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Hello. Thank you for standing by, and welcome to the SPS Commerce Q2 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Irmina Blaszczyk. Please go ahead.
Thank you, Josh. Good afternoon, everyone, and thank you for joining us on SPS Commerce Second Quarter 2021 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 traction and penetration with retailers and other customers. These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to 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 to 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-K as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available at our website, spscommerce.com and at the SEC's website, sec.gov. In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website, spscommerce.com. During our call today, we will discuss adjusted EBITDA financial measures and non-GAAP earnings 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 and adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures. And with that, I will turn the call over to Archie.
Thanks, Irmina, and welcome, everyone. We are pleased to report another outstanding quarter, driven by strong demand for SPS' fulfillment solution. The acceleration in e-commerce we have witnessed since the pandemic began continues to drive the digital transformation as retailers and suppliers conform to the omnichannel customer experience. Total revenue grew 25% to $94.5 million, and recurring revenue grew 22%. We continue to see strong momentum in fulfillment, which grew 24% year-over-year. Adjusted EBITDA grew 34% to $27.3 million. In a recent study by the Economist Intelligence Unit, 72% of enterprises have significantly accelerated their pace of digital transformation, and EDI is an integral part of the digital transformation initiative. Our growing network of e-commerce services and retailers, suppliers, vendors and distributors are leveraging SPS' industry-leading EDI solution to adapt their businesses to the demands of omnichannel retail. Osborn, the world's largest surface treatment and finishing provider, faced several challenges with its SAP EDI system. Many SAP EDI solutions require significant ongoing maintenance from IT teams to meet EDI requirements or to add trading partners. Some require making changes to the SAP system itself, which can be difficult and costly. Osborne deployed SPS fulfillment for SAP and was able to avoid hiring staff to support EDI operations, improve their order fulfillment performance and freed up resources to focus on the company's strategic initiatives. Our full-service solutions also help suppliers manage orders from all retail channels, including retailers, wholesalers, distributors, marketplaces and e-commerce stores, like Shopify. For example, businesses using Shopify for their online stores can leverage SPS capabilities to manage orders from the Shopify e-commerce platform. It makes Shopify integration fast, easy and affordable. And most merchants are ready to electronically receive their first order from thousands of retailers within 48 hours. This brings the simplicity and power of SPS fulfillment to 800,000 companies using the Shopify platform. SCHEELS, one of the largest sporting goods retailers in America and a long-time SPS partner, recently boosted its supply chain automation with electronic order fulfillment, making EDI a requirement for all their vendors. Working with SPS to quickly onboard their suppliers, today, over 95% of SCHEELS purchase orders are received via EDI, and products are stacked on the store floor within 48 hours of delivery instead of weeks despite a reduction in labor hours. With approximately 1,700 brands present in stores at any given time, it's been a win-win for both SCHEELS and their vendors to automate their trading partner relationships with SPS fulfillment. EDI software integration is a proven tool that unlocks digital transformation potential for trading partners across all industries. Omnichannel retail continues to fuel the demand for SPS Solutions, while growing our addressable market. This is a very exciting time for SPS Commerce. The strategic investments we have made in our platform and our people have positioned us well to capitalize on existing and new opportunities around the world. With that, I'll turn it over to Kim to discuss our financial results.
Thanks, Archie. We had a great second quarter of 2021. Revenue was $94.5 million, a 25% increase over Q2 of last year and represented our 82nd consecutive quarter of revenue growth. Recurring revenue this quarter grew 22% year-over-year. The total number of recurring revenue customers increased 10% year-over-year to approximately 34,550, and wallet share increased 11% to approximately 10,150. For the quarter, adjusted EBITDA grew 34% to $27.3 million compared to $20.4 million in Q2 of last year. We ended the quarter with total cash and investments of approximately $233 million. Now turning to guidance. For the third quarter of 2021, we expect revenue to be in the range of $96.7 million to $97.5 million. We expect adjusted EBITDA to be in the range of $25.3 million to $26 million. We expect fully diluted earnings per share to be in the range of $0.21 to $0.23, with fully diluted weighted average shares outstanding of approximately 37 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.40 to $0.41 with stock-based compensation expense of approximately $7 million, depreciation expense of approximately $4 million and amortization expense of approximately $2.7 million. For the full year, we expect revenue to be in the range of $380.6 million to $382.1 million, representing 22% growth over 2020. We expect adjusted EBITDA to be in the range of $104 million to $105.3 million, representing 20% to 21% growth over 2020. We expect fully diluted earnings per share to be in the range of $1.01 to $1.03, with fully diluted weighted average shares outstanding of approximately 36.9 million shares. We expect non-GAAP diluted earnings per share to be in the range of $1.68 to $1.71, with stock-based compensation expense of approximately $27.6 million, depreciation expense of approximately $15.6 million and amortization expense for the year of approximately $10.5 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. Beyond 2021, we expect the e-commerce dynamics that Archie described will fuel strong momentum in fulfillment for the foreseeable future. As a result, we are increasing our annual revenue growth expectations to 15% or greater. In addition, we expect adjusted EBITDA dollar growth of 15% to 25%, as we continue to invest in the business to capitalize on market dynamics and support current and future growth. In the long term, we maintain our target model for adjusted EBITDA margin of 35%. In summary, SPS Commerce continues to deliver strong results, driven by accelerating demand for our fulfillment solutions as retailers and suppliers adapt to new norms of consumer shopping preferences. With that, I'd like to open the call to questions.
