SPS Commerce (SPSC) Q1 2019 Earnings Call Transcript

SPS Commerce (SPSC -0.99%)
Q1 2019 Earnings Call
April 25, 2019 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the SPS Commerce Q1 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Irmina Blaszczyk.

Ma'am, you may begin.

Irmina Blaszczyk -- Investor Relations, The Blueshirt Group

Thank you, Jimmy. Good afternoon, everyone, and thank you for joining us on SPS Commerce first quarter 2019 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 the 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.

Archie Black -- Chief Executive Officer

Thanks, Irmina, and welcome, everyone. We posted strong performance in the first quarter of 2019, continuing to execute on our financial targets while growing our network of customers. For the quarter, revenue grew 13% to $66.9 million, recurring revenue grew 14%, and adjusted EBITDA grew 51% to $16.4 million. SPS Commerce's leading technology, expertise and trading partner relationships and global reach continue to fuel the growth of our business.

Retail trends are making rule book compliance increasingly complex, and the need for automation becomes essential to meet the strict requirements of retailers and trading partners. As we make progress in integrating customers from both the EDI Admin and CovalentWorks acquisitions made in late 2018, many are starting to recognize the capabilities and scale of our network and the SPS platform. For example, ALS, a leading testing, inspection, certification and verification company, became an SPS Commerce customer through the acquisition of CovalentWorks. In an effort to streamline operations, ALS wanted to globally consolidate EDI providers and engage with our SPS Commerce team in Australia.

ALS chose to work with SPS as its only EDI provider and leverage our vast trading partner network. This is an example of SPS using its network to expand an existing customer relationship. Belwith Products, a hardware manufacturer, was upgrading their ERP system and needed to overhaul their EDI environment. Ultimately, they chose SPS's fully outsourced solution over their current provider due to the additional automation capabilities we acquired through the EDI Admin acquisition.

SPS's technology allows Belwith to keep their business processes within their current ERP system. And our full-service approach relieves Belwith from managing this data workflow and eliminates risk associated with business process automation. In addition, they gained a team of experts while still securing significant cost savings compared to their previous provider. Today's consumer demands are also pushing the retail sector to invest in technologies that make more data collection possible.

After making investments in automated -- automation solutions, vendors can leverage the SPS Commerce Assortment product to streamline item content setup and ongoing management to meet the in-store, e-commerce and distribution center requirements of all trading partners. For example, SCHEELS, one of the largest sporting goods retailers in America, has partnered with SPS to leverage SPS's fulfillment solution to both introduce and manage all EDI infrastructure and day-to-day operations. Once SCHEELS automated order fulfillment, they engaged SPS's assortment service to manage the daily collection, setup and ongoing management of their vendors' extensive item attribute content that is required for order placement and product management across all channels. This is an active partnership generating ongoing vendor onboarding opportunities to increase the total number of vendors engaged on SPS's assortment and fulfillment services.

In summary, as retail trends fuel the need for business process automation and increased efficiency, SPS Commerce continues to redefine EDI solutions with best-in-class technology and full-scale retail change management. With that, I'll turn it over to Kim to discuss our financial results.

Kim Nelson -- Chief Financial Officer

Thanks, Archie. We had a great first quarter of 2019. Revenue was $66.9 million, a 13% increase over Q1 of last year and represented our 73rd consecutive quarter of revenue growth. Recurring revenue this quarter grew 14% year over year.

The total number of recurring revenue customers increased 14% year over year to approximately 29,500. For Q1, wallet share was approximately flat year over year at approximately $8,500. Keep in mind, these numbers take into account CovalentWorks, which, at the time of the acquisition, added over 2,000 customers and reduced the consolidated company average wallet share by approximately $500. For the quarter, adjusted EBITDA was $16.4 million, compared to $10.9 million in Q1 of last year.

We ended the quarter with total cash and marketable securities of approximately $185 million. We also repurchased $3 million of SPS shares in the quarter. Now turning to guidance. For the second quarter of 2019, we expect revenue to be in the range of $67.7 million to $68.2 million.

