Q4 2023 SPS Commerce Inc Earnings Call
Participants
Chad Collins; CEO; SPS Commerce, Inc
Kim Nelson; Executive VP & CFO; SPS Commerce, Inc
Irmina Blaszczyk; MD; The Blueshirt Group, LLC
Matthew Pfau; Analyst; William Blair & Company L.L.C
Parker Lane; Analyst; Stifel Nicolaus & Company, Incorporated
Scott Berg; Analyst; Needham & Company, LLC
Joseph Vruwink; Analyst; Robert W. Baird & Co
Jeffrey Rhee; Analyst; Craig-Hallum Capital Group LLC
Mark Schappel; Analyst; Loop Capital Markets LLC
Nehal Chokshi; Analyst; Northland Capital Markets
Presentation
Operator
Good afternoon and welcome to the SPS Commerce Q4 2023 earnings conference call. All participants will be in a listen only mode. Should I need assistance, please press star zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star one to remove your question. Start to Please note this event is being recorded.
I would now like to turn the conference call over to Nina Latchways. Please go ahead.
Irmina Blaszczyk
Thank you, Homi Good afternoon, everyone, and thank you for joining us on SPS Commerce Fourth 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 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, SPS Commerce.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, SPS Commerce.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 John.
Chad Collins
Thanks, Regina, and good afternoon, everyone. Thank you for joining us today. I'd like to start my prepared remarks by expressing gratitude to the SPS. team for enabling a smooth leadership transition during my first full quarter as CEO. Having spent the last four months median SPS employees. I have come to appreciate their inherent retail expertise, their drive to deliver the best customer experience and their commitment to consistent execution. Having completed a review of our product road map, I can say with conviction that the network SPS. has built over the years uniquely positions the Company to optimize our customers' supply chain operations by simplifying the exchange of supply chain data. SPS. has become the world's retail network. By harnessing that data, we can help our customers make their trading partner relationships, more collaborative and profitable as we explore new use cases and adjacencies to leverage the data. We are creating a strong defensible competitive position and an undeniable value proposition for trading partners everywhere.
Looking back to 2023. The Company's strong performance underscores our ability to execute as macro and retail dynamics continue to evolve. Q4 was the 92nd consecutive quarter of revenue growth and a strong finish to an exciting year. For the full year 2023, revenue grew 19% to $536.9 million. Recurring revenue grew 20%, led by fulfillment growth of 20% and analytics, which grew 10% in 2023. The number of recurring revenue customers reached approximately 44,800 throughout the year we demonstrated ongoing success in expanding our network as we continue to play a key role in retailers and suppliers, transformation to omnichannel retail, improving supply chain efficiencies and enabling international expansion the true value company are wholesaler with over 4,500 independent retail locations worldwide and one of the largest distributors in the U.S. partnered with SPS to standardize their electronic order fulfillment with over 1,000 vendors, most toys, a large toy manufacturer in Australia and an SPS fulfillment customer since 2016 chose SPS's analytic solution to effectively manage the vast amount of data feeds from their many trading partners as they grew across Asia Pacific, North America and Europe. Deckers, a footwear designer and distributor, which includes the old Ciba and Hooker brands has been a long-time SPS analytics customer in North America as they expanded their vendor network to Europe. Deckers chose SPS's fulfillment solution to ensure they can service a growing number of retailers across both regions.
