Good day, and welcome to the SPS Commerce First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Irmina Blaszczyk, Investor Relations for SPS Commerce. Please go ahead.

Thank you, Drew. Good afternoon, everyone, and thank you for joining us on SPS First Quarter 2024 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, 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 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 Chad.

Thanks, Irmina, and good afternoon, everyone. Thank you for joining us today. We delivered a strong start to the year. First quarter revenue grew 19% to $149.6 million. Recurring revenue also grew 19%. As a leader in supply chain cloud services, we are capitalizing on ongoing investments in automation. According to the 2023 MHI Annual Report of over 1,000 supply chain and manufacturing leaders, 74% plan to invest in supply chain technology and innovation with 90% planning to spend over $1 million, an increase of 24% over last year, to improve supply chain resiliency, sustainability, and transparency. With an ongoing focus on automation across retail, SPS is leveraging our strong channel partnerships with technology leaders such as Acumatica, ensuring we are at the forefront of emerging trends, from the blurring lines in retail to sustainability as omnichannel dynamics increase the complexity of fulfillment processes. Underscoring the value of such a collaboration, SPS was recently honored with the ISV Partner of the Year Award for distribution at the Acumatica Summit. SPS offers deep integration expertise to help our customers increase the effectiveness of their ERP system and enable instant connections to trading partners. As we continue to grow our network, we remain committed to excellent customer experience. We recently acquired SAP Business One integration technology from Vision33, an expert in EDI system automation, expanding our leadership in full-service EDI. This acquisition deepens our expertise and experience in this space and broadens our access within the SAP ecosystem. The investments we make in our business and our solutions are key to our customer acquisition success and long-standing partnerships. With evolving retail dynamics, collaboration between trading partners is crucial. SPS is proud to have many decades-long relationships with customers across the retail ecosystem. For example, Select Brands, a third-generation family business, designs and produces small kitchen appliances, offering a diverse brand portfolio and a global presence, selling products through a variety of channels, including Big-Box retailers, online retailers, and direct-to-consumer. The company's success translated into rapid growth and increasing order volumes, which drove the need for automation. Select Brands upgraded its ERP by migrating to Oracle NetSuite, bolstering its infrastructure for scalability. Leveraging the NetSuite partnership with SPS, the company automated its fulfillment solution, which enhanced order processing with retailers and simplified collaboration with third-party logistics providers. Now a customer for 14 years, Select Brands worked with SPS to connect with 40 retail customers and 3PLs to fully automate the order-to-cash process. This partnership truly exemplifies the benefits SPS customers receive through our network model and commitment to last-mile ERP integration technology. Canadian Tire, the #1 retail brand in Canada, engaged with SPS in 2001, driven by the need to support various omnichannel fulfillment models across their network. As Canadian Tire grew through acquisitions, maintaining agility and flexibility in vendor relationships was paramount, and vendor onboarding for all 5 acquired retailers was outsourced to SPS. Throughout this long-standing relationship, SPS' role evolved from a technology vendor to a strategic partner, delivering valuable insights that support order planning and distribution efforts across Canadian Tire's network. With more than 20 years in partnership supporting the significant growth trajectory, Canadian Tire trusts SPS' retail expertise to help them make the right decisions as they strive for supply chain resilience among evolving market demands. GNC, a leading health and wellness brand, maintains a vast retail presence, strong wholesale partnerships, and a growing digital footprint, operating as both a retailer and supplier. GNC partnered with SPS to automate data exchange across their entire supply chain, improving collaboration with over 1,000 vendors and more than 30 retailers and grocers. In addition, sharing point-of-sale data enabled GNC and its vendors to optimize inventory management and sales strategies. To summarize, SPS' vast network, retail expertise, and unique go-to-market strategy are significant competitive differentiators. The ongoing investments in supply chain management underscore our conviction in the growth opportunity ahead of us as we continue to execute our mission to be the world's retail network. With that, I'll turn it over to Kim to discuss our financial results.

