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Operator: Good day, and welcome to the SPS Commerce Q4 2022 Earnings Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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.

Irmina Blaszczyk: Thank you, Sarah. Good afternoon and — everyone, and thank you for joining us on SPS Commerce fourth quarter and fiscal year 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 at our website at spscommerce.com and at the SEC’s website sec.gov. In addition, we are providing a historical datasheet 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 the comparable GAAP measures.

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

Archie Black: Thanks, Irmina, and welcome, everyone. 2022 was another strong year for SPS Commerce. The ongoing transition to omnichannel and retail and increasing complexity in supply chain management continue to fuel the need for automation. Q4 of 2022 represented our 88 consecutive quarter of revenue growth, driven by our network effect, community go-to-market approach, retail expertise and execution, all of which culminate an excellent customer experience and underscore SPS Commerce’s competitive differentiation. For the full year 2022, revenue grew 17% to $450.9 million. Recurring revenue grew 18%, led by fulfillment growth of 19% and analytics, which grew 10%. In 2022, the number of recurring revenue customers reached 42,300.

SPS Commerce offer solutions to address supply chain challenges and make trading partner relationships more collaborative and profitable. For some of our customers, gaining EDI or API capability enables them 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. Other customers leverage our full suite of solutions, which are designed to simplify omnichannel fulfillment for brands and suppliers of all sizes and across many industries. We help those customers achieve scale, supply chain efficiency and international expansion. Gym+Coffee, one of Ireland’s largest and fastest growing active and athleisure brands, used EDI and automation to synchronize inventory across all sales channels and prioritized order fulfillment based on warehouse locations to offer fast and efficient delivery to a global customer base.

Ooni, a pizza oven company, expanded operations beyond U.K., and now partners with SPS across North America and Europe. Daikin Industries, the world’s number one indoor comfort solutions company and the largest HVAC manufacturer, has over 90 production sites worldwide. To support their growth plan, Daikin partnered with SPS to drive EDI compliance across all their suppliers. PetCulture, a joint venture between Woolworths and PetSure in Australia, achieved 85% EDI compliance with SPS Commerce onboarding program, and set up a process to bring on new vendors within 48 hours. To help grocers stay competitive and meet changing consumer shopping expectations, many are standardizing how they exchange information across supply chain, and EDI remains one of the most common protocols.

Most large retailers require EDI compliance, and for suppliers like Twin Cups, automation was necessary to scale and remain lean while signing new customers such as Safeway and Target. Peavey Industries, a leading farm and ranch supply retailer in Canada, work closely with SPS to automate nearly 93% of the retailer’s purchase order volume through EDI. Peavey also leverages SPS’ analytics solution, sharing point of sale data with vendors for greater visibility into its inventory position to drive sales performance and develop vendor partnerships that support its ongoing success. Global companies such as Crocs are leveraging sell-through data across all their sales channels to help drive visibility, profitability and predictability to mitigate inventory pressure across their supply chain.

Lastly, SPS continually strives to help trading partners work better together as we expand our network and build on our leadership position. In 2022, we acquired GCommerce, a software solution provider known for its expertise in automotive aftermarket industry. We also acquired InterTrade Systems to strengthen our leadership across apparel and general merchandise markets. Over the years, SPS has consistently executed on our mission to connect all retail trading partners through the easiest-to-join end use network. Since 2017, we realigned our sales force, increased our focus on digital marketing and launched a new fulfillment solution and add-on products. We also remain laser-focused on improving customer experience, as we significantly enhanced full-service omnichannel supply chain solutions and system integrations through internal development and targeted acquisitions.

These strategic investments are consistent with our core value, win today, win tomorrow, which helped us build the world’s largest cloud retail network and positions us for continued success. With that, I’ll turn it over to Kim to discuss our financial results.

Kim Nelson: Thanks, Archie. We had a great fourth quarter. Revenue for the quarter was $122 million, a 19% increase over Q4 of last year and represented our 88th consecutive quarter of revenue growth. Recurring revenue this quarter grew 20% year-over-year. Adjusted EBITDA increased 26% in the quarter to $35 million. For the year, revenue was $450.9 million, a 17% increase, and recurring revenue grew 18%. The total number of recurring revenue customers increased 13% year-over-year to approximately 42,300, and wallet share increased 4% to 10,500. As a reminder, in July, we announced an acquisition of GCommerce and the addition of approximately 500 customers to our network. And in October, we announced an acquisition of InterTrade and the addition of approximately 2,500 customers.