Starboard cruise services, a division of LVMH is known as the preferred partner for luxury retail Etsy with over 700 stores on over 100 ships across 15 cruise lines, Starboard understood the need for efficiency across their 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 using SPS Commerce analytics, which incentivized a higher than expected adoption of SPS's fulfillment solution by Starboard vendor network. Our continued focus on the channel and the strategic partnerships we established over the years play a key role in the expansion of our network as trading partners strive for automation. Erp integration is another key component to solving supply chain challenges. For example, our team's expertise in the Microsoft space earned us a spot as the featured app on the main app store space, SPS Commerce's deep integration technology, multi-tenant cloud-based retail network and full service model is allowing Microsoft in their value added resellers to leverage best-in-class technologies when trying to migrate customers and win new business by partnering with ERP providers. We engage with suppliers like Corbion, who are focused on long term omnichannel success. Automating connections with their trading partners was a priority for Orbia who became a fulfillment customer shortly after they subscribed to analytics for visibility into inventory levels and sell-through across their various sales channels and trading partners that include Bloomingdale's, Macy's and Nordstrom SPS's ability to deliver world-class solutions includes targeted acquisitions that integrate best in class technology with the SPS. platform in 2023, we continue to expand our portfolio with the acquisition of Thai kinetics to strengthen our e-invoicing capability and extend our European presence. We also acquired the order if she wanted to Knology partners in Australia who enabled suppliers to link their line of business applications through SPS's network, unlocking connections to trading partners around the world. Sps plays a pivotal role in supporting retailers and suppliers on their omnichannel journey. Our technology roadmap includes initiatives to further simplify access to the network and continued build out of trading partner connections, creating long-term growth opportunities as we continue to execute our strategy to be the world's retail network.
And with that, I'll turn it over to Kim to discuss our financial results.
Kim Nelson
As you can see, we had a great fourth quarter of 2023. Revenue was $145 million, a 19% increase over Q4 of last year and represented our 92nd consecutive quarter of revenue growth. Recurring revenue this quarter grew 19% year over year. Adjusted EBITDA increased 20% in the quarter to $42 million.
For the year, revenue was $536.9 million, a 19% increase and recurring revenue grew 20%. The total number of recurring revenue customers increased 6% year over year to approximately $44,800 and wallet share increased 10% to approximately $11,550. Adjusted EBITDA grew 19% to $157.6 million. We ended the year with total cash and investments of $275 million.
Now turning to guidance. For the first quarter of 2024, we expect revenue to be in the range of $145.9 million to $146.7 million, which represents 16% to 17% year-over-year growth. For the full year, we expect revenue to be in the range of $616.5 million to $619 million, representing approximately 15% growth over 2023. For the first quarter of 2024, we expect adjusted EBITDA to be in the range of $42.1 million to $42.7 million. For the full year, we expect adjusted EBITDA to be in the range of $183 million to $185 million, representing growth of approximately 16% to 17%. For Q1 2024, we expect fully diluted earnings per share to be in the range of $0.26 to $0.27, 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 $0.72 to $0.73, with stock-based compensation expense of approximately $20.1 million. Depreciation expense of approximately $4.7 million and amortization expense of approximately $4.7 million. For the full year 2024, we expect fully diluted earnings per share to be in the range of $1.75 to $1.78 with fully diluted weighted average shares outstanding of approximately $38 million shares. We expect non-GAAP diluted income per share to be in the range of $3.11 to $3.13, with stock-based compensation expense of approximately $55.7 million. Depreciation expense of approximately $19.4 million and amortization expense for the year of approximately $18.8 million for the year, you should model approximately a 30% effective tax rate calculated on GAAP pretax net earnings beyond 2024, we maintain our annual revenue growth expectation of 15% or greater as we expand our network through community enablement campaigns and acquisitions. 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 Commerce achieved strong fourth quarter and full year 2023 results. Despite ongoing macro dynamics, we delivered profitable growth while we closed two acquisitions and continued to strengthen our competitive position across a large addressable market.
And with that, I'd like to open the call to questions.
Question and Answer Session
Operator
Thank you. We will now begin the question and answer session. If you have a question, please press star one. Our first question comes from Matt Paul with William Blair. Please proceed.
Matthew Pfau
Great. Thanks for taking my question and great quarter. I wanted to ask on the analytics product, some very strong growth in fulfillment analytics, about half the growth rate did Chad, now that you've been at the company for a few months, what needs to happen in your view to get that analytics growth rate more in line with the fulfillment product?
Chad Collins
Yes, good question, Matt. And I'm still our view is on the analytics plays a pretty key role in sharing this sales data. That's very important to come to the suppliers. Part of the growth strategy there is continue to give more retailers to drive that adoption of that program. And what we see overall is that sort of the Warner exchange, which is really our fulfillment product, is on, you'll see retailers much more willing to put that business process in place, which then drives our community programs there. And it's not that there's a hesitancy, but just not quite as common in all the various segments of retail to share this point of sale data. So driving those retailers to share more of that data is connected to our overall growth strategy on analytics.
Matthew Pfau
Okay, great. And just a follow up on that. And so it seems like it's still more of an issue with getting retailers to share data versus any sort of product adjustments that need to be made.
Chad Collins
Yes, I think that's a fair characterization.
Matthew Pfau
Great. Thank you. Appreciate it.
Operator
Our next question comes from Parker Lane with Stifel. Please proceed.
Parker Lane
I'd like him to explain the questions here. Could we just start with the inorganic contribution that you guys saw in the fourth quarter? And what is embedded in your expectations for 2024 relative to tie Connetics and your exchanges?
Kim Nelson
Sure. So when we announced the acquisition of Pi kinetics at that point in time, we had expectations of what we anticipated that would deliver not only for Q4, but as well as 2024 as we're now providing our consolidated results and by default, that does include tight kinetics and what we have seen and what our expectations are very similar to what we had previously identified or disclosed of what our belief was of that portion of the business in Q4 as well as 2024.
Parker Lane
Got it. Okay. And then can stay with you, but look at the 15% to 25% adjusted EBITDA growth target longer term, what is the primary lever to get you there from a margin standpoint, understanding that sales and marketing, it's one of your big base expenses. Is it purely productivity gains there? Are there other structural components of that the cost structure here that you regain some improvements out of longer term, is that across the board? Anything there would be great to hear about.
Kim Nelson
Sure. So when we think about where we see a larger opportunity than maybe in some other areas. I would point you to gross margin. We made a lot of investments over the years in the overall customer experience. We'll continue, of course, to add resources and make sure we have appropriate capacity to meet our customers' needs. But we do see the opportunity to be scaling and growing into that investment. And when you look at our guidance that we just provided for EBITDA in 2024, we actually slightly took that up versus what our initial expectation was there. And that is reflective of our belief that in the back half of 2024, where you're going to see that margin expansion start to come in gross margin.
Parker Lane
Understood. Thanks for the publication. Congrats again on the quarter.
Operator
Our next question comes from Scott Berg with Needham. Please proceed.
Scott Berg
Hi, Jay and Kim. Congrats on the nice quarter and thanks for taking my questions. I guess I get to hear, Ken, you've been there 90 days. I guess how about an impression of your first 90 days? And is there something within the company that you may not have appreciated before you started that you have certainly been able to appreciate 90 plus days later.
Chad Collins
Yes, absolutely. I think, Scott, as I said in the prepared remarks, really engaging with the employees here at SPS Commerce and understanding the really deep domain expertise we have around retail and the retail value chain is one extremely impressive and I think just a strong capability that gives me confidence in the future development of the business. And I think that expertise is also reflected in some of these community go-to-market programs in a way that we're able to help retailers in a very short period of time at a relatively low cost for the retailer, fully digitalize their supplier base and really drive a lot of value in that supply chain that's beneficial both for the retailer as well as efficiencies on the supplier side, I think just the level of detail and expertise built into the community programs was difficult to appreciate from the outside and now that I'm on the inside and have a great appreciation for that.
Scott Berg
Got it. Helpful. And then Kim, you reiterated the intermediate term growth opportunity of the company, 15%- plus annually here going forward. I think that bodes well to how we all start thinking about maybe fiscal year 25 a little bit. But as you enter fiscal 24 here and you look at the opportunities, whether it's through the enablement campaigns, whether it's through some of the channels maybe by product which you're doing in Europe, et cetera. Does the opportunity that you see in the next 12 months? Does it differ from what you saw maybe a year ago or is the playbook this year?
Kim Nelson
Very similar to how you entered 24st that I would say the playbooks are very similar to 2023. We look at a nice healthy pipeline of community enablement activities in 24, we'd expect that to be similar to 23. Still lots of opportunity to be helping retailers as well as suppliers on this omnichannel journey. When I think about the European side and we think about the acquisition we made of time and our philosophy, our approach there is the same as when we announced that acquisition, which we really want to take the year 24 to really understand that market and better understand the e-invoicing capability inside as it relates to that market opportunity and we'll be taking that time in 24 to then inform our view of what that looks like for 25 and beyond. So sort of a long-winded way to say our expectation is it lots of opportunity for us in 24, similar to what we saw in 23.
Scott Berg
Excellent. Helpful. And congrats again on the nice quarter.
Operator
Our next question comes from Joe Vruwink with Baird. Please proceed.
Great.
Joseph Vruwink
Thank you for taking my questions. You normally talk about your revenue growth being a combination of both customer counts and wallet share capture, I think 2023, it was a bit more weighted to wallet share high. And if I did my net organic customer out math, right, I think that was a positive number obviously, but down from 2022.
I guess getting back to that, the intro comments, if the algorithm holds, I would expect maybe 2024 to therefore be stronger from a customer count perspective? And if you agree with all of the help on what might be some of the drivers behind.
Kim Nelson
Sure. So when we think about 2023, we would characterize that as sort of similar, call it, net customer adds outside of acquisitions. The level we were seeing at really So call it pre-pandemic level as it relates with the biggest driver, of course, being related to those community enablement activities.
If you look at Q4, just a reminder, we added about a net {$300 million} in Q4. Do keep in mind that Q4 tends to be our seasonally lowest sequential net customer adds just because of the holiday season. Our Q4 was up slightly versus last year when you adjust out for the acquisitions are pretty similar, pretty in line with what we have seen historically, a little bit higher, but pretty close in line. And as it relates to our view in 24, we provided what our overall expectation is for revenue. Obviously, when we announce our results, we then give the breakout between customer adds as well as our COO. But we you should anticipate the highest quantity of customer adds coming from our community activities that we're anticipating in Q4. We also have a very vibrant channel sales organization that brings us in front of some of the larger than average customers that will impact more the RPU scorecard, then the customer scorecards.
Joseph Vruwink
And maybe my second question on that. So I think the best example is shared true value where you end up adding a thousand vendors. But I'm sure a lot of those vendors were probably already on the network and some capacity. I do think the opportunity is evolving a little bit where you're kind of in front of Cree. You need to be in front of I mean, you're the largest network in the industry by far, but there's actually more of an opportunity to maybe monetize are the customers on the network already.
Kim Nelson
So when I'm sure a great question, Joe. So it is actually quite different depending on the retailer. So as you know, we do multiple community enablement activities throughout the year and there's a mix between those. So in some cases, depending on who the retailer is it's going to skew more towards a new like net new customers. In some cases, it might skew more to existing customers. And therefore, to your point, that's adding to our wallet share. It's just more revenue we're getting from an interesting customer. And then, of course, within a community enablement activity, there's also some that just test with. So they're in our database to reach out over time, but don't become a recurring revenue customer at that time. So our belief is that we are not at all fully penetrated or saturated and that we would expect to still see a nice healthy mix of adding new customers as well as, of course, getting more revenue from our existing customers.
Joseph Vruwink
Okay, great. Thank you very much.
Operator
Our next question comes from Jeff Van Rhee with Greg Harrison. Please proceed.
Jeffrey Rhee
Excuse me, great. Thanks. Thanks for taking the questions, guys. So maybe a couple for me. Couple of cleanups, Kim, what was our channel revenue for the year percent of revenue.
Kim Nelson
We actually had we don't share that in percentage out. It's probably been a lot. It's been multiple years since we've shared that our what we would say is it remains a very important and healthy component of our overall contribution to revenue and new business. And you will see that more again impacting our pool versus the customer adds. But it's a really important part. If you think of sort of the concept of a three legs to the stool are through that one, primarily driven by channel sales is one of the three components there. Ourselves remains very healthy and robust for us.
Jeffrey Rhee
Growing would you at least say it's growing as a percent of revenue.
Kim Nelson
I would say that we have a more as each year goes on. We have more and more relationships more and more expertise in the channel market for that our name, it certainly is resonating and coming up often as some times where you're going to see, however, there might be a prospect and maybe they have a system, they're deciding are they moving to another system and sometimes we might get into that sales cycle where they're where they're evaluating. A couple of different ERPs will ultimately win that business. But we get connected with that prospect, actually sometimes through multiple ways through the channel.
