SPS Commerce, Inc. (NASDAQ:SPSC) Q3 2023 Earnings Call Transcript

SPS Commerce, Inc. (NASDAQ:SPSC) Q3 2023 Earnings Call Transcript October 26, 2023

SPS Commerce, Inc. beats earnings expectations. Reported EPS is $0.75, expectations were $0.66.

Operator: Good day, and welcome to the SPS Commerce Q3 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Irmina Blaszczyk, Investor Relations for SPS Commerce.

Irmina Blaszczyk: Thank you, Dave. Good afternoon, everyone, and thank you for joining us on SPS Commerce third quarter 2023 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, 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 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 income 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 financial measures, including reconciliations of these measures with comparable GAAP measures.

And with that, I will turn the call over to Archie.

Archie Black: Thanks, Irmina, and welcome, everyone. As you all know, in March, we announced my planned retirement. And in July, we announced my successor. On today’s call, I am pleased to welcome Chad Collins, who assumed the role of CEO of SPS Commerce on October 2. This earnings call is my last at SPS after 22 years in my role as CEO. I am extremely proud of what SPS has accomplished during that time. The value we bring to customers and trading partners across the retail industry is a result of extreme focus on customer success a culture of consistent execution and a vision to be the world’s retail network. This is a legacy I leave in the very capable hands of an exceptional leadership team and talented employees around the world.

And I am confident SPS is positioned for continued success with Chad Collins at the helm. Chad has spent 25 years in supply chain technology, building market-leading businesses. His leadership and industry experience and focus on innovation align well with SPS’ culture. I look forward to continue working with Chad as Executive Chair of the Board. Before I review Q3 results, I’d like to hand the call over to our new CEO, and give you all the opportunity to hear about his initial impressions and what you can expect as he settles into his role.

Chad Collins: Thank you, Archie. I’m excited to be here and honored to succeed Archie at such an important time for the Company and the industry. I want to thank the management team and the Board for their trusted me to lead SPS Commerce in its next chapter of growth. I spent the last 25 years focused on supply chain software. Since 2017, I have been CEO of HighJump, which was rebranded Körber Supply Chain in 2020. And at which time I assumed the role as CEO of Körber Supply Chain Software. During my tenure as CEO, we executed a buy-and-build strategy, resulting in a global leadership position within warehouse management systems. A key lesson I’ve learned during my career is that while supply chains are inherently multi participant, most software is focused only on a single enterprise.

This is why SaaS networks like SPS are in a unique position to improve collaboration and data accuracy and optimize supply chain operations. I chose to join SPS Commerce for three main reasons. First, as a longtime supply chain technologist, I believe in the power of networks to unlock value for trading partners. This is demonstrated through the Company’s success, and I’m highly confident it’s a differentiated network approach will provide long-term value and an ongoing opportunity for growth. Second, SBS has a strong corporate culture and is a well-respected employer in my home town in Minneapolis. I’ve worked with many SPS employees through our mutual partnerships, and I found SPS Company values to be consistent with my own and consistent with values that lead to market success.

Lastly, I believe my experience in supply chain software, SaaS product strategy, global go-to-market expansion and M&A position me to lead SPS as we capitalize on growth opportunities fuelled by omni-channel retail dynamics. Over the next couple of quarters, I will dive into our product strategy and road map, engage with customers and spend time with employees across the globe to begin building relationships and reinforcing the culture that has established SPS as a successful organization with a very exciting future. I look forward to giving you an update on our next earnings call after my first full quarter in the role. In the meantime, I hope to meet some of you over the next several months. Now I’d like to turn the call back to Archie for a review of third quarter results.

