SPS Commerce (SPSC) Q4 2019 Earnings Call Transcript

SPS Commerce (SPSC -1.56%)
Q4 2019 Earnings Call
Feb 13, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the SPS Commerce Q4 2019 earnings call. [Operator instructions] I would like to turn the conference over to your host, Ms. Irmina Blaszczyk. Ma'am, please go ahead.

Irmina Blaszczyk -- Managing Director, The Blueshirt Group

Thanks, Jona. Good afternoon, everyone, and thank you for joining us on SPS Commerce fourth quarter and full-year 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 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.

Archie Black -- Chief Executive Officer

Thanks, Irmina, and welcome, everyone. 2019 was a year of significant accomplishments for SPS Commerce. We continued to deliver on our strategic goals and financial targets as we expand our community of trading partners and leverage the unique lead generation engine fueled by the power of the SPS Commerce network. In 2019, the number of recurring revenue customers reached approximately 30,800, nearly three times the number of customers since we went public in 2010.

We acquired MAPADOC to expand our leadership in full-service EDI and successfully completed the integration of two acquisitions made in 2018, EDI Admin and CovalentWorks. We remained committed to shareholder value and repurchased 418,000 shares at an average price of $49.38 per share. For the full-year, revenue grew 12% to $279.1 million, and adjusted EBITDA grew 36% to $69.8 million. Our consistent focus on profitability resulted in an adjusted EBITDA margin of 25% in 2019, up from 21% in 2018 and 16% in 2017.

Throughout the year, we have seen retail dynamics continue to stabilize. The need for optimizing fulfillment and increasing collaboration positions SPS to capitalize on ongoing growth opportunities. As the industry evolution and omnichannel retail continues to fuel growth, SPS Commerce experienced another year of strong enablement campaign activity. Early in the year, ALS Limited, a leading testing, inspection, certification and verification company, became a SPS Commerce customer through the acquisition of CovalentWorks.

ALS wanted to globally consolidate EDI providers and chose to work with SPS and leverage our vast trading partner network. Belwith Products, a hardware manufacturer, needed to overhaul their EDI environment during an ERP system upgrade and chose SPS' fully outsourced solution over their current provider due to the additional automation capabilities we acquired through the EDI Admin acquisition. SCHEELS, one's of the largest sporting goods retailers in America, has partnered with SPS to leverage our fulfillment solution followed by assortment. This is an active partnership generating ongoing vendor onboarding opportunities for SPS' assortment and fulfillment solutions.

Drop-ship continues to be top of mind for many of our customers and partners, and SPS has decades of experience working with retailers and suppliers at expanding direct-to-consumer operations. SPS has enabled several thousand Walmart vendors across all of Walmart's business units, including drop-ship vendors for walmart.com. We added REI, an American retail and outdoor recreation services corporation, to the SPS Commerce's analytic retail network, covering over 80% of their vendors. Grocery Outlet is a high-growth extreme value retailer of quality name brand consumables and fresh products.

With more than 300 stores across the U.S. and growing, the grocer was undergoing a large merchandising transformation project in partnership with PwC, one of the world's largest consulting services companies. EDI was identified as a top priority for Grocery Outlet to more effectively manage their trading partnerships, including inventory management and product delivery and improve order fulfillment accuracy. Given the scale of the project, Grocery Outlet chose to outsource EDI to SPS Commerce, including the onboarding of new and existing suppliers.

In Europe, SPS is leveraging strong partnerships in a coordinated effort to entice retailers to share their point-of-sale data with suppliers through the SPS' analytics network. As a result, we have seen the number of European retailers in SPS' analytics network more than triple since 2015. As a result of strong year of enablement campaign in 2019, fulfillment grew 15% year over year, and our analytics solution grew 8%. To advance and expand our product leadership across all retail channels and deliver the easiest-to-use, most automated EDI solutions, we leveraged partnerships with leading ERP and EDI systems providers.

In 2019, we acquired MAPADOC, a strategic partner that we have worked with for over 15 years, to jointly deliver EDI and its system of expertise in the Sage and Acumatica markets. We believe EDI is an essential business function. To help quantify the benefits of EDI, we commissioned a Total Economic Impact study conducted by Forrester Consulting to provide an independent perspective. The study quantified EDI cost savings experienced by Peter Grimm, a leading supplier of hats and fashion accessories.