We expect adjusted EBITDA to be in the range of $15.8 million to $16.3 million. We expect fully diluted earnings per share to be approximately $0.33 to $0.35 with fully diluted weighted average shares outstanding of approximately 18 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.51 to $0.53 with stock-based compensation expense of approximately $3.3 million, depreciation expense of approximately $2.8 million and amortization expense of approximately $1.3 million. For the full year, we expect revenue to be in the range of $275 million to $276.5 million, representing approximately 11% growth over 2018.

We expect adjusted EBITDA to be in the range of $65 million to $66.5 million, representing 27% to 30% growth over 2018. We expect fully diluted earnings per share to be in the range of $1.39 to $1.45. We expect fully diluted weighted average shares outstanding of approximately 18 million shares. We expect non-GAAP diluted earnings per share to be in the range of $2.16 to $2.22 with stock-based compensation expense of approximately $15.5 million, depreciation expense of approximately $11.3 million and amortization expense of approximately $5.2 million.

For the remainder of the year, on a quarterly basis, investors should model a 30% effective tax rate calculated on GAAP pre-tax net earnings. We are pleased with our first-quarter performance, and we'd like to thank all employees for their continued dedication to help SPS execute on our strategic and financial targets. With that, I'd like to open the call to questions. 

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Matt Pfau with William Blair. Your line is now open.

Matt Pfau -- William Blair -- Analyst

Hey, guys. Thanks for taking my question. Just wanted to ask on the one-time revenue and enablement campaigns in the quarter. It looks like that was fairly healthy.

And I know this year, you're comping over a difficult comp with the big Walgreens enablement program in the prior year. So maybe you can talk about what's sort of driving the strength in enablement campaigns, and what are your expectations for the remainder of the year.

Kim Nelson -- Chief Financial Officer

Sure. So in Q1, we had nice healthy enablement campaign activities, pretty much in line with what we were anticipating. The Walgreens, which you bring up, that happened in Q2. So you will have that compare when we announce our Q2 actual results relative to Q2 2018.

Matt Pfau -- William Blair -- Analyst

OK. Just in terms of where you're seeing the activity, any type of retailers specifically that you're seeing the strength from? And then I guess just help me understand in terms of how retailers engage on the enablement campaigns. How often would retailers run them ? And then with -- or does most of the activity come from retailers that haven't previously run one with you?

Archie Black -- Chief Executive Officer

Yes. So there's really two types of enablement campaigns we run. One is just the new, what we call, expansion. And so somebody like Costco, every day, every month, are adding suppliers.

And so we're doing continuous onboarding for them. That is the best time to onboard suppliers, right at the beginning of the relationship. It's part of doing business with the retailer. So that's a meaningful part of our enablement campaign.

Then there tends to be different types of change management enablement campaigns. One can be they haven't done EDI before. Two can be they haven't done EDI with all their suppliers. And then the third, which is very common, is they're doing something to their rule book.

They might have used a purchase order and an invoice, and now they're adding an ASN or other documents. They bought a warehouse management system. They're doing something to change that. Typically, when they're doing that, they also will dig deeper into their vendor base.

And so that -- at any given time, there's probably half a dozen to a dozen of those going at any given time. They tend to run out over about 90 days. It is a typical 90 to 120 days, and that tends to be a very, very predictable part of our business once we have the webcast. We sign a retailer, and then there's typically about 60 days, and then we do a webcast and then the formal part of the enablement campaign begins.

But a meaningful part is the just the everyday 100-plus retailers that give us their new suppliers.

Matt Pfau -- William Blair -- Analyst

OK. I'll pass the line, guys. Thanks a lot for taking my questions.

Operator

Thank you. And our next question comes from Scott Berg with Needham. Your line is now open.

Scott Berg -- Needham and Company -- Analyst

Hey, everyone. Congrats on a good quarter, and thanks for taking my questions. I guess two for me. We'll start off with, Archie, can you maybe comment about general customer spending trends in the current retail environment? And I ask the question because I think retail spending in the last several months would have -- is ahead of what most expectations were probably at this point.

The numbers seem to be relatively healthy. Don't know if you're seeing any benefit from those trends yet year to date.

Archie Black -- Chief Executive Officer

Well, interestingly enough, the spend can be both a tailwind for us and a headwind, depending on the type of [Audio gap] programs or can accelerate programs. For instance, if somebody is in the process of a new order management system, we're going to typically trail that. So I'm probably not the best judge to say what's happening in the spend and where they're spending it. But I would say, in general, sometimes, it's a positive.

