Hello and thank you for standing by. Welcome to SPS Commerce Q4 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Irmina Blaszczyk. Please go ahead.

Thank you, Josh. Good afternoon everyone and thank you for joining us on SPS Commerce fourth quarter and full year 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 the 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 and 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 would like to turn the call over to Archie.

Thanks, Irmina, and welcome everyone. 2021 marks another year of strong execution and profitable growth for SPS Commerce as retail dynamics continue to emphasize the need for fulfillment automation and supply chain efficiency. Since the pandemic began, consumer shopping habits forced retailers and suppliers to embrace a true omnichannel strategy. In addition, ongoing disruption across the global supply chain was intensified by unanticipated spikes in consumer demand, port delays and labor shortages. Overnight supply chain automation became a priority for the retail industry and SPS Commerce was instrumental in connecting thousands of suppliers and retailers to overcome inventory constraints and get products to consumers. Our add-on solutions such as carrier service and streamlined connections to e-commerce platforms and marketplaces are helping our customers execute a true omnichannel strategy and represent a growth opportunity while expanding our addressable market. The need for supply chain automation continued to fuel demand for EDI. For the full year, revenue grew 23% to $385.3 million. Recurring revenue grew 20% year-over-year, led by fulfillment growth of 22%. We're also seeing acceleration in analytics, which grew 10% in 2021, as retailers are adopting omnichannel fulfillment strategies and leveraging stores for distribution, making point-of-sale data critical in optimizing product sales and inventory. Net new customer adds increased by 40% in 2021, which excludes the recent Genius Central acquisition. Following organic growth of 27% in 2020 as retailers, brands, and suppliers continue to prioritize automation and a consumer-centric fulfillment strategy. Stitch Fix, a leading e-commerce personal styling service, needed to completely overhaul their technology landscape to enable ongoing business expansion. They chose SPS for our ability to onboard vendors and volume, provide full-service support and offer expertise in vendor and distribution management. Williams-Sonoma, a multichannel specialty retailer of high-quality home products, focused on expanding its ship to consumer distribution channel capabilities since early 2020 and engaged with SPS to onboard over 500 drop-ship vendors to EDI. Osborne, the world's largest surface treatment and finishing provider faced several challenges with its SAP EDI system. Many SAP EDI solutions require significant ongoing maintenance from IT teams to meet EDI requirements or to add trading partners. Making changes to the SAP system itself can be difficult and costly. Osborne deployed SPS fulfillment for SAP and was able to avoid hiring staff to support EDI operations, improve their order fulfillment performance, and freed up resources to focus on the company's strategic initiatives. SCHEELS, one of the largest sporting goods retailers in America and a long-time SPS partner, made EDI a requirement for all their vendors. They worked with SPS to quickly onboard their suppliers and now send over 95% of their purchase orders via EDI. Their products are stocked on the floor within 48 hours of delivery instead of weeks despite a reduction in labor hours. With approximately 1,700 brands present in stores at any given time, it's been a win-win for both SCHEELS and their vendors to automate their trading partnerships. Buc-ees, a gas station and convenience retailer with approximately 40 stores across the U.S. and a growing number of locations, needed to increase efficiencies throughout the supply chain by improving visibility in their shipments and inventory. In conjunction with an ERP update, Buc-ees aimed to automate order fulfillment across all their vendors and chose SPS for their EDI solution. Hello Bello, a family and baby product company, embraced evolving retail dynamics and migrated their on-premise solution to a cloud ERP and selected Microsoft Dynamics 365. Having signed a one-year exclusive contract with Walmart, they had to ensure their operations could handle the expected volume. Thanks to SPS' vast network and expertise in Microsoft ERP integration, Hello Bello went from sign-on to go live in a matter of weeks. Lastly, to strengthen our leadership in food retail and distribution, we recently acquired Genius Central, a leader in in-aisle ordering for natural and specialty food grocers. SPS' competitive differentiation and our ability to expedite trading partner onboarding is rooted in the size of our network, our world-class products and people and the strategic acquisitions we made over the years to facilitate integration of the SPS solution to our customers' ERP system. Our investments are accelerating our growth while expanding our addressable market. SPS has grown from a groundbreaking disruptive idea into the largest retail cloud service and the industry's first integrated suite of products architected for today's omnichannel and retail world. I would like to thank all of our employees for their steadfast dedication to the company and our customer success. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Archie. We had a great fourth quarter. Revenue for the quarter was $102.8 million, a 23% increase over Q4 of last year and represented our 84th consecutive quarter of revenue growth. Recurring revenue this quarter grew 21% year-over-year. Adjusted EBITDA increased 21% in the quarter to $27.7 million. For the year, revenue was $385.3 million, a 23% increase and recurring revenue grew 20%. The total number of recurring revenue customers increased 13% year-over-year to approximately 37,500 and wallet share increased 9% to 10,050. As a reminder, in November 2021, we announced the acquisition of Genius Central, which added approximately 1,700 customers to our network. Adjusted EBITDA grew 23% to $107 million. We ended the year with total cash and investments of $257 million and repurchased approximately $20 million of SPS shares. Now turning to guidance. For the first quarter of 2022, we expect revenue to be in the range of $103.8 million to $104.8 million. For the full year, we expect revenue to be in the range of $442.5 million to $445.5 million representing approximately 15% to 16% growth over 2021. For the first quarter of 2022, we expect adjusted EBITDA to be in the range of $28.8 million to $29.3 million. For the full year, we expect adjusted EBITDA to be in the range of $125 million to $126.5 million, which is higher than the $124 million to $126 million previously communicated on the Q3 2021 earnings conference call and represents 17% to 18% growth over 2020. For Q1 2022, we expect fully diluted earnings per share to be in the range of $0.24 to $0.25 with fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.46 to $0.47 with stock-based compensation expense of approximately $9.2 million, depreciation expense of approximately $4 million, and amortization expense of approximately $2.5 million. For the full year 2022, we expect fully diluted earnings per share to be $1.15 to $1.18. We expect fully diluted weighted average shares outstanding of approximately 37.5 million shares. We expect non-GAAP diluted earnings per share to be in the range of $1.99 to $2.02 with stock-based compensation expense of approximately $35 million. We expect depreciation expense of approximately $18.1 million and we expect amortization expense for the year to be approximately $10 million. For the year, you should model approximately a 30% effective tax rate calculated on GAAP pre-tax net earnings. Beyond 2022, 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 delivered strong fourth quarter and full year results, culminating in two firsts: quarterly revenue greater than $100 million and annual adjusted EBITDA dollars greater than $100 million. Fulfillment automation and the need for supply chain efficiencies continue to drive demand for EDI and SPS is well positioned to capitalize on evolving retail dynamics with our growing portfolio of solutions and expanding addressable market. With that, I'd like to open the call to questions.

