SPSC
#Thanks, <UNK>, and welcome, everyone.
2017 was a year of strong execution for SPS Commerce in a retail market undergoing significant transition.
For the full year, revenue grew 14% to $220.6 million, and adjusted EBITDA grew 23% to $32.6 million.
Additionally, recurring revenue grew 15%, customer account grew 4% and wallet share grew 10%.
In the past several years, we have seen tremendous change in the retail industry as we continue to engage with retailers to adapt their businesses to the evolving retail environment and enhance their omnichannel capabilities.
In 2017, we expanded our network to include such notable brands as Walgreens Boots Alliance, a $100 billion global conglomerate; Lidl, a German grocer and one of the largest retailers in the world; and Mills Fleet Farm, a full service retailer for life, work, home and recreation products.
Throughout the years, SPS Commerce has partnered with many early adopters to successfully deploy new e-commerce strategies and continues to offer unmatched capabilities to those undergoing the transition today.
It's imperative for retailers to improve shipping and fulfillment capabilities to compete.
And enhancing customer experience may involve offering online educational webinars, loyalty programs, subscription boxes or repeat order programs.
Retailers understand the need for retail and e-commerce efficiencies, but they must all also learn to differentiate themselves and win customer loyalty to be able to compete against the retail and e-commerce giants of the world.
SPS offers a comprehensive cloud-based platform and a broad-based retail network to enable thousands of trading partners to communicate in real time and adapt quickly to the ever-changing consumer demands and the complex retail environment.
The numbers speak for themselves.
We now have over 75,000 customers and over 25,000 recurring revenue customers.
We have over 2,100 customers to pay us more than $20,000 annually.
As we move upmarket, we are seeing an increase in customers integrating with us through our channel partners, and this year, channel sales contributed 22% of all new business.
Our leadership position continues to drive growth in our channel strategy.
As a result, we have developed strong alliances with some of the world's largest system ---+ global systems integrators and value-added retailers like Capgemini, and most recently, Pw<UNK>
With the world's largest retail network, SPS continues to be a strategic partner of choice, enabling robust omnichannel capabilities.
As the retail space continues to evolve in complexity, many retailers are now looking for real-time collaboration, inventory visibility and data, which is critical to satisfy elevated consumer demand and realize efficiencies to address the high cost of doing business in the omnichannel world.
These trends are fueling the adoption of our broad suite of products.
In 2017, our analytics solutions comprised 17% of total recurring revenue, growing 4% year-over-year.
As we noted on our last call, the retail environment changes.
Bankruptcies and consolidations are impacting the sale of analytics.
As a result, our analytics business grew slower than fulfillment in 2017, and we expect this trend to continue.
Fulfillment remained strong at 18% year-over-year growth, driven by strong demand for our cloud solution despite lower enablement activity.
In 2017, we rolled out the next generation of our web fulfillment product to our customers, which moves beyond traditional EDI and allows us to develop more strategic, consultative relationships with our customers by enhancing their ability to consult with SPS directly through the interface to address the needs of their trading partners.
In the fourth quarter, we engaged with Mills Fleet Farm, an Upper Midwest retailer since 1955 with a diversified offering of merchandise of over 120,000 SKUs across a broad range of product categories.
Mills recently launched an expansion plan to double its size in 6 years, which began with making significant improvements to their supply chain, including the construction of a new distribution center and an overhaul to their legacy technology and processes.
Mills needed to quickly onboard vendors and ensure compliance with their new EDI requirements and turn to SPS for our expertise.
We ran a community enablement campaign to quickly onboard hundreds of vendors in time for the opening of their new distribution center in early 2018.
These types of community enablement campaigns demonstrate the increasing requirements for retailers to upgrade their legacy technologies and are also an important lead generation source for SPS Commerce.
In summary, SPS is the largest retail platform to enable fully orchestrated retailing across all channels, a platform architected for today's complex omnichannel environment, which includes brick-and-mortar, e-commerce and drop-ship.
