SPSC
#Thanks, <UNK>, and welcome, everyone.
We had a strong start to 2017.
Our solid Q1 performance was driven by the continued growth of the SPS Commerce network and demand for our comprehensive cloud-based platform.
For the first quarter, revenue grew 14% to $51.9 million.
Recurring revenue grew 15%, and adjusted EBITDA grew 43% to $8.5 million.
Today's retail economy is driven by a generation of consumers who expect a consistent personalized omnichannel experience and retailers are being challenged to continuously address their ever-changing demands.
The retail environment is more complex than ever, and retailers need to exceed that merchandising and operations across a growing number of channels.
Consumers continue to shop both in-store and online.
They don't see the difference between online or in-store channels, but they do expect an engaging shopping experience, whenever and however they shop.
For further context, last year, total retail sales in the U.S. grew 4% to $3.5 trillion.
In-store sales grew 3% and represented 89% of total sales.
Online sales grew nearly 16% and represented 11% of total sales.
Drop-ship represented about 10% of online sales.
Consumer shopping habits are increasingly complex.
While all retail channels continue to grow, services such as Amazon Prime have led consumers to expect fast and free fulfillment with an endless selection of goods, and the in-store experience must equal or exceed the digital experience for retailers to remain relevant.
In 2016, 53% of in-store sales were web-influenced.
It is no longer sufficient to have an online strategy or a drop-ship strategy or an in-store strategy.
It is imperative that retailers and suppliers have a truly omnichannel strategy and achieve real-time collaboration to be able to adapt to the always-on retail environment.
Omnichannel and retailer is working.
A recent HBR studying found that within 6 months of an omnichannel experience, customers logged 23% more repeat shopping.
As the importance of having an omnichannel business strategy continues to increase for the retail ecosystem, the need for retailers and suppliers to partner with world-class technology providers is becoming even more significant, and this continues to drive demand for our platform.
Red Wing Shoes is an example of a company which developed an omnichannel strategy to be able to address consumer demands now and into the future.
Founded over 100 years ago with just one store, Red Wing now has 500 of its own retail stores and also sells its shoes at over 4,000 stores.
Best known as a maker of work boots, Red Wing has worked to continually evolve its brand beyond industrial footwear to tap into the consumer market and engage more shoppers.
To keep pace with the rising expectations of today's consumers, Red Wing needed to grow their online business and align their strategy with their brick-and-mortar stores while continuing to support their retail partners.
They were quickly outgrowing their legacy EDI system and turned to SPS for both fulfillment and analytics to draw their operations online and in-store.
Through our fulfillment solution, Red Wing can now onboard a training partner in weeks rather than months.
They are also using our analytics solution to make fact-based decisions about product performance and inventory, ensuring that the right inventory is in the right place at the right time.
Retailers are increasingly adopting omnichannel strategies to remain competitive, and suppliers must follow suit to grow their businesses.
Legacy processes are no longer sufficient to achieve the agility that is needed to address ever-changing consumer demands.
The need to have an end-to-end solution that enables real-time collaboration between trading partners is more important than ever before.
Fulfillment enables retailers and suppliers to communicate quickly and efficiently, while analytics provides the visibility necessary to optimize inventory at the store level.
Additionally, analytics allows trading partners to collaborate to track product performance and identify opportunities to grow sales while enhancing fulfillment performance.
Due to our broad-based solutions, retail expertise and leadership position, we continue to grow our network.
A recent example is Reinhart, one of the largest Tier 1 food service distributors in the U.S. With $7 billion in annual revenue, they deliver more than 170 million cases of food and products.
They recently hired a new CIO, whose ultimate goal was to move away from legacy EDI software and automate their supply chain across the entire enterprise, enabling real-time communication with their suppliers.
In partnership with SPS, Reinhart ran a successful community enablement program.
Holiday Stationstores is a recent retailer addition stemming from the ToolBox acquisition.
One of the largest convenience store chains in the U.S. with over 500 locations, Holiday prides themselves in utilizing data to optimize their performance, but much of their internal solutions they developed were resource-intensive and couldn't easily integrate multiple data sources and be shared in real-time across the organization or with strategic partners.
In their continuing effort to improve insight and collaboration with their strategic partners, they selected our analytics solution with its robust capabilities such as item performance, assortment and promotion opportunities to deliver sales growth while improving efficiency.
Comprehensive cloud-based platform and broad-based retail network enable thousands of trading partners to communicate real-time and adapt quickly to ever-changing consumer demands in the complex retail environment.