[Operator Instructions] Our first question comes from Scott Berg with Needham & Company.
Archie and Kim, congrats on a fantastic quarter. I guess I'd like to start with Kim's last comments about your expectations around growth rates, stepping them up to 15% or greater in this e-commerce environment. I guess, Archie, kind of a 2-part question there is the first one, obviously, is what's driving the confidence in that, one, in that growth metric versus the, what we call it, lower teens that you've reported in general, the last 2 to 3 years? And then two, I know you and I spoke after the last quarter about some sales changes that you've made that increased your customer acquisition in the last couple of quarters and stepped that up meaningfully above historical trends. Maybe talk to us a little bit about what's kind of driving that confidence? And then is that customer acquisition kind of thought process sustainable here?
Yes. I think a couple of things on the confidence. One, we have significant momentum, as you've seen in the acceleration in revenue growth. We're not ready to state the claim that we'll continue to accelerate. But we think the effects of our growth are no longer just because of the pandemic or effects thereof. We think we're mostly through that. And I think all the things we've done, we're really seeing the fruits of those labor that we are expanding our TAM by going after accounts that are non EDI add-on products, different ways to really add value to our customer base. And that is allowing us to not only win more, but keep more. And we think that we have a lot more run room. So we published a $5 billion TAM. We think it's substantially above that, and we'll do some work on that. As far as the sales force, we really haven't made any significant changes. Obviously, you're always making moves, but any significant changes in -- since 2018. But I think the changes we made in 2018 just continue to accelerate our performance of that team. The team got very focused on the retail on different segments. I think that allowed them to work better with the customers. I think it gave them clear talking points. And they've also really, really have a targeted go-to-market strategy and messaging, which is much stronger. So I think that is allowing us to have more success on the retail side, which will ultimately drive customer adds.
Got it. Helpful. I guess if I parse through your comments there, Archie, and the prescriptive comments, you spoke a lot about fulfillment in EDI, but I didn't hear anything about analytics. How does analytics or the opportunity there figure into this 15% organic growth profile here?
Yes. I think right now, it's being led by fulfillment. Again, we continue to see a huge opportunity with analytics. We are starting to see increased growth in the analytics. It's still trailing fulfillment, so it's still being driven by fulfillment. So with the comments, we're not reliant upon a big rebound in analytics, but we feel very confident in the long-term growth aspects of analytics. What we've always struggled with is when and what the timing is. And I'm just a little skeptical about predicting when the timing is. And if you have a couple of good quarters, you feel really good. But we've had a number of great quarters in fulfillment. So that just starts giving you a lot more confidence.
Excellent. And then I'm going to just sneak a third one in here. Kim, your -- you outperformed by $0.06 in the quarter on the earnings side, at least versus consensus, you only raised your full year earnings by $0.03. Did you pull -- push some hiring or some of the other expenses, I guess, pull them forward, right -- excuse me, push them into the back half of the year? Just trying to understand maybe the delta between those 2.
Sure. So the second half expectations for EBITDA does take into account hiring we are doing on both the customer success side as well as the sales side based on our performance we've already seen to date and our expectations going forward. So it would be correct to think that in the back half of the year, the spend is higher than the front half. Some of that just naturally is just timing, right, of when hires occur.
Our next question comes from Jason Celino with KeyBanc Capital Markets.
