SPS Commerce, Inc.

Good day, and thank you for standing by. Welcome to SPS Commons Q2 2022 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star, then one, then one on your telephone. That's star, one, one. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for the day, Ermina Blaschek. You may begin.

Thank you, Tawanda. Good afternoon, everyone, and thank you for joining us on SPS Commerce second quarter 2022 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 attraction 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 different materials. 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 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 financial measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to Archie.

Thank you, Romina, and welcome everyone to SPS's 50th earnings conference call. Solid performance in the second quarter was driven by ongoing momentum in EDI adoption. Demand for fulfillment and analytics remained strong. with 17% and 12% year-over-year growth, respectively. Total revenue grew 15% to $109.2 million, and recurring revenue grew 16%. Adjusted EBITDA grew 13% to $30.9 million. SPS continues to capitalize on the retail industry's ongoing investments in supply chain management efficiency, digital transformation, and cloud migration. Retailers and suppliers are more motivated than ever to overhaul their systems to accommodate the demands of an omnichannel retail and to address ongoing supply chain disruptions. Since the pandemic, trading partners have been under pressure to implement agile, seamless, and resilient workflows to ensure business continuity, and that need has been amplified by ongoing macro challenges. SPS is uniquely positioned to support our customers with full-service EDI, which includes access to resources to help manage increasingly complex trading partner communications and help retailers and suppliers across various industries successfully navigate challenging supply chain dynamics while they focus on achieving their business objectives. Dakin Industries, the world's number one indoor comfort solutions company and largest HVAC manufacturer, has over 90 production sites worldwide. To support their growth plan, Daikin is tackling costly and time-consuming redundancies to get products to customers faster by eliminating all manual processes. They partnered with SPS to successfully accomplish EDI onboarding of all of their suppliers. Garnett Hill, an online boutique retailer specializing in fashion and home goods, chose to replace an existing order fulfillment process and adopt EDI to improve the customer experience with efficient inventory management, order tracking, and increasing speed to shelf. PV Industries, a leading farm and ranch supply retailer in Canada, offers a unique product mix that differentiates the company in the marketplace with an assortment of 45,000 SKUs from more than 1,400 vendors. PV worked closely with SPS on vendor outreach to communicate how critical automation is the company's growth, And today, close to 93% of the retailer's purchase order volume is automated through EDI. PV also leverages SPS's analytics solution, sharing point of sale data with vendors for greater visibility into its inventory position to drive sales performance and to develop vendor partnerships that support its ongoing success. With the help of SPS Commerce, Retailers are recognizing the importance of sharing data to drive business decisions and expand globally. Uni, a pizza oven company, expanded operations beyond UK and now partners with SPS across North America and Europe. Global companies such as Crocs are leveraging sell-through data across their sales channels to help drive visibility, profitability, and predictability to mitigate inventory pressure across their supply chain. SPS continually strives to help trading partners work better together as we expand our network and build on our leadership position. Earlier this month, we acquired G-Commerce, a software solution provider known for its expertise in the automotive aftermarket industry. We're excited to welcome the G-Commerce team and customers to SPS Commerce. In summary, increasing complexity in omnichannel retail and supply chain management continue to fuel investment in digital transformation as trading partners strive to improve collaboration and successfully deliver on today's consumer expectations. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Archie. We had a great second quarter of 2022. Revenue was $109.2 million, a 15% increase over Q2 of last year, and represented our 86th consecutive quarter of revenue growth. Recurring revenue this quarter grew 16% year-over-year. The total number of recurring revenue customers increased 12% year-over-year to approximately 38,650, and wallet share increased 4% to 10,550. For the quarter, adjusted EBITDA grew 13% to $30.9 million, compared to $27.3 million in Q2 of last year. We ended the quarter with total cash and investments of approximately $259 million and repurchased approximately $15 million of SPS shares. In addition, the Board of Directors has authorized a new program to repurchase up to $50 million of common stock, which becomes effective on August 26, 2022, and is expected to expire on July 26, 2024. The company's November 21 program, the previously authorized repurchase of up to $50 million, will terminate when the new program goes into effect. Now turning to guidance. We acknowledge the evolving dynamics of inflationary pressure and the uncertainties in the global economy, which may impact the retail industry and our customers. However, given our limited exposure to foreign exchange rate fluctuations, our pricing structure, and the role we play in supporting trading partners across all retail channels, our operating model and growth expectations remain unchanged. For the third quarter of 2022, we expect revenue to be in the range of $113.4 million to $114.4 million which represents approximately 16% growth year over year. We expect adjusted EBITDA to be in the range of $32 million to $32.7 million. We expect fully diluted earnings per share to be in the range of $0.29 to $0.31, with fully diluted weighted average shares outstanding of approximately 37.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.51 to $0.52, with stock-based compensation expense of approximately $8.5 million, depreciation expense of approximately $4.5 million, and amortization expense of approximately $3 million. For the full year, we expect revenue to be in the range of $446.4 million to $448.4 million, representing approximately 16% growth over 2021. We expect adjusted EBITDA to be in the range of $128.2 million to $129.4 million, representing 20% to 21% growth over 2021. We expect fully diluted earnings per share to be in the range of $1.25 to $1.29, with fully diluted weighted average shares outstanding of approximately 37.1 million shares. We expect non-GAAP diluted earnings per share to be in the range of $2.13 to $2.15, with stock-based compensation expense of approximately $34.2 million, depreciation expense of approximately $17.3 million, and amortization expense for the year of approximately $11.1 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. Beyond 22, we maintain our annual revenue growth expectations of 15% or greater, and we continue to expect adjusted EBITDA dollar growth of 15% to 25% as we invest in the business to capitalize on market dynamics and support current and future growth. In the long term, we maintain our target model for adjusted EBITDA margin of 35%. In summary, SPS Commerce is well-positioned for long-term growth as macrodynamics, digital transformation, and the growing need for trading partner collaboration continue to fuel demand for SPS's full-service EDI. With that, I'd like to open the call to questions.