SPS sits at the center of the retail ecosystem, which allows us to act as a strategic adviser to retailers and suppliers on their omnichannel strategies, and we continue to grow our market leadership.
We had a successful first quarter, and we continue to believe we have a multibillion-dollar opportunity in front of us.
With that, I'll turn it over to Kim to discuss our financial results.
Thanks, <UNK>.
We had a great first quarter.
Revenue for the quarter was $51.9 million, a 14% increase over Q1 of last year and represented our 65th consecutive quarter of revenue growth.
Recurring revenue this quarter grew 15% year-over-year.
The total number of recurring revenue customers increased 5% year-over-year to approximately 25,000.
For Q1, wallet share increased 9% year-over-year to approximately $7,700.
For the quarter, adjusted EBITDA was $8.5 million compared to $6 million in Q1 of last year.
We ended the quarter with total cash and marketable securities of approximately $157 million.
We ended the quarter with approximately 275 quota-carrying sales headcount, in line with our expectations.
As we mentioned last quarter, due to the increased sales force productivity we expect to realize in 2017, we anticipate adding approximately 15 salespeople by the end of the year.
Now turning to guidance.
For the second quarter of 2017, we expect revenue to be in the range of $53.4 million to $53.9 million.
We expect adjusted EBITDA to be in the range of $7.3 million to $7.8 million.
We expect fully diluted earnings per share to be approximately $0.06 to $0.07, with fully diluted weighted average shares outstanding of approximately 17.7 million shares.
We expect non-GAAP diluted earnings per share to be approximately $0.18 to $0.20 with stock-based compensation expense of approximately $2.5 million, depreciation expense of approximately $2 million and amortization expense of approximately $1.2 million.
For the full year, we expect revenue to be in the range of $220 million to $222 million, representing 14% to 15% growth over 2016.
We expect adjusted EBITDA to be in the range of $31.8 million to $32.5 million, representing 19% to 22% growth over 2016.
Our philosophy on margin expansion remains the same, and we expect to invest any additional upside back into the business.
We expect fully diluted earnings per share to be in the range of $0.36 to $0.39.
We expect fully diluted weighted average shares outstanding of approximately 17.7 million shares.
We expect non-GAAP diluted earnings per share to be in the range of $0.83 to $0.85, with stock-based compensation expense of approximately $10.1 million, depreciation expense of approximately $8.3 million and amortization expense for the year to be approximately $4.9 million.
For the remainder of the year, on a quarterly basis, investors should model a 40% effective tax rate calculated on GAAP pretax net earnings.
As a reminder, we have begun tax effecting non-GAAP income to conform to the May C&DI issued on non-GAAP measures in 2017.
Non-GAAP income now reflects the tax adjustments of the add-back of stock-based compensation and the amortization of intangibles to non-GAAP income.
A reconciliation of the impact of historical periods can be found on the financial data sheet we have posted to the IR section of our website.
In summary, we have a strong start to the year, and we look forward to expanding our market leadership and remain confident in our ability to achieve our long-term targets.
With that, I'd like to open the call to questions.
Yes.
So I think as far as our change in go-to-market strategy, I don't think that's had, really, an impact.
Fairly marginal.
I mean, somewhat, but fairly marginal.
And the deals in retail tend to be longer sales cycles.
So it is somewhat in the enablement campaigns, which is a large driver of our growth rate.
And from a customer account standpoint, it's through the retail enablement campaigns where you're going to get the largest number of customer accounts.
So it is more reflective of enablement campaigns.
Sure.
So first, as it relates to the EBITDA, we have reiterated what our expectations are for the year, and our expectation is that we will make sure that we are reinvesting appropriately back in the business to hit that EBITDA.
As it relates to the favorability in the quarter, most of the favorability of the EBITDA in the quarter just was related to timing of hires and investment in the business.
Specific to your question on the R&D side, you are correct.
You did see the Q1 R&D down sequentially from Q4.
A portion of that reason is that a portion of our R&D ---+ a small portion of our R&D, we actually capitalized for product enhancements.
And in our business, we tend to do less of that type of activity in Q4 because we're really focused on the holiday season, and more of that happens in the Q1 time period.
So that's part of the dynamics you see there.
The second part is that more of our hires are now going to be coming in, in the Q2 than we saw in Q1.
So as you're modeling R&D, you should expect to see the R&D spend increase for the remainder of the year relative to where it was in Q1.
Yes.
So obviously, bankruptcy is where they don't continue operations and they actually close down.