Adjusted EBITDA grew 24% to $132.3 million. We ended the year with total cash and investments of $214 million and repurchased $43.2 million of SPS shares. Now turning to guidance. For the first quarter of 2023, we expect revenue to be in the range of $123.3 million to $124.3 million. For the full year, we expect revenue to be in the range of $523 million to $526 million, representing approximately 16% to 17% growth over 2022. For the first quarter of 2023, we expect adjusted EBITDA to be in the range of $35 million to $35.7 million. For the full year, we expect adjusted EBITDA to be in the range of $152.5 million to $154.5 million, which is higher than the $151 million to $153 million previously communicated on the Q3 2022 earnings conference call, and represents 15% to 17% growth over 2022.

For Q1 2023, we expect fully diluted earnings share to be in the range of $0.26 to $0.27, with fully diluted weighted average shares outstanding of approximately 37.2 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.56 to $0.57, with stock-based compensation expense of approximately $12 million, depreciation expense of approximately $4.8 million and amortization expense of approximately $3.9 million. For the full year 2023, we expect fully diluted earnings per share to be in the range of $1.49 to $1.55. We expect fully diluted weighted average shares outstanding of approximately 37.3 million shares. We expect non-GAAP diluted earnings per share to be in the range of $2.63 to $2.69, with stock-based compensation expense of approximately $45 million.

We expect depreciation expense of approximately $19.8 million, and we expect amortization expense for the year to be approximately $15.6 million. For the year, you should model approximately 30% effective tax rate calculated on GAAP pre-tax net earnings. Beyond 2023, we maintain our annual revenue growth expectations of 15% or greater, and 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 2022 results. We continue to deliver profitable growth and invest in the future to capitalize on existing and new opportunities across our expanding addressable market.

And with that, I’d like to open the call for questions.

Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from Matt Pfau with William Blair. Please go ahead.

Matt Pfau: Yes, great. Thanks for taking my question, and congrats on the strong end to the year. Wanted to start off on analytics and the 10% growth rate that you saw in ’22. I believe it was around 10% in ’21 as well. How are you thinking about analytics for ’23? Is there potential to see acceleration? And what would drive that?

Kim Nelson: Sure, Matt. When we think about analytics for 2022, you’re correct, it was approximately 10%, similar to the growth rate from the prior year. When we think about the next year or this current year 2023, you should expect a pretty similar — around a similar growth rate. Longer-term, we do think that analytics can grow at a rate similar to fulfillment. But when we think about this year of 2023, probably more similar in a growth rate of what we experienced in 2022.

Matt Pfau: Got it. And Kim, on the margin guidance, I think the EBITDA margin guidance for ’23 is essentially flat with ’22. What should we think about that’s driving that to be flat year-over-year? Thanks.

Kim Nelson: Sure. When you think it’s really being driven because of the strong EBITDA dollars in 2022. So, in 2022, our EBITDA growth was about 24% year-over-year. Keep in mind, remember we’ve given a range of sort of 15% to 25% on an annual basis. So, you saw a lot more of that in 2022. The real driver for that had to do with timing of hires, particularly in the customer success and sales area. We’re a little bit lighter on that in the first part of 2022 and made great progress in the latter part of the year. So, in 2023, you have that full year of expense associated with all those resources that we added. If you were to look at ’22 and ’23 and sort of add it together, you’re going to get more of a normalized EBITDA growth rate, probably more in the midpoint, but that’s why you saw a lot more the higher end in ’22 and closer to the lower end — our expectation is sort of that 15% to 17% in 2023.

Matt Pfau: Perfect. Thank you. Appreciate it.

Operator: Our next question comes from Scott Berg with Needham. Please go ahead.

Scott Berg: Hi, Archie and Kim. Congrats on the nice quarter and thanks for taking my questions. I guess I’ll ask the obligatory macro question because it’s on everyone’s mind, but I’ll ask you with a spin. We’ve seen a couple of software companies report over the last week or two that have a focus on smaller kind of SMB-sized customers. And knowing that still comprises a decent chunk of your customer segments, are you seeing any pressure there for spending on software, because we’re starting to see that at least pop up in other SMB-focused vendors?

Archie Black: Yes. Thanks, Scott. Typically, we’re not. And part of the reason is because of the level of spend. You’re at a very small level of spend, and especially on the fulfillment product where if you’re a small vendor and you are going to do business with Costco or Loblaws or somebody, you’ve worked really hard to get that relationship. And it’s just part of cost of doing business. So, I think there’s two things: one, it’s more or less mandatory; and two, it is typically fairly small fee, $100, $200 a month.

Scott Berg: Got it. Helpful. And then, Kim, I just wanted you to double check my math with inorganic customer contributions this quarter from the acquisition. It looks like there’s roughly 250 that were added organically, if my math is correct. And then, wanted to get your all thoughts on customer additions this year. They spiked in ’20 and ’21 for several reasons. It looks like they normalized a little bit, yet you’re still driving that 15%-plus subscription revenue growth target that you are talking about, which to me suggests you’re either selling more products or you’re having more success selling upmarket. How do we think about that kind of (ph) mix or opportunity mix to trend maybe in the next year or two relative to what you’ve seen recently?

