Good afternoon. and welcome to the SPS Commerce Third Quarter 2022 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. Please go ahead.

Thank you, Gary. Good afternoon, everyone, and thank you for joining us on SPS Commerce third quarter 2022 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 the risk factors that may affect our results. These documents are available on 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.

Thanks, Irmina, and welcome everyone. SPS continues to deliver strong results as retail dynamics and increasing supply chain complexity amplify the need for automation. With double-digit revenue growth in fulfillment and analytics, total revenue grew 17% to $114.5 million, and recurring revenue grew 18%. Suppliers and brands of all sizes are benefiting from automating their processes with trading partners to improve efficiencies throughout the order fulfillment workflow, enable scale and international expansion and increased assortment. For example, automation enables vendors to outsource fulfillment and inventory management to partners like Shopify, Amazon or Etsy and take advantage of their vast market reach as well as their scale to enjoy discounted shipping rates and faster delivery. According to a survey conducted on behalf of where to go, a UPS company, 42% of consumers expect two day shipping on their online orders. A separate survey from Linnworks quotes that 61% of consumers want to purchase from businesses that offer next day delivery. Brands are learning that there are many benefits to digital transformation, not the least of which is to help create a positive customer experience. Gym+Coffee one of Ireland's largest and fastest growing active and at leisure brands needed to streamline increased order volumes as they expanded internationally. With EDI and automation, they were able to synchronize inventory across all channels and prioritize order fulfillment based on warehouse locations. Gym+Coffee is now able to offer fast and efficient delivery to a global customer base and scale the business further. PetCulture is a joint venture between Woolworths and PetSure in Australia. As a fast growing startup retailer, they knew the supply chain is a critical part of their business. Their goal was to provide a superior online customer experience by offering the right assortment and having inventory readily available to ensure timely order…

Thanks, Archie. We had a great third quarter of 2022. Revenue was $114.5 million, a 17% increase over Q3 of last year, and represented our 87th consecutive quarter of revenue growth. Recurring revenue this quarter grew 18% year-over-year. The total number of recurring revenue customers increased 12% year-over-year to approximately 39,550 and wallet share increased 5% to 10,900. As a reminder, in July, we announced the acquisition of GCommerce, which added approximately 500 customers to our network. For the quarter, adjusted EBITDA grew 31% to $34.7 million compared to $26.5 million in Q3 of last year. We ended the quarter with total cash and investments of approximately $237 million and repurchased approximately $12 million of SPS shares. Now turning to guidance. We recognize that ongoing dynamics of inflationary pressure and uncertainties in the global economy may impact the retail industry and our customers. However, we have limited exposure to foreign exchange rate fluctuations and our pricing structure is primarily driven by the number of trading partner relationships in our network. As a result, our operating model and our short and long-term growth expectations remain unchanged. For the fourth quarter of 2022, we expect revenue to be in the range of $120 million to $121 million, which represents approximately 17% to 18% year-over-year growth. We expect adjusted EBITDA to be in the range of $32.8 million to $33.5 million. We expect fully diluted earnings per share to be in the range of $0.29 to $0.30 with fully diluted weighted average shares outstanding of approximately 37.2 million shares. We expect non-GAAP diluted income per share to be in the range of $0.52 to $0.53 with stock-based compensation expense of approximately $8.3 million, depreciation expense of approximately $4.8 million and amortization expense of approximately $3.8 million. For the year, we expect revenue to…

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Matt Pfau with William Blair. Please go ahead.

Thanks for taking my questions. And nice results, guys. Just wanted to ask on in terms of the way to think about the macro impact, I appreciate that it's a very sticky solution. You need to use it to connect to retailers. But what about on the new customer acquisition side? How would you expect the ability to add new suppliers to the network to be impacted if perhaps the retail segment did see some pressure next year?

Yes. A couple of thoughts. One, what we've seen historically during more challenging times is actually community enablement campaigns go up because there's more pressure on retailers to make their supply chain efficient. And as you know, we don't monetize the retailers, so it's a very fast cost efficient way for the retailer to add efficiency. The second part of really how we look at it is digital marketing that will continue to be -- we haven't seen a major change in that through different times. And then the third is -- will be about whether ERP implementations slow down with in the supplier community. We haven't seen that mainly because of the massive switch to omnichannel over the last few years. So we would continue to expect that to be reasonably strong. So there are puts and takes underneath the covers when times get challenging in retail, but it tends to wash out within 1% or 2%.

Great. And then on acquisitions, so you've made three roughly within a 12-month period here. Is it just coincidental that these businesses are coming up for sale in that 12-month period? Or is there something else going on where you're seeing customers become more willing to sell, whether that be uncertainty around the macro or something else?