That is a negative.
We saw that last year, where we had 4 or 5 go bankrupt, and we ---+ it cost us a point-or-so of growth.
So that does have an impact.
Store closings, for the most part, don't.
What's interesting is, when you look at the underlying retail environment, if you have an omnichannel strategy as a retailer, you are seeing that brick-and-mortar stores are growing 3% last year, and that is 100 outlets.
About 120% of that is because of web-influenced sales.
So store sales are up but you need to be in the right standpoint.
So there's a lot of uncertainty, obviously.
Some of the players just didn't have omnichannel strategies.
Some of the players just ---+ you need to be very strong operationally and merchandising-wise in today's retailer environment to compete, and some of them aren't doing that.
So one of the things that we've talked about internally and et cetera is one of the things with the uncertainty in the retail environment, I will tell you that it is uncertain when we'll get back to that 20% number, but we see good traction.
We see a huge total addressable market in front of us and a big opportunity.
So with the customers we're helping and surviving, we're really adding a significant amount of that.
Sure.
So we ---+ for most currently, approximately 275, that's in line with Q4.
So the way can think about it is in the quarter, there was a pretty typical amount of attrition that we see as a business, and we hired to offset the attrition.
That was in line with what our expectations were for the quarter.
We also did reiterate that our expectation is that we would add about a net 15 by the end of the year.
That amount is lower than what we've added historically based on the efficiencies and the productivity changes that we put in place with the sales force.
As it relates to the mix of hiring of that sort of net 15 people, to your point, there's a portion of that, that are going to be more experienced or seasoned reps or seasoned sales executives to go after some of our larger customer opportunities.
As you would expect on those types of hires, those do take a bit longer to hire those folks, but we are right in line with what our expectations are relative to hiring them during the year.
It's pretty varied.
To the extent they're retail reps, senior retail reps, it helps if they have some background in retail.
They've been an enterprise rep.
And some of them aren't experienced to that extent.
They might have 2, 3 years experience if they haven't in some type of non-commodity type sales, that's ---+ so it's pretty varied among the sales groups between channel and supplier sales and supplier sales, enterprise and retail.
So it's pretty varied.
It's ---+ we are still hiring out of college, and we still are hiring.
We've already hired extremely senior sales reps.
Sure.
There's really no ---+ nothing as it relates to the pricing dynamics, <UNK>.
The growth rate is pretty similar to last quarter, when you look at it on an organic basis.
So just keep in mind, this is the first quarter we're lapping the acquisition of ToolBox last year.
So if you look at it from an organic perspective, we're 9% this quarter, and we're a little bit closer to 10% last quarter.
So pretty similar dynamics within the 2 quarters.
Nothing specific to highlight relative to pricing dynamics.
Well, Australia is a pretty good strong market for us, and we're seeing pretty decent growth.
Obviously, Amazon just announced they were going in to Australia.
So I think you'll see the mindset there.
They do have some extremely sophisticated retailers, just like the U.S. does, and some that are (technical difficulty) It feels pretty similar to the U.S., except without the ---+ it had not had the Amazon impact.
It's had the opportunity of e-commerce but not the threat of Amazon.
But obviously, Amazon (technical difficulty) a big announcement there.
Sure.
So Tim, we provide update on analytics on an annual basis.
So I don't have an update to tell you specific within the quarter.
You are correct.
We did highlight some examples, one being on the ToolBox side.
So now that we're just about a year into that acquisition, we really are pleased with what we've seen there.
And so we feel very good as it relates to the analytics business.
Do keep in mind, relative to some of the bankruptcies that <UNK> had referred to that occurred sort of in the latter part of 2016, the negative impact that's having in 2017 is more skewed to the analytics business.
So that's nothing particularly new in the quarter, but that's just sort of a reminder.
Overall, we think there's lots of opportunities to grow both the fulfillment business as well as the analytics business.
Sure.
So as it relates to the user conference, you are correct.
That's in Q2.
And the dollars associated with that are already reflected within our guidance, very similar to last year.
What you saw last year and what you're also seeing this year is our expectation for EBITDA goes down a little bit sequentially from Q1.
Partly that is to reflect the cost of that user conference.
So nothing really different relative to what you would have seen last year.
Yes.
I think the ---+ to address the first question on the time lines on the retailers.
Obviously, there's a lot of uncertainty in the retail environment, et cetera.
So I don't know that with the uncertainty, I'm going to project how long it'll stay longer or whatnot, but we are seeing uncertainty.
