SPSC
#Thanks, <UNK>, and welcome, everyone.
We had a great second quarter.
Revenue grew 15% to $54.3 million, recurring revenue grew 16% and adjusted EBITDA grew 35% to $7.7 million.
It is more crucial than ever for retailers and suppliers to have a truly omnichannel strategy, to reach the greatest number of consumers.
And in order to succeed, they must deliver the best possible experience across all shopping channels.
The SPS Commerce network empowers retailers and suppliers to communicate and collaborate in real time to address changing consumer demands in the omnichannel era.
Our broad network and cloud platform places us at the center of the retail ecosystem.
And the increasing need to adopt to omnichannel strategies continues to drive our success.
To remain ahead of the competitive curve, retailers and suppliers must have a well-tuned, agile supply chain that can seamlessly get consumers what they want, when they want it.
As retailing becomes more and more complex, solutions created for single-channel shopping are no longer sufficient.
Throughout 2017, our team has been working to roll out the next generation of our web fulfillment product to our customers.
The first of its kind solution, moves beyond traditional EDI and allows us to develop more strategic, consultative relationships with our customers.
It provides users actionable insights and recommends the highest priority actions to take, enabling them to increase their efficiency and serve the needs of consumers better than ever before.
I want to commend the hard work of our customer success, product and technology teams, who built this exceptional product and successfully rolled it out to our customers.
This next-generation product has received phenomenal feedback from our customers.
Cashout Company, Something Special Deli Foods and B&G Enterprises are 3 of our suppliers, who are using the new web fulfillment.
They highlighted its ease of use, increased efficiency and time they saved, as well as their ability to consult with SPS directly through the interface to address the needs of their trading partners.
To remain relevant and reach new customers, retailers and suppliers are expanding fulfillment channels to customers with a variety of methods, such as buy online, pick up in store, shop/ship directly to consumer, shipped from store and ship to store.
The agility needed from their trading partners to address the many different complexities of these methods cannot be addressed quickly or efficiently by legacy or manual solutions.
Retailers are also realizing the need to upgrade their technologies, as they utilize these more complex distribution strategies to grow sales and improve their bottom lines.
One company successful in doing so is Walgreens Boots Alliance, a $100 billion-plus global conglomerate.
Walgreens launched a retail transformation project to upgrade their technology and build a global business platform with the goal of streamlining efficiencies.
As part of this project, Walgreens identified an opportunity to expand adoption of direct-to-store fulfillment and chose SPS to run a community-enablement campaign to onboard suppliers for this new functionality.
They chose SPS to aid in their retail transformation because of our cloud technology and high engagement with their network of suppliers.
SPS will run a multi-phase community-enablement campaign with them over the next several years, as Walgreens rolls out their new business platform.
Our network consisting of thousands of trading partners and our deep retail expertise enable SPS Commerce to act as an adviser to both suppliers and retailers, such as Walgreens, to help navigate the complexities of omnichannel in retail.
Retail is growing across all channels.
However, consumers have nearly limitless choices on where, when and how to shop.
So one late shipment, bad review or negative store experience can permanently break a sale.
It has never been more important for retailers to deliver an exceptional, consistent consumer experience, both in-store and online.
The SPS Commerce platform helps ensure happy customers by enabling retailers and suppliers to communicate and collaborate quickly and efficiently.
We have a multibillion-dollar global opportunity in front of us, and we will continue to grow our market leadership even further.
With that, I'll turn it over to Kim to discuss our financial results.
Thanks, <UNK>.
We had a great second quarter.
Revenue for the quarter was $54.3 million, a 15% increase over Q2 of last year and represented our 66th consecutive quarter of revenue growth.
Recurring revenue this quarter grew 16% year-over-year.
In Q2, the total number of recurring revenue customers increased 4% year-over-year to approximately 25,200 and wallet share increased 11% year-over-year to approximately 8,000.
For the quarter, adjusted EBITDA was $7.7 million compared to $5.7 million in Q2 of last year.
We ended the quarter with total cash and marketable securities of approximately $164 million.
Also we currently have 283 quota-carrying sales headcount in line with our expectations.
Now turning to guidance.
For the third quarter of 2017, we expect revenue to be in the range of $55.8 million to $56.3 million.
We expect adjusted EBITDA to be in the range of $7.4 million to $7.9 million.
We expect fully diluted earnings per share to be approximately $0.05 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 $2.6 million, depreciation expense of approximately $2.1 million and amortization expense of approximately $1.2 million.