Thank you. As a reminder, to ask the question, you will need to press star 1-1 on your telephone. Please stand by while we compile the Q&A roster. Again, that's star 1-1 to ask the question.

One more moment for our question.

Our first question comes from the line of Matthew Fowle with William Blair. Your line is open.

Great. Thanks for taking my questions, guys. Wanted to just start off, I think it'd be helpful if you could, Kim, you mentioned the pricing model as being a positive for SPS, but maybe it would just be helpful to dig in a bit in terms of how much changes in volume or retail sales impact the pricing model that you have with your customers?

Yeah, Matt, I'll take that. I think there's a couple things. One, remember that we're completely omni-channel. In other words, as e-commerce goes down, if it's going into brick and mortar, that's the first thing. Second thing is very little of our revenue comes from actually transactions, and we don't have any revenue coming from GMV transactions. What we've found in the past is even if overall retail sales drop, what we've seen historically is the transaction volumes tend not to fluctuate. In fact, in times of uncertainty, sometimes they'll actually go up as instead of ordering 100 shovels, they'll buy 45 twice. And that's the way we're paid. We're paid by trading partner relationships, primarily trading partner relationships, and then a small portion from transaction volume. So we don't As GMB goes up, as it has in the past, you're not going to see a boom for SPS Commerce, and the flip side is also true.

Got it. And then just to follow up, in more difficult times, what would you expect to see from a churn perspective within your customer base?

Sure. So our churn has remained constant at around that 12% on an annual basis. If I look back historically on time periods where it has been a little bit more difficult economy, we have seen that churn historically go up by about a percent, but that is not something that we're currently seeing. The same could be said when you look at overall revenue. Again, there have been times in the past where there's been sort of more difficult economy, and even during those time periods, the amount of impact that it's had to our overall revenue has been quite nominal, again, a percent or so.

Great. Thanks, guys. Appreciate it.

Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Banbury with Craig Hallam. The line is open.

Great. Thanks for taking my questions. Two quick ones off the top. You know, Archie, I think in the past you've said a lot of times ERP replacement decisions prompt a rethinking of how people are conducting ERP. Certainly it seems right now those ERP decisions would likely be delayed or at least starting to be delayed. So the broader question is just, you know, outside of us and the whole world telling you things are getting really bad really quick, I mean, what have you seen in your model? Have you seen any of those impacts from the delayed ERP? It sounds like the answer is no. And have you seen any other variations?

To our business, no. A couple things. One, I think, frankly, in the supply chain world and retail, this is my personal opinion, you're going to continue to see some investments. And the primary reason is what retailers and suppliers did during the pandemic is they started fulfilling on the consumer's demands. But they didn't necessarily do that efficiently. And what we're seeing over the last year is people trying to figure out how to do what they're doing more efficiently and effectively. So I think some of those supply chain expenditures are going to continue. And I think that includes the cloud migrations, because typically, especially with the cloud migrations, it tends not to be a big capex. It tends to be a pay as you go. So that does help the model. We have not seen any slowdown. I will tell you what we've historically seen, which we're not seeing today, in a, we have been not overall affected or minimally affected in a down economy. What we've seen in the past is a lot of puts and takes in those environments where our retail team actually gets additional business because we are a very cost effective, non-capital extensive way for retailers to drive efficiencies in their supply chain. So we've seen strength in that area. On the flip side, we've seen a little tougher sales cycle in analytics and on the supplier side. Again, we're not seeing that today, but history would tell you that is a potential.

Okay. And then on the G-commerce acquisition, maybe just spend a minute there. I think you may have made a reference, but just refresh me on customer count and ARPU impacts, and then maybe just a minute on the logic there and what it brings.

Sure. So the acquisition, which closed in July, so you'll see it reflected in our Q3 results, added about a net 500 additional customers. The ARPU for that 500 net new customers is around 12,000. Our average ARPU is about 10,500. So all in, when we combine the two together, it's a very, very nominal impact to that overall combined A reminder, when we announced that acquisition, we said in 2022 we anticipated it would add about $2.5 million of revenue and be slightly negative on adjusted EBITDA, again, about $300,000. We also did give our view as relates to 2023, saying we expected it to add about $7 million in revenue in 2023 and deliver about $2.5 million in EBITDA.

And I would say it's a couple things. One, they have a strong presence in the automotive aftermarket, which strengthens our leadership position there. And then the customer base, obviously extremely important. We think we have additional ways to add value to those customers, which would potentially allow us to monetize that. And then we also think we got a very, very talented staff there. So again, just expanding our already industry-leading network and building on that.

Okay, I'll leave it there.

Thank you. Please stand by for our next question. Our next question comes from the line of Scott Berg with Needleman Company. Your line is open.

Hi Archie and Kim. Congrats on the good quarter and thanks for taking the questions. I guess too, there's probably a macro theme to all of us here today. I wanted to also touch on the macro a little bit is how do you all see the macro today in terms of not the macro environment, but your space as a whole? When you consider the secular demand for fulfillment solutions, if you look back at 08 or 09, I think you would characterize that as a very strong demand environment, especially for cloud, because it was building momentum. If you fast forward, say, 14 years till today, is the secular strength for your end market as strong as what it was back then, or has it changed somehow?

Yeah, overall, we think there's a ton of potential. And actually, we think what's happened over the last two years should benefit us for some time as, again, retailers, in my opinion, really fought to meet the demands of the consumer over the last two years. But they aren't doing that necessarily efficiently or effectively. So they need to continue to invest. And again, we went public off our numbers in 2009, which were very strong. And in 2009, what we saw was a strengthening of our retailer leads. as retailers, this became a higher priority for retailers. On the flip side, we did see longer sales cycles and more challenging sales cycles on the supplier side. So net-net, we were somewhat unaffected, but a lot of puts and takes underneath the covers.

Got it. Helpful. And then, Kim, your revenue outperformance in the quarter was one of your We'll call it smallest that I can remember off the top of my head. Yet your customer additions, your net customer additions were actually quite strong in the quarter at roughly, I think, 750 by my count. Was there anything different in maybe the linearity of the quarter versus other recent quarters that might have driven maybe a smaller revenue outperformance given what seemed to be a really strong actually net customer acquisition quarter?