Thank you. Our first question comes from Scott Berg with Needham. You may proceed with your question.

Hi, Archie and Kim, congrats on the good quarter and the metrics were fantastic. I guess, Archie, let’s start up with the general kind of state of the ecosystem. You all have raised your growth couple of quarters ago, the annual growth rate over the intermediate term. Obviously, Kim's guidance sounds like you still feel very confident in the macro environment. But the question I continue to get when I think about SPS Commerce is the business seen like had benefit from the pandemic. How should we feel about the – I guess those benefits really being sustainable over the next two or three years? Are there incremental or different drivers that you're seeing that will drive the business kind of more forward or extend the momentum that you're seeing?

Yes. When I look back, I think there were some benefits in 2020, 2021 as the world has truly accelerated to an omnichannel world. We're moving along on e-commerce. We're moving along on brick-and-mortar but it really wasn't an omnichannel world. And I think that is a driver. But I think, Scott, more importantly, what's really driving our acceleration from three, four years ago is our investments in our strategic initiatives. We started investing in demand generation marketing more aggressively. Customer success, we made some investments, especially on the retail side. In 2018, we reordered the sales organization which was more painful than I anticipated, but is now gaining more than I would have anticipated. We rolled out a brand-new fulfillment platform in 2017 with a new go-to-market strategy over the next couple of years. So I think that actually what's happening more for SPS Commerce is a combination of the investments that we've made in 2016, 2017, 2018, 2019, that really start benefiting us in 2020, 2021, 2022 and beyond. So I think some slight positives with the pandemic or acceleration in the omnichannel world, but I think it's actually driven more by our strategic initiatives.

Got it. Helpful. And then from a follow-up perspective, Archie, I know you mentioned that analytics grew 10% in the year, 2020 was a poor growth year for that as analytics kind of fell in the priority stack of your customers. But does 10% feel like the right growth rate for analytics going forward now that, hopefully, that environment is normalized? Or do you think there might be more puts and takes might move that needle one way or the other as you look at calendar 2022? Thank you.

I think long-term, I view fulfillment being able to have – or analytics having the capability of growing consistent with fulfillment. I think in the current environment, I think we've hit a mark and I feel somewhat confident being around the 10% mark, plus or minus that we're past where we were 1.5 years ago, and that real confident of what the timing is to get analytics back to where it was pre-pandemic, but pretty confident long term that it has a lot of opportunity.

Great, that’s all I have. I will jump back in the queue. Congrats.

Thank you.

Thank you. Your next question comes from Jason Celino with KeyBanc. You may proceed with your question.

Hi, this is actually Devin on for Jason. Can I – thanks for taking my question. Maybe first one I have is probably more broadly – are you still seeing some end vehicles that kind of lag the broader market in terms of recovery? And are you expecting kind of these industries to come back to normal or online back in 2022?

We're not seeing as bigger differentiation now as we did 1.5 years ago or even a year ago. There's some companies per se that are lagging. But in general, we're coming back to more of a normal pace. I think we're also coming back to a more normalized growth rate in e-Commerce as well. Obviously, we did not take a step back in e-Commerce but we did not see in 2021, the large gains that we saw in 2020. But e-Commerce is – it's a little bit hard to judge, because each company does it a little bit different, each retailer does it a little bit different. If you order something online and pick up from the store, some retailers are counting that as store sales. Some are counting as e-Commerce sales. We view it as an omnichannel sale and so we're seeing much more of that.

Great. That's helpful. And then maybe just one more, congrats on the acquisition of Genius Central, it seems like a nice addition. But maybe could you just quickly comment on how the go-to-market motion is there? And maybe if there's any sort of opportunity for SPS to quickly ramp up the go-to-market efforts and maybe accelerate product adoption there?

Yes. I think there were two parts of the Genius Central acquisition. One was a go-to-market motion, which is just like ours and that has been fully integrated into our go-to-market and the quality people that we picked up in that acquisition have been integrated into our teams. So that part is going fairly well. And then I think as we go forward, this is much more of a retail sales having that in the bag of the retailer and having some specialization and expertise to help the retail reps is really the motion. Again, this was a small tuck-in acquisition. And I think it's a very good acquisition, but I'm not expecting this to be a significant part of our revenue over the coming five years.

Got it. Thanks Archie. Thanks for the color.

Thank you. Our next question comes from Parker Lane with Stifel. You may proceed with your question.

Yeah, hi Kim and Archie, thanks for taking the question. Archie, you talked about this omnichannel road we’re now living in, can you share maybe a sense of what share of your customer base hasn't fully embraced this omnichannel vision yet some of these newer use cases like drop shipping and in-store pickup? And potentially how much incremental wallet share could you gain from those customers embracing this omnichannel world that we're now in?

That's a good question, Parker, and a little bit challenging, but a little bit of swag as long as everybody considers this way. I think the vast majority have at least embraced it, but they're on a long-term journey. And I think there's two parts of the journey. Truly getting to have a true omnichannel full experience with expanded aisle with drop ship is a long-term journey. And then the second piece that I think retailers are struggling with is, they did a really good job of making sure that they could service their customers and the second phase is now how do we do it efficiently and effectively. So I think we're in the very, very early days. But I think for the first time, retailers are using their stores as a competitive advantage against e-Commerce as opposed to a negative. They're using the fact that there's a store by your house and they can do same-day delivery. They can do pick up in store. So I think we're very, very early in the transformation, but I think it has made a meaningful first start for many, many retailers.

Yes. That's great feedback. And then throughout the year, you've been talking about the uptick in migration to an adoption of cloud ERPs and obviously, the channel plays a big role there. Kim, in the past, you've given us the share of business that's been attributed to the channel, if I'm not mistaken. Is there any way to give us a sense of where that shook out in 2021 or just how it is compared to the last few fiscal years?

Sure. So channel sales remain an important contributor and it's a great lead generation engine to us, particularly to get to some of our larger-than-average customers. So that remained very strong in 2021. Also with the acquisition of Data Masons, which was at the end of 2020, so we just completed our first full year of having that part of SPS Commerce. That certainly has been a great tailwind for us, and we've seen a lot of momentum in the Microsoft Space.

Got it. Makes sense. Thanks again.

Thank you. Our next question comes from Joe Vruwink with Baird. You may proceed with your question.

Awesome. Hi, everybody, this is Peter on for Joe tonight. Thanks for taking our questions. Just one for me on the competitive environment, recently, there's been some public commentary from some of your fulfillment network peers. I'm wondering if you're seeing any increased competitive in the segment of the market. Or is it just a byproduct of what is ultimately a larger and faster market opportunity today?

Yes. I would tell you that over the last two years, we’ve seen a further differentiation in the competitive landscape between SPS Commerce and its peers for a couple of reasons: One, this trend towards omnichannel, where we are the – we have the largest network. It's a vast network that includes both drop ship, e-commerce, and brick-and-mortar. And then our relationships with the retailers and so we have not seen intensified competition. We think our expertise in, particular, in the ERP systems, is a competitive advantage. And then obviously, we are a network service. We truly have built out a network. So some of the announcements we've seen are from people that are either software-oriented or managed service oriented, so they really don't have a network. And that will continue, we believe, into the future, be a very strong competitive advantage for SPS Commerce.

Awesome, thank you. I will leave it there.

Thank you. Our next question comes from Jeff Van Rhee with Craig-Hallum. You may proceed with your question.

Yes. Kim and Archie, I have several for me. I'll jump through these fairly quickly. Definitely, on the sales side, obviously, Dan Juckniess and team have done a great job. They seem to have hit their stride. I mean, how do you think about sales capacity additions as we get into 2022?

Sure. We will continue to add resources as we see it appropriate based on the opportunity in front of us. To your point, over the last few years, there's been a lot of work done to increase that capacity per sales rep. And certainly, the longer a person is with us the more expectations we have for each of those sales reps and therefore, their quota, for example, would increase on an annual basis. But we are in a position where we are adding capacity and adding some resources really more driven by the opportunity in front of us.

Okay. On the Carrier Service and Carrier Optimization product, can you just talk about – I realize it's early there, but just where is that? What have you seen in terms of early pipeline, early receptivity? It seems like a pretty interesting product.

Yes. I would say, again, it's very early. We're seeing good reception to that. Obviously, it's value. I think we're also seeing it as a potential – two things: one, a potential competitive advantage; and also a retention tool as well once people are fully integrated and using it.

Okay. Last for me, just on the pipeline of enablement campaigns, anything else you'd observe in the pipe that's a little out on the normal whether it's the size of the target customers, the makeup of that pipe vertical? Is anything else notable in what you're seeing working through?

I would just say an evolution from the last two, three years that we continue to get bigger and bigger deals. I think it's because of our capabilities, our leadership position, and company's willingness to move to cloud ERPs, and so we're following that trend. And then I would say the retail pipeline continues to get broader and broader in the retail and in industrial distribution and different distribution specialty as I think the moves the sales organization made more specialization within the retail sales group is paying off.

Interesting. Okay, great. Thanks. Great quarter.

Thank you.

Thank you. Our next question comes from Mark Schappel with Loop Capital. You may proceed with your question.

Hi, thank you for taking my question and nice job on the quarter. Archie, regarding M&A, historically, the company has been making about one acquisition a year, at least for the last few years here. Given your strong balance sheet, is there any appetite to do more than, say, one deal a year going forward?

Yes. I think that when we look at the pipeline, et cetera, I think that one year, we never had an appetite to do less than or only do one a year. I think as we move forward, I won't make a projection for 2022. But going forward, as we're looking at more product road map and more acquisitions for add-on products for our 37,500 recurring revenue customers to add value to them and be able to monetize that. I would like to believe we could do at least slightly more than that. Again, that's not a 2022 prediction. But as we ramp that pipeline up and that becomes a priority of looking slightly broader. Most of these are going to be tuck-in type acquisitions where we can have our extremely highly qualified sales force sell to the 37,500 customers.

Great, thanks. And Kim, the recurring revenue customer number was up quite nicely in the quarter. How many of those customers did Genius Central add?

Sure. Genius Central added about 1,700 in the quarter. So about 400 net adds, excluding.

400 net adds. Okay. Great.

Excluding Genius Central, Genius Central was 1,700.

Thank you. Our next question comes from Nehal Chokshi with Northland Capital. You may proceed with your question.

Yes, thank you for taking my question and good quarter. Past few quarters you mentioned that your revenue opportunity, long-term revenue opportunity may be much bigger than $5 billion, citing that Shopify has 600,000 customers versus your target of 200,000 customers. But Shopify's customers tend to be a lot smaller, that's presumably a smaller ARR opportunity than your current target set. So any advice on how to think about, one, SPS' ability to hit that smaller customer size in a meaningful way. And then the ARR opportunity associated with that smaller customer size as well.

Yes. I would say there's two things that we have our eye on. One is when we have a supplier, they are using us for all of their EDI or API retailers, right. And they do have smaller retailers they're doing business with that are sending e-mail or fax or however they're sending their purchase orders to them. As we have add on products, we're able to – I believe, so that supplier can have a bigger chunk of their business besides just the EDI API retailers. So that's the first part. And then the second part is to continue to add on products to those 37,500 recurring revenue customers and be able to drive value for our customers while at the same time, monetizing those customers. So I think those are the two things, not necessarily the smallest suppliers, but capturing all of the retailers that a supplier does business with regardless of how that retailer does business.

Okay. And you have been adding functionality as is but why doesn't your target ARR per customer go up given that you have been adding functionality?

Sure. So if you look at what we – which we show, which we say the opportunity is at least $5 billion. That's really primarily based on the two primary products we have today, which are fulfillment and analytics. That's also why we have said that the total addressable market is greater than that for the exact reason of what we're talking about now. When we have additional sort of add-on products, all of that would be considered additive to that $5 billion number.

Okay. And any sense as for as like what is actually the true ARR per customer target when you consider those additional add-on products that you guys have already added?

Sure. At this point, we're saying we think the answer is certainly significantly greater than that $5 billion overall, but we haven't updated the number. The way I like to look at it is $5 billion versus where we are today is much larger than where we are today. And we know that opportunity is definitely much more than that $5 billion. So there will be a point in the future we may take that opportunity to increase that number.

Okay. And then finally, you are guiding to 15% to 16% year-over-year growth for calendar 2022, do you have a small acquisition. Does that 15% to 16% apply on organic basis? Or is that a little bit lower?

So what we do as a company in the year we're in, we guide to consolidated. So our expectation for full year 2022 is reflected in our guidance of 15% to 16%. We did a small tuck-in acquisition in November 2021. At the time we did that acquisition, we said that would translate to roughly $3 million of revenue in 2022. And all of that has been taken into account in that consolidated guidance number.

Great. Thank you very much.

Thank you. Our next question comes from Joe Goodwin with JMP. You may proceed with your question.

Great. Kim and Archie, just on the – how did the International segment perform in this quarter? And can you just talk about some of the – how you're feeling about the future growth prospects in the international markets going forward?

Yes. I would say there's three areas we're focused on. One is the Australian marketplace, which is – it's a full ecosystem, and they had a very strong 2021, especially as they move into more retail programs. And it was a tougher 2020 for them because they were very segmented and they didn't have as broad a network as we do in North America. So they were in areas that got hit harder. So a very strong 2021 for Australia, and we feel very optimistic about the team in Australia and the quality of the team there to be able to execute. The second area is more really Asia, which is part of the North America supply chain. And we continue to have retailers that have suppliers that are in APAC and want us to help enable them. I was actually on a kickoff call this morning with the retailer, and that was one of their specific questions was, how are you going to handle all of my suppliers in Asia? So that's really more of an extension of SPS Commerce. And then the third part is Europe. And we're focusing, first and foremost, on the analytics opportunity in Europe, hoping our largest suppliers bring us to the retailers. We have a product that's Game Time Ready is fully used and feel very good about that. Again, that took a hiccup at the beginning of the pandemic. We literally opened up our Amsterdam office, I think, about the day before we closed it for a period of time, but that's starting to get more momentum as well as we're seeing in analytics. So that's where we see our three areas of focus on international at this time.

Understood. Thank you.

Thank you. Our next question comes from David Robinson with William Blair. You may proceed with your question.

Hi, guys. The question I had was more around, I guess, capacity for implementing deals for 2022. And then I was also curious how the implementation capacity tracked in 2021 relative to your expectations?

Sure. So that is an area that we have been investing in, and we've been adding resources. We really started that adding those resources in Q3 or call it the second half of 2021. And that was really in response to really a lot of the acceleration momentum that we've seen in the fulfillment space, and you see that aligned with the net customer adds that we added in 2021. So we feel really good about the additional hires that we brought on board in the back half of 2021. And then we will have all of those resources with us into 2022. So the expectation is we'll continue to add in 2022, just like we continue to add each and every year. But the large increase in capacity and headcount adds really occurred in the back half of 2021, and then we get to sort of grow into all of that capacity into 2022.

Got it. And then just thinking about those adds relative to, I guess, the different labor dynamics that are going on. I mean, are you experiencing any difficulty hiring or any delays in kind of meeting your goals there?

We have not. I think we have a very strong reputation in the marketplace as a preferred place to work. I think the other thing is that we have world-class training programs that we have over the years. So we're able to bring in – for junior people, we're able to bring in people mid-career and later careers. So we have a mix of where we can hire. And with the training, we don't need to bring in people with specific expertise. So I think that helps us. And then as far as retention, while our turnover is higher than 2020, which was essentially zero, it is at historically low. It continues to be at historically low marks.

Got it. Okay. That’s all helpful. So I appreciate taking my questions.

Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.