Archie Black: Thanks, Chad. Our third quarter performance reflects the ongoing investments in optimization and automation across the retail industry and the role SPS plays in helping our customers achieve operational efficiencies while scaling their businesses. Total revenue in Q3 was $135.7 million, which grew 18% in the quarter, while recurring revenue grew 20%. The Retailers and suppliers looking to expand globally, rely on SPS for access to centralized data and streamlined fulfillment processes across different markets. For example, Deckers, a footwear designer and distributor which includes the UGG, Teva and Holdco brands, has been a long-time SPS analytics customer in North America. As they expanded their vendor base to Europe, Deckers chose SPS’ fulfillment solutions to ensure they can service a growing number of retailers across North America and Europe.

Callaway, an American manufacturer of golf equipment and apparel acquired Jack Wolfskin, a premium outdoor brand headquartered in Germany. Having been a long-standing fulfillment and analytics customer in North America and Australia, Callaway chose SPS to centralize their EDI needs across their global supply chain. As suppliers expand their network across multiple sales channels and retailers, real-time inventory management becomes increasingly more important. Starboard Cruise Services a division of LVMH is known as the preferred partner for luxury retail at sea with over 700 stores on over 100 ships across 15 cruise lines, Starboard understood the need for efficiency across the supply chain and chose to work with SPS to standardize and automate their electronic order fulfillment.

To underscore the importance of this initiative, Starboard chose to share sales data with their vendors using SPS Commerce analytics solution, which drove significant EDI adoption exceeding Starboard’s expectations. To support our customers’ growth, SPS continues to invest in solutions to enable expansion across various sales channels and across markets worldwide. Last month, we completed the acquisition of TIE Kinetix to strengthen our e-invoicing capability and expand our European presence. We also acquired the Order Exchange, one of our technology partners in Australia would enable suppliers to link their line of business applications in the major retailer supply chains. We believe that integrating best-of-breed technology with the SPS platform will enhance our ability to support and grow our network.

We’re excited to welcome our new employees and customers to SPS Commerce. With that, I’ll turn it over to Kim to discuss our financial results.

Kimberly Nelson: Thanks, Archie. We had a great third quarter of 2023. Revenue was $135.7 million, an 18% increase over Q3 of last year, and represented our 91st consecutive quarter of revenue growth. Recurring revenue this quarter grew 20% year-over-year. The total number of recurring revenue customers increased 13% year-over-year to approximately 44,500 and wallet share increased 7% to 11,650. As a reminder, in September, we closed the acquisition of TIE Kinetix, which added approximately 1,000 customers to our network. For the quarter, adjusted EBITDA grew 17% to $40.5 million compared to $34.7 million in Q3 of last year. We ended the quarter with total cash and investments of $239 million. Now turning to guidance, for the fourth quarter of 2023, we expect revenue to be in the range of $142.2 million to $143.2 million, which represents approximately 17% year-over-year growth.

We expect adjusted EBITDA to be in the range of $40.5 million to $41.3 million. We expect fully diluted earnings per share to be in the range of $0.40 to $0.42, and with fully diluted weighted average shares outstanding of approximately 37.7 million shares. We expect non-GAAP diluted income per share to be in the range of $0.67 to $0.69, and with stock-based compensation expense of approximately $10 million, depreciation expense of approximately $5.1 million and amortization expense of approximately $4.5 million. For the full year, we expect revenue to be in the range of $534.2 million to $535.2 million, representing approximately 18% to 19% growth over 2022. We expect adjusted EBITDA to be in the range of $156.2 million to $157 million, representing growth of approximately 18% to 19%.

We expect fully diluted earnings per share to be in the range of $1.65 to $1.67 with fully diluted weighted average shares outstanding of approximately 37.5 million shares. We expect non-GAAP diluted income per share to be in the range of $2.77 to $2.79 with stock-based compensation expense of approximately $46.1 million, depreciation expense of approximately $19 million and amortization expense for the year of approximately $15.6 million. For the remainder of the year, on a quarterly basis, investors should model approximately a 30% effective tax rate calculated on GAAP pre-tax net earnings. Beyond 2023, we maintain our annual revenue growth expectation of 15% or greater as we expand our network through community enablement campaigns and acquisitions.

