SPSC
#Thanks, <UNK>, and welcome, everyone.
We posted strong performance in the first quarter of 2018 as SPS Commerce continues to be a key strategic partner to a large network of retailers and suppliers.
For the first quarter, revenue grew 14% to $59.1 million, recurring revenue grew 14% and adjusted EBITDA grew 28% to $10.9 million.
Retailers are continually evolving their omnichannel strategies to adapt and anticipate the shopping habits and expectations of today's consumers, which have largely been influenced by retail giants like Amazon and Walmart.
In an annual survey from Retail Systems Research, hundreds of retailers, suppliers, distributors and logistics firms weigh in on the biggest factors impacting consumers' buying decisions.
For 5 years in a row, one theme endures year-over-year.
Consumers are setting expectations in retailing, and delivering on those high expectations requires accurate, efficient, streamlined and automated trading partner relationships.
We anticipate that this trend will continue and accelerate in the coming years, which underscores our belief in the multibillion TAM ahead of us and the tremendous opportunity it presents for SPS Commerce and our leading platform, which enables retailing across all channels.
SPS Commerce has managed community enablement campaigns for some of the world's largest and leading retailers.
Costco, for example, has been working with SPS Commerce for 15 years while expanding its retailing platform and onboarding thousands of vendors over the course of our partnership.
Over the years, Costco has partnered with SPS for vendor onboarding, achieving nearly 100% automation.
As a strategic partner of choice, SPS Commerce onboards new vendors to the Costco platform on a monthly basis, which in turn continually fuels the growth of our retail network.
As retailers invest in new technologies to improve supply chain execution, they turn to SPS Commerce to optimize their investments.
We have recently engaged with Wesco, a leading global supply chain solutions provider and distributor to help them create a world-class customer experience by transitioning to a new electronic order fulfillment system.
In a matter of months, SPS Commerce launched a community enablement program and onboarded a significant number of their vendors.
Costco and Wesco are only 2 examples of exceptional companies who recognize the benefits of supply chain efficiencies.
But there are many more who are in the process of making investments to optimize supplier integration and to offer the omnichannel retail experience that customers have come to expect.
Reports from the 2018 Shoptalk Retail & Ecommerce Conference, which took place in <UNK>h of this year, point to lagging e-commerce infrastructure, aging inventory and order management systems and the need for integration between retailers and suppliers to achieve some of the most basic yet imperative omnichannel capabilities such as drop-ship.
These trends validate the need for agile supply chain solutions to deploy an efficient omnichannel strategy and highlight the vast number of retailers out there who are at different stages in adapting the e-commerce.
Increasing collaboration among trading partners is a complex progression, and we believe that SPS Commerce, with the retail industry's largest network and a comprehensive portfolio of e-commerce solutions, is well positioned to connect retailers and suppliers on the industry's most broadly adopted retail cloud services platform.
With that, I'll turn it over to Kim to discuss our financial results.
Thanks, <UNK>.
We had a great first quarter of 2018.
Revenue was $59.1 million, a 14% increase over Q1 of last year and represented our 69th consecutive quarter of revenue growth.
Recurring revenue this quarter grew 14% year-over-year.
The total number of recurring revenue customers increased 4% year-over-year to approximately 25,900.
For Q1, wallet share increased 10% year-over-year to approximately $8,500.
For the quarter, adjusted EBITDA was $10.9 million compared to $8.5 million in Q1 of last year.
We ended the quarter with total cash and marketable securities of approximately $168 million.
We also repurchased $5.9 million of SPS shares in the quarter.
Now turning to guidance.
For the second quarter of 2018, we expect revenue to be in the range of $59.4 million to $60 million.
We expect adjusted EBITDA to be in the range of $10.2 million to $10.7 million.
We expect fully diluted earnings per share to be approximately $0.14 to $0.16 with fully diluted weighted shares outstanding of approximately 17.5 million shares.
We expect non-GAAP diluted earnings per share to be approximately $0.32 to $0.34 with stock-based compensation expense of approximately $3.3 million, depreciation expense of approximately $2.4 million and amortization expense of approximately $1.1 million.
For the full year, we expect revenue to be in the range of $242 million to $244 million, representing 10% to 11% growth over 2017.
We expect adjusted EBITDA to be in the range of $43.5 million to $45 million, representing 27% to 32% growth over 2017.
We expect fully diluted earnings per share to be in the range of $0.70 to $0.74.
We expect fully diluted weighted average shares outstanding of approximately 17.5 million shares.