We have a multibillion-dollar global opportunity in front of us, and we feel confident in our momentum exiting 2017.
With that, I'll turn it over to Kim to discuss our financial results.
Thanks, <UNK>.
We had a great fourth quarter.
Revenue for the quarter was $58.2 million, a 14% increase over Q4 of last year and represented our 68th consecutive quarter of revenue growth.
Recurring revenue this quarter grew 15% year-over-year.
The total number of recurring revenue customers increased 4% year-over-year to approximately 25,800.
For Q4, wallet share increased 11% to approximately $8,400.
For the quarter, adjusted EBITDA increased 14% to $8.5 million.
For the year, revenue was $220.6 million, a 14% increase.
Recurring revenue grew 15% for the year, and adjusted EBITDA grew 23% to $32.6 million.
We ended the year with total cash and investments of $169 million.
In an industry that is in transition, SPS Commerce has adapted its business model and set new targets to ensure we continue executing and delivering results for our shareholders.
We continue to position our company for the long term and have aligned our sales force to thrive at a dynamic retail environment.
We exited the year with a strong sales organization of approximately 295 quota-carrying sales headcount, and we believe this set us up well to deliver on our 2018 expectations.
Going forward, we will no longer provide specifics on headcount on a quarterly basis.
We may provide periodic color as relevant.
We delivered strong traffic growth while investing for the long term, and we implemented a buyback program to repurchase up to $50 million of SPS shares.
Before turning to guidance, I would like to highlight the impact of our adoption of the new revenue recognition standard, ASC 606.
The impact to our financial results and guidance is as follows.
Under ASC 606, 2017 revenue will show a reduction of approximately $500,000 and 2018 revenue will be reduced by approximately $400,000.
Under ASC 340, the majority of commissions will now be expensed over 2 years, resulting in a reduction of commission expense of approximately $2 million in 2017 and approximately $1 million in 2018.
As a result, adjusted EBITDA increases by approximately $1.5 million in 2017 and approximately $600,000 in 2018 versus the prior accounting standard.
Our guidance reflects these changes, and you can see the impact of prior years on our financial data sheet on our website.
There will also be more information provided in our 10-K filing.
Now turning to guidance.
For the first quarter of 2018, we expect revenue to be in the range of $57.4 million to $58.1 million.
For the full year, we expect revenue to be in the range of $241 million to $244 million, representing 10% to 11% growth over 2017.
For the first quarter of 2018, we expect adjusted EBITDA to be in the range of $9.5 million to $10 million.
For the full year, we expect adjusted EBITDA to be in the range of $42 million to $43.5 million, representing 23% to 27% year-over-year growth.
We'd like to note that without the impact of AOC 606, our adjusted EBITDA year-over-year growth would have been 27% to 31%.
For Q1 2018, we expect fully diluted earnings per share to be $0.14 to $0.16 with fully diluted weighted average shares outstanding of approximately 17.4 million shares.
We expect non-GAAP diluted earnings per share to be approximately $0.30 to $0.32 with stock-based compensation expense of approximately $2.9 million, depreciation expense of approximately $2.1 million and amortization expense of approximately $1.1 million.
For the full year 2018, we expect fully diluted earnings per share to be in the range of $0.67 to $0.71.
We expect fully diluted weighted average shares outstanding of approximately 17.5 million shares.
We expect non-GAAP diluted earnings per share to be in the range of $1.32 to $1.36 with stock-based compensation expense of approximately $11.9 million.
We expect depreciation expense of approximately $9.9 million, and we expect amortization expense for the year to be approximately $4.4 million.
For the year, you should model approximately 30% effective tax rate calculated on GAAP pretax net earnings.
We expect to pay nominal cash taxes in 2018 due to our NOLs.
In addition to the 2018 guidance, we are introducing a 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 percentage in the low 20s.
We expect a 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%.