We will provide detailed 2024 guidance on our Q4 earnings conference call. But for modelling purposes, we expect to deliver approximately $181 million to $184 million in annual adjusted EBITDA in 2024 or approximately 15% to 17% year-over-year growth. Beyond 2024, we continue to expect adjusted EBITDA dollar growth of 15% to 25% as we 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 continues to grow its global network, strengthening our competitive position and expanding our leadership across various industries. I would like to welcome Chad to the SPS team and look forward to working together as we execute on SPS’ strategy to be the world’s retail network and continue to deliver sustained profitable growth.

With that, I’d like to open the call to questions.

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Berg with Needham. Scott, your line is now live. Please go ahead. Your line is now live.

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Q&A Session

Scott Berg: Hi, everyone. Congrats on a good quarter. Before I get to the questions, so Archie, it’s 13 years, it’s been an amazing run good lock in what all the retirement plans may look like. But on the question side, first of all, Kim, I wanted to start with your adjusted EBITDA guidance for next year. it is on the lower end of your typical kind of 15% to 25% expected growth in adjusted EBITDA on an annual basis. Can you talk about maybe some of the investments or acquisition impact that’s guiding that number to maybe be on the lower end versus the kind of mid- to upper end of that range?

Kimberly Nelson: Sure. To your point, we do have a guidance of anywhere between 15% to 25% on an annual basis. This year, our expectation is closer to that middle next year going into the year at this point, we’re on the lower end to that 15% to 17%, which we think is appropriate based on what we see as opportunities for the business to grow top line as well as invest back in the business. Also do keep in mind that in 2024, when we announced the acquisition of TIE Kinetix, at that time, we also said that in 2024, we expected that portion of the business to be breakeven in EBITDA.

Scott Berg: Got it. Helpful. And then, Chad, welcome to the team. I look forward to working with you more going forward. But I wanted to ask a question on your recent experience from Körber. Körber was an international Company based in Germany, I believe. You’ve had a pretty extensive experience historically with international supply chain software and operations. I guess when I look at the SPS business, while it’s not 100% U.S-centric, it has had more of a U.S-centric flavor to it than something that’s truly having the same impact on a global basis. But how do you think about growing internationally, bringing new products to the international product portfolio to making this be a business that has just a really outstanding international footprint that is probably a little bit more balanced than just in the United States.

Chad Collins: Yes. Thanks, Scott. Thanks a warm welcome. And yes, obviously, one of the growth vectors that we will be looking at is geographic expansion. I will say that the acquisition that we did of TIE, I think, gives us a nice jumping off point. and has been noted in the last quarter, obviously, the component of invoicing is a little bit different in Europe than what we see here in North America. And so I think that continued execution on TIE will help us develop our framework for expansion into Europe and then potentially other markets outside North America.

Operator: Our next question comes from Matt Pfau with William Blair. Please go ahead.

Matthew Pfau: Hey, great. Thanks for taking my questions and congrats, Archie, on a great run. And welcome, Chad. Good to speak with you again. wanted to ask Chad, a question to you. As you’ve looked at the Company, obviously, SPS has done a great job with fulfilment and then they started to get into analytics. From a product perspective, are there any areas that stand out to you as opportunities where SPS can expand into?

Chad Collins: Yes, absolutely. I mean clearly, SPS has established a leadership position in the network that connects retailers and distributors to the suppliers. I think what we see in supply chain technologies overall is there is quite a bit of innovation going on as well as the landscape is fairly fragmented. And I think that gives me confidence that if we keep the customer needs at our forefront of our product road map, whether it’s through organic product development or through M&A, we’ll be able to satisfy those customer requirements in a more fulsome way over time.

Matthew Pfau: Got it. And then just wanted to ask on the macro environment, a lot of uncertainty here heading into the holiday season for retailers and what that is ultimately going to look like. And does that have any impact in terms of demand for your products from the suppliers?