Archie, Kim, this is actually Devin, on for Jason tonight. Just first one I have is looking at your customer additions, slight acceleration, a lot of our adds in last quarter, which is encouraging and sort of building off of the strong momentum in the past few quarters. Just wondering if you could provide any sort of details on kind of the profile of these new customers that you're winning in terms of their size and like where they're coming from, partners versus direct, just anything out of the ordinary that you're seeing? Any details you can provide would be helpful.
Sure, Devin. As it relates to the net customer adds, we added about 700 in the quarter, a similar amount to last quarter. And to your point, we've now seen multiple quarters where that number is higher than where it had historically been. A lot of that is related to the community activity that we have. And just as a reminder, the majority for a quantity of net customer adds tend to come from those community enablement campaigns we run. The size of those customers can vary, although they are going to skew to smaller-sized customers and then over time, our -- the value of those customers do grow with us. That's not to say that we didn't also have, I'll call it, a normal or good quarter as it relates to with some larger customers. But as it relates to the quantity of the net customer adds, that is going to be primarily driven with the relationship we have on the community enablement campaigns.
Got it. Got it. That's helpful. And then one more question for me. Archie, in your prepared remarks, you mentioned 72% of companies have accelerated their digital transformation and EDI being one of them. But as the economy and, I guess, offices reopens, I was wondering what have you been hearing from your customers in terms of their investment priority in EDI among kind of the broader retail IT projects? Has there been some sort of reshuffle of priorities on their end? Or is EDI still high priority?
Yes. From the retail side, we're seeing strong demand. And I think it's really driven by the new omnichannel experience that customers are expecting. And I think when you look at our market space, our competitors, we're just uniquely situated to handle e-commerce, to handle brick-and-mortar and more importantly to really to do omnichannel. And we're seeing just -- it's everywhere, right? You're thinking more and more of e-commerce is coming from stores, store delivery, store pickup. So we continue to see very strong demand from the retailers and anticipate that's here for the foreseeable future.
Our next question comes from Matt Pfau with William Blair.
Great quarter. I wanted to ask on the adjusted EBITDA growth expectation longer term. Decent sized range that you guys provided there. So I want to know, one, where do you expect the leverage to come from? And then, two, what sort of drives you being at the upper end or lower end of that range?
Sure. So prior to this earnings call, we had said that we're a company that can deliver around 20% EBITDA dollar growth on average in any given year. And to your point, we now have a range of 15% to 25%, that -- for the foreseeable future. And that range takes into account as we have some acceleration in the top line, we want to make sure that we are investing back in the business for the current customer needs as well as future needs. So having a little bit larger range allows for that additional investment that -- and for that to explain some of sort of, I'll call it, the -- putting the range down to the 15%. As it relates to the other side, on to the 25%, we certainly are a SaaS business model with still lots of opportunity for us to expand our margin. And so that takes that into account as well. Longer term, our belief is still about a 35% adjusted EBITDA margin. And with that, there's -- based on where we're currently at compared to the 35%, there's still room in each of the areas with the caveat of most likely not in R&D. We think as a tech company, we are investing appropriately as a percentage of revenue. So you'll see over time, longer term, expansion in gross margin, improvement in that G&A as a percent of revenue. And there's still is some room, albeit smaller than a few years ago as it relates to the sales and marketing spend as a percent of revenue as well.
Got it. And last 1 for me just on Microsoft Dynamics 365 upgrade cycle and your investment with Data Masons to take advantage of that. How is that playing out relative to your expectations?
I would say on every account, everything is at or above expectations. I think the team has done a fantastic job. The team is executing extremely well. The Microsoft Dynamics environment is extremely strong. So Microsoft itself is executing well. And we're seeing more deals and larger deals. The larger deals is, I think, a factor of 2 things: one, our ability to more effectively go after the large customers; and two, Microsoft's ability to service larger and larger accounts. So I mean this was perfect timing, perfect acquisition, I have to say.
Our next question comes from Parker Lane with Stifel.
I wanted to go back to the point you made at the beginning, Archie, which is how much easier it is to add trading partners through use of SBS' platform. Can you maybe talk about the last year with such a disruptive environment in place, if you think about some of those long-term customers you had, how much of an acceleration or an expansion in the number of trading partners that they were managing on the SBS platform took place? Is that something that really accelerated or is it more just about the efficiency of those trading partner relationships through SBS?