For the full year, we expect revenue to be in the range of $220.2 million to $221.3 million, representing 14% growth over 2016.
We expect adjusted EBITDA to be in the range of $32 million to $32.5 million, representing 21% to 23% 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 $0.40 to $0.42.
We expect fully diluted weighted average shares outstanding of approximately 17.6 million shares.
We expect non-GAAP diluted earnings per share to be in the range of $0.86 to $0.88, with stock-based compensation expense of approximately $9.8 million, depreciation expense of approximately $8 million and amortization expense for the year to be approximately $4.8 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.
In summary, we had a strong quarter.
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.
A couple of things, <UNK>.
I think, over time, the cost of supporting will actually be lower, as it's easier to use and more intuitive which makes that easier to support.
I think from a long-term perspective, we think it shows well.
It's going to be easier to sell.
And when we're in a retailer community enablement campaign, many times, they do want to see the underlying technologies that their suppliers are going to use.
And again, this shows ---+ although hard to quantify, I'd much rather be in a sales cycle with our newly imagined web fulfillment product than our old products.
So I think it's one of those things that, in general, it should be a very big positive.
Sure.
So for the full year, what we did is we took ---+ we revised or shrunk the guidance.
So before, we had a $2 million range.
Now we have a $1.1 million range.
Halfway through the year, it made sense for us to revise the size of that.
So what we ended up doing is we took up slightly the bottom end and we took down slightly the top end.
And that's really just reflective of what we see, as it relates to the mix of community enablement campaigns for the remainder of the year.
Sure.
So this year, as we've made some previous comments on, because of a lot of activities happening in the retail space and retailers having to make a lot of change of their back end systems, the number of community enablement campaigns that we are seeing this year compared to prior years is a bit lighter.
If you recall, community enablement campaigns is a big driver in the quantity of customers.
And so for this year, what you're seeing is that customer growth number is a little bit lower than what you've seen last year, for example.
That's really directly correlated to those community enablement campaigns.
Over time, we still believe a mix of both adding customers, as well as upselling existing customers and size of customers, all of that factors into the overall recurring revenue, which for the quarter, was approximately 16%.
This quarter, it was made up of 4% customer and 11% ARPU.
So both are important contributors to the overall recurring revenue.
But what you're seeing this year is a little bit more pressure on that customer growth number, primarily attributed to the community enablement campaign.
Yes.
So obviously, the sales reorganizations took effect January 1.
What we're seeing, I think, is a very motivated, qualified sales force.
And I think they're very focused on success at this time.
These things are never easy.
And we did it for the intent of setting us up for the long term.
And I think we've accomplished that.
And I think our ---+ as Kim had mentioned in the prepared remarks, our hiring is in line with expectations and our size of our sales force is in line with expectations.
So at this time, about 7 months into it, we feel very good about what we've done and what we've accomplished.
And hats off to the team.
Sure.
Yes, we're at 283.
And we started the year at 275.
Yes, we ---+ first up, we think we are in a very solid state on a competitive standpoint on pricing.
And I think, long term, we have capability to increase pricing.
We think, at this time, we have a very, very large opportunity in front of us and want to continue to capitalize on that.
And so pricing is not a significant part of our short-term growth strategy.
Well, I think, Tom, it's a little bit of both.
And not to be coy about it, but one of the advantages we have as a Software-as-a-Service company is we have a very, very strong land and expand strategy.
So we are very comfortable taking a small piece of business.
We're very confident in our ability to execute and then expand over time.
So although some ---+ a lot of it will come from upsells, a lot of them are from upsells that were sold, perhaps, in the last 12 to 24 months with the idea was that you're willing to land and expand.
But then we are also lending larger and larger accounts.
I think it's a ---+ just a general ---+ continued general trend for us.
And obviously, we have more and more senior reps.
And we're having a great deal of success.
And a lot has been talked about on how much pressure is on the retailers, but the suppliers and the brands really need to continue to move their businesses as well.
And they need to respond to the ever-changing demands of the retailers who are responding to the consumers.
So that puts us on a good spot from that side.
Yes.
So overall, the bankruptcies that happened last year are drag on this year's growth.
Analytics continues to be more challenged in its growth.
Fulfillment is actually growing quite nicely.
And analytics is more challenging.
I think it's a prioritization for the ---+ for both the retailers and the suppliers.
So when we ---+ we don't give middle of the year percentage numbers, but you're going to continue to see a slower growth for analytics in the overall for SPS Commerce.
Sure.