Sometimes, it's a negative. Sometimes, it's a neutral. The most important thing for us where we are in a retailer's priority stack. Are we the next top priority? Or do we make the top three to five priorities? If we do, we're good to go.

If we're down at eight to 10, then we're just going to be in a waiting pattern.

Scott Berg -- Needham and Company -- Analyst

Fair enough. But you're not seeing that priority change at all necessarily in your customers today?

Archie Black -- Chief Executive Officer

There isn't any meaningful change for us that we're seeing. Again, it's customer by customer, so you kind of have to consolidate the data. I mean, all the deals we win, we went right to the top of their priority list. And the prospects that we're waiting on, we're not.

So it's customer by customer, but in general, we're not seeing a shift.

Scott Berg -- Needham and Company -- Analyst

Got it. Helpful. And then a follow-up for Kim on the margin profile. Your updated guidance for the year, at least by my math, suggests about 23% adjusted EBITDA margins.

I think that's kind of where your target range for 2020, next year, is then. Any thoughts on updated guidance going forward? Or should we wait to see how the rest of the year trends first before we get too ahead of ourselves?

Kim Nelson -- Chief Financial Officer

Sure. So we've established longer-term EBITDA margins in the mid-30s. We still feel comfortable in our ability to hit the mid-30s. How you should think about that, since we're not there yet, we have nice margins, but we are not up to the mid-30s yet.

So you should expect on an annual basis, the company will continue to make progress as we march toward mid-30s at more of our long-term EBITDA margin expectation.

Scott Berg -- Needham and Company -- Analyst

Great. That's all I have today. Thanks for taking my questions.

Operator

Thank you. And our next question comes from David Hynes with Canaccord. Your line is now open.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Hey, thanks, guys. So, Archie, obviously, really impressive EBITDA margin gains while you've been sustaining growth here nicely in the low teens. I guess the question is what's been the biggest structural change in your view that's enabled you guys to get more out of your sales team over the last four or five quarters?

Archie Black -- Chief Executive Officer

Well, obviously, we made a number of changes. Dan came in in 2016. We made some changes in '17. We made some changes in '18.

And obviously, on day one, they tend to be negative as opposed to positive. I think the territories are helping. I think the focus teams are helping. The retail team is accelerating because of the regions.

I think that's been really a positive, so I just think the overall structure. And we've just gotten to a point where our current structure really wasn't built for the next generation for -- of SPS Commerce. It had kind of been built from $50 million to $200 million, and we need to build the structure from $250 million to $500 million.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Yes. OK. So it sounds like alignment and focus kind of. And then a question on analytics and just kind of where we are with that.

I know it's not -- hasn't been as much of a focus of late. I guess I want to know, are you still out advocating with your retail partners for point-of-sale data share? Or is the tack at this point, hey, we realized it's not a priority. Let's take more of a wait and see and see if that opportunity comes to us somewhere down the line? Or just kind of where are we in that effort and evolution?

Archie Black -- Chief Executive Officer

Yes. I would say our strategy always has been with the retail partners to be a trusted advisor, to make sure they understand our capabilities, what others in the industries are doing and where they can take their journey. So that's the way we position ourselves with a retailer. And I would say the retail team, on almost every deal, is talking about analytics at this stage or in future states.

I also think it's a very important part of our discussion with the retailers. The more we can offer retailers, the more we -- the easier it is to get a conversation started. There are times when we get started on analytics, and then they realize it's just not their priority today. But along the way, they learn about our fulfillment capabilities, and we're able to secure some business.

And then obviously, our goal is to build these long-term relationships that we can have for five, 10, 15, 20 years.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Yes, yes. OK. That makes perfect sense. Congrats on the quarter.

Archie Black -- Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Koji Ikeda with Oppenheimer. Your line is now open.

Koji Ikeda -- Oppenheimer and Company -- Analyst

Great. Thanks for taking my questions, and congrats on the quarter. I just want to follow up on the previous question on the EBITDA expansion trends here. It just looked like really nice EBITDA number there in the first quarter.