In summary, we delivered strong revenue and adjusted EBITDA growth in 2017 as we continue to invest for the future.
We believe SPS is well positioned to expand its market leadership.
And with that, I'd like to open the call to questions.
Yes.
I think when you look back from ---+ we haven't seen the full year '17 numbers yet, but '16 numbers were ---+ that overall brick-and-mortar grew about 3% and e-commerce grew more in the 17% range.
And I think my guess is it's going to be slightly better than that but not significant for the full year.
Retail continues to be overbuilt.
I think we're going to continue to see store closings partly because of e-commerce but a big part just because it's been overbuilt for the last 25 years.
So I think we're going to continue to see that.
We did see additional transaction volume in Q4 that ---+ mostly from our drop-ship that created a little extra revenue in Q4, so that was strong.
And then we did see some strength in our enablement campaign activity in Q4.
But I don't think it's a huge overall change in the environment, and we're not counting on a complete turnaround.
(inaudible) I think we're just going to continue to see some bankruptcies.
I think we're going to continue to see store closings, and it continues to be an industry in transition.
So if you take a step back, first off, from a product suite standpoint, we think analytics is an extremely important part of our portfolio.
It fits very nicely with our mission and vision of perfecting (inaudible).
And it does help in the overall sales for ---+ as we have an entire package for both retailers and suppliers.
So we think it's an important part, and we do believe in the long-term TAM.
I don't think the store closings and that matter.
It's just a matter of where it's falling in people's priorities.
I met with a supplier yesterday, and the suppliers are very much engaged and want to do more with the point-of-sale data and analytics.
But they can only go so far if the retailers aren't going to share that data.
So I still believe that there's an incredibly large long-term total addressable market.
But I don't think we're going to see that move to the top of the party list for retailers over the next year or 2.
Well, the customer growth count, as we stated in the past, is really around enablement activity.
And channel sales will drive revenue.
But for the most part, channel sales tend to be slightly larger deal.
Typical deal size is 3 to 10 or larger than our average size.
So it drives revenue but lower customer count.
An enablement activity is what will be the stronger activity for customer count.
We saw a relatively strong Q4, especially relative to most Q4s' enablement activity.
I think, obviously, we believe in an incredibly large total addressable market.
And I think for things to accelerate, we need to see a higher activity of enablement campaigns, so there's some normalization there.
And we obviously need an acceleration and a prioritization of analytics.
So those are the 2 things that we're going to watch.
Sure.
So when we look at 2017, EBITDA dollar growth was about 23%.
When you look at our guidance for 2018, our EBITDA growth is 23% to 27%.
So really, we demonstrate our ability to show some of that margin expansion in '17.
And so really, in '18, you'd expect similar as it relates to the implied margin expansion.
As it relates to where that comes from, over time, we believe we have opportunities for efficiencies really in most of the areas, with the exception of R&<UNK>
We think that as a percent of revenue, and sort of that 10% to 12% makes sense for us.
But over time, we think there's opportunities to show improvement in gross margin, sales and marketing as well as G&A.
Specific to your question on the sales and marketing side, a couple things.
We exited 2017 with about 295 quota-carrying sales headcount.
We believe that puts us in a great position relative to what our expectations are for 2018.
So the way you should think about that sales and marketing then in '18 is we'll continue to add here or there as we see opportunities to do so, but we're exiting in a really good sort of sales force optimization point so we don't need to be adding as many as we've had to add in prior years.
Therefore, there's more efficiencies that you're going to see out of our model and more efficiencies that you'll see translated to the sales and marketing line itself in 2018.
Well, I think there's a number of things that are driving the sales force.
Obviously, we had a reorganization about a year ago, and I think the sales force ---+ I mean, I really believe we have extremely committed, strong sales organization.
We have more seasoned sales reps.
But more importantly, our customer success team has stepped up over the last year or 2 and is really driving customer behavior and assisting the sales force in selling to our existing customers.