The November 2019 study concluded that SPS Commerce's fulfillment delivers an ROI of 372% and a payback period of fewer than three months. Savings resulted from avoiding costs primarily associated with managing retailer rule books. Through our vast network of multitenant integrations, SPS has a unique ability to capitalize on the efficiency of its centralized change management, which translates into economies of scale for SPS and its customers. In summary, retail dynamics and industry evolution continue to drive growth across e-commerce.

Our ongoing focus on sustained growth and profitability is inherent in our business model, and our ability to scale is unique to the retail network of over 90,000 customers that fuel the lead generation engine with every new engagement. With our vast trading community and leading product offerings that span all retail channels, SPS Commerce is positioned to become the world's retail network. With that, I'll turn it over to Kim to discuss our financial results.

Kim Nelson -- Executive Vice President and Chief Financial Officer

Thanks, Archie. We had a great fourth quarter. Revenue for the quarter was $72.7 million, a 12% increase over Q4 last year and represented our 76th consecutive quarter of revenue growth. Recurring revenue this quarter grew 13% year over year, and adjusted EBITDA increased 35% in the quarter to $18.9 million.

For the year, revenue was $279.1 million, a 12% increase, and recurring revenue grew 14%. The total number of recurring revenue customers increased 5% year over year to approximately 30,800, and wallet share increased 4%. As a reminder, in December 2018, we announced the acquisition of CovalentWorks. At the time, we stated that we expect our customer count to increase by approximately 2,000 and our wallet share to decrease by approximately 500 due to CovalentWorks' smaller average customer size.

In Q4 2019, we lapped the customer adds and we will have lapped the full revenue impact in Q1 of 2020. Adjusted EBITDA grew 36% to $69.8 million. We ended the year with total cash and investments of $214 million. Now turning to guidance.

For the first quarter of 2020, we expect revenue to be in the range of $73.6 million to $74.2 million. For the full year, we expect revenue to be in the range of $306.5 million to $308.5 million, representing approximately 10% to 11% growth over 2019. For the first quarter of 2020, we expect adjusted EBITDA to be in the range of $19.2 million to $19.8 million. For the full year, we expect adjusted EBITDA to be in the range of $83 million to $84.5 million, representing 19% to 21% growth over 2019.

For Q1 2020, we expect fully diluted earnings per share to be in the range of $0.19 to $0.20 with fully diluted weighted average shares outstanding of approximately 36.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.31 to $0.32 with stock-based compensation expense of approximately $4.6 million, depreciation expense of approximately $3.3 million and amortization expense of approximately $1.4 million. For the full-year 2020, we expect fully diluted earnings per share to be in the range of $0.85 to $0.88. We expect fully diluted weighted average shares outstanding of approximately 36.3 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $1.34 to $1.37 with stock-based compensation expense of approximately $19.8 million. We expect depreciation expense of approximately $13.9 million. We expect amortization expense for the year to be approximately $5.7 million. And for the year, you should model approximately 30% effective tax rate calculated on GAAP pre-tax net earnings.

Beyond 2020, we are confident in our ability to deliver 10% or greater annual revenue growth, as we capitalize on global retail industry dynamics, the viral lead generation nature of our business model and the opportunity to upsell and cross-sell industry-leading products. We also expect to see continued margin expansion with strong operating leverage, driving 20% annual adjusted EBITDA dollar growth and targeting long-term adjusted EBITDA margin of 35%. In summary, SPS Commerce continues to deliver on its financial targets, capitalizing on the evolution of the retail industry and leveraging the power of our network to deliver profitable and sustained growth. And with that, I'd like to open the call to questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Scott Berg from Needham. Your line is open.

Scott Berg -- Needham and Company -- Analyst

Hi. Congrats on the good quarter here. A couple, I guess, brief ones for me. Kim, let's start with your last comment there.

Confident in 10% organic, or excuse me, 10% annual revenue growth for the foreseeable future. Can you help us maybe unpack that a little? Is that all organic? Is there some impact of potential acquisitions in that? Just trying to understand how you're kind of sizing up that 10%-plus.

Kim Nelson -- Executive Vice President and Chief Financial Officer

Sure. So when we think about the dynamics that we're seeing in the retail space, and we recognize that we believe we're the clear leader in our product offerings to meet the needs of the retail network, we see a nice, long runway ahead of us that gives us confidence in being able to deliver at that 10% or greater. Now as a business, we certainly are open to acquisitions should they make both business and financial sense, but we're not compelled to do acquisitions. So regardless of that, we are confident in our ability to deliver 10% or greater.

