SPS Commerce, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the SPS Commerce Q1 2021 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Ms. Armina Blaszczak. Please go ahead, ma'am.

Thank you, Elaine. Good afternoon, everyone, and thank you for joining us on SPS Commerce First Quarter 2021 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 at our website, spscommerce.com, and at 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 dividend measures, including reconciliations of these measures with GAAP-comparable measures. And with that, I will turn the call over to Archie.

Thanks, Hermina, and welcome, everyone. We delivered a strong first quarter and a great start to the year as dynamics in the retail industry continue to fuel the accelerated shift to e-commerce. Supply chain shortcomings that surfaced during the pandemic have forced the industry to adapt, and we have seen numerous examples across various verticals of the efficiencies that can be realized with EDI as retailers and suppliers invest in supply chain automation. According to the U.S. Census Bureau, e-commerce sales for 2020 grew over 30% from 2019 and accounted for 14% of total sales. SPS Commerce is well-positioned to capitalize on this ongoing trend as we help our customers succeed in their digital transformation. The accelerated adoption of EDI continues to drive strong momentum and fulfillment, which grew 21% year-over-year, including the data masons acquisition. Total revenue grew 21% to $90.1 million, and recurring revenue grew 18%. Adjusted EBITDA grew 25%. to $25.5 million. The number of recurring revenue customers grew by 700 to approximately 33,850. New and existing customers span from e-commerce services to brick and mortar retailers. Stitch Fix is a leading e-commerce personal styling service. To enable ongoing business expansion, Stitch Fix needed to completely overhaul their technology landscape. They chose SPS for our ability to onboard vendors in volume, provide full-service support, and offer expertise in vendor and distribution management. With a goal of eventually having all order fulfillment managed electronically, SPS helped onboard their global vendor community, and over the course of only five weeks, we saw more than 90% of all orders committed to electronic trading with Stitch Fix. Williams-Sonoma is a multi-channel specialty retailer of high-quality home products. The company has been focused on expanding its shift to consumer distribution channel capabilities since early 2020 and engaged with SPS to onboard over 500 dropship vendors to EDI. We continue to work closely with Williams-Sonoma to drive efficiencies across their supply chain. We are also seeing consumer shopping trends driving the need for retail analytics. Studies have already shown that two-thirds of consumers consider sustainability prior to making a product purchase. Some regions across the U.S. may be slightly more conscious than others. So for retailers or suppliers, analytic software can help identify which cities are best to target with eco-friendly products and make sure these shelves are always fully stocked. Ongoing investments in our business have also paid dividends. expanding our addressable market and strengthening our competitive differentiation. The acquisition of data masons, for example, has already resulted in increased momentum in the Microsoft space with new customer wins in the U.S. and Australia. Our portfolio continues to evolve to support our customers. Our fulfillment product has always had the ability to manage orders sent to distribution centers, stores, and directly to consumers. Over the past year, we launched add-on products like carrier service to support customers who book shipments themselves. In March, we announced that SPS Commerce Fulfillment has expanded its support of e-commerce platforms and marketplaces. The added capabilities consolidate orders from e-commerce platforms like Shopify, BigCommerce, and WooCommerce, as well as popular marketplaces like Walmart, Amazon, and eBay into a single fulfillment solution. This allows suppliers to manage orders from multiple sales channels using a single platform to share data with logistics partners, integrate data with AP and ERP systems, and manage shipments. Also, within our API environment, partners such as SupplyPipe have begun to leverage our pre-built integrations to retailers and develop additional add-on services to allow more of a supplier's fulfillment workflow to be centralized on the SPS fulfillment platform. Since this time last year, the world faced unprecedented challenges. SPS Commerce remains committed to provide mission-critical and uninterrupted service to suppliers and retailers. The SPS team continues to work hard to support supply chain continuity and improve efficiencies amid evolving industry dynamics. The investments we made over the years have positioned us for the long-term growth as we leverage the power of the SPS retail network. Lastly, as a Minneapolis-based company, we wanted to comment on the April 20th verdict, finding police officer Derek Chauvin guilty of all charges related to the murder of George Floyd. The verdict does not lessen the grief felt for the loss of countless victims of police brutality. but I hope it helps to heal the community and bring real and lasting change. There is still a lot of work to reduce systemic racism, and SBS remains committed to action at organizational, leadership, and individual levels. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Archie. We had a great first quarter of 2021. Revenue was $90.1 million, a 21% increase over Q1 of last year. and represented our 81st consecutive quarter of revenue growth. Recurring revenue this quarter grew 18% year-over-year. The total number of recurring revenue customers increased 9% year-over-year to approximately 33,850, and wallet share increased 9% to approximately 9,900. For the quarter, adjusted EBITDA grew 25% to $25.5 million compared to $20.4 million in Q1 of last year. We ended the quarter with total cash and investments of approximately $211 million. Now turning to guidance. For the second quarter of 2021, we expect revenue to be in the range of $90.5 million to $91.5 million. We expect adjusted EBITDA to be in the range of $24.8 million to $25.5 million. We expect fully diluted earnings per share to be in the range of $0.20 to $0.21 with fully diluted weighted average shares outstanding of approximately 37 million shares. We expect non-GAAP diluted earnings per share to be in the range of 39 to 40 cents with stock-based compensation expense of approximately $7.2 million, depreciation expense of approximately $4 million, and amortization expense of approximately $2.7 million. For the full year, we expect revenue to be in the range of $371.1 million to $373.6 million, representing approximately 19% to 20% growth over 2020. We expect adjusted EBITDA to be in the range of $102.5 million to $104 million, representing 18% to 20% growth over 2020. We expect fully diluted earnings per share to be in the range of $0.97 to $1, with fully diluted weighted average shares outstanding of approximately 37 million shares. We expect non-GAAP diluted earnings per share to be in the range of $1.65 to $1.68, with stock-based compensation expense of approximately $26.9 million to depreciation expense of approximately $15.9 million, and amortization expense for the year of approximately $10.5 million. For the remainder of the year, on a quarterly basis, investors should model a 30% effective tax rate calculated on GAAP pre-tax net earnings. In summary, SPS Commerce delivered another strong quarter as the shift to e-commerce continues to drive momentum and fulfillment. Our customer focus and product portfolio are aligned with evolving retail dynamics, and we're excited about the growing market opportunities ahead of that. With that, I'd like to open the call to questions.