Thanks, Chad. We had a great first quarter of 2024. Revenue was $149.6 million, a 19% increase over Q1 of last year, and represented our 93rd consecutive quarter of revenue growth. Recurring revenue also grew 19% year-over-year. The total number of recurring revenue customers increased 5% year-over-year to approximately 44,800 and wallet share increased 13% to approximately 12,450. During the quarter, we executed a large-scale enablement campaign with a strategic retailer that rolled out a new requirement to all of their vendors. Since a large majority of those vendors are already existing SPS customers, the number of recurring revenue customers was flat sequentially, but the campaign contributed to solid growth in wallet share. For the quarter, adjusted EBITDA grew 20% to $44.4 million compared to $37 million in Q1 of last year. We ended the quarter with total cash and investments of $291 million and repurchased approximately $20 million of SPS shares. Now turning to guidance. For the second quarter of 2024, we expect revenue to be in the range of $150.9 million to $151.7 million, which represents approximately 16% year-over-year growth. We expect adjusted EBITDA to be in the range of $43.4 million to $44.1 million. We expect fully diluted earnings per share to be in the range of $0.45 to $0.46 with fully diluted weighted average shares outstanding of approximately 37.9 million shares. We expect non-GAAP diluted income per share to be in the range of $0.75 to $0.76, with stock-based compensation expense of approximately $11.7 million, depreciation expense of approximately $4.7 million, and amortization expense of approximately $4.6 million. For the full year 2024, we expect revenue to be in the range of $619.9 million to $621.9 million, representing approximately 15% to 16% growth over 2023. We expect adjusted EBITDA to be in the range of $185.1 million to $186.7 million, representing growth of approximately 17% to 18%. We expect fully diluted earnings per share to be in the range of $1.99 to $2.02 with fully diluted weighted average shares outstanding of approximately 37.9 million shares. We expect non-GAAP diluted income per share to be in the range of $3.28 to $3.32 with stock-based compensation expense of approximately $56.1 million, depreciation expense of approximately $19.5 million, and amortization expense for the year of approximately $18.1 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings. Beyond 2024, we maintain our annual revenue growth expectation 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 support current and future growth. In the long term, we maintain our target model for adjusted EBITDA margin of 35%. In summary, we delivered a strong start to the year and the 93rd consecutive quarter of revenue growth. As we capitalize on ongoing opportunities across our addressable markets, we continue to invest in our solutions and customer experience to strengthen our competitive position across the largest network of trading partners in the retail supply chain. And with that, I'd like to open the call to questions.

The first question comes from Scott Berg with Needham.

Chad and Kim, congratulations on a good quarter. I guess I have a couple here. First of all, Kim, can you talk about the contribution from Vision33 in terms of your full year guidance, both in terms of the top-line impact and maybe margin impact?

Sure. As it relates to Vision33, they were already a partner of ours. So there's really no change that you're going to see on the financials in the year, meaning we were already billing and invoicing our customers. And then Vision33 behind was actually servicing those customers. So no change really anticipated in our financials in 2024, and it was a nominal acquisition, a few million dollar purchase price.

Got it. Helpful. And then you mentioned the large enablement campaign. Your business has kind of ebbed and flowed in any given quarter historically, between maybe customer adds and growing wallet share. It seems to play out many times. But in this quarter, you talked about the large customer that already had most of their customers you're enabling were already on your platform. Was this purely these customers adding more connections at this extra retailer as a connection? Or was there an opportunity to cross-sell? I don't know, something like your analytics platforms to try to understand maybe what they were buying through this large enablement campaign.

Yes, Scott, this is a great example of retailers really expanding the scope of supply chain data that they exchange across our network, which then we're able to monetize. In this case, this large retailer was implementing what's called the advanced shipment notice, which is a supply chain message that gives them visibility to inbound inventory. Not only do they get that visibility, it really streamlines things in their distribution centers because they know what's coming at them. We were able to roll out that new program with all of their vendors. Because we've had such historic success with this particular customer, we were already highly penetrated for other supply chain information within this customer. So we found a lot of existing subscribing customers as we ran this campaign. But to me, it's a great example of, a, expanding the use of the network for more supply chain data; and b, how when we are deep in a customer, we see that higher penetration of subscribing SPS customers based on that long-standing relationship with that particular retailer.