Kim Nelson: Sure. So, you are correct, we did see in (ph) sort of heightened net customer adds and that was something that we said was sort of a high watermark, not something that we were anticipating going forward. 2022 was back a bit more to sort of, if you want to call it, pre-pandemic levels, maybe a little bit higher all in, but pretty closer to that. And that’s really maybe, I guess, what you could think about as sort of your future view of that. Obviously, we do have some acquisitions and our stated goal of revenue — top-line revenue growth of 15% or greater is an all-in number, right? So that does also include acquisitions. Specific to Q4, do keep in mind, that tends to be a seasonally lower net customer add quarter.

So, if you adjust for the acquisitions, you’ll see that, that number was somewhat in line with prior Q4’s adjusted for acquisitions. We do see, however, a continued trend that the longer a customer is with us, we do have the opportunity to get more revenue from that customer really based on how they’re using us. So, typically, they’re going to use us for more connections, potentially for additional products and services. So, once we acquire that customer typically in the future, now that future may be out a year or two, but it will translate into more additional dollars per customer, and that side of the equation would show up on that wallet share or that ARPU number. It’s also why we really do think both that customer adds as well as that wallet share, both of them combined will continue to be really solid and meaningful contributors to that overall 15% stated growth number.

Scott Berg: Great. That’s all I have. Thanks for answering my questions, and congrats on the good quarter.

Operator: Our next question comes from Joe Vruwink with Baird. Please go ahead.

Joe Vruwink: Great. Hi, everyone. I guess, Archie, in the past, you’ve discussed change events at retailers being good for you, good for lead generation. Are you seeing any changes in the composition of those change events? And I guess, where I’m going with the question, I think, there’s been pretty high activity in ERP upgrading, new supply chain systems, those are good for you. Do you think retailers have maybe neglected their brick-and-mortar footprint a bit over recent years, and so, as they circle back, there’s actually one more channel that you can now address?

Archie Black: I think you’re exactly spot on. I think the reality is that the retailers really made sure that they met the demands and expectations of the consumer during the pandemic. And now they have a lot of work to now make that profitable. I think that with — really it was an ecom and a brick-and-mortar game four, five years ago, and now it truly is much more of an omnichannel game. I know that’s a buzzword. But I think if a retailer really wants to operate in a true omnichannel way, they have a lot of work to continue to make their business more efficient.

Joe Vruwink: Okay. That’s great. And then, Tim, one for you. Just as I think about the EBITDA guidance, so is the right interpretation here that the range for 2023, I think, that moved higher by pretty much the overage in your performance here in 4Q exiting the year. So, is the right read that the base just shifted up a bit? And all those things you still intend to invest in and layer on, really no changes here, so we’re just kind of seeing the baseline effects into the forecast?

Kim Nelson: That would be correct. We have not made changes in our views of investments that we think are appropriate for both the short-term as well as the long-term in our sort of win today, win tomorrow value that we hold very dear to us. But we were in a position based on sort of how we exited the year and based on our expectations for 2023 to be able to take up the guidance for EBITDA about $1.5 million on the low end and high end versus what we said 90 days ago.

Joe Vruwink: Okay, great. I’ll leave it there. Thank you.

Operator: Our next question comes from Justin Lee with Craig-Hallum. Please go ahead.

Justin Lee: Great. Thanks. Hey, guys, another real nice quarter. Just a couple from me. Maybe on — as it relates to the new suppliers that you’re signing, any variance in the types of new suppliers that are coming aboard versus historical, namely the size of the suppliers, the platforms they are on, the pain points, (ph)? Just wondering if there’s any variance in terms of the new adds outside of obviously the acquired customers?

Archie Black: Yes, not a significant change. Obviously, as we moved to omnichannel, there’s more and more of that activity. Interesting in our — when we’re going after new customers, we have customers that are around our average. We have customers that are well below a few thousand dollars a year, and then we have large customers, and we continue to see success in all three of those types of customers. So, it tends to be across the board and pretty diverse actually.

Justin Lee: Got it. And, Kim, on the net adds number, curious as you reflect back on ’22, the gross churn numbers, just what you saw and if there’s any variance? Just maybe a refresh on what you typically see in churn and if you saw anything different?

Kim Nelson: Sure, we really did not see anything different. Annualized churn is about 12% and that’s — ’22 was at that 12%, similar to historical.

Justin Lee: Yes. Okay. And then, just last one and I’ll jump off the — obviously, GCommerce, InterTrade, you referenced the two. Any observations on them either particularly standing out as well ahead of expectations? Are they both meeting expectations? How would you characterize it?

