© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day ladies and gentlemen, and welcome to the SPS Commerce Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded.
I would now like to introduce your host for today’s conference, Ms. Irmina Blaszczyk. Ma’am please go ahead.
Thank you, Liz. Good afternoon, everyone, and thank you for joining us on SPS Commerce fourth quarter and full year 2017 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 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 the 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. 2017 was a year of strong execution for SPS Commerce, in a retail market undergoing a 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 omni-channel capabilities.
In 2017, we expanded our network to include such notable brands as Walgreens Boots Alliance, $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 on line educational webinars loyalty programs, subscription boxes or repeat order programs.
Retailers understand the need for retail and e-commerce efficiencies but they must 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 it adds 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 that pay us more than $20,000 annually. As we move up market, we're 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 PwC.
With the world's largest retail network, SPS continues to be a strategic partner of choice and enabling robust omni-channel 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 omni-channel 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 SKU’s across a broad range of product categories. Mills recently launched an expansion plan to double its size in six 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 turned to SPS for our expertise. We ran a community enablement campaign that quickly onboarded 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. Our platform architected for today's complex omni-channel environment, which includes brick and mortar, e-commerce and drop ship. We have a multi-billion 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 Archie. 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 two 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 year accounting standard. Our guidance reflects these changes, and you can see the impact to 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.
[Operator Instructions] Our first question comes from the line of Koji Ikeda with Oppenheimer. Your line is now open.
Hi, thanks for taking my questions and congrats on the quarter. Just real high level here, I guess, recent – our recent chats into the retail industry, it really sounds like the retail technology spending environment is trending to a better place in 2018, especially with the good holiday spending and consumer sentiment. Everything seems to be trending in the right direction. So I was wondering if you could share with us some of your high-level thoughts on the current state of retail.
Yes. I think when you look back from – we haven't seen the full year 2017 numbers yet, but 2016 numbers were – that overall brick-and-mortar grew about 3% and e-commerce grew more than 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 – 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.
Got it. Thanks for that Archie. And my next question is either for Archie or for Kim, and it's on the analytics products here. And I get the effect of bankruptcies and if the retailer completely shuts down. But I guess, moving forward, what's the right way of thinking about analytics and maybe any potential impacts to the analytics value proposition to the supplier if the retailer starts to consolidate stores, the effect of that? And how is that all playing to the analytics story going forward?
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 [indiscernible]. 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 do not 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 priority list for retailers over the next year or two.
Got it, thanks for that Archie. Congrats on the good quarter and hopefully life is returning back to normal over there post Super Bowl.
It is. It’s cold and damp. That’s normal.
Thanks guys.
Our next question comes from the line of David Hynes with Canaccord. Your line is now open.
Hey, thanks guys. Archie, you touched on this a little bit. I want to ask two questions on the customer add front. Some unusual seasonality, I guess, in the customer adds, stronger Q4 than we normally see, I guess, relative to kind of the start of the year. So any color there? And then higher level, what needs to happen in your view to see kind of a reacceleration on the customer growth count?
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. The 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.
Yes, okay. Let me ask then. So you got the new 2020 targets out there that you can kind of get to the revenue number, applying trend from kind of what you're guiding to 2018, right, 10%, 11% growth, gets you that $300 million mark. Obviously, a little bit different approach, much better on the margin expansion front, getting the margins to low-20s, but does it still feel like this business can reaccelerate? I mean, for the longest time, we were talking about growth getting back towards the high-teens. And I'm not saying it – the expectation is to get back there. But do you still feel like SPS should be a faster grower than 10% to 11%? Or should we think of this as kind of the new norm?
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 on the prioritization of analytics.
Yes.
So those are the two things that we're going to watch.
Yes. Okay, fair enough. Thanks guys. I will pass the line.
Our next question comes from the line of Tom Roderick with Stifel. Your line is now open.
Hey, Archie, hi, Kim, thanks for taking the question. Let me ask you guys a question maybe just a little differently and looking at this sort of trade-off between higher profitability this year and what looks to be a 2020 gold that would require at least consistent growth, if not even a little we exaggeration. Could you, Kim, talk a little bit more, at just about where are you kind of seeing more leverage in the model this year? I mean, in the last quarter, you had talked about Korea [ph] EBITDA growth above 20%, now you're telling that's going to be close up to 30%, if not above that.
