SPS Commerce Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 27, 2023

There are 11 speakers on the call.

Operator

Good day, and welcome to the SPS Commerce Second Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ermina Plaszczyk, Investor Relations for SPS Commerce.

Operator

Please go ahead.

Speaker 1

Thank you, Drew. Good afternoon, everyone, Thank you for joining us on SPS Commerce Q2 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 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 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 ks as well as our financial results press release for a more detailed description of the risk factors that may affect our results.

Speaker 1

These documents are available on our website, spsconners.com, and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on the 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.

Speaker 2

Thank you, Irmina, and welcome, everyone. Before I proceed with my prepared remarks, I'd like to mention the CEO announcement we made earlier this month. In October, I will transition to the role of Executive Chair of the Board as we welcome our new CEO, Chad Collins. Given Chad's leadership and industry experience, I believe he is uniquely qualified to lead SPS through its next chapter of growth and innovation, capitalizing on omni channel retail dynamics. We look forward to introducing Chad to you all on our earnings conference call.

Speaker 2

Turning to our Q2 performance. We continue to see investments in organizations across retail, fueling ongoing demand for SPS fulfillment and analytics products. Total revenue of $130,400,000 grew 19% in the quarter, while recurring revenue grew 20%. In today's omnichannel world, The average consumer expects to purchase exactly what they want from where they want, looking for a consistent experience across all channels. They are pushing the limits of retailers' operations and forcing suppliers to embrace an omnichannel strategy.

Speaker 2

Since the pandemic, the increased pace and complexity of fulfillment exposed inefficiencies, which are now forcing suppliers to revitalize their supply chain. According to the 2022 MHI Annual Industry Report, a survey of over 1,000 supply chain and manufacturing leaders, 74% of respondents plan on investing in inventory and network optimization tools over the next year. For example, Moose Toys, a large manufacturer in Australia, has been a SPS fulfillment customer since 2016, expanding their network across Asia Pacific, North America and Europe. To effectively manage their inventory, they use sell through data retailers for forecasting and planning. However, they were receiving the data in many different formats and had to process it manually, which delays in their ability to extract meaningful insights.

Speaker 2

SPS's analytics was the right solution for Moose Toys to begin aggregating, normalizing and integrating the vast amount of data feeds from their many trading partners. They can now leverage the strategic insights derived from the data to capitalize on significant growth opportunities around the world. As trading partners strive for automation, ERP integration is another key component to solving supply chain challenges. For example, our partnership with Microsoft has been mutually beneficial over the years and Microsoft has recently chosen to highlight SPS Commerce as the featured solution on their app store. Microsoft has been focused on migrating their customers to the cloud.

Speaker 2

And with their strong presence in retail, distribution and manufacturing, The need for fully automated and scalable supply chain operations is a pivotal factor of these ERP migrations. SPS Commerce's deep Microsoft integration technology, multi tenant cloud based retail network and full service model is allowing Microsoft sellers and VARs to leverage best of breed technologies when trying to migrate customers and win new business. Just as retailers and suppliers are investing in new technologies to optimize their supply chain, SPS Commerce remains committed to delivering world class products excellent customer experience. By capitalizing on artificial intelligence technologies, we're already driving efficiencies throughout our organization to serve our customers and improve our product offerings. SPS is the world's largest retail cloud network, which gives us access to the depth and breadth of data necessary to leverage AI and reduce the requirements for suppliers to connect to retailers, making it much easier to implement trading partner connections.

Speaker 2

We see many opportunities to enhance our products in the future as we use AI to increase the intelligence of SPS's network, which in turn will make joining and operating within the network increasingly more efficient. We also continue to expand our portfolio and global footprint. We believe Tye's e invoicing capabilities will enable us to capitalize on opportunity presented by mandatory e invoicing regulations in Europe, while expanding our European presence to serve our growing network with access to international markets. In summary, increasing complexity in omnichannel retail is fueling investment in supply chain revitalization. SBS is well positioned to capitalize on new technologies such as AI, which are proving necessary for automation and optimization of trading partner relationships and amplify our ability to bring our network to more retailers and suppliers faster and easier.