And we expect non-GAAP diluted earnings per share to be in the range of $1.40 to $1.45 with stock-based compensation expense of approximately $12.7 million, depreciation expense of approximately $9.9 million and amortization expense for the year to be approximately $4.5 million.
For the remainder of the year, on a quarterly basis, investors should model a 30% effective tax rate calculated on GAAP pretax net earnings.
As a reminder, on our fourth quarter earnings conference call, we introduced the 2020 goal and an updated long-term target model.
Specific to the 2020 goal, factoring in current industry dynamics, we expect to reach adjusted EBITDA of at least $65 million and adjusted EBITDA margin percent at least in the low-20s.
We expect the revenue run rate comfortably in excess of $300 million exiting 2020.
Beyond 2020, we expect to see continued margin expansion with a long-term target model for adjusted EBITDA margin of 35%.
Given the progress we've made towards our adjusted EBITDA targets in the first quarter of the year, we are well on our way to achieving our 2020 goal and feel confident in our ability to grow our margin profile in the long term.
With that, I'd like to open the call to questions.
Yes.
Tom, it continues to be a retailer by retailer question.
And I would say, when you add up all the retailer by retailer status, I would say it's greatly unchanged from the past.
Obviously, there's some that are moving forward, some that are struggling, some that are in the process of transforming.
So it continues to be, I would say, consistent with what we've seen over the last 4-plus (inaudible)
No, I think ---+ Tom, thank you.
We laid out in the December board meeting our strategy for 2018, which we think is a good, strong strategy.
And to the extent we're executing on it, what we tend to do as a business is as we have a strategy at the beginning of the year, as long as we're executing on it, we tend to stay the course on the strategy.
So obviously, we're out talking to shareholders, but we think we have a strategy set out that we set out in December, and we plan on continuing to execute towards that plan.
Sure.
So as we mentioned on the last conference call, we were actually in a great position exiting 2017 that we felt like we have the appropriate sales resource and capacity for us to deliver on our expectations for 2018.
So that puts us in a different spot than we had been historically.
No change relative to our opinion that we have the appropriate sales capacity to hit our expectations in 2018.
Sure.
So as it relates to the quarter, our outperformance was primarily driven by really, the community enablement campaigns, the quantity as well as the timing associated with that.
That translated to outperformance on both recurring revenue as well as onetime revenue.
When we think about the full year, what we've done is we've increased the midpoint of our annual expectation by $0.5 million, which takes into account our results for Q1.
But it also takes into account the fact that there's still a lot of uncertainty in the retail space and the retail environment, and both of those were reflected into our full year expectations for revenue.
Sure.
So I'd say in the retail space, there's always some consolidations or bankruptcies that are occurring.
For the most part, we tend to have a pretty minimal impact to that.
What you're referring to that occurred back in sort of the latter part of '16, impacting us in '17 by about 1% was based on about a handful of retailers.
So in general, there are bankruptcies and consolidations that occur, but they tend to have somewhat limited impact in our overall results.
We ---+ our guidance reflects our expectations as we're thinking about the retail environments and retail in transition in 2018.
Sure.
I'd probably go back to the previous comment I made, which is specific in the quarter.
A part of our outperformance has to do with timing, some of the community enablement campaigns.
So that's been taken into account as it relates to the Q2 guidance as well as the full year guidance.
And also there's ---+ certainly, again, the retail space still has a lot of transition now that it's going through and both having been taken into account in both the Q2 as well as full year guidance.
Sure.
So as a business, we talk about total revenue and we talk about our recurring revenue.
We did give a data point last year on sort of an annual basis that we thought was helpful for investors last quarter for the full year.
And that information, just to remind, for 2017, analytics was about 17% of total recurring revenue and it was growing about 4%.
But that's a metric that we haven't provided on a quarterly basis.
We have not provided expectations by product.
We've provided expectations for total company revenue.
We did, however, on the last earnings call, mentioned that there is about 1% of revenue from a customer consolidation that we are impacted by, and that customer was an analytics customer.
Sure.
So what we had talked about ---+ the numbers are similar and consistent with last quarter, which was about 13% annual customer churn and about 7% dollar churn.
Sure.
So that revenue per recurring revenue customer continues to benefit from size of customer, so larger customers impact that as well as more and more revenue from our existing customers.
One thing that was interesting in this quarter as it related to the mix of community enablement campaigns that we had, we actually had a larger percentage of that mix of community enablement campaign ends up impacting us with existing customers versus newer customers.
And so that also has a positive impact on that revenue per customer.