I think our sales operations team is doing a great job of taking burden off of the sales force, which allows them to be more efficient.
So I think we've done a number of things that are proving out to allow the sales force to do what they do best and go after new prospects and work with our existing install base.
Well, I think if ---+ when I look back 3 or 4 years ago, I think the e-commerce trend and omnichannel trend was more of an opportunity than a threat to people.
We had a lot of tailwinds, retailers weren't as stuck, and there was ---+ they felt there was less disruption.
I think over the last 3 or 4 years, the last 20 years of behavior from retailers of overbuilding is catching up with them.
Obviously, the e-commerce, they need to get in the game, so there's more disruption there.
And analytics is completely much more on the back burner as far as priorities.
There's very large priorities.
I think retailers actually are getting more engaged and into the game of truly building an omnichannel business.
I think there's areas where we can continue to grow the sales force.
I think there's areas where you need to be careful, I think, like analytics.
I think they're ---+ it just ---+ it's not just a matter of more headcount will give you more sales.
I think there's areas that we'll continue to add and we'll be selective, but it's not as straightforward that you just knew that if you added more, you'd sell more.
But I think from a capacity standpoint, the things that Dan Juckniess and the entire sales organization has done and embraced over the last 12 months really set us up well for the long term.
Sure.
So from a customer churn, we're at 13%, that's an annual number, same as we were last quarter.
And dollar churn is just about half of that, it's at about 7%.
And that same is what we saw last quarter as well.
Those are annual numbers, not just quarterly numbers, obviously.
Sure, the last ---+ it's changed by about 1%.
So if you went back, the customer churn used to be around 12% and the dollar churn used to be about 6%.
So we've seen a slight uptick of about 1% on both of those metrics.
Yes.
I think it's fairly fresh in their minds.
I haven't had a lot of feedback, but I think their plates are full.
I think capital has been, in some cases, been the restraint.
But I think a lot of the restraint for retailers is just how much can they do at a time.
We still see that trend.
Obviously, that's a retailer by retailer.
They're not all going through the pipe at one time.
But I think it's retailer by retailer.
And I think there's going to be ---+ continue to be more and more large transformation as retailers are realizing that they either embrace an omnichannel strategy or they're not going to survive.
So as it relates to 2018, we provided overall guidance for what our expectations are.
However, we've also stated that we do expect that the analytics will continue to grow at a slower rate relative to the fulfillment growth.
No, I think Mills Fleet Farm was a nice program.
What we tried to do on the earnings call is highlight a customer or 2.
So it was a nice program and it was one of a few that ---+ several that drove that.
So it was deeper than just one program.
Yes, and the ---+ in Q4, with the sequential adds being a bit higher and you also saw that in the customer growth rate, so it went up ---+ it's 4% versus the 3%.
Those are highly correlated to the quantity of community enablement campaign.
So one of the comments that <UNK> had made earlier is we did see a few more of the community enablement campaigns.
They ended up coming in, in the latter part of the quarter, which was part of our reasons for our exceeding in the quarter.
Sure.
So we continue to see and expect to see the retail market.
It's still undergoing significant transition.
And as those retailers do that, there's opportunities for us to help them through community enablement campaigns, but the timing of when those campaigns happen really are more dictated on where the retailers are within their journey.
So a lot of the commentary we said in '16, again, we still expect retailers are on this journey for ---+ into '18 and beyond.
Yes.
Our international business, in Australia, we've had nice traction there.
That's an entire ecosystem obviously built into the whole global concept.
But we've see nice traction in Australia.
Our business in Asia is really more linked to the supply chain ---+ North America supply chain, and we continue to see that growing more at the pace of overall fulfillment on a growth standpoint.
It's ---+ we actually support thousands of customers that may have a component in Asia through our Asian operations.
And then Europe has been slower, but that's more linked to our analytics business, which, again, continues to be slower growth.