Speaker 2

With that, I'll turn it over to Kim to discuss our financial results.

Speaker 3

Thanks Archie. We had a great Q2 of 2023. Revenue was $130,400,000 a 19% increase over Q2 of last year and represented our 90th consecutive quarter of revenue Recurring revenue this quarter grew 20% year over year. The total number of recurring revenue customers increased 11% year over year to 43,000 And wallet share increased 8% to 11,350. For the quarter, adjusted EBITDA grew 24% to $38,200,000 compared to $30,900,000 in Q2 of last year.

Speaker 3

We ended the quarter with total cash and investments of approximately $270,000,000 Now turning to guidance. The following Q3 and full year 2023 revenue For the Q3 of 2023, we expect revenue to be in the range of $133,600,000 to $134,400,000 which represents approximately 17% year over year growth. We expect adjusted EBITDA to be in the range $39,300,000 to $40,000,000 We expect fully diluted earnings per share to be in the range of $0.37 to $0.38 with fully diluted weighted average shares outstanding of approximately 37,600,000 shares. We expect non GAAP diluted income per share to be in the range of $0.65 to $0.67 with stock based compensation expense of approximately $11,700,000 depreciation expense of approximately $4,900,000 and amortization expense of approximately $3,700,000 For the full year, we expect revenue to be in the range of $528,500,000 to $530,000,000 representing approximately 17% to 18% growth over 2022. We expect adjusted EBITDA to be in the range of $155,800,000 to $156,900,000 representing growth of approximately 18% to 19%.

Speaker 3

We expect fully diluted earnings per share to be in the range of $1.60 to 1 $0.63 with fully diluted weighted average shares of approximately 37,400,000 shares. We expect non GAAP diluted income per share to be in the range of $2.69 to 2.72 With stock based compensation expense of approximately $46,200,000 depreciation expense of approximately $14,400,000 in amortization expense for the year of approximately $14,700,000 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. As noted in our press release announcing the planned acquisition of TY Kinetics, we expect it to have a nominal impact on Q3 financial results with the exception of approximately $1,000,000 of certain one time deal related costs. In the 4th quarter, we expect Hi Kinetics to contribute $3,900,000 of revenue and expect adjusted EBITDA of the acquired business to be approximately negative $500,000 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 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.

Speaker 3

In the long term, we maintain our target model for adjusted EBITDA margin of 35%. In summary, ongoing investments across the retail industry continue to present tremendous opportunities for SPF. With the only full service EDI solution, we are well positioned to help our customers optimize their network as we capitalize a multibillion dollar adjustable market to deliver sustained profitable growth. With that, I'd like to open the call to questions.

Operator

We will now begin the question and answer session. The first question comes from Matt Pfauch with William Blair. Please go ahead.

Speaker 4

Hey, great. Thanks for taking my questions. First, I wanted to ask on the Ti Kinetics acquisition. Can you just better help us understand What this brings to the table? Is this e invoicing product different than what you currently have?

Speaker 4

And how does

Speaker 2

Yes. Thanks for the question, Matt. A number of things. 1, The company is at roughly 60% European revenue and 40% U. S.

Speaker 2

Revenue. So and those businesses are relatively separate as far as go to market, etcetera. The U. S. Business, Think of that as much more consistent with a customer acquisition play.

Speaker 2

So meaningful revenue there, Put them on our platform, they can have more offerings so we can upsell the customers like we've done in the past. The European business, I think it gives us a couple of things. 1, it gives us a larger platform to go after fulfillment and really just think about learning about the market. We're in the market On a much smaller basis, we're in the market in analytics, but not much there. And then the e invoicing product is think of it as in Europe, it's a government reporting almost regulatory Compliance where you need to report VAT tax, etcetera.