Scott Berg -- Needham and Company -- Analyst

Got it. Super helpful. And then, Archie, I guess you're coming up on your 10th birthday as a public company here in April, I believe. But over the last 10 years, you've really only added one major product category to the portfolio in the analytics space.

There's been some smaller, I know, areas of functionality as well but one major category. As you look out over the next two or three or maybe four years, is there something coming down the pipeline that we might expect or something that you're looking at that might expand the product portfolio maybe a little bit more?

Archie Black -- Chief Executive Officer

Yes. I think there's a couple of things, Scott. One is to expand with add-on products to the existing capabilities, especially as it relates to fulfillment and possibly analytics, but primarily on fulfillment. So add-on functions and features that we can add value to our customers and charge more.

And then the third leg is assortment item information, which is we think as you move out into 2022, 2023, that can start adding some value and some revenue.

Scott Berg -- Needham and Company -- Analyst

Got it. Helpful. All I have. Thanks for taking my questions.

Operator

Your next question comes from the line of Tom Roderick from Stifel.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Thanks for the questions. So Archie, let me just kind of throw you one follow-on question there regarding analytics. And if I heard you right, I think it sounded like analytics grew, I think, 8% for this year. Talk a little bit about that in the context of that line item accelerating a little bit.

It seemed like point-of-sale data hadn't been something that retailers were sharing as frequently or as often as you had hoped kind of going back a year ago, two years ago. So is that starting to pick up a little bit? Is there a reason to invest more in this analytics side? Talk a little bit more about that mix, and then I'll come back to the fulfillment side. Thanks.

Archie Black -- Chief Executive Officer

Yes. We're clearly feeling better about the analytics side of the business, and I think there's a couple of things. One, as we've stated in the past, it's really a prioritization for the retailers. And as retail's stabilizing, we feel better about where that is.

And I think we have an opportunity to cross-sell as well into our installed base. So I think those two things are helping. I wouldn't get too far ahead of yourself on growth, but we feel very good about that, where that product is going. And we've always believed in the long-term addressable market for that product.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Archie, it's not the first time you've mentioned Europe as an area where you have some sizable retailers and some sizable customers that are leaning into that point-of-sale data a little bit more aggressively. Is that an area that you'd be inclined to invest [Audio Gap] aggressively in? Are you seeing some better things out of analytics in Europe? Or is that just still a little anecdotal?

Archie Black -- Chief Executive Officer

Well, I would say we are investing on a relative basis aggressively in that, but it's off a very small base. So I mean, when I get excited about the European analytics opportunity, I think if we can continue making progress like we are in 2020, 2021, you get the snowball effect, and then it can become meaningful over time. So we are, on a relative percentage basis, being fairly aggressive in 2020, but it's still very small dollars.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Excellent. OK. Kim, quick follow-up for you then just in terms of capacity and investment dollars and how you need to invest in the business to support this 10%-plus growth. Historically, you used to give us a head count of sales.

I don't know if that's something you could still provide at the year-end or give us some directional commentary as to what's been happening with your sales head count. But I guess the question is, how fast did you grow that this year? And how do you think about how fast you need to grow the sales headcount this year, this coming year to support the growth you're looking for?

Kim Nelson -- Executive Vice President and Chief Financial Officer

Sure. So when we think about sales, I think capacity is a great way to look at it. And I know you did use that word. So when we think we believe that we have done a really good job in sort of optimizing capacity of our sales organization.

So what that means is there is an expectation that we will continue to add resources based on the opportunities that we see. That has been factored in to our guidance for 2020, and we certainly did add in 2019 as well. But based on changes that we've made over the last couple of years in the sales organization, we've been able to get a very healthy output based on each salesperson. So feel very good as it relates to the sales organization that we have in place, and we'll continue to augment that as necessary, based on the opportunity that we see.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Thank you. I'll jump back in queue. Congratulations on a nice finish to the year.

Operator

Your next question comes from the line of Pat Walravens from JMP Securities. Your line is open.

Pat Walravens -- JMP Securities -- Analyst

Great. Thank you. And congratulations, Kim and Archie. Archie, I'm going to ask you two big picture ones.

The first one, and I know this is going to be hard, but can you tell or do you have any thoughts on how the coronavirus is going to impact retail and retailers and then how that might flow through to you?

