Sps Commerce Inc Q3 FY2023 Earnings Call

Thank you, everyone, and thank you for joining us on SPS Commerce's third quarter 2023 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 risk factors that may affect our results. These documents are available at our website, spscommerce.com, and at the SEC's website. In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP income per share. In our press release and our filings, you will find additional disclosures regarding these non-GAAP financial measures, including reconciliations with comparable GAAP measures. And with that, I will turn the call over to Archie.

Thanks, Irmina, and welcome, everyone. As you all know, in March, we announced my planned retirement, and in July, we announced my successor. On today's call, I am pleased to welcome Chad Collins, who assumed the role of CEO of SPS Commerce on October 2. This earnings call is my last at SPS after 22 years in my role as CEO. I am extremely proud of what SPS has accomplished during that time. The value we bring to customers and trading partners across the retail industry is a result of extreme focus on customer success, a culture of consistent execution, and a vision to be the world's retail network. This is a legacy I leave in the very capable hands of an exceptional leadership team and talented employees around the world. And I am confident SPS is positioned for continued success with Chad Collins at the helm. Chad has spent 25 years in supply chain technology, building market-leading businesses. His leadership and industry experience and focus on innovation align well with SPS' culture. I look forward to continuing to work with Chad as Executive Chair of the Board. Before I review Q3 results, I'd like to hand the call over to our new CEO and give you all the opportunity to hear about his initial impressions and what you can expect as he settles into his role.

Thank you, Archie. I'm excited to be here and honored to succeed Archie at such an important time for the Company and the industry. I want to thank the management team and the Board for trusting me to lead SPS Commerce in its next chapter of growth. I spent the last 25 years focused on supply chain software. Since 2017, I have been CEO of HighJump, which was rebranded Körber Supply Chain in 2020. During my tenure as CEO, we executed a buy-and-build strategy, resulting in a global leadership position within warehouse management systems. A key lesson I've learned during my career is that while supply chains are inherently multi-participant, most software is focused only on a single enterprise. This is why SaaS networks like SPS are in a unique position to improve collaboration and data accuracy and optimize supply chain operations. I chose to join SPS Commerce for three main reasons. First, as a longtime supply chain technologist, I believe in the power of networks to unlock value for trading partners. This is demonstrated through the Company's success, and I'm highly confident its differentiated network approach will provide long-term value and an ongoing opportunity for growth. Second, SPS has a strong corporate culture and is a well-respected employer in my hometown of Minneapolis. I've worked with many SPS employees through our mutual partnerships, and I found SPS Company values to be consistent with my own and consistent with values that lead to market success. Lastly, I believe my experience in supply chain software, SaaS product strategy, global go-to-market expansion, and M&A positions me to lead SPS as we capitalize on growth opportunities fueled by omni-channel retail dynamics. Over the next couple of quarters, I will dive into our product strategy and roadmap, engage with customers, and spend time with employees across the globe to begin building relationships and reinforcing the culture that has established SPS as a successful organization with a very exciting future. I look forward to giving you an update on our next earnings call after my first full quarter in the role. In the meantime, I hope to meet some of you over the next several months. Now I'd like to turn the call back to Archie for a review of third quarter results.

Thanks, Chad. Our third-quarter performance reflects the ongoing investments in optimization and automation across the retail industry and the role SPS plays in helping our customers achieve operational efficiencies while scaling their businesses. Total revenue in Q3 was $135.7 million, which grew 18% in the quarter, while recurring revenue grew 20%. Retailers and suppliers looking to expand globally rely on SPS for access to centralized data and streamlined fulfillment processes across different markets. For example, Deckers, a footwear designer and distributor which includes the UGG, Teva, and Holdco brands, has been a long-time SPS analytics customer in North America. As they expanded their vendor base to Europe, Deckers chose SPS' fulfillment solutions to ensure they can service a growing number of retailers across North America and Europe. Callaway, an American manufacturer of golf equipment and apparel, acquired Jack Wolfskin, a premium outdoor brand headquartered in Germany. Having been a long-standing fulfillment and analytics customer in North America and Australia, Callaway chose SPS to centralize their EDI needs across their global supply chain. As suppliers expand their network across multiple sales channels and retailers, real-time inventory management becomes increasingly more important. Starboard Cruise Services, a division of LVMH, is known as the preferred partner for luxury retail at sea with over 700 stores on over 100 ships across 15 cruise lines. Starboard understood the need for efficiency across the supply chain and chose to work with SPS to standardize and automate their electronic order fulfillment. To underscore the importance of this initiative, Starboard chose to share sales data with their vendors using SPS Commerce analytics solution, which drove significant EDI adoption, exceeding Starboard's expectations. To support our customers' growth, SPS continues to invest in solutions to enable expansion across various sales channels and across markets worldwide. Last month, we completed the acquisition of TIE Kinetix to strengthen our e-invoicing capability and expand our European presence. We also acquired the Order Exchange, one of our technology partners in Australia, which will enable suppliers to link their line of business applications in major retailer supply chains. We believe that integrating best-of-breed technology with the SPS platform will enhance our ability to support and grow our network. We're excited to welcome our new employees and customers to SPS Commerce. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Archie. We had a great third quarter of 2023. Revenue was $135.7 million, an 18% increase over Q3 of last year, and represented our 91st consecutive quarter of revenue growth. Recurring revenue this quarter grew 20% year-over-year. The total number of recurring revenue customers increased 13% year-over-year to approximately 44,500, and wallet share increased 7% to 11,650. As a reminder, in September, we closed the acquisition of TIE Kinetix, which added approximately 1,000 customers to our network. For the quarter, adjusted EBITDA grew 17% to $40.5 million compared to $34.7 million in Q3 of last year. We ended the quarter with total cash and investments of $239 million. Now turning to guidance, for the fourth quarter of 2023, we expect revenue to be in the range of $142.2 million to $143.2 million, which represents approximately 17% year-over-year growth. We expect adjusted EBITDA to be in the range of $40.5 million to $41.3 million. We expect fully diluted earnings per share to be in the range of $0.40 to $0.42, with fully diluted weighted average shares outstanding of approximately 37.7 million shares. We expect non-GAAP diluted income per share to be in the range of $0.67 to $0.69, with stock-based compensation expense of approximately $10 million, depreciation expense of approximately $5.1 million, and amortization expense of approximately $4.5 million. For the full year, we expect revenue to be in the range of $534.2 million to $535.2 million, representing approximately 18% to 19% growth over 2022. We expect adjusted EBITDA to be in the range of $156.2 million to $157 million, representing growth of approximately 18% to 19%. We expect fully diluted earnings per share to be in the range of $1.65 to $1.67 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 $2.77 to $2.79, with stock-based compensation expense of approximately $46.1 million, depreciation expense of approximately $19 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 expectation of 15% or greater as we expand our network through community enablement campaigns and acquisitions. We will provide detailed 2024 guidance on our Q4 earnings conference call. But for modeling purposes, we expect to deliver approximately $181 million to $184 million in annual adjusted EBITDA in 2024 or approximately 15% to 17% year-over-year growth. Beyond 2024, 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 continues to grow its global network, strengthening our competitive position and expanding our leadership across various industries. I would like to welcome Chad to the SPS team and look forward to working together as we execute on SPS' strategy to be the world's retail network and continue to deliver sustained profitable growth. With that, I'd like to open the call to questions.

We will now begin the question-and-answer session. Our first question comes from Scott Berg with Needham. Scott, your line is now live. Please go ahead.

Hi, everyone. Congrats on a good quarter. Before I get to the questions, Archie, it's been an amazing run. Good luck in what all the retirement plans may look like. But on the question side, first of all, Kim, I wanted to start with your adjusted EBITDA guidance for next year. It is on the lower end of your typical 15% to 25% expected growth in adjusted EBITDA on an annual basis. Can you talk about maybe some of the investments or acquisition impact that's guiding that number to maybe be on the lower end versus the mid- to upper end of that range?

Sure. To your point, we do have a guidance of anywhere between 15% to 25% on an annual basis. This year, our expectation is closer to that middle next year going into the year at this point. We're on the lower end to that 15% to 17%, which we think is appropriate based on what we see as opportunities for the business to grow top line as well as invest back in the business. Also, do keep in mind that in 2024, when we announced the acquisition of TIE Kinetix, we also said that we expected that portion of the business to be breakeven in EBITDA.

Got it. Helpful. And then, Chad, welcome to the team. I look forward to working with you more going forward. But I wanted to ask a question on your recent experience from Körber. You've had a pretty extensive history with international supply chain software and operations. When I look at the SPS business, while it's not 100% U.S.-centric, it has had more of a U.S.-centric flavor to it than something that's truly having the same impact on a global basis. But how do you think about growing internationally, bringing new products to the international product portfolio to make this business have a more balanced international footprint?

Yes. Thanks, Scott. And yes, one of the growth vectors that we will be looking at is geographic expansion. I will say that the acquisition of TIE gives us a nice jumping-off point, and it has been noted in the last quarter, obviously, the component of invoicing is a little bit different in Europe than what we see here in North America. So I think that continued execution on TIE will help us develop our framework for expansion into Europe and then potentially other markets outside North America.

Our next question comes from Matt Pfau with William Blair. Please go ahead.

Hey, great. Thanks for taking my questions and congrats, Archie, on a great run. And welcome, Chad. Good to speak with you again. Wanted to ask Chad a question to you. As you've looked at the Company, obviously, SPS has done a great job with fulfillment and then they started to get into analytics. From a product perspective, are there any areas that stand out to you as opportunities where SPS can expand into?

Yes, absolutely. SPS has established a leadership position in the network that connects retailers and distributors to the suppliers. I think what we see in supply chain technologies overall is there is quite a bit of innovation going on, as well as the landscape is fairly fragmented. I think that gives me confidence that if we keep the customer needs at the forefront of our product roadmap, whether it's through organic product development or through M&A, we'll be able to satisfy those customer requirements in a more comprehensive way over time.

Got it. And then just wanted to ask on the macro environment, a lot of uncertainty heading into the holiday season for retailers and what that is ultimately going to look like. Does that have any impact in terms of demand for your products from the suppliers?

Yes, absolutely. There's certainly some mixed signals out there. On one hand, we're seeing some consumer and retail positive dynamics. But when we talk to our customers, there's a lot of uncertainty in the retail landscape right now. And I would just remind everybody that retail outlook is not a direct bill weather on SPS performance. In general, SPS tends to perform better when there are changes in dynamics driven by omni-channel sales.

Our next question comes from Parker Lane with Stifel. Please go ahead.

Hi. Thanks for taking the question and congrats on a great run here, Archie. Just jumping in on the recurring revenue customer growth here. Even if you back out TIE, it looks like it was a nice tick up from where we were last quarter. Anything to call out about the demand environment or community enablement campaigns? You've also acquired a few businesses over the last year and expanded into some interesting new markets. How should we think about that balance of recurring revenue growth for customers versus wallet share moving forward?

Sure. As it relates to customer adds, you are correct, it sequentially went up about 1,500. We had mentioned that the TIE Kinetix acquisition brought us approximately 1,000 net new customers. Outside of that, you are correct, it was a little bit higher than a typical quarter for us for customer adds. We had a nice quarter of community enablement activity, and that still does remain the largest contributor to our net customer adds. So I feel really good about that. The mix between net customer adds and ARPU will continue to be important for delivering the overall growth of 15% that we believe is sustainable.

Got it. Appreciate that. And then, Kim, sticking with you, looking at the implied operating margins for the fourth quarter. It looks like a slight downtick from Q3. Is that primarily acquisition-related impacts, or is there some additional investment you're putting into the business in Q4?

Sure. Great question. It's primarily going to be acquisition-related. If you look at our Q4 guidance, it's basically the same as before, except we've added in our expectation for TIE. So just as a reminder, when we announced the TIE acquisition, we said it would deliver approximately $3.9 million of revenue in Q4 and contribute a negative $500,000 in EBITDA in Q4. So that's the main reason for the expected decrease.

The next question comes from Joe Vruwink with Baird. Please go ahead.

Great, hi, everyone. Congrats Archie. It really pains me to say this, but it looks like Marquette's is going to have a pretty good team this year. We still have one thing to do; not that you're stepping away completely, but maybe I'll follow up on Matt's question for Archie and Chad. When you think about ways you can ultimately help customers, would you start to point, Chad, to your background in warehouse management and then see exposure to logistics management, order management, as those relevant adjacencies that might pop up here at SPS?

Yes. The key to our product roadmap, whether organic or inorganic, will be looking at how we can best help the customer. Most likely, that will include leveraging the differentiated network and data we have. There are lots of opportunities given our customer base and the differentiated network. Starting with the customer and determining if we are better off building solutions or making strategic acquisitions will guide our approach.