I understand. That's helpful. I apologize for adding one more question. A common question for both of you and myself tomorrow will be regarding the customer additions, or the customer count that remained unchanged from the previous quarter, indicating no new net additions. While I know you were focused on this significant enablement campaign, how should we view the environment for acquiring new customers? I assume your current focus does not reflect a market that is likely still quite healthy.

Yes. I would just say that because we were running this large enablement program, and it was quite substantial in proportion to our average enablement program. It's skewed towards these existing customers. That's why you didn't see the sequential growth in customers, but it showed up in wallet share. I'd say this is no indication of overall what we expect to see going forward. It's just this particular program was pretty dominant in this particular quarter.

The next question comes from Parker Lane with Stifel.

Kim, you've acquired a few businesses over the last couple of years. I'm wondering when we look at this wallet share strength over the last couple of quarters here, if you can help us understand how much of that is coming from wallet share growth in those acquired businesses, getting them on your network and establishing more connections versus what we could call organic customers. Is there a way to distinguish between the wallet share growth rates between those two cohorts? Or is it roughly similar?

Sure. If we think about some of the acquisitions that we've made more recently, that really hasn't had a major change in the wallet share per se. What I would characterize is just if you think about our business model that just in general, as we acquire customers over time, organic or inorganic, the same rule applies. But as you acquire customers over time, typically we get more revenue from those customers in future years as their business grows and they connect to more and more retailers. So that sort of network effect is alive and well within our business model. I'd say that's really a driver to why wallet share over time just continues to grow on a year-over-year basis. The only unique aspect in this quarter was the comments that Chad talked about as it related to that large enablement campaign that skewed more to existing versus new customers.

Got it. That makes sense. And Chad, one for you. You outlined a few different data points that suggested we could be poised for years of continued investment in your end markets. I'm wondering about some of the competing priorities you're seeing out there and other vendors, other initiatives that are up for grabs versus SPS expanding further in these end markets.

Yes. I think overall, especially with the major dynamics and disruptions we saw during the pandemic, which heightened the focus on supply chain, we see that continuing. Combined with the ever-changing and demanding consumer expectations on retailers in the retail supply chain around omnichannel commerce, we believe there will be continued technology investment in supply chain. As it relates to other options that people have when they invest in those technologies, we tend to be quite complementary to other technologies. If there's an implementation of a new ERP system or supply chain applications, often tied to those programs is a focus on the data that's going to be used in those programs. Because we're able to help organizations improve the data and accuracy by helping them collaborate with their supply chain partners, it can benefit us when they're doing other types of supply chain application implementations.

The next question comes from Dylan Becker with William Blair.

Maybe I wanted to kind of dig into the data approach as well and how that relates to the platform expansion opportunity. As that continues to compound, Chad, how do you think about the potential to address additional stakeholders here, kind of drive deeper layers of automation across the supply chain, and how that unlocks further wallet share momentum by additional potential monetization areas, if that makes sense?

Yes, it does make sense. I think it just points really to the power of the network that's been built over time here and the ability for that network to exchange increasing amounts of supply chain data for our customers. Even this enablement program we did this quarter, expanding the ASN document for this particular retailer, is yet another example of that. The network itself from a technology standpoint and the vast number of participants that we've been able to add to that network are both growth drivers. Over time, I would expect that we would find more and more supply chain data that we're able to exchange across that network.

The next question comes from George Kurosawa with Citi.

Congrats on a good quarter. Wanted to ask about kind of a follow-up on TIE Kinetix. I think you've framed it as building a beachhead of customers in Europe. You want to do some learning in that market before you kind of invest in the go-to-market resources there. So just love to hear how you guys are thinking about the European market opportunity today.