Archie Black -- Chief Executive Officer

Yes. It's tough to say, Pat. I think there's going to be some disruption in supply chains. It feels a little bit similar, on a different scale, to the trade war questions.

And I'll tell you on that, I thought there might be a slight positive because as people shift or add additional trading partners to be able to fulfill, that can sometimes be a slight positive for us. So I think it could be a slight positive, but I don't think it's going to have a material change.

Pat Walravens -- JMP Securities -- Analyst

OK. Good. And then bigger picture, I mean, you've been talking for about a year, I think, and correct me if I have that wrong, about things having stabilized. And in '17, '18, there was a lot of discussion of how the environment was more difficult.

I would just love you to sort of step back for us and explain what happened? And how much of it was the environment and how much of it was maybe SPS making some adjustments?

Archie Black -- Chief Executive Officer

Yes. I think there's two things, Pat. I think when you look at it, I think the retail environment was in a position of uncertainty. Who is going to survive? How are they going to survive? Can omnichannel retailers really survive what's happening? So I think that has had an impact.

Obviously, we did some pretty significant sales restructuring, which is starting to pay off. But that wasn't easy. But I think the vast majority of it was the environment. And as I say, the restructuring, which is now paying off in a number of different ways, probably took a quarter of a step back because of that in '17 and '18.

Pat Walravens -- JMP Securities -- Analyst

Awesome. All right. Thank you for that perspective.

Operator

Your next question comes from the line of Jeff Van Rhee from Craig-Hallum. You're on the air.

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

Great. Thanks, guys. A couple for me. One quick housekeeping, I think you gave the channel as a percent of bookings for the year usually, just that figure.

And then on the test customers, I'm particularly interested in the 50,000-plus that you've tested. Just talk to me about what you're doing to cultivate those people, stay in touch with them, understand their intentions and really how that program has evolved? And what insights you're gaining from staying in touch with those that have tested but not yet fully adopted SPS' solutions?

Kim Nelson -- Executive Vice President and Chief Financial Officer

Sure. But as it relates to channel, channel still remains a nice, healthy lead generation engine for us and similar to what you've seen historically as it relates to sort of that mix of the business.

Archie Black -- Chief Executive Officer

And as far as the testing and certification, we do a number of different things. One, the marketing group is trying to hit those people up. We can also do very targeted marketing campaigns, either against specific competitors and/or specific retailers. Many times, we are seeing a tester multiple times.

And in those cases then, we do have the data as to how they're performing, whether they were efficient on their testing. So depending on the size of the account, the sales rep may stay in contact with their individual. But it's an aggressive marketing push and continuing part of our business. It is a meaningful part of our new business.

There's a leg of it and the customer count isn't large, but they tend to be larger customers. And so it's a meaningful part of our lead generation engine.

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

Got it. And just two other quick ones. On the acquisition front, any change in terms of what you're looking for? I think earlier, there were some questions about product and product innovation. Just wondering if there's anything different about what you're looking for on the acquisition front.

And then, on the ALS customer that you've mentioned, you said you displaced their existing EDI infrastructure. I'm curious what you displaced.

Archie Black -- Chief Executive Officer

Yes. No, what we're looking for is exactly the same as it is in the past, which is either: One, pure customer acquisition; two, product enhancement, in other words, something along the road map such as an EDI Admin or a MAPADOC, which also has revenue or geographic expansion. I don't have at the tip of my fingers exactly what we displaced in the ALS example.

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

OK. Great. Thanks. 

Operator

Your next question comes from the line of Jason Celino from KeyBanc Capital Markets.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Hey, guys. Can you hear me OK?

Kim Nelson -- Executive Vice President and Chief Financial Officer

Yes.

Archie Black -- Chief Executive Officer

Yes.

Jason Celino -- KeyBanc Capital Markets -- Analyst

On the 8% analytics growth this year, how should we think about the strength that you mentioned from Europe versus maybe like a new customer, like REI? Are you able to, can you provide us a little bit more color on where that came from?

Archie Black -- Chief Executive Officer

Yes. So the vast majority of it is in North America. I think it's still off a small base. So it's contributing.

Europe is starting to contribute, but it's off a very small base. But like anything, as we've seen it, when you get a small base, if you have strong growth after three, four -- two, three, four, five years, it starts becoming meaningful. So at this point, it's more of an optimistic look than a mass of contribution to the growth line.