Archie Black: Yes, I would say a couple of things. One, they’re both meeting expectations. I think we’ve had very good reaction from the customer standpoint. And then, I think the talent from both of those teams is very, very strong. And so, thrilled to have them part of the team.

Justin Lee: Yeah, good stuff. Okay, guys. Thanks.

Operator: Our next question comes from Parker Lane with Stifel. Please go ahead.

Matthew Kikkert: Hi. This is Matthew Kikkert on for Parker. Thanks a lot for taking my questions, and congrats on the quarter. To start, I know a while back you launched the fulfillment solution on the Oracle Cloud Marketplace. First, how has the traction in that partnership progressed? And secondly, are you looking to expand that Oracle partnership at all or expand other partnerships to gain further market awareness?

Archie Black: Yes. Well, first off, the channel part of our business is a very robust and a very important part of our business. And just the focus area is on Oracle, NetSuite, SAP, Sage, the Microsoft space and the Intuit space. Those are all really important parts. And so, we continue to do a couple of things. One, make sure we have people in those fields, making sure we’re aware of leads and people are aware of our capabilities, but also making sure that our capabilities are the best in the marketplace, that last mile of integration. Obviously, we can — we have the best solution. We have — we, obviously, have the biggest network. But I think one thing that’s very different from five years ago is we clearly back-end system — integration into whether it’s Oracle or NetSuite or SAP, we are the best far and away at integrating back end of the back-end system.

So, we will continue to drive that forward and continue to invest to make our solutions stand out in the marketplace.

Matthew Kikkert: Okay. That’s great to hear. And then, secondly, you talked a little bit on the call about kind of implied EBITDA margins stand flat into 2023. But as we move forward beyond that moving toward that 35% EBITDA margin target, are there any levers that you have in mind anticipating on pulling back on in order to get that additional EBITDA leverage?

Kim Nelson: Sure. When we think about long-term 35%, there is multiple components there. When you look at relative to where we currently are, we would expect to see more improvement in gross margin as well as in G&A. Sales and marketing, there could be a little bit, but nothing too large. We’ve already seen a lot of efficiencies gain there. And then, on the R&D side, we do think that range of, if you want to call it, sort of 9% to 11%, 10% to 12%, somewhere in there is sort of an appropriate range as a percent of revenue. So, in the future, you would expect to see more come from sort of the gross margin or the G&A side of the world. Specific to ’23, because we’re — the EBITDA expectation is sort of that 15% to 17% and our revenue expectation is 16% to 17%, that’s why you’re not seeing an improvement in margin in ’23.

’22 you certainly got, obviously — you’ve seen margin expansion in prior years and there will be years in the future where you would expect to see that as well on our path to 35% overall adjusted EBITDA margin.

Matthew Kikkert: Okay. That’s all from me. Thank you very much.

Operator: Our next question comes from Mark Schappel with Loop Capital. Please go ahead.

Mark Schappel: Hi. Thank you for taking my question and nice job on the quarter and the year. Archie, starting with you, I was wondering if you’d just walk us through what you believe are your or the firm’s top two or three priorities in the coming year?

Archie Black: Yes. First off, I think investing in add-on products through acquisitions and building to be able to expand the market opportunity for us with our 42,000 recurring revenue suppliers. And then, obviously, we’ll get one of the priorities always is to continue to expand the network, that is our competitive advantage. And then, I think some of the things as we look long term to make sure that we can meet our margin expansion, continue to invest in, what I would consider, our back-end integrations to make the processes for our support and implementation teams more efficient.

Mark Schappel: Okay, great. Thanks. And then, on the hiring side, Kim, I was wondering if you could just provide a little color on where the company stands with respect to hiring this year. Maybe just talk a little bit about where — what parts of the business you’ll be hiring in and maybe what parts you won’t be?

Kim Nelson: Sure. So, we exited 2022 in — being in a great position where we’re able to hire a lot of talent across the board, but from a quantity, customer success would be the largest. We certainly did add also in the sales space, technology and other areas, but customer success being the largest. When we think about 2023, we’re going to continue to invest across the organization and across different areas in the organization, as we see that is appropriate not only to meet our existing customers’ needs, but also the future opportunities that we see. So, in ’22, we specifically highlighted customer success was an area where we know we’re a little bit behind and we needed to sort of catch up on that hiring, great that we’re able to do it.

’23 will be more about, if you want to call it, a typical year. If there is such a thing as a typical year where we will be adding resources throughout the organization, but not maybe at that large part in one particular area of the company.

Mark Schappel: Great. Thank you.

Operator: This concludes our question-and-answer session. And our conference is also now concluded. Thank you for attending today’s presentation. You may now disconnect.