So nothing's changed in our belief that there's a multibillion dollar opportunity and that's really ours for the taking.
We believe we will continue to have lots of opportunity to grow the top line nicely.
And we believe that we can get ourselves back to a 20% growth.
What we've done, however, is just we've removed the timing associated with when we believe we could get back to the 20%.
Sure.
The way we look at it is, overall, we think that there's, again, that multibillion dollar opportunity that we are absolutely going after.
And we expect that a lot of what we currently have is the way we're going to get there.
Meaning community enablement campaigns continue to be a large driver and lead generation for us.
We also have a great channel sales team that's also ---+ drives leads to us.
Those 2 lead generations really engine speed into our direct sales force that then translate into that recurring revenue.
And we expect that mix of customers to be a combination of customers we get from community enablement campaigns, as well as some larger customers as well.
The larger customers will show up more on that revenue per customer than the number of customers.
So really, you should think of it as basically the products we have and our go-to-market strategy that we have.
All of that will just translate into more and more revenue for us, as the years go on.
Sure.
So what I would say is community enablement campaigns continue to be a large portion of our lead generation.
Nothing's different there.
The comments that we talked about that you also articulated is that some of the retailers, they have more work to do than they had maybe fully appreciated or the time line associated with the investments they need to make in their back end system.
And because of that, some of those ---+ the timing of those campaigns are not in '17.
They've been pushed out into future years.
As it relates to giving any color or expectation specifically on 2018, we really give our information as it relates to our expectations for next year.
We do that on our Q4 earnings call.
Sure.
So as a business, we believe a balanced approach is appropriate, meaning we continue to grow the top line and we also do deliver profit back to the investor.
As it relates to the exact mix in any given year, as you'd expect, there's conversations that we have with the Board as it relates to our annual planning and strategic planning.
And then we set those annual expectations that we give in the form of annual guidance on our Q4 earnings call.
So what you should expect as a balanced approach is something that we believe is appropriate for the business.
The exact mix between what is the top line growth and the profit is something that we discuss on an annual basis.
Yes, it's ---+ as one would expect, it's slightly higher than historical levels.
But I would say it's better than we had anticipated and had expected, so feel pretty good about that.
As far as ramp, I think the ramps are relatively constant.
We might see a slight improvement.
We've made some pretty big investments in overall training at SPS Commerce and, in particular, for the sales group, which ---+ it's getting good feedback and that's like ---+ has like 3 months in to that process.
So I would like to tell you that I would think, as we look out 6 months from now that I might make the comment that we are getting slightly faster ramp and higher productivity out of the gates from sales people.
I think it's been consistent with this year, on a relative basis between this year and last year.
We continue to have nice traction in the channel sales group.
And it continues to be a big part of our go-forward strategy.
I wouldn't say there's any change in historical norms, other than as we've moved and sold a higher percentage of our deals to our larger customers, we see them that as a percentage more often as that's where they tend to reside.
So we tend to see them a little more often.
Obviously, we feel we have a competitive advantage against them, and a truly multi-tenant Software-as-a Service offering as opposed to managed services, and continue to have momentum on that front.
Well, I think a couple ways.
Over time, we do believe that by delivering value, you ultimately have the ability to raise prices.
I also think the more value you add to the retailers, that's really going to be a big sales sticking point and you're going to be able to drive community enablement campaigns.
And the retailers are more and more likely to have a heavier and heavier endorsement of SPS Commerce, as they see the value-added on.
So I think, over time, it is pricing.
I think, in the short term, it really is a service and competitive sales advantage to drive growth.
Yes, I would say this.
Our M&A strategy has remained extremely consistent over the last 7 years.
We're looking for customer acquisitions, product roadmap ---+ leap forwards, I would call them, as opposed to new roadmap things and then, geographic expansion.
I will tell you the one thing, the better and better your product is, to do an acquisition where you're going to put them onto our platform, the stronger your product is, the easier that is to do and the more positive an experience it is for them.
So from that standpoint, I think execution would be significantly improved because, I think, just out of the gates, those customers would be extremely wowed by the level of our service.
Yes.
We see that all of the different markets a little bit different.
Asia is really more of ---+ part of the North American supply chain, European supply chain.
We continue to support a high number of customers and that tends to be a very important part of our sales cycle as opposed to lead ---+ a lead indicator.
In Europe, we're getting some momentum, although it's slow on analytics side.
And Australia, we're seeing nice momentum.
The Australian team is performing extremely well.
The sales force there, and the customer success teams, are having good success.
So we feel really good about that part of the world.
