Again the customer experience being positive is always been a cornerstone and really important for us, because of the viral nature of our business.

Got it. Thank you.

Thank you. And our next question comes from Tom Roderick of Stifel.

Hey guys good afternoon. Archie, I didn’t hear you talk too much about the channels on this call I love to hear AC can offer anything sort of quantitative with respect to how the channels is contributing I know you typically give that at the end of the year. But just sort of curious for made your update and then perhaps more qualitatively any anecdotal wins you can point to where the channel is in fact pulling you into larger deals mid-market deals what does the competition look like there?

Yeah, so I would say if you look at 2015 it’s similar to 2014 we continue to add new partners, we continue to have slightly larger partners and we continue to deepen our relationships with our existing partners all giving us momentum into that future. So it is giving us larger deals indirectly, but the deal we talked about today was Del Monte, which was indirectly a channel because Danone was a channel deal and we had exactly there was we go from Danone to Del Monte and obviously had a fantastic experience at Danone. So indirectly that was a channel and trickle down from Danone and there, but the contribution continues to be meaningful.

And any particular partners in the channel that are sort of ramping their practices or knowledge around SPS Commerce at this point they I know that you of course NetSuite and Microsoft and some others have been very important partners. Anyone you point to and sort of play more resources or momentum towards that relationship?

As you mentioned NetSuite been a very strong good strategic partner. The other practices I’d say it’s more fragmented and segmented among the buyers and the system integrators. So it’s more of a numbers game than one or two big ones I think there’s a host of as we say literarily hundreds of channel partners.

Got it Kim thanks for given out the sales headcount numbers 250 people in sales. Can you begin to give us sort of a rough breakout how that sales force is sort of structured with respect to I know you hire a number of inside sales reps to kind of build the funnel and as well as close some of the smaller deals. How does that breaking out now and as you are adding incremental heads are they largely being put into that inside group but the successful folks from inside moving up to more direct enterprise approach or are you proactively recruiting more senior experienced sales reps for the field?

Sure so as it relates from a sheer number or quantity the largest quantity are going to be those that are a bit more junior that come in here that’s a very cost effective way to bring in talent that then we can train how to solution sold on our products and from a quantity the largest number would go into what we refer to as our direct sales team so they’re the ones that are out having the conversations directly with our end recurring revenue customer. We often do have two sales teams that are lead generation engines that we have our retail sales team and then we have a channel sales team. We do hire and recruit in each of those areas. So from a numbers perspective in general the largest number goes into that direct sales team.

Perfect. Last one from me Archie I’ll hold some back to you in terms of the behavior from your larger retailer customers and I guess just they’re retailer partners and the retail community out there at large. Are you seeing them share more data if you kind of compare this to say a year ago or even six months ago. Are they sharing more data with their supplier partners three year analytics engine on the point of sale front and collaborative fronts these day or is that still kind of a little bit of a trickle in terms of getting their behavior changed?

So I would say yes, but temper that with as we talked in the past retail trends above slowly some get it some don’t so I’d say it’s a continued slow long-term evolution and that’s what I had expected to continue to.

Got it. Thank you guys nice job.

Thanks.

Thank you. And our next question comes from Richard Davis of Canaccord. Your line is now open.

Okay, thanks. This is the simple question I guess maybe hard to execute on, but what’s a reasonable expectation kind of with regard to percentage of revenues we should see coming from Asia Pacific in two or three years I mean is it double-digits how do you kind of think about that when you’re strategizing?

So, when we think of Asia we really think today as after being part of a North America supply chain. And those deals that you need to just have the Asia component to be all the compete and support your customers. So there's well over a 1000 customers we actually support in Asia many of those it comes in as North America revenue, because there’s a North America hub and there is a component so it’s a meaningful part. So I think it's going to be continue to be - from a reported revenue guidance standpoint of relatively small component because again even of those – revenue of those 1000 customers are supporting in Asia the vast majority of that is North America revenue.

Got it. We’ve seen materially have some product announcements of late from presumptive competitors. Little bit top two or three comp firms that you’re replacing these days, and just kind of thought process on that. Thanks.

I would say on the fulfillment side, it tends to be legacy software. So I consider that more of a do it yourself, and they bought software, they have staff, they have a brand. I’d say that’s the primary what we’re replacing there or on the low end we replacing believe or not we’re in the retail environment manual processes. On the analytics, I think we’re replacing that they didn’t do anything before as the vast majority of that.