And at this time, if you have a question, you can press Store 1 at this time. And your first question comes from the line of Matt Foe from William Blair.

Hey, guys. Nice quarter, and thanks for taking my questions. First one, just wanted to understand, as the U.S. economy transitions now with more physical retail being open or getting closer to sort of full capacity, how does that impact some of the digitization trends and the tailwinds that you've seen from the shift to e-commerce over the past year?

You know, Matt, I would tell you that it's our belief that e-commerce is And dropship will continue to be strong, but perhaps not at the same level that they have been over the last year because of the pandemic. You know, and that's the great thing about our business model and the fact that we are somewhat indifferent, e-commerce, brick and mortar, omni-channel, that we are in all spots. So we're kind of there to service our retailers and our suppliers to wherever it is. But we anticipate it to continue to strong growth, but probably slightly lower.

Got it. Okay. And just one more for me. On data masons, you cited that you're seeing some increased momentum there in the Microsoft space, which was obviously your investment thesis there with buying that. Maybe just sort of dive into that a little bit. Is it sort of some of the functionality or skill set that they brought, the relationships that's helping you gain momentum in the Microsoft space?

I think it's a number of things. One, putting the teams together and having a sale where It's just a very easy end-to-end sale with one team. And it's very obvious that we have, on all aspects now, the best product. Whether you're looking at the retail network aspect of it, the integration to Microsoft, the additional add-on products, we're just a clear leader in all aspects now. But being able to sell as a complete team, I think, is a huge advantage. One of the things that's happening as well is a deal that perhaps data masons would have won. We're now winning together, but we're also winning at a higher dollar amount because we are full service as opposed to just the software component. They did obviously have a service offering as well, but it wasn't full service like the SPS. So we're able to monetize at a higher level because we're bringing more value to the customer.

Makes sense. Thanks, guys. Appreciate it.

And you have a question from Scott Berg from Needham.

Hi, Archie and Kim. Congrats on a great quarter, and thanks for taking my questions. I guess I got two. Archie, let's stay on the sales side, your customer additions. Organically, I think best quarter ever in the company's history. As you look at the additions in the quarter, and you've had a couple strong quarters in a row, But are the customers you're adding, is their profile any different than the historical profile, maybe coming more from partners versus direct or size? Just trying to understand if there's a change outside of just the sheer volume being better.

I would tell you it's just momentum. Typically, if you see large customer ads, it's momentum and community is the reflection there. But we are continuing to see good momentum in community, and we're also seeing more and more larger deals. That does not necessarily show up as much in the customer count, the larger deals. But I would say that there's strength throughout all segments of our customer base.

Got it. Helpful. And then as you start looking into calendar 21 here relative to calendar 20, I know analytics was a product that had less focus among some of your customers last year. With the calendar flipping and priorities changing around, kind of reopening and hopefully healthier businesses for some of these retail customers, are you seeing an increased demand around analytics here, or is that maybe something that's more on the come as we get through calendar 21?

I would tell you we're seeing slight improvement in analytics, and I would anticipate that to come over a period of time, especially as suppliers and retailers are more confident in the economy. I think that will be the guiding principle. The only thing it fights is that there's so many other priorities. But we're seeing it's stronger right now than it has been the last year.

Great. That's all I have. I'll jump in the queue. Thanks for taking my questions. And congrats again.

And you have a question from Joe Brink from Baird.

Great. Hi, everyone. Archie, just going back to this dynamic where you're seeing more large deals, and I think that also shows up in the acceleration of wallet growth in the quarter, what's your assessment of this? We've heard some other vendors in the supply chain space just kind of allude to the fact that in many ways 2020 – ended up perhaps being a bit of a gap year around strategic projects. And now that everyone seems to be acclimating a bit more, you know, 2021 is maybe the opportunity to execute on some bigger transactions. So is SPS kind of seeing that as well? And then maybe just any more color granularity on, you know, timing and what specifically you're seeing?

Yeah, I would say that there's a slight acceleration there. On that side, I wouldn't say it's drastic. One of the things that was better than we thought it was going to be is the whole push on ERP system migrations. I would tell you last year it ended up being similar to what we predicted at the beginning of the year, but come April, on April earnings call, we anticipated that there would be a weakening on that front, and there really wasn't a weakening. We're seeing a lot of different trends, obviously, the migration of the cloud, especially one of the reasons we were so excited about data masons was Microsoft is being very, very successful in migrating things to the cloud, as you're seeing in their numbers. And so that is a tailwind for us as people are moving ERP systems, especially if it's to the cloud. But I would say it's a slight improvement, but not drastic. It's not the main driver.

Okay, that's helpful. And then second thing, just in thinking about your outlook for the full year and kind of what's implied in 2Q, and then by consequence what's implied for the back half in terms of growth, You know, if you do end up seeing, I suppose, a deceleration in some of the elements of your model that are more, you know, document transactional oriented because of the phenomenon you alluded to, you know, dropship activity perhaps normalizing. Are there other areas where you anticipate, you know, SPS could potentially look to accelerate what has been contributing so far? And so, ultimately... you know, maybe the second half does not see that meaningful of a growth deceleration?

So when I think about the guidance that we just gave for the year and I compare it to the prior quarter, we actually took up the midpoint of guidance on revenue by a little over $9 million. And we certainly beat in the quarter, but our beat was 2-plus million. So what you've seen is based on our results, for the first quarter, that gave us confidence, particularly on the fulfillment side, to be in a position to be able to pretty significantly increase what the expectations are for the year versus where we were just 90 days ago.