Okay, that's great. And then one for Kim. If I take your Q4 revenue guidance and then back out what you said about TIE, it seems like the implied organic growth rate is decreasing compared to the 16% plus we've seen all year. Are there any specific reasons for this forecast as we approach year-end?

Sure. When we think about Q4, just a couple of things. Do keep in mind you're starting to lap some acquisitions, and we have the new acquisition. But overall, our expectations for Q4 have not changed in comparison to our last earnings call. The implied Q4 guidance we provided on our July earnings call is very much in line with what we just guided to. Technically, we guided up slightly on EBITDA.

Our next question comes from Jeff Van Rhee with Craig Hallum. Please go ahead.

Great, thanks for taking the questions. Chad, look forward to getting to know you better, and Archie's 20 years is an incredible run. So congrats and wish all the best. A couple of questions for me. You commented on the behavior of the target customers becoming a bit more cautious. What does the pipeline of enablement campaigns look like? How is that cautious behavior within the target customers manifesting?

Yes. Obviously, the guidance reflects our pipelines overall. The area that does not tend to go negative is the retail enablement campaigns. We've seen throughout history that retail community enablement campaigns, if anything, tend to improve when there's caution, because we don't take much of the economics from the retailer. So that part tends to improve. Channel performance can vary, especially analytics can show slight negative trends. But typically, the retail aspect of the world does not suffer, and often improves.

Got it. And then just a longer-term question. Over the last several years, how has what you're displacing changed?

It has remained fairly consistent over the last several years. Looking at the numbers over the last decade, we've clearly moved upstream and been effective at doing so. We continue to displace paper and fax from retailers that aren't automating their supply chains, and suppliers that have not worked with retailers in an automated way. So that trend continues, especially as it becomes easier to start new brands and new supplier companies.

Next question comes from Mark Schappel with Loop Capital Markets. Please go ahead.

Hi, thank you for taking my question, and Archie, again, congrats on your time with SPS. Just wondering if you could provide some additional details around the Order Exchange, including market areas they focus on, number of employees, and their profitability?

Yes. The Order Exchange is a very small acquisition with about 10 employees. This company was built to help and implement SPS Commerce customers starting in Australia. Their expertise focuses on integrating with long-tail or one-off ERP systems. The deal makes a lot of sense because acquisitions of partners tend to improve customer experience and sales momentum. Almost all the revenue was already flowing through SPS Commerce, so now we can control the revenue and integrate it fully into our business.

Great. And in respect to ERP implementations within your business, particularly the supplier community?

It continues to be strong in the small to mid-market. In the enterprise space, it's a bit slower but still moving forward. There are many challenges faced by suppliers and retailers that necessitate fixing their base infrastructure to meet customer demands. This is what drives ongoing ERP implementations and includes some of our products.

Our next question comes from Nehal Chokshi with Northland Capital Markets. Please go ahead.

Thank you. And congratulations to Archie on an incredible career. Chad, we look forward to working with you. You talked about the value of networks for your customers. In the context of SPS' international footprint, what do you think can be done to enhance that value so it becomes similar to what it is in the United States?

Yes. From a customer's view, I think the value is quite similar in terms of connecting with trading partners and accessing data, whether the customer is in the U.S., Canada, Europe, or Australia. Our business is still dominated by North America, but there is an opportunity for geographic expansion. Some transactions and approaches across the network do vary by geography, and the TIE acquisition gives us a nice beachhead into Europe, especially concerning invoicing capabilities.

This concludes our question-and-answer session. I would like to turn the conference back over to Archie Black for any closing remarks.

Thank you. Before we end the call, a big thank you to the management team and SPS customers for their support during my 22 years at the Company, and to all SPS employees for their unwavering dedication to our vision. I've truly had the privilege to work with and lead an exceptionally talented group of people, and I'm proud that together, we built a Company that has consistently delivered exceptional results for our customers and shareholders. Lastly, I would like to acknowledge Kim Nelson for her commitment to excellence throughout our 16-year partnership, including a successful IPO and 55 earnings reports. In addition to being a fantastic CFO, Kim has been a thought partner, a strategic adviser, and a trusted confidante. I wish Kim, Chad, and the SPS team continued success in the years ahead. Thank you all for your time today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.