Jason Celino -- KeyBanc Capital Markets -- Analyst

Got it. So if I think about it, as a follow-up, Europe is maybe just behind where retailers in the U.S. might be.

Archie Black -- Chief Executive Officer

Yes. We also have some very large influential suppliers that are helping us push the European retailers and opening doors for us. So that's one of our primary lead generators in Europe, it's the large influential suppliers.

Jason Celino -- KeyBanc Capital Markets -- Analyst

OK. Great. That's all for me. Thanks.

Operator

Your next question comes from the line of Tyler Wood from Northland Securities. Your line is open.

Tyler Wood -- Northland Securities -- Analyst

Thanks for taking our question. You mentioned seeing increased interest during the quarter with the drop-shipping product. Could you just drill down maybe a bit more on that as far as your expectations for 2020 there? And then kind of related, you've mentioned in the past, still selling this bundled and as a stand-alone product. Could you kind of fill us in there on how you're approaching, positioning that product for 2020 and beyond? Thanks. 

Archie Black -- Chief Executive Officer

Yes. I think quite often, with a retailer, it's a bundling and it's completely, they're looking at their entire supply chain, and we'll sell it that way. What we've seen is sometimes they're specifically looking for a drop-ship solution, and our strategy has always built, been to build long-term relationships with our customers and meet them where they are at. And so the drop-ship is an event that's changing more rapidly.

So that gives us an introduction to a customer or a retailer. And to the extent that we land that part of the business and we execute extremely well, which we tend to do, then that gives us an opportunity to expand our footprint. When I think about drop-ship, over time, drop-ship's going to be about 20% of e-commerce. So e-commerce right now is about 13%.

And so it'd be 20% of that. So pick your number where you think e-commerce is going and what the trajectory is, and my guess would be 20% of that will be drop-ship.

Tyler Wood -- Northland Securities -- Analyst

And then one more quick one. Any change in churn during the quarter worth mentioning?

Kim Nelson -- Executive Vice President and Chief Financial Officer

No. It stayed consistent.

Tyler Wood -- Northland Securities -- Analyst

All right. Thank you. 

Operator

[Operator instructions] Your next question comes from the line of David Robinson from William Blair. Your line is open. 

David Robinson -- William Blair and Company -- Analyst

Hey, guys. Thanks for taking my question. I just had a question around MAPADOC. I was wondering if anything changed relative to your expectations.

And kind of how the integration is progressing so far?

Archie Black -- Chief Executive Officer

Yes. First off, the staff and the employees that came with that acquisition have been a real positive to the business. They're extremely qualified and extremely engaged. So we feel that they're just part of the SPS Commerce family now.

I would say what we had hoped for, which was more business and better customer experience, is materializing. So feel really good about the acquisition.

David Robinson -- William Blair and Company -- Analyst

OK. Thanks, guys. 

Operator

Your next question comes from the line of David Gearhart from First Analysis.

David Gearhart -- First Analysis -- Analyst

Hi. Good afternoon. Thank you for taking my questions. I just have one for you.

Going back to the drop-ship question, you said drop-ship should be 20% of e-commerce at some point. Can you give us some sense of how big drop-ship is for SPS Commerce as a percent of revenue to kind of give us some idea of how much expansion opportunity remains for the company either with existing customers or new?

Archie Black -- Chief Executive Officer

Well, if I had to guess, we'd probably look somewhat like the marketplace because a lot of times, it's all part of a different rule book and different documents and different trading partners. So very infrequently do we have a supplier that's just using us for drop-ship for one retailer. That's just not a material part of our business. So it is all part of a bundle typically.

But I would guess that drop-ship is well below the 10% of e-commerce today, probably 6% to 10%, because only 350 of our retailers today are doing drop-ship. And e-commerce is about 13% of retail. So as far as document volume on fulfillment, that would be my guess.

Operator

[Operator signoff]

Duration: 34 minutes

Call participants:

Irmina Blaszczyk -- Managing Director, The Blueshirt Group

Archie Black -- Chief Executive Officer

Kim Nelson -- Executive Vice President and Chief Financial Officer

Scott Berg -- Needham and Company -- Analyst

Tom Roderick -- Stifel Financial Corp. -- Analyst

Pat Walravens -- JMP Securities -- Analyst

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

Jason Celino -- KeyBanc Capital Markets -- Analyst

Tyler Wood -- Northland Securities -- Analyst

David Robinson -- William Blair and Company -- Analyst

David Gearhart -- First Analysis -- Analyst

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