Yes. I think you summarized our approach in the first year of owning TIE very well. It does give us this beachhead for our fulfillment business. We have had a sales force for the analytics product in Europe for several years, but TIE really gives us that beachhead for the fulfillment market. As we work through our post-merger integration, it certainly is beneficial to actively participate in Europe with existing customers that we can learn from, being in deals, understanding the competitive landscapes, and also understanding any unique requirements specific to Europe. All of which will influence our longer-term thinking about go-to-market strategy for Europe.

Got it. And then just one follow-up on this large enablement campaign you called out. It sounds like layering on a new type of communication rather than, let's say, an add-on product or new net connections. Is that a kind of expansion motion that you think is maybe repeatable with some of your other retailer bases?

Yes. I would describe it as certainly part of our business model. We are expanding customers to the network. We're also constantly expanding the number of connections those customers make on the network. We're also striving to expand the scope of supply chain information that they go across that network. All of those things are growth levers for us. I think this particular enablement program was large and demonstrates how that expanded data type across the network can benefit our customers.

The next question comes from Joe Vruwink with Baird.

Just on the quarter itself, can you maybe talk about some of the drivers of upside? Just relative to your original guidance, I would imagine the enablement campaign, just given the size that was probably an unknown contributor out of the gates. The quarterly revenue beat you put up this quarter is a bit more than usual. I'm hoping to dig into the contributors there? And then just going back to TIE, was better contribution from TIE a part of the upside.

Sure. Overall, I feel really good, very strong, solid business performance overall. You did highlight, however, this large community enablement campaign we've spent time talking about that drove part of the beat relative to expectations. You'd see that come through in one-time revenue from testing as well as in the wallet share from existing customers adding. As it relates to TIE, that performed very close to what our expectations were.

Okay, great. Then I suppose it's a good problem to have when you operate the biggest network, and so retailers come to you for these campaigns. But it has been the case a few quarters now in recent history where the adds have slowed. I'm wondering if there's a certain point where that starts to impact the growth algorithm in the sense that the new customers are not around a year from now and subsequently growing connections. So the wallet share contribution starts to moderate a bit?

What I would say, the beauty of our model or our network is the fact that there are multiple ways in which we attract new customers, and there are multiple ways in which we drive additional revenue from those customers. If we take each of those buckets, community generally drives additional customers, usually smaller-sized customers onto our platform and into our network. We've talked about some of the differences with this large campaign. Let's put that aside for the moment and just say, in general, that's what we tend to see with community. Nothing has changed within our view there. We also see great opportunities through our channel sales to attract larger customers, usually when they're making an ERP change. In that case, it will impact the customer count, but on a smaller amount, and it will have more of an impact on that wallet share because they happen to be larger customers at the time they move over to us. Then the traditional marketing campaigns are great ways to attract new customers. Once we have those customers over time, they tend to increase their revenue with us or wallet share with them based on connections and how they're using us. That could be more trading partners, more documents, more activity flowing through fulfillment, or additional products and services. Long-winded way to say all of those are contributors to our overall growth, and in some cases, that will translate into more customer growth; in some cases, it will translate into more wallet share. But because there are so many different components gives us that conviction and confidence in being able to grow at that 15% or greater for the foreseeable future.

The next question comes from Mark Schappel with Loop Capital.

Chad, in your prepared remarks, you highlighted the ongoing investments that organizations are making in supply chain management. Today, the company is very strong in EDI, specifically in retail, but it's kind of a relatively small part of the overall supply chain software spend. I was just wondering if you could talk about some of the potential natural product adjacencies that the company could get into to maybe capture a larger part of that spend.

Sure. I'll say that I think the current execution against the business model we have and the products we have, combined with continued growth and the opportunity for all the various growth drivers in our business that Kim just mentioned, present a tremendous opportunity. Over the mid- to long-term, there are potential areas where we could enhance our offerings. Some examples could be around the shipping process, the transportation, as our customers are involved in other types of information beyond the purchase order exchange process around supply chain documents. All of these would be examples of further areas of supply chain where our network and unique go-to-market approach could be helpful for our customers.

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.