Sure. So we feel really good about our results in the quarter. And that really goes across our whole product portfolio. But to your point, one thing that was a bit different than we had anticipated, we actually had a higher net customer ads of 700 plus in the quarter, which is higher than it's been the last couple of quarters. And so that part was a bit different than we thought in a positive direction. But do keep in mind, typically what happens is when we add more customers through enablement campaigns, etc., A lot of times those are going to end up being smaller revenue customers initially. And then we certainly have the opportunity to grow that book of business with those customers over time. So the only thing that really is somewhat different in the quarter is higher number of net customer ads. And when you look at those customers, there certainly is an aspect of that that is smaller than average customers.

Excellent. Super helpful. Thanks for taking my questions.

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Chappell with Loop Capital. Your line is open.

Hi. Good evening. Thank you for taking my questions. Just a couple. Archie, with respect to the vertical markets that you sell into, are you seeing any notable strength or weakness in any particular vertical?

I would say, you know, from a selling standpoint, no. I think we continue to be pretty broad-based. We continue to see probably a little more momentum in the distribution area than any place. But overall, it's been relatively consistent.

Okay, great. And then on the international front, I realize your international business is relatively small, but how are you seeing that segment perform?

Yeah, well, a couple places. In Europe, that is, we're primarily attacking Europe with our analytics product, and we continue to see really nice momentum. We don't seem to be caught up in the economy or the war or anything else there. Now, that could be just a factor of we're We're off a very, very small base, but we aren't seeing any slowdown on that side. Australia continues to be strong, so pleased with our international presence and momentum.

Great. And then finally, the carrier service solution, I think it's been a couple of quarters since it's been introduced. I was wondering if you'd just give us a sense of what you're seeing in terms of the pipeline and maybe when you think that solution may become material to the P&L.

Yeah, I think, well, it's contributing, as we had mentioned, a very small portion. It's a small add-on. These are examples of ways to continue to add value to our customers and ultimately monetize that value. And so we continue to see momentum. We continue to see pipelines growing, and we're learning how to sell it and make it just part of a bundle when you buy. So continued momentum, and I'm really optimistic about how we do that and other products into the future.

Okay, great. Thank you.

Appreciate it.

Thank you. Please stand by for our next question. Our next question comes from the line of Parker Lane with Stiefel. Your line is open.

Yeah, hi. Thanks for taking the questions. Arch, you just alluded to the strength in analytics in Europe. I was hoping to, you know, if we look at the balance of inflation and supply chain disruption alongside fears of a recession in both Europe and here. Which of those factors do you think has a bigger influence in the way that buyers are thinking about that product? Is it a must-have for them in this current environment or do you think it could be a bit squishier as they sort of prioritize other areas of investment? Thanks.

Yeah, in Europe it's a little bit different story just because we're coming off a small scale. So again, we've got a big place to to fish, and we're not seeing that. Again, I think if you go into continued recession, history would tell you, and we're not seeing that right now, history would tell you that the puts and takes under the covers of our businesses, we would see stronger retail business, we would see longer sales cycles and suppliers, and a tougher time in analytics. That's what history would tell you. Overall, it would look more or less the same, but a lot of puts and takes underneath.

Speaking of history, can we go back to 2008-9 and maybe you could remind us about the cadence or magnitude of retailer bankruptcies and how would you assess the health of the retailers you're working with today versus back in that time?

You know, we didn't see that many retail bankruptcies, and those are always factored in if it's one, you know, it might be 1%. You're always subject to that 1% revenue hit. We don't have any concentration, so a lot of times when somebody goes bankrupt, there's a small fee from many suppliers that gets, you bring the revenue down from those suppliers. I think the biggest quarter we've ever seen in impact was about 1% or less than 1% is the biggest impact we've seen. I would say overall, I mean, a lot has been made about bankruptcies and retail over the last four or five years, but really when you look at who has primarily gone bankrupt, it's companies that had big debt infrastructures, did not invest into their business. You take like five, six years ago, Sports Authority Inc., They had invested in their stores. They didn't have an omnichannel presence at all. In fact, they had sold off their rights to their e-commerce. So, you know, obviously always a risk, but with over 3,000 retailers in the network, feel pretty good about the minimal exposure.