By my model, it looks like it expanded over 600 basis points, even while you guys were integrating two acquisitions. I mean, by just taking a look at the guidance, it looks like it's roughly similar or maybe just a little bit below where the first quarter ended up. What's the right way to think about potential margin expansion trends? Or is the first quarter kind of the high watermark for you for adjusted EBITDA? Just any sort of help there would be helpful. Thank you.

Kim Nelson -- Chief Financial Officer

Sure. So with our business, I think it's the most helpful to look at numbers on an annual basis. In any given quarter, there may be some different margins that you see or dollars as a percent of revenue that you see. When we think about our business and then when we establish the expectations for the year, we start by understanding what are the things that we need in order to support our existing customers and our existing book of business, and then we also make sure that we are incorporating appropriate level of investment and spend on things that you're not necessary going to see translating into really strong financial results in that year, but they're investments that you'll start to see the payoff in future years, might be two, three, four, five years in the future.

So the timing sometimes of those spends and those investments are going to be different throughout the year. So I think the appropriate way to look at it is that we have established an expectation for the year for EBITDA dollars. And what you've seen us announce today is we have updated that, meaning we expect that we will deliver more EBITDA dollars this year, partially due to a strong Q1 and partially due to as we look at the remainder of the year, we are still absolutely investing for today as well as investing for the future. But we see the fact that we're getting a little bit more returns on some of the prior investments that's flowing through to EBITDA.

So to summarize, you look at it on an annual basis. And then as a business, we make sure that throughout the quarters and the year, we are appropriately investing not just for the short term but also for the medium term and long term.

Koji Ikeda -- Oppenheimer and Company -- Analyst

Kim, that's super helpful. And I think it plays into my follow-up question here. Just looking at your sales and marketing spend, it was down year over year, but the revenue growth was still pretty good on the top line. So that seems to imply that sales efficiency is improving over there.

I guess how do we -- what's the best way to think about sales efficiency and sales capacity going forward here?

Kim Nelson -- Chief Financial Officer

Sure. So how we look at it internally is we look to say, OK, what do we see that's happening in the market? So where do we see the opportunities and how much new business, new revenue that we're expecting. And then we look internally we say, OK, with our current organization, do we feel that we have the appropriate capacity in order to go after those numbers. And a lot of this piggybacks on what Archie talked about a little bit earlier in this Q&A section, where Dan and his team have made some changes over the last couple of years, and those changes have really allowed us as an organization to get more output, get more efficiency and productivity with our existing sales force.

So rest assured, when we put together guidance and expectation for the year, we factor in the appropriate amount of resources and spends that we feel is necessary in order for us to achieve our expectations for the year.

Koji Ikeda -- Oppenheimer and Company -- Analyst

Thank you. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Tom Roderick with Stifel. Your line is now open.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Hey, guys. Happy spring. Congratulations on the results and appreciate you guys taking my questions. So I'll throw this to both of you.

I would love to kind of get to the numbers but also sort of the qualitative stuff around the acquisitions, CovalentWorks and EDI Admin. You've had a couple of quarters to wrap them into the results and get them under your belt. Financial question for you, Kim. Can you talk about the organic results, the organic growth and then how the acquisitions are pacing relative to expectations? And then maybe, Archie, from a qualitative standpoint, we'd love to hear what the acquired customers are thinking about as they become part of the SPSC community.

And are you starting to move any of those customers on to your platform? What's the technical integration looking like at this point?

Kim Nelson -- Chief Financial Officer

Sure. I will take the first part of that. So when we announce our results, it's companywide. So in this case, it includes both of the acquisitions that we made in Q4.

So what I can do is turn you back to the comments that we made at the time we made the announcement. So we said that CovalentWorks added more than 2,000 customers and that the impact to the annualized wallet share is sort of a minus $500 to our overall wallet share. And the reason for that is they have a lot of smaller-size customers than we do, great opportunity for us to continue to grow those customers over time. But at time of acquiring them, they did have a lower ASP.

So those are reflected in our overall results for the quarter.

Archie Black -- Chief Executive Officer

And from a qualitative standpoint, two very different acquisitions. CovalentWorks customers, we have started to move. Typically, the first quarter is kind of an acquisition, kind of planning and getting things set up. Second quarter is movement of suppliers, the vast majority.