Okay, great. I'll leave it there. Thank you.

And you have a question from Tom Rodrick from Stiefel.

Hi, Archie. Hi, Kim. Great to hear from you. Archie, let me ask you this question. You talked a little bit here about supply chain challenges that many of your customers have been having. I think all of us on the consumer side have felt it, whether it's a hard time finding things in stores or getting things through the mail. It's very clear that supply chain logistics have been tough all over the So I'd love to hear a little bit more how your customers are adapting with your solutions to sort of solve for that in real time. And maybe, you know, part of that answer is a lot of what they've been doing historically, drop ship, maybe it's tighter integrations with 3PLs. But maybe there's other things that they're doing also to better coordinate between manufacturers, facilities, and suppliers. Can you just talk a little bit more about how your customers are trying to adapt to those supply chains? and how they might be leveraging more of your platform to do that?

Yeah, there's a couple things. One, there are supply chain challenges just because getting product is difficult, and the growth rates, especially as it comes to dropship and e-commerce, are so large. That just puts natural pressure on things. You know, we're seeing a couple things. One, people are looking for making sure that what they're doing is as efficient as they can make it, so the retailers want to make sure like in the Williams-Sonoma example, that they have extremely efficient supply chains as it relates to the whole document flow and visibility. It doesn't necessarily take away the crunch, but they know where they are and they have high visibility. I think that's really, really important. And then they are, in some cases, looking for additional sources of product. And they're looking for us to onboard suppliers in a very, very timely or accelerated fashion. And then just overall, they just want to make sure that they have all these other challenges, that the places we play, we just make it significantly more efficient so that they can spend more time on the other components of their supply chain.

Yeah, that makes good sense. Thank you for that. And, Kim, just kind of a question on the model and the margins here. I mean, 28.3%, if I'm calculating this right, best EBITDA margin we've seen for our first quarter ever, I guess, and nearly at the high of all time. But I'm looking at that sales and marketing number, just barely over 22% of the percentage of sales and revenue of revenue itself. What do you think that number gets to over time if you consider it in your long-term model? How much more efficient can you be and sort of how do you make it more efficient? Because this is, you know, It's a lot lower than what we've seen historically and don't know how you take it down from here. So we'd love to hear your thoughts on that.

Sure, Tom. So first thing is I think with our business, it's always better to look at whichever line you're looking at. It can be sales and marketing as a percent of revenue. It could be gross margin, any particular line item there that you look at. For our business, it's always better to look at it on an annual basis. Sometimes you might see movement either positive or negative in a quarter. So an annualized view is always, I think, more reflective of the business. Longer term, what we've said is it relates to adjusted EBITDA margins of about mid-30s or 35% as a target. In there, we're assuming that sales and marketing is low 20%. meaning at that point we're still obviously adding a bunch of customers. We're still upselling a bunch of customers. But to get to sort of the mid-30s, we're assuming sales and marketing is that low 20%. It doesn't mean there's not opportunities for it to go lower, but that's sort of what we've penciled out as it relates to what that spend will look like when we're at a mid-30s EBITDA margin.

Yeah, and so given that you're kind of already in the low 20s on that front, I mean, thinking about other ways to sort of create that leverage that gets you that extra seven points up to the 35% level. Where are the efficiencies that you see potentially around the G&A line? That's one where it has stayed at kind of roughly the same level for a while. How do you create further leverage from here to get to the target?

Sure. So I think when you're looking at it, I would say the growth margin and G&A are two areas that you will see more leverage over time. Gross margin, we expect that will be at least low 70s. And on the G&A side, there's a lot of expense in that that's more fixed in nature. Think of that as, you know, accounting fees, legal fees, et cetera. And so as we continue to scale and grow and accelerate our top line, There's some spend in G&A that naturally does not need to increase at that same level that the top line does, so you will naturally over time see more efficiency and leverage come through that G&A line.