But obviously, we're seeing a lot of traction as well.
So I don't ---+ it's not gloom and doom.
We've had significant traction, but we have a lot of great activity going on with the retailers, and we add a ton of value to those retailers.
With that uncertainty, we are pulling any long-term forecast.
I think to be able to give guidance more than a year out just doesn't seem prudent at this time, saying we're going to hit 20%.
I think that's right, Jeff.
And just saying, it just seems ---+ I don't know.
In the retail environment, we feel very optimistic about our business.
We're very optimistic about how the reorg has happened and how the ToolBox acquisition, feel very upbeat about the business.
But the uncertainty looming out there just doesn't feel like to give long term ---+ to give guidance more than a year out just doesn't seem like a prudent thing to do.
Yes.
First ---+ the first part of the question, we're not seeing significant changes in who we're going after, how we're doing enablement campaigns.
It's still pretty similar on that front.
From a drop-ship standpoint, we do drop-ship with over 300 retailers today.
So it's an important ---+ our story is really about the network and supporting you as a supplier regardless of who ---+ what channel you sell into.
And it's the really the life cycle of the order and the life cycle of the item to able to address your concerns or needs as a supplier.
I'd say the biggest difference, CommerceHub is 100% focused on the drop-ship.
It's really not a network play.
It's a drop-ship play a lot of on the order management system for the retailers, for about 40 retailers, I think, is their thereabouts today.
So in those deals, where it's a large retailer looking for the drop-ship component of their e-commerce business, CommerceHub is in those deals.
If they have an order management system and they've solved that problem, we're in really good standings.
If they're looking to purchase CommerceHub's order management system, then they're going to have a competitive advantage.
That's an ---+ Pat, we look at that on an more of a ---+ we think about it like an annualized or a TTM basis.
So we'll provide an update on that on ---+ as we exit this year on an annual basis, consistent with what we've done before.
Within the quarter itself, we had a nice healthy mix of enablement campaigns and leads coming from retailers.
However, the same comment that we had mentioned on the last earnings call, the expectation in this year, we're not having as many as we had initially anticipated because of a subset of retailers, but the dynamics that we saw within the quarter was pretty much what we're expecting as we entered into the quarter.
What we do is, on an annual basis, we'll provide how many retailers we do some activity with on its community enablement campaigns and how many we do all with.
And that's a metric that we track on an annual basis.
Yes, we feel good about the tone of the business.
We feel good about the total addressable market.
We feel good about what happened with the ToolBox acquisition.
We don't feel good about the uncertainty in the retail market.
But I mean, we think, Pat, we're set up for the long-term and plan on continuing to execute on that.
For recurring revenue or for ---+ what numbers are you looking for, Pat.
Yes.
Since we've lapsed the ToolBox acquisition, the reported inorganic are one and the same.
So GAAP revenue, 14%; recurring revenue, 15%.
Well, this is really, Pat, what we anticipated.
Obviously, we talked about it.
We did a pretty significant reorganization in the beginning of the year.
So to hire into that environment, to be recruiting heavily in December with that out there and then having people come in to that new environment, just ---+ we anticipated more back end of the quarter hiring.
So January was nonexistent for the most part.
So it is what we anticipated from a headcount standpoint.
And I think you'll see, as we go through the quarters, we'll be on about 15, where we think we'll be.
So I feel pretty confident in that number of 15.
Yes.
So first off, I think it's extremely early, but I think what we'll take victories on is the turnover has not been significantly different than what it's been in the past.
I think the pipelines are growing and people are past the changes, and they're ---+ we have a very, very strong sales force with very committed people that I think are embracing the change in the new world.
So ---+ and I think they're going after some of their territories extremely aggressively.
So early signs of pipelines, et cetera.
I feel very good about the stability in the sales force, the leadership of the sales force, all the ---+ unfortunately, those are softer things, but the pipeline is growing and the pipeline is strong with the changes.
Yes.
So from ---+ we look at it from a couple of different ways.
Australia, we continue to have nice success there.
We continue to expand our sales force there.
We continue to make progress there.
And I think, frankly, Amazon coming in that market will give a more sense of urgency on some of the initiatives for retailers, so very much what we saw 3, 4 years ago at the impact of Amazon more so 3, 4 years ago in the U.S. So I feel Europe has been more around the working with the analytics play, and we continue to expand our network there.
And then Asia is really more around the North American supply chain.
We continue to expand our footprint.
We continue to let the viral nature of our network expand our business, and that's the way we'll continue to execute on that opportunity.