Chad Collins
He has have time for us, it's with one or multiple marketing campaign. So the ideal way for us to engage with prospective customer is that they are through a community program and there's a relationship with the channel partner, and they've responded to our traditional marketing campaigns on the right is not just coming through one particular channel, actually the more the more channels they come through, the better for us.
Jeffrey Rhee
We're great at it in terms of the people that have tested any change in the pace or timing of people that might have tested in the past coming back to ultimately be customers?
Chad Collins
No, I wouldn't say no dramatic change there. But obviously, those that test with us may just not be the right time for them to join the SPS. network. And those are ideal targets for us for future customer acquisition.
Jeffrey Rhee
Okay. And then maybe just last sort of broadly speaking observations from a macro perspective, just the changes, any notable changes in your base customer behavior as the quarter progressed.
Chad Collins
No notable changes. I would say there would there didn't seem to be some positive sentiment coming out of the NRF conference for retail technology where we were a participant and able to meet with a number of our customers and customers have noted just a little uncertainty on the macro in 2024. Would it be an election year, some of the geopolitical instability, but some of the supply chain technology spending we see as continuing at a healthy pace.
Jeffrey Rhee
Yes. Okay. Fair enough. Thanks, guys, appreciate it.
Operator
Once again, if you have a question, please press our line. Our next question comes from Mark Schappel with Loop Capital Markets.
Mark Schappel
Hi. Thank you for taking my question and nice job on the quarter and the year for that matter. Chad, starting with you, I realize it's still early yet. I was wondering if you could just walk through what you believe are going to be your top priorities for the firm in the coming year?
Chad Collins
Yes, for sure. So I think with this nice addressable market we have in front of us, our strong market position, the strength of these community enablement programs. First and foremost, priority is taking advantage of that market opportunities that is in front of us with strong execution within the same core segments and around the product offerings that we have today.
Now that said, over the sort of mid to long term, I do think that there are some great opportunities in this business to help our customers with a broader scope of their supply chain technology. And if we start with the customer that could lead us to a build out organically of new product offerings, expanded partnerships to bring those solutions to customers, our targeted M&A. And I think that any of those will provide a great opportunity given that we have 40,000 plus customers to cross sell those solutions to them.
On the M&A front, I would say there is a pattern here of some very disciplined M&A approach. And I see no reason that deviating from that pattern.
Mark Schappel
Great. And then investment-wise, it's kind of a follow-up to the earlier question. From an investment standpoint, where does the company plan to make some incremental investments to run the business.
Kim Nelson
So what I would say, Mark, is our approach there is similar to every year. We have a we have a value of win today, win tomorrow. And so we always want to make sure that we're investing for our existing customers and the customer experience, but also looking forward to opportunities that we see nothing really different there. Really everything think about it from the customer perspective. So what is it that the customer it needs wants? How do we help them? How do we get them up and running as quickly as possible? How do we make sure we're helping them be as efficient as possible? How do we make sure we're helping those suppliers get an A. with their retailers. So all of those concepts of that overall customer experience and again, helping suppliers get an A. with their retailers will remain a focus area for us.
Mark Schappel
Okay. Thank you. That's all for me.
Operator
Our next question comes from Tony, how Chuck beginning with Northland Capital Market?
Nehal Chokshi
Yes. Thank you for taking my question and congrats on a great first quarter, Chad, here as a full full-time CEO, what are you guys seeing macroeconomically both internationally and domestically?
Chad Collins
Yes. What we're seeing at this stage and see a healthy environment, although there certainly is some uncertainty about 2024 given the elections, given the geopolitical environment that we're in. But I would say supply chain does seem to be a priority around technology spend. And that's what we're hearing from our customers.
Nehal Chokshi
It was a better or worse than September quarter.
Chad Collins
But farming.
Nehal Chokshi
Simply put better or worse than the September quarter.
Kim Nelson
I'd say not a lot of difference between that time period to now.
Nehal Chokshi
Thank you very much.
Operator
We have no more questions. The conference has now concluded, and thank you for attending today's presentation. You may now disconnect.