Yes, I mean, we have a commitment to these interim targets, which we feel very confident of.
And as we look at M&A, we're obviously going to have a same lens.
I think what you would see us is, keep in mind of these commitments and probably be more aggressive on any costs in any acquisition to make sure that it does not move us in the wrong direction.
Sure, <UNK>.
So you're right.
In general, the quantity of community enablement campaigns is more correlated as it relates to the quantity of customer adds.
What was interesting in this quarter is the mix of the community enablement campaigns that occurred in the quarter, more of that ended up translating into an up-sell of an existing customer versus the quantity of new customer.
So it's just a slightly different dynamic that we saw in this quarter compared to last quarter as an example.
Yes.
I wouldn't expect a major change.
Obviously, we continue to be out landing new customers.
And from that standpoint, there's always the spot pricing pressures, and I think you should expect more of the same.
Sure.
So you're correct, a similar commentary we've provided the last 2 quarters and in Q4, you saw that reflected in actually higher customer net adds than you typically see in Q4.
In this quarter, you saw it reflected a little bit more in net revenue per customer.
But in either case, what drives the timing of the campaign, when we are at the beginning of a quarter and we're forecasting what the expectations are for that quarter, we certainly know where we've engaged in conversations with the retailers, and we have a pretty good view of what do we think that will translate to specific in that quarter.
And sometimes, however, that timing may be slightly different between quarters.
So when you engage in a conversation with a retailer to when you've completed the webcast and you completed the rolling out of the community enablement campaigns, some of those may happen at a faster time period than originally anticipated, and so that's what we saw in Q1.
So you can think of it as some that we had initially anticipated in Q2 just happened to occur earlier and therefore, the results you're seeing in Q1.
It's the latter.
Really, on the timing of community enablement campaigns, they're really solely driven by the timing and the pace that the retailer wants.
No, I would say it's relatively consistent.
Obviously, Jeff, it bounces from program to program and depending on the type of customers they have and whatnot.
But it's relatively consistent over the years.
When we put together our expectations for the year, when we take into account a lot of factors, we look at what we've seen historically.
We also look at what our expectations are for the year.
And all of that ends up into what is reflected in our guidance.
So hard for me to answer a particular number in there, because there's multiple factors that go in, but we feel comfortable with our ability to deliver on our expectations for revenues for the year in light of the environment of retailers in transition.
Yes, I would say there's 0 impact.
I mean, obviously, their business is normal.
At least I haven't seen any change in their behaviors as a business.
They are specific to drop-ship.
We compete with them on a retailer by retailer basis for the drop-ship component of an e-commerce provider, and that continues to be the same.
We kind of got asked the same question when they went public on the flip.
They went public and now they're going private, and that ---+ the financial capital structure of your competition doesn't have a major impact.
It's more ---+ what ---+ will it have an impact to us, what access to capital they have, what people they retain, everything else will have the biggest impact.
Usually, that doesn't happen over the first quarter or 2.
We'll take a wait-and-see attitude on that.
Yes.
From our standpoint and our product sign, it's relatively consistent over the last 4, 5, 6 quarters.
Again, it's somewhat on a retailer by retailer basis, so you got to be a little careful by generalization.
But there's ---+ we're seeing a lot of investment in technology.
Sometimes that's good for us in the timing, sometimes it's not good.
We sit behind difference initiatives, but more or less pretty consistent from our standpoint over the last 4 to 6 quarters.
Yes.
Our channel strategy has always been about making it easier and easier for us to do business with partners or partners to do business with us.
So that's always been on both the people, process and technology side of the equation, and then both add new partners, both large and small, and then deepen the relationship.
And I'd say, probably the biggest change over the last few years is going after more of the bigger global partners.
Look, the drop-ship is complicated for retailers, and it takes a lot of coordination between a retailer and their supply chain and their trading partners.
We continue to see it as a driver, a change management agent for retailers.
Again, to remind everybody, last studies, e-commerce is about 11% of total retail.
And in general, I would say that drop-ship tends to be between 10% to 20% of that 11%.
So it's still a very small set part of retail, but it's growing, I think, rapidly, and it's a driver of change, which is, we believe, a tailwind.
Yes.
Looking back, I think our sales leadership has a nice job really setting us up for the long term.
Obviously, they're into an environment that's somewhat challenging on the retail side, but I feel good there.
And I think we're focusing on ---+ continue to focus on just a lot of the basics of talking to the retailers, talking about the supply chain efficiencies and making sure our message is as crisp as we can and that our reps are well trained.