Yeah, really helpful. Congratulations. Thank you, guys. Appreciate it. Thanks, Tom.

And you have a question from Jason Salina from KeyBank.

Hey, guys. Maybe just one from me. I'll keep it brief. You know, the strength in the quarter and the outlook, what would you attribute, you know, the biggest driver to that? You know, we've spoken a lot about how, you know, data masons might be performing better than expected, but I'm curious on what's driving the positivity so early in the year.

Sure, Jason. What I would say is really a continuation of what we saw in Q4 with really strong momentum and fulfillment. And it's really across the board. When we think about our community go-to-market, which is really focused on helping retailers on their journey and then helping them connect with suppliers in an automated way, we saw that continue to be quite strong in Q1. With the data masons acquisition, we're very happy about that acquisition, very excited about that acquisition. What I would tell you is that the data masons slightly overperformed versus our expectations. But more broadly, the biggest driver is just really strong fulfillment across the board.

Great. That's actually quite helpful. Thank you.

And you have a question from Pat Walraden from JMP Securities.

Oh, great. Thank you. Hi, guys. Hi, Pat. So the question, Archie, what's your number one – in terms of what you're spending your R&D dollars on these days?

I would say, Pat, that we're leaning into added additional products for the 30,000-plus suppliers we have and our strong network to utilize a strong network. And that can either be through partnerships acquisition and also R&D. and to make it easier and easier for partners to build like a supply pipe, to build on top of us. But I would say it's additional new sources of revenue.

Is that like the, you know, breaking up the code and creating a lot more APIs? Is it that trend that we're talking about?

It's really more things like carrier service, building to a supply pipe, and just making sure that we have additional, you know, one of the things we're focused on is additional services for our supplier customers to make their processes more efficient, which can also drive more revenue to SPS Commerce.

Great. And then also, how are your employees doing? Are you back to the office? What are you telling them?

We're not back to the office. We're working home optional through June is what we've stated. Don't think we'll be back in July, August. And we're working through it. I jokingly tell people internally that March 15th of last year, I said we're working home optional for two weeks. So I don't know that I'm the best predictor of when exactly things are happening, they're evolving. So we're just going to continue to make sure we think about our employees first as we come back to work, and I think it will be different as well. And we've told people that it's going to be different. But I would say, you know, like everybody's employees, I think there's a high amount of stress. Our employees have a lot on them, making sure that the supply chain for our country continues to operate efficiently. And so it's a challenge. The whole mental stress is a challenge for people, and we're trying to recognize that. No good.

All right. Thanks, Archie.

And as a reminder, if you would like to ask a question, press star 1 on your telephone keypad. And you have a question from Neil Chokshi from Northland Capital.

Yeah, thank you. Great quarter. Impressive on the incremental ARR. Real quickly, you probably gave this, but I probably missed it. What was the contribution of DataMasons for the quarter?

Sure. So when you think about DataMasons, at the time we announced the acquisition, we had said that it would contribute about $20 million in revenue to 2021. And based on that business, it's pretty equally spread across the quarters. So you can think of that as roughly, you know, $5 million a quarter. And as a reminder, their mix of business is about 50% recurring, 50% non-recurring. The results for the quarter were slightly ahead of what those expectations were.

Okay, great. And very impressive increase in recurring revenue customers on the quarter. It looks like, per my calculation, though, that the ARR per recurring revenue customer was down. Is that because you did have such an impressive add in recurring revenue customers and, you know, it takes time for them to grow to the average?

So the two metrics for the quarter, the total amount of recurring revenue customers was approximately 33,850, and the average Average recurring revenue per recurring revenue was approximately $9,900. Both of those were a 9% increase year over year. So it did increase.

Gotcha. Okay. Thank you.

It appears there's no more questions in the queue. So at this point, we'll conclude the conference call. Thank you very much for your time.