Speaker 2

So in order to do business in Europe, you have that. We partnered in the past for those capabilities. It's Applicable in Europe and also we use some of it in Mexico, but don't anticipate using it in the U. S. Just because It's not really utilized here.

Speaker 2

So we do not have an e invoicing platform as we speak. So that's capabilities and customer acquisition.

Speaker 4

And just one quick follow-up on that. Kim, I know you said that the revenue from the acquisition isn't included in the updated guidance that you provided in the earnings press release. But the $1,000,000 of additional expenses in Q3, is that factored into the guidance?

Speaker 3

No. The guidance we provided excludes anything related to the acquisition we announced of, Ty Kinetics. And the reason for that is we announced it, but it is not yet closed. So, all the numbers Exclude, but we have separately in a press release about Ti Kinetics as well as on this earnings call reiterated The numbers that we believe they will be in 2023. So that $1,000,000 of really deal related costs in Q3 is not factored into The SPS Commerce guidance we provided today.

Speaker 3

Okay,

Speaker 4

got it. Thank you very much.

Operator

The next question comes from Scott Berg with Needham. Please go ahead.

Speaker 5

Hi, Archie and Kim. Congrats on the good quarter and thanks for taking my questions. I guess a couple of things here. Starting with the acquisition Archie, I'm certainly familiar with the VAT reporting requirements there. There's some nuances, I think, Kind of developing over the next couple of years around real time reporting for VAT for different vendors.

Speaker 5

Can that be a catalyst to maybe drive some outsized Growth from that segment going forward, knowing that a lot of these countries are kind of trying to get to more of this real time almost straight through processing for VAT reporting?

Speaker 2

Well, I think the e invoicing has an opportunity to grow and it has an opportunity. Right now, it's fairly small, But pretty optimistic that it can be a bit of a catalyst into the future, but I wouldn't put a lot of weight onto it as we look at 2024 And clearly not 2023, but having those capabilities will be a positive. And from us more importantly, we really get to learn that market by being in it. So I think that's a nice sized deal that puts us in the market and we can really see more firsthand What is happening and what the real opportunity is.

Speaker 5

Got it. Helpful. And then on business trends in the quarter, looks like the company added roughly 250 net new customers, knowing the 2nd quarter is usually seasonally strong period for customer acquisitions. That's actually lighter, not just during the pandemic, but during several years before that. Anything to read through necessarily on a single quarter Snapshot on customer acquisition trends.

Speaker 5

Sure.

Speaker 3

So when we think about the community enablement activity in the quarter, it was quite a strong quarter. But what we saw is more skewed towards existing customers that we were able to upsell versus the amount of net new customers. We don't think that that is at all a trend. It just so happened this quarter that the mix was a bit more on our existing customers versus new.

Speaker 5

Got it. Helpful. I'll jump back in. Thank you. Congrats again.

Operator

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

Speaker 6

Hi, Kim. Hi, Archie. Thanks for taking the questions here. Kim, I know it's early be talking about 2024, but as far as it relates to Ti Kinetics, you talked about a $16,000,000 revenue benefit for next year. And I noticed that I think they did $8,000,000 of total revenue in their first half of their year.

Speaker 6

Can you just give us a better sense of what your assumptions are as you look forward to 2024, 2025 Any interesting dynamics to that revenue growth in that business?

Speaker 3

Sure. So obviously, we have not yet acquired the business, but that is our obviously our intent, which we do believe will close later in Q3. As it relates to our expectations for 2024 of the approximately the $16,000,000 that we did mention, That is primarily based on our view of what we see as the opportunity. Do also keep in mind that there is As a fair portion of their business is in Europe, it is subject to fluctuations from FX

Operator

Just one moment. Ms. Nelson, please continue. Thank you.

Speaker 3

Great. Apologies for that. Parker, I don't know exactly where I cut off, but you were Asking as it relates to our expectations for 2024. The acquisition, we believe, will close at the end of Q3. At this point, we put together our best view of what we see as that opportunity in 2024 Based on where that company is on its journey to moving over to a SaaS fulfillment model as well as the opportunities that we see in Europe.

Speaker 6

Understood. Okay. And then on the gross margin side of things, it's been a few quarters now. They're Relatively in the same place. And I know you've talked about low-70s being the long term target in this business.

Speaker 6

As we march up towards that low 70s target, are there things you're doing internally to actually get there? Or is this just going to be a matter of the business Achieving some additional scale and that naturally flows through there.

Speaker 3

Sure. So the biggest way that that gross margin will move from where it is now Up to the lower 70s is really primarily around efficiencies and scalings. So you may recall that in prior conference Calls and years, we've talked about investments that we've made in the overall customer experience. In some years, those investments have been larger From a growth perspective than our revenue or similar in line for the growth as our revenue, thus you have not seen that improvement from a gross margin As our business continues to grow, we believe we will be able to grow into some of those investments. We'll still obviously continue to add resources, But we shouldn't need to do those at the same level that we have historically.

Speaker 3

We also, as Archie mentioned, we'll be looking at AI. There's many things we're already doing on the artificial intelligence side, but we certainly do see opportunities on the customer success side as well, where we'll be able to leverage

Operator

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

Speaker 7

Great. Thanks. Hi, guys. Thanks for taking the question. So a couple For me, I guess, just high level, I guess, Archie, as you look at the suppliers that are not yet on the platform, What are the characteristics?

Speaker 7

I mean, you've been at this for a while. Just talk about the people that haven't jumped yet and the sort of the defining characteristics.

Speaker 2

Well, I think that it's segmented into 2 different areas. The first, I assume we're talking about the fulfillment product. The first is really people that just having are doing things more manually, email, mail And just the retailers have not forced them to do it. They're small and they're just not there yet. So those are different solutions that we typically get those through our retail enablement campaigns, pretty high success rate I would say the other is where they have bought legacy software.

Speaker 2

And if they haven't moved ERPs and their business isn't moving very fast, then they're in the spot where they're in legacy software. It's working. They might have 5, 10, 20 retailers. It's working. If those retailers' environment isn't changing much, It's hard to get them to move.

Speaker 2

Once you see start seeing more change in their environment or they start Growing or making acquisitions, that's the bigger op that is the biggest opportunity with them. Or just simply some of these guys As we work with the retailers, we're helping the retailers effectively become dynamic in their supply chains, which is putting more pressure on the suppliers.

Speaker 7

Yes. And then along the lines of the enablement campaigns, if you look at the enablement campaigns, What are you seeing that might be the enablement campaign pipeline? What are you seeing that's different with respect to potentially the size of the campaigns? And specifically as you're implementing the rate at which people are just testing versus signing?

Speaker 2

The testing versus signing is Really just dependent on the mix and where we are and the type of retailer. I would say What we are seeing is consistent is automation of warehouse management. So we're seeing more ASN programs, advanced Ship notice where if you purchased Manhattan Associates or trying to more fully utilize their capabilities, in order to do that, you need to receive A document called an advanced ship notice so that you know what's being shipped and when it's going to be received and then to be able to receive that product into the distribution center Barcode label that is scanned. So we're seeing more of those programs. Sometimes those will be a little heavier testing because It's a massive change for the retailer, but for the supplier, it's adding a couple of documents, which are complex.

Speaker 2

We are seeing we continue to see it's amazing multibillion dollar organizations that are for the most part Manual still. And they're getting into the game because they need to have visibility. The advanced ship notice and the warehouse management That is a lot of that is about inventory visibility, which is becoming a hotter and hotter topic is I don't want to have too much inventory and I need solid visibility into the inventory.

Speaker 7

Yes, yes. Okay, makes sense. Thanks so much.

Operator

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

Speaker 8

Yes. Thank you, Chris, on a nice quarter here. Kim, you mentioned earlier that notice upside was driven by Strong upsell, was this new SKUs or expanding connections?

Speaker 3

This would be expanding connections. So when we run a community enablement campaign, where we will end up seeing that impact us is really going to be in 3 places, Customer adds, testers or existing customers that are now adding that connection. And in this quarter, the mix just happened to skew a bit more on the existing customers adding a connection versus adding new customers. We still of course did add new customers, but the quantity of new customers was a bit lower in this quarter than what you would Typically see from us with community activity.

Speaker 8

Got it. Okay. And then you guys also talked about one of the unique capabilities that Hi Kinetics brings is the e invoicing. What's the value of this capability relative to your typical ARR that you're able to get from your customers or maybe talk about the ASC invoicing for a given customer size relative to the rest of your product suites that you're offering?

Speaker 2

Yes. So first off, we're not going to be using it in the U. S. Because it's not a concept That reporting tax tax reporting compliance reporting. So it's not applicable to that business.

Speaker 2

It really is a European And then we see that in Mexico as well. It's really more of a you have to have it. It's like a document type. You have to have it to be able to play. We have done that through partnering.

Speaker 2

And our fulfillment business in Europe is relatively small, as we've discussed in the past. We've Really attacked Europe more with the analytics product, which we're seeing success in and being able to Now with those analytics products have a more robust fulfillment product and having the fulfillment customers from Ty Kinetics to be able to have a Analytics product, we think over time will also add value. But I think of it more as a capability you just have to have as opposed to an upsell. To get into the game, you have to have it.

Speaker 8

Understood. Great. Thank you for taking my question.

Operator

The next question comes from Mark Chappell with Loop Capital. Please go ahead.

Speaker 9

Hi, thank you for taking my question. Just a couple of follow-up questions on Chiokinetics, such as how fast was it growing? How many employees did they have? Do they have certain target industries that they focus on?

Speaker 3

Sure. So about 100 employees And on a they were growing if you sort of look at things from sort of a constant currency perspective because they obviously have a U. S. Business plus the European business, they were growing in about the single digits when you're adjusting for again for a constant currency.

Speaker 9

Okay, great. And then, given that they have more of a European focus, could you just remind us what percent of SPS's revenue today comes from international sources.

Speaker 3

Sure. So when you look at our overall revenue, think of it as approximately 85 Percent of the revenue is in more U. S, so non international. But do keep in mind that our Asia business, which is heavily there to support the supply chain of our North American suppliers. That does show up as U.

Speaker 3

S. Revenue, Because the it's the paying company is in the United States.

Speaker 9

Great. Thank you. That's all for me.

Operator

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

Speaker 10

Great. Hi, Archie and Kim. Maybe just one follow-up on the customer count adds this quarter and maybe a revenue question as well. Seize on kind of revenue and the number of connections that might have went away in response to a retailer bankruptcy?

Speaker 3

No, there was not. There was nothing unusual as it relates to the bankruptcies that we saw in the quarter.

Speaker 10

Okay. Thank you. And then, Archie, I wanted to go back to that tidbit you shared at the very beginning. I think it was 74% of surveyed customer base planning to invest in inventory and networking solutions. Do you have a number for current levels of either electronic fulfillment or EDI, Just to kind of relate the 2, yes, I'm wondering if we could compare 74% to that whatever that adoption rate Happens to be to get kind of a sense of what the market might be growing at this point?

Speaker 2

I don't. Unfortunately, that data was not broken out is what I understand. And what we see is the more It's been the same story all along. With the more change in the environment for suppliers, kind of back to an earlier question from Jeff as far as The people that are sticking with their old software, the more change they have in that environment, that tends to serve us well. So the fact that people are going to be changing environments, investing and looking to do things on the supplier side is a positive for SPS Commerce.

Speaker 2

So That's kind of the point. How much of that is, going to be on our fulfillment side? Don't know, but I know if it's on ERP, Warehouse management, all those things tend to be a positive for us.

Speaker 10

Okay. Thank you very much.

Operator

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.

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