Many of these are long cycles where we've known people anywhere from two to 10 years. So a little bit of its timing. But we tend to be out there looking and we're increasing our intensity around finding opportunities. Having said that, we're going to continue to be disciplined. We're going to continue to look for deals that we think make sense for us. But we have a significant cash balance, and we have an appetite to continue to do acquisitions that are right for us.

Great. Appreciate you guys.

The next question is from Scott Berg with Needham. Please go ahead.

Hi, Archie and Kim. Congrats on great quarter and thanks for taking my questions. I guess I have two. The first one is to follow-up on Matt's question on the macro. We received a data point yesterday that kind of talked about how global supply chains seem to be loosening up. Shipping container pricing seems to be a splash today versus where it was a year ago. But as the global supply chains loosen up, is that, I guess, a tailwind for the SPS business? Or is there any sort of headwind? Because I know in the last two years, with the tightening of global supply chains and retailers needed more trading partners that seem to be a boon. But as that unwinds, does that change the dynamic of your customer acquisition at all? Thanks.

It really doesn't. It -- we're seeing different things in the supply chain, not surprising that shipping rates are coming down as there's -- it's been well-documented excess inventory at retailers, which that seems to be correcting, but obviously, that pushes back to suppliers and the suppliers' suppliers still have excess inventory. So it will take some time for that to work its way out. But it really doesn't because there was a little bit of a pop in Q2, Q3 of 2020, where there were people who were really looking for new suppliers to -- because of extreme shortages. But since then, we've been more or less back to normal. So I don't see that being either a tailwind or a headwind.

Got it. Helpful. And then on your acquisition of InterTrade, I found that one to be interesting for a couple of different reasons. But as I look at their product set today, it looks like they have some customers that are using them for pure EDI, but they also have a PIM product in their portfolio. I guess, how do we look at that acquisition going forward? Is this really more of just a customer acquisition where you're going to migrate them to your fulfillment solutions or does the PIM product that they bring you give you maybe a more meaningful cross-sell opportunity as you're able to integrate that with your own technology sector?

Yes. So a couple of things. One, they do have a very similar fulfillment product to ours. And when it makes sense for the customer, we will move those over to our platform. In a lot of cases, we have a superior platform. So that becomes pretty easy. On the -- what you call PIM product, it's really an item maintenance item. We call it assortment at SPS Commerce. So it's complementary to our assortment product, where -- what is happening is a supplier to Neiman Marcus is putting their item information onto the InterTrade platform and InterTrade can share that information directly into Neiman Marcus or Nordstrom's or whoever is their PIM. So there's not really a PIM, and it's not meant to be a PIM replacement. It's sitting in between the retailer and the supplier. And so that supplier can use that information to share with multiple retailers, which is our business model. So we think that product. They've done some really nice things with that product. They have a very talented team that understands that product will be very complementary to our assortment product and expect those two teams as they come together to work very nicely together.

Great. Helpful. Congrats again and thanks for taking my questions.

Thanks Scott.

The next question is from Parker Lane with Stifel. Please go ahead.

Yes, hi. Thanks for taking the question. Kim looking at the adjusted EBITDA guide for next year, $151 million to $153 million. Curious if you could provide some of the big investment priorities for the company in 2023? And then how should we think about the impact of the recent acquisitions on the gross margin line in particular next year?

Sure. So on the EBITDA question, based on the guidance we just gave for 2022, that implies an EBITDA growth of about 22%. You may or may not recall that earlier in the year, our expectations for EBITDA was actually at a lower number and a lower growth rate, meaning more is dropping to the bottom line this year. The primary reason for that has to do with our pace of hiring. So you may remember earlier on in Q1 as an example, we did not hire as many people as we had anticipated hiring. We have made great progress on that, and our expectation is exiting this year. We're going to be in a great spot relative to our needs and demands that we see going into 2023. However, that does though put pressure when you're comparing the full-year of that expense in '23 compared to the full-year of expense in '22. So a simple way to look at it is you're getting a bit more from an EBITDA growth in '22 than originally anticipated. And therefore, that EBITDA growth in 2023 would be a little bit less. So said another way, higher end of the range in '22, a little bit lower in the range in '23. As it relates to your second question on gross margin, the InterTrade acquisition, you can think about that as similar gross margins to SPS Commerce. So we are not expecting a large, call it, positive or a negative relative to the consolidated gross margin based on that acquisition.

Got it. Understood. Thank you. And then, Archie, I know last quarter, this has touched on a little bit, but have you seen any variance in transaction volumes themselves as the e-commerce and broader retail environment appears to be a little bit more uncertain? I know that maybe that's something you saw in the past, but given your pricing model, it doesn't have a huge impact. Just curious if you're seeing that in the macro?

Yes, we saw that, I would say, Q4, Q1. Obviously drop-ship. We follow the general patterns of retail. The drop-ship transaction volume was down as e-commerce growth either drastically slowed or actually declined and brick-and-mortar picked up pace. So we did see that, and we're seeing more activity in just the brick-and-mortar. But again, the great thing for us being truly omnichannel is it's just going one place instead of another at SPS Commerce, whereas I think when you look at the competitive landscape, that is our -- one of our competitive advantages is that we are one of the -- we are really what we believe is the true omnichannel solution for suppliers and retailers.

Great. Appreciate for taking the questions. Congrats in the quarter.

The next question is from Joe Vruwink with Baird. Please go ahead.

Hi, everyone. Just to go back to the Gym+Coffee customer examples. So it sounds like they were upgrading their supply chain and logistics systems and then you were brought in kind of as part of this process. Is it possible for you to kind of separate out the activity you see from ERP upgrades and the activity you see from all the adjacent supply chain investment areas like warehouse or transportation? And is it the latter area, is that still representing an important feeder for your business?

So I'd say there's a lot of different feeders for our solution. If a supplier switches ERP, they are in their current environment, integrating from their ERP to the different retailers. So by definition, they're going to have to make either a massive investment into their current solution or buy a new solution, which if you bought a 20-year-old solution that's on-prem and now you're going to a NetSuite or D365 from Microsoft, a hosted solution, you're most likely not to stay with a software. So those are -- that is -- that continues to be very strong. And the challenges suppliers have with our old solutions are real. They just can't meet the business needs that they have in today's omnichannel world. As far as warehouse management systems, et cetera, that tends to be more on the retail side. So if a retailer goes out and purchases Manhattan and one of the reasons they want to do that is they really want to automate their distribution center. In order to do that, they do need to have their hundreds or thousands of suppliers change their behaviors. They need to start receiving an advanced ship notice with a corresponding bar code label. They need different information from the suppliers. So that's where we come in and run in an enablement campaign program as it's a big change management for all of their suppliers. And that's another way -- another change event -- that is very positive for SPS Commerce. Essentially, anything that's a change in their environment, a change in that we do business is going to be a positive for us.

Okay. That's great. And then I get it in time to have only Gym+Coffee questions, but another one. So they're a Shopify merchant. And I just want to ask you've added quite a few new customers over the last couple of years. And I think the Shopify platform is an example that there's a lot of potential logos out there and maybe those logos initially land and their smaller customers for you yet over the past couple of years, your wallet numbers have also kind of steadily tracked higher. So I guess the question is, is there anything about this newer cohort of customers that you've onboarded since 2020 that would lead you to believe there are any less kind of rich in economics or potential than you would have spoken about pre-2020?

No. I would tell you, we've done this for 20 years now is onboarded suppliers that sometimes it's their first retailer that they're needing to do EDI from. And those tend to have really nice upsells over the first 30 months. Now obviously, if that retailer stops doing business with them before we expand it, we also have higher churn rate in those customers because if they only use us with one retailer, we're going to lose that customer. But those continue to be really strong. It's supplier by supplier, but as they grow their business, we can grow right with them. And some of those are what we call sales-driven activities, and some of them are just customer-driven activities. They're landing new retailers that are requiring them to integrate to them and that becomes an automatic upsell for us.

Okay, great. I'll leave it there. Thank you.

The next question is from Jeff Van Rhee with Craig-Hallum. Please go ahead.

Great, thanks for taking the question, hey, Kim, Archie. So a couple for me. Archie, maybe just to follow on somewhat similar to the prior question, but I'm just always interested in the cohort. So as you're layering in the new cohort of customers this quarter, last quarter, any observations about the size of suppliers that are coming into those new cohorts or the solutions they were on that you're displacing? Any observations there?

Jeff, it hasn't changed drastically. It's really -- remember that our average supplier pays $10,000 a year, but that's somewhat misleading. There's a bell curve around that $10,000 and then we have a significant number of customers that pay us less than $3,000 and then we have several thousand customers that pay us $20,000 up to multiple hundreds of thousands of dollars. So what they're displacing, it tends to be more about what type of customer they are. In the smaller cohort, that's less than $3,000, quite often, we're displacing literally email or Fax. They've just never done this before. They're working with smaller retailers that aren't requiring EDI. And so this is the first time they're going to start doing that. I think on the midsize and larger size, it tends to be either some type of change event, a ERP switch. They're becoming acquisitive and they can't keep up or they're just -- their business is growing or changing so quickly that they realize they cannot keep up with the business demands with their legacy software. So depending on the cohort or depending on the type of customer, it really does vary.

Is there anything as you look at the remaining TAM, I guess two questions. One is you're thinking about the peak ARPU per customer changed at all? And then two, of the remaining TAM, is there any observation about just the big pockets that have been hold out to going to the cloud that you would make?

While we continue to just think there's more and more opportunity out there as we go every year it seems like you wake up and you feel like you've got a smaller percentage of the TAM that you started with, even though you had good growth. So I continue to think we have an incredible opportunity, not only in our existing product line, but additional product lines. And again, very often, when we're doing community enablement campaigns, we're essentially taking white space, a space -- a group of suppliers that we're using e-mails and doing nothing and turning it into total addressable market. So that is one of the things our machine does. I think the other thing is that we have hundreds of thousands of trading partner relationships, but they're not always as deep as we'd like. They're not doing all the documents. They're not doing assortment, analytics and EDI. So continue to be -- have significant opportunity ahead of us.

Okay, I'll leave it there. Thanks guys.

The next question is from Mark Schappel with Loop Capital. Please go ahead.

Hi, thank you for taking my questions. Archie, a couple of quarters ago, you introduced your carrier service solution. And I was wondering if you could just give us a sense of what you're seeing in terms of pipeline for the relatively new product? And maybe when you think the solution may be material to the P&L?

Yes, so we continue to get traction there. It is a smaller add-on products. So it's not going to be -- it's never going to be 10% of revenue. I mean for a given customer that does this, this is a nice add-on that can add five, 10 points of value. It's an example of a type of add-on. It makes the customer makes it more challenging for that supplier to leave SPS Commerce. The more things they rely on SPS Commerce for the harder it is for us to displace -- be displaced. So we continue to like the traction there. It's a selling advantage, it is a revenue advantage. So we continue to make progress.

Great. And then on your analytics solution, maybe you could just provide a little bit of color what you're seeing in the marketplace with that? I think you said earlier, it was growing at double-digits?

Yes, for the year, we'll be -- we believe we'll be at that 10% mark. So compared to where we were 12, 18 months ago is really encouraging. We continue to be extremely optimistic. See some signs in the marketplace. It's just really hard to know when it can accelerate from where it currently is. But the usage is fantastic when we're selling it, and we're seeing it on that side. So more and more retailers are sharing data. So I feel pretty optimistic but cautiously optimistic is what I'd say.

Great, thank you.

[Operator Instructions] The next question is from Nehal Chokshi with Northland Capital Markets. Please go ahead.

Yes, thank you for taking my call. It looks like excluding the $1.7 million contribution from interest rate for Q4 that you previously highlighted -- it looks like Q4 guidance is a few $100,000 less than prior implied Q4 guidance. A, is that correct? And then B, why is that?

Sure. So when you look at the guidance and you compare it to 90 days ago when you adjust for the acquisition, it's pretty similar -- within a couple of hundred thousand to what we had thought about 90 days ago. So for the most part, not a lot of change from 90 days ago, but our guidance does take into account. Our view of what we see as it relates to the retail space, community enablement activities and opportunities in Q4 going into 2023. So pretty similar to 90 days ago once you adjust for the acquisition.

Okay, great. And then 900 incremental customers in the quarter, correct?

When you look at the customer number in the quarter, do keep in mind that there is an acquisition of GCommerce in there of about 500. So that number is accurate that you stated, but part of that is from an acquisition of GCommerce, which was approximately 500 customers added.

Right. So excluding the GCommerce, then it's 400 customers acquired organically, which I think is a bit lower in the year, a lot of -- quite a bit lower than the year-ago period and what you have been trending at. What was the driver of that?

Sure. So you might keep in mind comments we've made about last year, where last year was a record high for the net number of customers that we were adding and seeing relative to a lot of the demand in omni-channel. So the comments that we've consistently made is 2021, an outlier in a positive way, 2022. In general, you'd expect that net customer adds to be similar or slightly higher than pre-pandemic levels. If you look at this year, Q3 and Q1 pretty darn similar. Q2 was actually a bit of an outlier and higher than typical or higher than we would have expected, and that had to do with the timing of community activity specific in the quarter.

Got it. Okay. Very good. And did you give about the ARR recurring revenue customer?

Yes. That information, it's about, call it -- about 10,900.

And then final question is that your rate of share repurchases has consistently been about $15 million per quarter during this calendar year? That's a big uptick from prior calendar year. Is that intentional? Or is that just something else going on?

So as it relates to capital allocation, what you've seen the company do as it relates to using that cash because we are cash flow positive. We have the opportunity to buy back stock. We also have the opportunity to put capital in the form of M&A. You've seen the company do both of those over the years, and both of those remain opportunities for us from a capital allocation perspective. As far as how much or when those may happen, we provide at the end of every quarter what we did within the quarter. So you have that information. But outside of that, you should think of it as there's basically two opportunities that the company has to use that cash in the form of M&A and stock buyback.

Okay, thank you.

This concludes our question-and-answer session, and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.