And third quarter and fourth quarter are kind of the trailers, if you will. So we're in the throes of it right now. We moved a decent number a suppliers over. I would say, so far, the reaction has been very, very positive.

We -- as you recall, a couple of years ago, we rolled out a new fulfillment product. It is clearly, clearly the best in the industry, very intuitive, very easy to use, very reliable. And I think those customers are reacting to that very positive experience on the new platform. So that is going extremely well.

The team is executing extremely well down in Houston. The people that were part of CovalentWorks are doing a fantastic job, so very happy with where that is. That's on pace. The Covalent -- the EDI Admin was more technology, and they are helping us accelerate many of our paths, and Ian Redlin and his team on the technology side are really starting to help accelerate it.

It's very early, but we love what they are doing.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Great. OK. And Kim, just a follow-up on the financials. I think I remember that you guys had projected about $4.5 million in revenues and $1 million in EBITDA from CovalentWorks.

Is that still the right way to think about the annualized impact for that contribution to the numbers this year?

Kim Nelson -- Chief Financial Officer

That's correct.

Tom Roderick -- Stifel Financial Corp. -- Analyst

OK, good. And then, Archie, I know you had commented last quarter or maybe in the quarter before that that you've been spending a bit more of your own time on M&A analysis and looking at targets, and this is becoming more of a critical focus for the company. Curious, relative to a reasonably sized deal with CovalentWorks and integrating a few thousand customers, is that -- are you at a point now where you think you could -- we could potentially see one or more deals of that similar size? Or do you want to take some time to digest what you've acquired here just recently?

Archie Black -- Chief Executive Officer

Would love to do more. Again, we are out there. We're being active. We're very disciplined as far as it has to add to our mission and vision.

It has to be in our focus, and we have to pay right. But as far as the CovalentWorks, I mean -- and not to minimize all the hard work the team is doing, and they're doing a great job, it's a couple of thousand customers. Remember back two years ago, we moved 22,000 customers from our old fulfillment product onto our new. We have capacity to do a lot of acquisitions like CovalentWorks.

So it's not -- it's definitely not capacity. We've just got to find the right deals at the right price and make sure that [Inaudible]

Tom Roderick -- Stifel Financial Corp. -- Analyst

All right, guys. I'll jump back in queue. Thank you very much. Nice job.

Operator

Thank you. Our next question comes from Tim Klasell with Northland Securities. Your line is now open.

Tim Klasell -- Northland Securities -- Analyst

Thank you. My questions have been answered.

Operator

Understood. Our next question comes from Jeff Van Rhee from Craig-Hallum. Your line is now open.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Great. A couple of questions. I guess just one, in terms of the new customers, new suppliers coming on, what's the ratio or percent of those new customers that are coming on that had previously tested and are now migrating to full-blown customers? How has that ratio of migrating prior testers to full-paying customers changed? And then secondly, just in terms of the size of suppliers that are gravitating to cloud, has that changed? Do you see the larger customers stepping into the pipeline more so than you had historically? Or anything to call out there?

Archie Black -- Chief Executive Officer

Yes. I'd say two things. One, the number of testers that move into recurring revenue customers is actually fairly small, but they tend to be the larger customers, so it tends to be a meaningful part of our revenue, if that makes sense, so a small percentage but a very meaningful level of activity for the sales team. As far as what you've seen over the last, really, decade is we continue to get larger and larger customers.

More large customers are really embracing the cloud, and they're moving ERPs to cloud-based ERPs. That's a positive anytime they're having a change. I would say that our biggest issue in the mid-market and I'd say the small end of the large customers isn't that they don't embrace the cloud, it's if they have -- if what they have is working, and they don't have a change in their environment or their retailers. It's going to be tough to get them to change.

So if they're making acquisitions, that's a great candidate if they begin to have ERP changes, any kind of change. But that continues to be an evolution, that a higher and higher percentage of business comes from larger than the $100-a-month customer.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Yes. And just one last from me. The -- it seems in prior quarters, we've heard quite a bit about channel and channel pulling you through to larger deals and drop-ship. And it's been some time since we've heard as much emphasis on those.

Is it -- has that trend sort of peaked and is less of a driver at this point than, say, a year or two years ago -- those two trends, I should say?