Thanks, Parker. I think it's both. Clearly, we have seen over time that when we land a customer, we can continue to grow that customer over time. And one of the things that e-commerce does do for the industry is it increases the total addressable market. Because ultimately, if you think about our business, it's about number of trading partner relationships. And in general, most retailers have increased their number of trading partner relationships as opposed to decreased. So that does expand -- continue to expand the opportunity. I think the fact that we're working with retailers, and we can onboard suppliers so much faster and so much better than anybody else because of those deep retailer relationships, and that, coupled with having a better solution in the marketplace, I think it's just a win-win-win. And then if we can get it to the fact that now we have added value services that were given to the suppliers, it just adds another layer of differentiation between us and the competitive landscape.
Yes. That makes sense. And then if we think about the annual growth targets you put out there, thank you for that, thinking back to the history of SPS, there have been instances with some brick-and-mortar stores in the past that have gone in the way of bankruptcy, and that's caused a little bit of disruption in the model. Do you think there's enough activity and sort of drop shipping and some more of these omnichannel approaches to offset any potential impact of that going forward, just as we think about such a transformative environment that we're in the retail sector as a whole?
Sure. So when we think about it from the bankruptcy's lens, in the retail space, there are always going to be some companies that don't make it, but we have not seen an acceleration there. So our belief is there's so much change happening really due to omnichannel. So a lot of what Archie discussed earlier on this call. There's lots of change events happening and lots of opportunities for suppliers to work with retailers in different ways. And I think that's really a lot of what's driving this fulfillment growth we're seeing in momentum, and we really have not seen an uptick or an increase in bankruptcies.
Our next question comes from Mark Schappel with The Benchmark Company.
This is actually Joe Brunetto, on for Mark Schappel. Congrats on a great quarter. Just to begin, with respect to Data Masons, did Data Masons revenue contribute -- Data Masons revenue contribution in the quarter track in line with the $5 million per year -- per quarter that you expected when it was acquired?
Joe, it was trending about 10% ahead of that, pretty similar to what we also saw in Q1.
Awesome. And then, Archie, could you comment on what you're seeing with respect to the part of your business tied to ERP system migration? Is this part of your business accelerating?
Yes. I would say that business continues to be very strong and steady. I wouldn't -- I don't see an acceleration in that, but you continue to see upgrades, new ERP system movements and I would say it would be very similar to the quarter before.
Great. And if I could just sneak one more in. Kim, you may have actually touched on this a bit in an earlier question. But with respect to margins in the past, you've stated that one place that you expected to drive further EBITDA margin leverage was from the gross margin line. What is the driver for the higher gross margins? Is it just scale or is there other cost initiatives in the works?
Sure. So longer term, we believe we have an opportunity to have gross margins in the low 70s. The biggest driver of how we get there over time, it really is a lot of leveraging higher revenue with investments that we've made. So we'll continue to add resources, of course, but you'd be able to get some scaling in the model over time. Now that is a longer term view as it relates to gross margins. Currently, when we're in a time period where we're seeing some acceleration happening on the top line, do keep in mind that we are going to be adding resources and customer success as sort of an obvious area there. And so that does, in the shorter term, put pressure as it relates to gross margin. That has all been taken into account as it relates to our EBITDA guidance for the remainder of this year. But again, nothing has changed relative to our long-term view. And what gets us to that long-term view is really about scaling.
Our next question comes from Joe Vruwink with Baird.
Quick one to start. Does the 15% assume any acquisition contributions?
So, Joe, you may recall that prior to this, we were saying we're a company that we believe we can grow 10% or greater, and we've now increased that number to say, 15% or greater. When we think about acquisitions, the comment would be the same in both. We're making that statement. And sometimes as a company, we do acquisitions, sometimes we don't, but we're confident with our ability to grow that 15% or greater. You can sort of think of it sort of with or without because it's 15% or greater.
Okay. Great. And then I'd be curious just to get kind of an update on what you see in terms of competitive landscape. And I'm wondering does the scale and network advantages that SBS has at this point, do you think you are seeing a stronger growth opportunity that's maybe a bit different than even your peers in this category might be seeing? Or do you think it's a case where just the broader imperative that you're now seeing and customers expressing demand for means the overall solution, both for you, but also your peers is also stronger than it has been?