Got it. Appreciate the color and congrats on the quarter. Thanks again.

Thank you. Please stand by for our next question. Our next question comes from the line of Nihal Chokshi with Northland Securities. Your line is open.

Yeah, thank you. And nice quarter, especially given the macro backdrop. Kim, you did mention that your customer ads were stronger on the small side than usual, yet you did have a really nice solid QQ increase in ARPU. So can you talk through that discrepancy?

Sure. When you think about the comment that I was making, we had a pretty high net ads of approximately 700. And when you think about what makes up our customer ads, the biggest quantity... Hello?

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Hello.

Hello. Who do I have? This is Kim and Archie. We have gotten disconnected. Yes, you are connected back. Thank you. We can hear you. Okay. Are we live? Yes, you are. Okay. Well, apologies for that. Michal, to answer the question that you had, you were asking, is it related to customer as well as the wallet share? So the comment that I was making is that in the quarter, we had approximately call it 700 net customer ads, a little bit higher than we've had the last couple of quarters. And just as a reminder, the vast majority of our net customer ads come through community campaigns. So the comment that I was making is typically when we get those customers for the first time through community, they tend to be a smaller than average ASP size. And then we have the opportunity to grow that business over time. So that's reflected to my comment as related to the 700 customers. Then as it relates to the wallet share size, to your point, certainly wallet share did increase in absolute dollars. If you look at it from a growth rate perspective, last quarter it was a 5% increase. This quarter was a 4% increase. So that's really the comment that I was referring to.

Got it. If you look at the wallet share increase on a Q2 basis and then annualize that, it's even better than the 4%. And so what is the driver of what was just let's call a good sequential QQ increase in the wallet?

Sure. So if you look at the overall results of our business, we had very strong performance on both fulfillment and analytics. All of that gets reflected into our overall recurring revenue. And then the output of that is there's also a concept of, you know, number of customers and then the wallet share. So the comment on the wallet share associated with the new customers, I feel like I've answered that. The rest would simply be the overall business. So if you look at the strength of our business in fulfillment and analytics, you can also look on the analytics that increased about a percent sequentially in year-over-year growth. That went from 11% to 12%. Got it.

That's fantastic. And then on G-Commerce, what was their growth profile prior to acquisition?

Sure. So they were growing. Somewhat similar to our growth rate. Our expectation is overall the growth rate of the combined companies will remain at what we have stated, which will be 15% or greater for the foreseeable future.

Got it. Thank you very much.

Thank you. As a reminder, ladies and gentlemen, to ask the question, you will need to press star 1-1 on your telephone. Please stand by for our next question. Our next question comes from the line of Joe Goodwin, JMP Securities. Your line is open.

Great. Thank you so much for taking my question. Just curious, are you maintaining the same investment path throughout the remainder of the year, or have you slowed any hiring on the sales side, or is there many changes made at all?

Hi, Joe. It's Kim. No changes. So our expectation, we had provided some visibility into this towards the end of last year, and it remains through this year. We continue to invest back in the business in areas of hiring, although, of course, we'll hire in all areas. We'll, in particular, focus on the customer success area as well as sales. Made nice progress in the quarter in both of those areas, and we'll continue to make investments to meet not only our existing customers' needs and expectations, but also in the growth opportunities we see going forward.

Got it. Okay. Thank you. And then on G-Commerce, is there any more background, I guess, can you share who engaged who on the transaction and maybe when that transaction process actually began? And if you could just provide a little more color on the relationship between the two companies prior to the acquisitions.

You know, one of the things we've done over a long, long period of time is get to know the people in the industry and the competitors. So Steve Smith, the CEO there, I've known for a decade and had different conversations along the time. And all of these, the seller needs to be prepared to sell at a reasonable price and want to sell. And so I think it all came together for them at this time. at the right price and at the right time. So most of these, a lot of these are multi-year relationships where you've built trust over a period of time and watch their business.

Got it. Thank you. Congrats on the quarter.

Thank you. I'm showing no further questions in the queue. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.