That makes sense. Thanks very much.

Thank you. And our next question comes from Pat Walravens of JMP Securities. Your line is now open.

Great, thank you. So I think that’s 21 in a row since I have been covering your stat congratulations. And I guess I have a two questions which is one, how you guys deliver such consistent results and two how much longer can you keep doing it?

Well couple of things, one is first of is our business model is we have a lot of different sources of lead generation. We have a lot of sources of revenue, we don’t have large customers and I think we understand our business extremely well, and we’ve talked about retail has a slow evolution and then I think we have good executions, so I think that’s it on why there is consistency in the results. The intent is to keep going, I mean we don’t have intentions of attempting to try to missing the near term future, so we’ll take a one quarter at a time, I guess just like the football coach says.

So let me ask the last one a little differently, Archie which is increasingly I have the opinion that I like stocks that are just going to grow at a certain rates for a long time more than once that, accelerate really fast and then decelerate and then eventually find equilibrium meanwhile turn it upside down. So how long can you keep growing at this sort of 20 to – I'm not sure you will take a range as the 20% to 25% organic recurring revenue growth.

We believe there is a multibillion dollar at least a $4 billion tam selling the suppliers on the two main products we have significant momentum on today. So that’s a $4 billion opportunity we’re guiding to a very, very small percentage of that. So we think we can continue to grow organically recurring revenue at 20 plus percent for a long period of time.

Great congratulations.

[Operator Instructions] And our next question comes from Jeff Van Rhee of Craig-Hallum. Your line is now open.

Thank you. Archie with respect to cohort analysis as you look at the adoption patterns of your customer base and your studied over years, I’m sure you pay close attention to the, the number of connections how long it takes to add additional connections sort of the standard channels of expansion of their relationship with you. As you look at the cohort analysis what have you seen as a different over the last say six months that you might not have not seen year ago, two years ago?

What I think is, it's been a consistent increased connection per customer, it's been a increase moving up market. So I think if you look at the underlying data its relatively consistent which gets back to the earlier question about why the consistency in the business, there is multiple levels of it that remain consistent anywhere from new customers, or smaller customer, enablement campaigns to larger customers in channel, to up selling and to new products. So I think it’s a more of an evolution again over the last six months, looks a lot like the six months before and just a little bit more of the same.

You had commented earlier in the call and you said this number of times to moving up market, can you quantify that in the context of the typical supplier and how that's manifested in the size supplier that you’re dealing with?

Well we are seeing, if you go back five years ago Del Monte would have been a very unusual sales for us, now it’s much more typical. Again we’re not moving away from the smaller suppliers, we have our sales force segment and this continued to dominate the small end, we’re going into adding the larger end. So one of the things you're seeing in wallet share going up is because of us getting larger customers just a straight math of it getting larger customers. So we’ve given stats in the past and you continue to see that evolution of that of, the number of customers that are three times, four times, five times are average is growing faster than our overall revenue. So that segment continues to have momentum.

Okay. I guess just the last one for me then as I look at the sales team and consider productivity efficiency that kind of thing, have you seen even minor changes in ramp times sort of the past to efficiency in productivity there. Any other trends within that organization along lines of productivity or efficiency call out.

Sure, so as it relates to our approach for the sales force, we want to continue to add new people because there are such a huge opportunity in front of us and we are capacity constrained. That being said when we add those people obviously they are much less efficient than folks that have been with us for longer. So overall what we try to do is get to a point where we can hold the efficiency level flat, so what that means is as we bring in new people, those people that are more ten year and have been here longer, they need to get that much more efficient in order to be able to hold the overall efficiency flat. Balance in our philosophy over the last couple of years and that really hasn’t changed Jeff I would say that we have a very rigorous fantastic training program in place that really helps people get up to speed and learn our business and learn how to solutions sales. There is the time we’re associated with that, that’s typically sort of 9 to 12 months and that’s been pretty consistent of the timeframe that it has taken. So unfortunately I can point to the something that is really different, I would say what we haven’t place we believe works well and allows us to hold our overall efficiency flat while continuing to expand the sales force.

Okay, great. Thank you.

Thank you. There are no further questions at this time. Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone.