SPS Commerce, Inc.

Good day and welcome to the SPS Commerce first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ermina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead.

Thank you, Andrew. Good afternoon, everyone, and thank you for joining us on SPS Commerce first quarter 2023 conference call. We will make certain statements today. including with respect to our expected financial results, both 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 reverse 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 income 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.

Thanks, Armina, and welcome, everyone. The first quarter of 2023 marks a strong start to the year. as macro and omnichannel dynamics continue to drive the need for efficiency across the retail industry. We continue to see strong momentum in fulfillment and analytics and achieve total revenue of $125.9 million. Both total revenue and recurring revenue grew 20%. Before I continue with my prepared remarks, I'd like to acknowledge the announcement we made in early March about my planned retirement. The board is in the process of conducting a search for my successor, and in the meantime, we continue to execute our strategy to be the world's retail network. The expertise and knowledge we gain from working with over 115,000 trading partners worldwide uniquely positions us as a business advisor to existing and potential customers who are looking to improve efficiency and productivity. Over the past three years, Retailers and suppliers face changing consumer behavior, growth in sales channels, and volatility in the supply chain. Coupled with ongoing macroeconomic uncertainty, strain on the retail industry has been substantial, uncovering inefficiencies among the trading partners of all sizes. SPS Commerce is proud to work with retailers and suppliers across different industries, helping growing businesses embrace automation and position them for success. We recently launched a community campaign for the True Value Company, a wholesaler with over 4,500 independent retail locations worldwide and one of the largest distributors in the US. Our initial engagement to address specific EDI inefficiencies led to a full business assessment by SPS. Having recognized our ability to improve the quality and adoption of EDI within their vendor community True Value decided to partner with SPS to standardize electronic order fulfillment with over 1,000 vendors. We believe this will result in improved order and inventory management, cost savings, and trading partner performance across key metrics such as fill rates and ship timelines to deliver a better customer experience. SPS Commerce's network model, our channel partner collaboration, EDI expertise, and our suite of solutions are key differentiators and underscore our competitive advantage. Orveon, a private equity-backed collective of premium cosmetic brands, was focused on long-term omnichannel success and was introduced to SPS during an ERP implementation. Making EDI a priority, Orveon became a fulfillment customer. And in an effort to optimize the omnichannel experience, they subscribed to analytics to gain visibility in the inventory levels and sell-through across their various sales channels. Orveon is a prime example of a customer who is successfully navigating the omnichannel journey, leveraging SPS's fulfillment and analytics solutions to work with trading partners that include Bloomingdale's, Macy's, and Nordstrom's. In summary, the ongoing expansion of our network is a reflection of SPS's ability to help retailers, suppliers, and emerging brands successfully and cost-effectively adapt to omnichannel retail while they future-proof their investments in supply chain automation. I believe our strategy and our people position SPS Commerce for continued success as we capitalize on the growth opportunities ahead of us. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Archie. We had a great first quarter of 2023. Revenue was $125.9 million, a 20% increase over Q1 of last year, and represented our 89th consecutive quarter of revenue growth. Recurring revenue this quarter also grew 20% year over year. The total number of recurring revenue customers increased 13% year over year to 42,750, and wallet share increased 7% to 11,050. For the quarter, adjusted EBITDA grew 16% to $37 million compared to $31.8 million in Q1 of last year. We ended the quarter with total cash and investments of approximately $233 million. Now, turning to guidance. For the second quarter of 2023, we expect revenue to be in the range of $128 million to $128.8 million, which represents approximately 17% to 18% year-over-year growth. We expect adjusted EBITDA to be in the range of $36.4 million to $37 million. We expect fully diluted earnings per share to be in the range of 30 cents to 31 cents, with fully diluted weighted average shares outstanding of approximately 37.5 million shares. We expect non-GAAP diluted income per share to be in the range of 62 cents to 63 cents, with stock-based compensation expense of approximately $12.8 million, depreciation expense of approximately $5 million, and amortization expense of approximately $3.9 million. For the year, we expect revenue to be in the range of $525.5 million to $527.6 million, representing approximately 17% growth over 2022. We expect adjusted EBITDA to be in the range of $154.2 million to $155.8 million, representing approximately 17% to 18% growth over 2022. We expect fully diluted earnings per share to be in the range of $1.55 to $1.58, with fully diluted weighted average shares outstanding of approximately 37.4 million shares. We expect non-GAAP diluted income per share to be in the range of $2.67 to $2.70, with stock-based compensation expense of approximately $45 million, depreciation expense of approximately $19.8 million, and amortization expense for the year of approximately $15.6 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pre-tax net earnings. Beyond 2023, we maintain our annual revenue growth expectations of 15% or greater as we expand our network through community enablement campaigns and acquisitions. 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, our history of strong financial performance and 89 consecutive quarters of revenue growth underscore the stability of our business model and our consistent execution. Despite ongoing macro dynamics, we believe we are better positioned than ever to deliver on our long-term targets and sustained profitable growth. And with that, I'd like to open the call to questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Scott Berg with Needham and Company. Please go ahead.

Hi, Archie and Kim. Congrats on the great quarter and thanks for taking my question. I guess I got two. Let's start with the revenue outperformance in the quarter. It was roughly double what it was in Q1 a year ago. What went better in the quarter than maybe you expected? Or was this more of a case of I guess a change in guidance philosophy where you're maybe a little bit more conservative on your guidance this year, just given what the macro backdrop is like.

Hi, Scott. I'll take that one. As it relates to the outperformance, it was really across the board. So we had solid execution on the fulfillment as well as our analytics product. We also in this quarter did have higher than typical one-time revenue as well. That is not something that you would anticipate or we would anticipate would continue going forward. That was really a mix of some of the community activity and a little bit of other one-time revenue.

Got it. Helpful. And then as we think about the macro a little bit, I know we've had a chance to discuss this, I think, a lot over the last three or four quarters, but if you break down by geographic region, on where your presences are. Maybe it's Asia-Pac, obviously, with your foothold out of Australia, U.S., and Europe. Are you seeing any changes there that are kind of noteworthy or anything that might be different than your expectations six to 12 months ago?

Yeah, Scott, thanks for the question. No, we're really not seeing major movements. I mean, the biggest theme in retail, besides omni-channel and trying to catch up with consumer expectations, is it is really challenging for retailers and suppliers to forecast their business. Because there aren't any comparables. I mean, you compare against last Q1, you compare against 21, 20, you've just got multiple years that are all one-off years. So that just continues to be the biggest thing. And so, you know, they're all cautious, obviously, but take the different regions. Europe is really all about analytics. We still see strong momentum there. Australia is really an entire ecosystem. We're seeing strong momentum there. And then last is Asia, which we're really supporting North America supply chain customers. And we frankly aren't seeing a lot of chains there either. I mean, not of significance anyway.

Archie, just a quick follow-up on that. I know China has opened up over the last 90 to 120 days, more from a travel perspective than a supply chain perspective necessarily. But Does that kind of loosening of some of their restrictions and I guess borders, does that create an opportunity at all for you maybe as a minor tailwind of the business or is it really kind of a non-event for you all?

You know, frankly, it's somewhat of a non-event. It really comes down to the suppliers and typically it's then the manufacturing is in China. So where that manufacturing takes place at the end of the day really doesn't affect us and doesn't really create an opportunity or a threat for us.

Yeah, that's all I have. Thanks for taking my questions.

The next question comes from Parker Lane with CIFL. Please go ahead.

Yeah, thanks for taking the questions and congrats on the quarter. Kim, noticed that wallet share was down a touch quarter over quarter. Wondering if you could dive into the dynamics of that. I know it's not a terribly large decline. And then just give us a reminder on the balance of wallet share and net new customer additions that you expect in the growth algorithm this year. Thanks.

Sure, Parker. So from a year-over-year perspective, it grew about 7%, but to your point, if you look at the absolute dollars Q4 to Q1, there was a slight sequential decline. That's driven from an acquisition we made in Q4 of InterTrade. As a reminder, when we made that acquisition, we said that would add about 2,500 customers, but their average revenue per customer is much smaller than ours, roughly around 3,000. And so that is why you see that sequential decline, because Q1 is the first full quarter where we have all of that inter-trade revenue. Also, just of note, that has occurred in some other acquisitions as well. So if you were to look back at Q4 21 compared to Q1 22, based on an acquisition we made in Q4 21, you saw a similar type of dynamic.

Got it. Appreciate that. And can you talk a little bit about gross margin leverage in this model longer term and just the impact that some of the recent acquisitions have had on gross margins where you expect a long-term model to shake out on that front?

Sure. So if you think about where we're at from a gross margin, we're at, call it sort of that mid-ish to maybe a little bit above mid-ish 60s from a gross margin perspective. Longer term, we believe that can be in the low 70s. The biggest driver of how that will change over time is to get us to the low 70s is really primarily going to be around scaling. Cost of goods sold is an area we've made a lot of investments in in the overall customer experience. And over time, we believe we'll be able to grow into a lot of those investments. For any acquisitions we've made where the asset that we've acquired has lower gross margins than we do, we do believe that there is nothing that would make them not equal our gross margins over time. So, nothing has changed from our belief of the ability to have gross margins in the low 70s in the future. And that would align with when we're at, call it that, sort of mid-30s from an adjusted EBIT job margin perspective.

Understood. Appreciate the feedback. Thanks again.

The next question comes from Jeff Van Ree with Craig Hallam. Please go ahead.

Great. Thanks. Thanks guys. And congrats. Another great course. So a couple of questions. I'd love to hear a bit more about the true value, you know, opportunity in terms of just maybe as a case study, what, what do they have now? What are they using? What are you displacing? How did they find you? Just a little more backdrop on how you got here.

Yeah. So a lot of manual processes, what we typically see in a retailer a lot and either a Some of the documents are automated, but not all the documents, but it's really not across the board. So a lot of manual processes. And I would say this is a little different type of company, but pretty much straight down the fairway as far as type of enablement campaign. They really are a distributor. They sit between them and the retailers. So we will enable their suppliers. We'll do a typical... campaign, which is where we record a webcast. We work with their team. We do calling. Those suppliers will have the opportunity to either use our solution and or buy a competitor's solution and test and certify with them. And we'll be aligned at the top at True Value. So it feels like, obviously, there's a pretty decent number of suppliers. But we feel this is pretty down the middle type of retailer. At the end of the day, they're more of a distributor than an actual retailer because they're independent stores.

Right, right, sure. On the acquisition front, just any update on sort of pricing, pricing expectations from potential sellers, pipeline of future deals that you're looking at, or how it's changing?

Yeah, I mean, we continue to be very active. And as you would expect, I mean, it is a challenge. At least if they've raised... If companies have raised funds in the last two years, a lot of times they have real ridiculous valuation expectations. And we're just not going to pay valuations that were normal 18 months ago but are outdated today. So that does create some headwind. But a lot of times, over time, they do become more, I don't know, more in check. I think the other thing we're seeing in some of these, if they are funded by investors, is a move towards profitability. A lot of them were burning a lot of cash, which creates some problems for us. And we'd rather not do that. So some of them are getting their houses in order. So we continue to be aggressive. We continue to be out there. But we're going to stay disciplined.

Last for me, in terms of the most recent, call it last 12 months, give or take, cohort of suppliers coming onto the network, any observations about how this cohort might be behaving differently with respect to the number of connections, the frequency or pace at which they start to add new connections, the size that they come in, any notable differences about the most recent cohort that stands out?

You know, that's a good question. It's something we look at pretty regularly and it tends to be, it's pretty typical. You know, over time, they do, over time, especially with a community enablement campaign, we have great upsell opportunity of those suppliers. It takes time, but nothing unique about over the last 12 months in particular.

All right. Thanks, Jack. The next question comes from Joe Brewink with Robert W. Baird and Company. Please go ahead.

Great. Hi, everyone. Yeah, I guess similar to the last question, maybe similar on just the macro topic with a bankruptcy, retailer bankruptcy now in the news. Is there any change in just how suppliers currently on the network kind of absorb information like that? Like, is there a certain immediacy where that connection, that particular connection just goes away? Or are there sometimes opportunities to actually use it as a re-engaging event and kind of re-educate on what the platform can bring and so you don't end up losing a lot of business? How would you kind of approach that proposition these days?

Yeah, so really when you think about the supplier, there's suppliers that only use SPS for that supplier, for that retailer. So you're... you're at risk of losing that supplier. And those numbers tend to be highest when we have a strong retail relationship. In other words, we're doing their onboarding, which in the Bed Bath & Beyond case, I assume that's what you're referring to, we don't have that. So we don't have very many suppliers in that boat. Then you have suppliers that they might have 5, 10, 50, or 100 different retailers retail trading partners they use SPS for. And kind of part of typical business for these guys is they're adding and subtracting trading partners along the way. I mean, our bigger suppliers in particular, they might stay at 50 retailers. They might go from 50 to 55, but they subtract seven and add 12. So it's kind of typical. So from that standpoint, I think it's kind of proof of our business model. It's not going to have a significant impact to us. Would we like to lose any business? Obviously, we don't like to lose any business. And along the way, our job of our sales staff and our marketing team is to continually be engaging with all of those suppliers so they're fully aware how else they can use SPS Commerce. So obviously, a little bit of an escalation in those processes when you have something like a Bed Bath & Beyond. You know, frankly, as I talk to retailers, we're seeing Bed Bath & Beyond as a little bit more of a one-off than a, wow, look at what's happening to retail.

Okay, that's all helpful. Thanks, Archie. And then just based on what one of your peers in the supply chain category had to say last night, it seems like kind of rejuvenated investment in retail The stores, brick and mortar stores, is something that's taking place. Is there maybe a lagged effect? You know, when you hear about retailers sinking investment into things like point of sale or inventory management, could your analytics product ultimately benefit, but it maybe benefits after those commitments? Or is there not a relationship at all?

Yeah, I think a couple things. One, not all that surprised by the results last night. I assume you're referring to Manhattan and just, you know, one of the big themes we're seeing in retail is they met the demands of the consumer in 21, 22, and now they're really trying to get the back-end systems. So there are different lag effects for us. For instance, if a retailer is automating their distribution center, so they're going to start receiving product in with a barcode label, That will typically, upon implementation, lead to a potential enablement campaign. And we have a partnership there. So there are different leading indicators for us that can be a positive. Don't want to overblow it, but they can be a positive. Again, like if a retailer is buying Manhattan Associates, they need to get their suppliers to understand to behave differently. They need to send an advance ship notice. They need to send a barcode label. And that's where we come in. We enable those suppliers. We do an enablement campaign for those documents. So a lot of those things are real positive. And we are seeing investment from retailers because they have met the needs of the consumer for the most part, but they're not doing it efficiently, effectively, or necessarily profitably. So there's a big push.

And does that relationship hold with the store activity? You know, thinking of like point of sale, just wanting to have more accurate placement of inventory if you're a supplier, visibility into kind of final demand. Does that kind of follow along?

It does. Obviously, the point of sales is most valuable for the store activity, either the store for the consumer buying at the store or Or also one of the trends we're seeing is stores are becoming distribution centers. So having inventory on hand that does stores, what's selling. So those are positives for us. Again, I don't want to overblow, but they are positives for us.

Yep, yep. I'll leave it there. Thank you very much.

Again, if you have a question, please press star then 1. The next question comes from Christine Jiang with Northland Capital Markets. Please go ahead.

Hey, guys. Thanks for taking my question and congrats on the quarter. Just wondering if you could talk about a little bit more about the level of activity that you're seeing from channel partners. Are you still seeing strong contributions from them and are there any changes to that relative to maybe 2020 levels?

Sure. So channel sales and that lead generation engine still remains very important and robust for us. There are some nuances depending on which ERP system, but that still remains quite positive and quite robust.

Got it. Thanks. Very helpful. And then on the revenue guidance provided for Q2 and the full year, I believe there is a slight deceleration embedded for the second half of 23. Can you just walk us through how you're thinking about that trajectory there? Was there maybe some pull forward that you saw in the first half or maybe a little bit more, you know, cautiousness baked into the guidance there?

Sure. So a couple of things I can point you to is one, There was a couple acquisitions that we made in the latter part of 22 that we lapped in the latter part of 23. So that has been reflected into the guidance itself. Also, just as a reminder, the guidance that we just provided for our revenue expectations for the year at a midpoint is about $2 million higher than what we had anticipated just 90 days ago.

Got it. Okay. And then the final question for me would be on the analytics piece of the business there. Did you guys see any acceleration this quarter? How did that part of the business perform?

Sure. So analytics grew about 10% year over year. And our expectation would be that we would expect to see analytics grow within a couple percentage points similar to that 10% number. So stay basically at 10 or plus or minus, you know, a percent or two.

Got it. Thank you very much. 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 and have a wonderful day. You may now disconnect.