Archie Black -- Chief Executive Officer

No. I would say the channel continues to be a very, very important part of business, and they continue to be executing extremely, extremely well. So that's not an intentional drop. That's just -- it just happens to be -- I guess we just didn't talk about it.

It tends to be a meaningful part. The drop-ship continues to be a challenge and a discussion point for retailers. We're getting more and more business there. And it brings you into not just the drop-ship business but the entire book of business.

So I would say, clearly, we talk more about drop-ship today than we did a year ago -- than a year ago. It just continues to be a louder and louder piece. But remember, I think at the end of the day, when we're all said and done, it's a big challenge. It's a big change event.

Channel is probably -- or drop-ship is probably going to be 10% to 20% of the sales volume of e-commerce, but it's a big challenge piece. And so we can fit in -- we can jump in and really help the retailer solve their problems there.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

OK. Last one. The international -- in terms of international expansion, I think historically you always said, we sort of follow our customers where they're pushing us. Has your stance on that changed at all? Do you feel -- do you find yourself pushing a little more as opposed to being pulled? And any sort of change in posture as to how you approach international?

Archie Black -- Chief Executive Officer

No. I think we are really using that true viral network part of our business, help evolve the business. That's been our strategy from day one. I would say the only exception to that is we did jump in a little more two feet in with Australia as far as really trying to generate more aggressively retail leads and be more aggressive there.

But Asia is really follow the customers and so is Europe.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Got it. All set. Thanks.

Operator

[Operator instructions] Our next question comes from David Gearhart with First Analysis. Your line is now open.

David Gearhart -- First Analysis -- Analyst

Hi. Good afternoon, Archie and Kim. I just had one question because all my questions have been asked. There is a nice step-up in the gross margin from Q4 to Q1 and just wanted to get a better sense of what's driving it.

And I think in the past, you've said investments in the customer experience and whatnot has pushed it down or kept it kind of in the 60 range -- mid-60s-plus range, and nice step-up here. Just wondering if that's what's driving it. And also, can you give us some sense of the cadence for gross margin for the quarters as we go through the year?

Kim Nelson -- Chief Financial Officer

Sure. So the first thing I'd mention is similar to how I answered one of Koji's questions, which is, I think you should really look at cost of goods sold or gross margins more on an annual basis for us than specific by quarter because depending on a particular quarter, there may be a little bit more or less spend relative to some of the longer-term investments that we're making. So really looking at that on an annual basis, I think, makes more sense. So what you saw on the quarter, you are, however, seeing some of the benefits from prior investments that we've made where we can get more efficient.

We certainly continue to add resources, and we'll continue to add throughout the year as well, but I would focus more on sort of the -- that annual basis of gross margin versus particularly on a particular quarter.

David Gearhart -- First Analysis -- Analyst

OK. And then your long-term targets of getting into the mid-30s, a lot of that is going to be driven by gross margin expansion as well. So I guess it kind of relates to my last question is how much of a bump should we expect on the gross margin front? Should we expect 100 basis points a year, 150, 200? Just trying to get a sense of how to layer in that versus the other expense items.

Kim Nelson -- Chief Financial Officer

Sure. So we haven't given that specificity by line item. What we've said is longer term, mid-30s. And with that we have said, we do think that we can get up to a mid-70s from a gross margin perspective.

On an annual basis, we -- the expectation is that we'll continue to make incremental EBITDA margin expansion till we get there, maybe a couple of hundred basis points or so. And as far as how that looks by year, it really does depend by year. So you should expect that we have the opportunity, and we'll make improvements in gross margin over time till we get to our longer-term expectations.

David Gearhart -- First Analysis -- Analyst

OK. Thank you.

Operator

[Operator signoff]

Duration: 36 minutes

Call Participants:

Irmina Blaszczyk -- Investor Relations, The Blueshirt Group

Archie Black -- Chief Executive Officer

Kim Nelson -- Chief Financial Officer

Matt Pfau -- William Blair -- Analyst

Scott Berg -- Needham and Company -- Analyst

David Hynes -- Canaccord Genuity Inc. -- Analyst

Koji Ikeda -- Oppenheimer and Company -- Analyst

Tom Roderick -- Stifel Financial Corp. -- Analyst

Tim Klasell -- Northland Securities -- Analyst

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

David Gearhart -- First Analysis -- Analyst

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