So it seems like you're finding additional leverage in the model. Does that come at the expense of additional sales marketing resources? Or are you kind of expecting to continue adding as the plan had it? At least talk about that trade-off between growth levers and profitability levers as we have been here in 2018. Thanks.
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 2017. And so really, in 2018, 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&D. 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 improvement in gross margin, sales and marketing as well as G&A.
Specific to your question on the sales and marketing side, a couple of 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 2018 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.
Yes, great. And following up on that concept of sales force efficiency. Last year, I remember you guys talking about effectively a move to add more high-end sales reps and maybe talking upstream a little bit. Curious for your feedback now that you've had about a year of putting that in place, what you think about the efficiency gains you've seen by going after more of the high-end market and if that's continuing to the direction you want to go in. Thank you.
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 two 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.
That’s great. Thanks, Archie. Thanks, Kim.
Our next question comes from the line of Pat Walravens with JMP Securities. Your line is now open.
Great, thank you. And I really like the long-term targets, thank you for that. So Archie, big picture, how is the market different today than it was, say, three years or four years ago?
Well, I think if – when I look back three years or four 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 want to add stock, and there was – they felt there was less disruption. I think over the last three or four 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 omni-channel business.
Okay, good. And then if you look at from a sort of – not quite sure the right way to ask this – but from sort of a sales productivity point of view, three or four years ago, if you doubled the sales force, would you double your bookings? And is that – and then today, if you double your sales force, do you double your booking?
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 last 12 months really set us up well for the long term.
Great. And then Kim one for you. Where are we on – to the extent that you guys disclosed it, where are we on churn from a survey unit basis and from a revenue basis? And then how does that compare to historical?
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.
Yes. And if you look back a couple of years, has it changed or not? Or how does it compare to the last couple of years?
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.
Okay. Thank you, guys.
Our next question comes from the line of Monika Garg with KeyBanc Capital Markets. Your line is now open.
Hey, guys. This is Jason on Monika. Thanks for taking my question. And one question around kind of the environment. So we see that retailers are kind of the biggest beneficiaries of tax reform. And what have you been kind of hearing from them as far as reinvesting some of those savings back into technology investments?
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.
Okay. You’ve kind of talked about this last year and coming into this year. Some of these retailers are making these big transformational technology changes. Where are we kind of in that cycle? Are you still kind of seeing that trend? Or are you starting to see it slow? Or any comments on that?
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 omni-channel strategy or they’re not going to survive.
Okay. Great. That’s all from me. Thank you.
Our next question comes from the line of Tim Klasell with Northland Securities. Your line is now open.
Yes, this is Tyler Wood on Tim. One quick one on the fulfillment offering. You mentioned, I think, 18% growth this year and that nitrogen product you just rolled out. Could you give us some color there on your expectations for that side of the business as we head into 2018? Thank you.
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.
Thank you.
Our next question comes from the line of David Gearhart with First Analysis. Your line is now open.
Hi, good afternoon. Thank you for taking my questions. Just to recap on the net additions for Q4. I know you mentioned in your prepared remarks Mills Farm running a community enablement program and trying to do it on an accelerated basis, and you saw a nice little jump in net additions for the quarter. How much of that is due to Mills Farm? I’m assuming, just based on your marks, it’s the bulk of the strong Q4.
No, I think Mills Fleet Farm was a nice program. What we tried to do an earnings call is highlight a customer or two. 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.
And 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 Archie 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.
And in terms of visibility on community enablement programs, I think you mentioned before that it has been light. Any change from that view that you expect it to continue to be light? I know given your guidance that – it would imply that. Just want to just to ask it again on the community enablement side.
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 2016, again, we still expect retailers are on this journey for – into 2018 and beyond.
Okay. And last one for me, it’s been a while since we’ve got an update on the international front and just wonder if you could talk around the dynamics there and what kind of traction you’re seeing.
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 in 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.
Okay. That’s it for me. Thanks for the color.
[Operator Instructions] I’m showing no further questions in queue at this time. That concludes today’s question-and-answer session. Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program, and you may now disconnect. Everyone, have a great day.