Yes. We definitely think that we continue to outpace our competitors in our solutions on a number of different fronts. The network has always been a significant competitive advantage, and our network continues to grow and strengthen. So that's the first part. I think the second part really is our solution has just continued to mature, continue to get better. As you recall, 2, 3 years back, we rolled out a brand-new fulfillment solution. That is allowing us to just have a better solution than the marketplace. That, and then our acquisitions and investments in technology over the last 3, 4 years, you take EDI Admin, that acquisition, we bought MAPADOC, which really gave us a clear leadership in the Sage; Data Masons in the Microsoft space, our own development in the NetSuite space. So we now consider ourselves to be the leader in that space. And then the last part is just adding value-added services to our customers to just make it easier to work and do their work, work with SPS Commerce. We think, ultimately, that makes the sales process more efficient and it also makes another reason -- yet another reason for a supplier to stay with SPS Commerce. So we think we continue to outperform our competitive landscape, and we'll continue making those investments. And hopefully, in a year or 2, I'll say it's even further differentiated from the competitors.
That's great. And then maybe just one more from me. Thinking about some of the things that, at the start of the year might have had a potential to impact the growth rates, and obviously, you're not seeing that. I think you had your supplier bankruptcies already. What about some of the potential changes in modes of fulfillment in just getting a normalization and things like drop ship or even as maybe retailers choose to do more ship from store, I mean, do -- some of these things influence potential growth for you, maybe relative to your views at the start of the year and what you see going forward?
Yes. I think they do. And I think one of the things that's highlighted since the pandemic is SPS Commerce, again, is very well suited to deliver on a pure e-commerce, to deliver on e-commerce coming from stores, to deliver on brick-and-mortar. And our solution, we're just differentiated in the fact that retailers are truly omnichannel and they need a truly omnichannel partner. And that's where we play. And so the shift -- anytime there's a shift regardless of what direction it is, we think that's an advantage for SPS Commerce because that's a change in somebody's environment. When there's change, they have pain and when they have pain, we can solve that pain. So we think any shifts are positive to us. And whether drop ship accelerates or we do more in-store delivery, we think each and every one of those is a net positive for SPS Commerce. Some of the competitive landscape if they have -- if they're really only in one world, they might have an acceleration during one period of time and then a deceleration. But we just feel like it's -- we're figuring out which pocket it's going into for SPS Commerce.
[Operator Instructions] Our next question comes from Nehal Chokshi with Northland Capital.
And congrats on the very strong results. Definitely, I think suggest that the momentum is much more in the pandemic driven here, it's great to see that. And it looks like part of this is fulfillment. Could you say what percent of customers now have the fulfillment module?
The majority of our customers use fulfillment. There's a small percentage that just use us for analytics, but the vast majority of our customers are fulfillment customers.
Got it. So what percent of ARR does fulfillment represent now?
So if you look at the amount of revenue -- when you're looking at sort of our recurring revenue or subscription revenue, over 80% of our revenue is fulfillment on recurring revenue.
Got it. Okay. Understood. And then can you give us an update on any international traction?
Yes. A couple of areas that are of focus to us. First off, the Asian marketplace is really, we consider that part of the North America supply chain. And so we primarily have those offices to support the North American supply chain, and it's an extremely important part of supporting the North America supply chain. I think it would be very, very challenging to support the North American supply chain without it. Australia, we're actually seeing some nice momentum, a little tougher 2020, off to a very, very strong 2021. So we're seeing nice momentum there. And then Europe has been primarily led by our analytics solution, and we're seeing some momentum there as well. That's off a very, very small base. As you recall, we had highlighted that at the end of 2019 going into the pandemic of an area we were going to really lean into and invest in, again, off of a very small base. And obviously, with the pandemic analytics, we've discussed that had -- was kind of on pause. But we're starting to see some nice momentum in that area and pretty optimistic. Again, not enough data points on analytics to stake a claim yet, but we are seeing some momentum there.
Got it. Okay. And if I can sneak one more in. You mentioned that you think that the $5 billion long-term revenue target maybe way too low. Which lever in terms of the 200,000 target customers and 25,000 average revenue per customer is likely off then?
I think both. I think just if you look at the marketplace, Shopify has 800,000 customers, and they don't have every customer, right? Those are all selling a product to a consumer. So not all of them are ultimately going to be SPS Commerce. But as we lean in and say that we're going to work with your trading partners whether or not they have EDI, that's one opportunity. And then the second opportunity is how else can we support our customers in a positive way, add value and consequently increase our revenue wallet share. So we think there's opportunity on both sides to continue to move up.
Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.