M&A announcement

Dec 17, 2020

Press release

Ladies and gentlemen, thank you for standing by, and welcome to the SPS Commerce conference call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Irmina Blaszczyk. Thank you. Please go ahead, ma'am. Good morning, everyone, and thank you for joining us on today's call to discuss SPS Commerce acquisition of DataMasons. Before turning the call over to management, I'll read our safe harbor statement. We will make certain statements today, including with respect to the acquisition of DataMasons, expected financial results, go-to-market strategy, and efforts designed to increase traction and penetration with retailers and other customers. These statements are forward-looking. There are 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, 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 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. During our call today, we will discuss adjusted EBITDA financial measures. 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 adjusted EBITDA measures. With that, I will turn the call over to Kim. Thanks, Irmina, and welcome everyone. Thank you for joining us on short notice. We're excited to announce the acquisition of DataMasons, which further expands SPS's leadership position in fulfillment system automation for Microsoft. SPS has acquired all equity interests in DataMasons for approximately $100 million in cash. The transaction closed yesterday and will be reflected on our 2020 financial statements. Given the timing of the transaction, we expect DataMasons to have a nominal impact to our fourth quarter and full year 2020 financial results. For modeling purposes, in fiscal year 2021, we expect the acquisition will add approximately $20 million in revenue and approximately $3 million in adjusted EBITDA. This includes the estimated impact of approximately $2 million of the deferred revenue adjustment related to purchase accounting. We also expect the acquisition to contribute approximately $5 million to adjusted EBITDA in fiscal year 2022. We expect customer count to increase by approximately 450, and our combined wallet share to increase by approximately $175. In addition, DataMasons' recurring revenue mix is approximately 50%. As a result, we expect the consolidated SPS recurring revenue to be in the low 90s% range. Lastly, we will have an increase in amortization of intangibles. However, that amount won't be finalized until the purchase accounting is complete. We will provide those details when we issue our fourth quarter and 2020 financial results and provide full year 2021 guidance for the combined company in February next year. With that, I'll turn it over to Archie to discuss the strategic elements of the deal. Thanks, Kim. We're excited to announce the acquisition of DataMasons, a provider of EDI solutions to hundreds of consumer goods, industrial, and distribution businesses and resellers. Together, SPS Commerce and DataMasons offer unmatched trading partner and system expertise for customers using Microsoft solutions. Combined, we have numerous partnerships in the Microsoft community that will extend SPS Commerce's leadership in this market. We have worked closely with DataMasons since 2011, and we share a vision of providing the easiest to use, most automated EDI solutions that help suppliers optimize efficiency when transacting with their trading partners. As part of the SPS Commerce community, DataMasons customers will now have access to the SPS Commerce global retail network, which includes more than 90,000 trading partners in over 80 countries and expanded capabilities for connecting with global supply chain partners. We would like to welcome DataMasons employees and customers to the SPS Commerce community. We believe we have a large global opportunity in front of us, and this acquisition further extends the power of our retail community. With that, I'd like to open the call to questions. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Scott Berg from Needham. Your line is now open. Hi, Archie and Kim, good morning, and congrats on the acquisition. First question is, Archie, on the fit of the technology, I had a chance to review the company's website this morning, and it doesn't look like it's a straight up EDI fulfillment technology that you would typically buy and maybe migrate those customers onto your platform. Can you help us understand how the technology is probably a little bit more complementary than just the typical customer variety you guys have typically went after? Thanks, Scott. I think there's a couple things. One, they were a straight competitor in the fact that you could buy DataMasons, and they would build out to your trading partners one at a time, not in the same manner. Then second, we were a partner where they used the systems automation where you'd be able to connect the retail network of SPS Commerce back into Microsoft systems. The primary system that we're really excited about is D365, which is moving to the cloud, and we're able to draft off of the momentum from Microsoft to be able to move many of the on-prem customers into a cloud-based solution as they move to D365. I would say it's both complementary and competitive, and as those customers move to a cloud-based solution, I think we'll be able to take that one-time revenue that they have and convert that into recurring revenue. Got it. That 50-50 revenue split that Kim mentioned on the services side, it doesn't sound like that mix split will be kind of continuing in the future as those customers move. The 50-50 split, Scott, is based on what it currently is, and you are correct. Over time, we expect that more of that percentage will be recurring revenue. Great. Helpful. Last question from me, and I'll turn it over. Of the 450 customers, should we assume that those are all new customers or were there examples of that complimentary offering where maybe there's some overlap with those 450? Thank you. The 450 is the net new. We did have some overlap with complimentary customers, but the 450 is what would be a net new customer to SPS. Great. Thanks, congrats again on the acquisition. Thank you. Our next question comes from the line of Jason Celino from KeyBanc. Your line is now open. Great. Thank you. Just a couple from me. I think by the numbers, this is the largest acquisition in the company's history. Should we just view this as a natural progression of M&A strategy? Yeah, I think that's right. We're in a position where, although this is the largest acquisition as both a percentage of revenue of the company and based on market cap, it is not the largest, but as we continue to grow. Having said that, as we've stated in the past, most of our acquisition opportunities are this size or smaller. We'll continue to be on the look for acquisition opportunities, but my guess is that the vast majority will be this size or smaller just because of the landscape of opportunities, not because of our willingness. Got it. Okay. I know the growth profile will likely change going forward, but are you able to discuss maybe how fast DataMasons was growing as a standalone company? Sure. They would have similar growth rates to our business. You can think about we're sort of a 10%-plus revenue growth band, similar dynamics in their growth rate. Okay, great. I will get back in queue. Thank you. Thank you. Our next question comes from the line of Mark Chappell from Benchmark. Your line is now open. Hi, thank you for taking my questions. Congratulations on the deal. Most of my questions have been answered, but just one. How much professional services revenue did they have as a percentage of total sales? Sure. When you look at their mix of business, about half is more one-time in nature, and we would consider professional services one-time in nature, and about half of it's that recurring revenue. The one-time revenue is going to be a mix of when they're getting a customer up and running to ongoing requests that may come in from that customer in more of their on-prem model. The split's about 50% one-time, 50% recurring. Okay, thank you. Then employees, how many employees do they have? They have about 150 employees. I assume most of them are coming on board with SPS? Yes. Our plan is we think the combination of the two companies put the consolidated company in even a better position. Yes, the employees are part of the transaction. We're very excited to welcome them all to the SPS business. Great, thank you. That's all for me. Thank you. Our next question comes from the line of Joe Vruwink from Baird. Your line is now open. Great. How are you, Keith and Kim? Just on the last question, are there things about adding DataMasons that enables SPS to maybe change some of the investments you had alluded to on the last quarterly call into 2021? Specifically thinking if you add 150 new colleagues, does that change the kind of organic investment intent on the SPS side of things? It actually doesn't. The primary rationale of this deal is that combined, we think we can sell more, and we think we can have a better customer service experience. That's really the rationale of the deal. In the non-Microsoft spaces, it's business as usual. In the Microsoft part of our business, it'll be an acceleration. This is not a cost synergy play. This is really a growth plus customer experience story. Okay, that's helpful. I was hoping you could maybe walk through some of the differences between your two businesses. Just surfing their website this morning, there's some allusion to growing revenues by 130% in 2019, record rates of growth. Client retention seems to be very high, and as you alluded to, Kim, the wallet share is quite a bit bigger than SPS. There would seem to be some differences there that I'm just hoping you can walk through. Yeah. I don't know about the 130% growth. I know they didn't grow 130% this year, that must be some segment of some other segment. It must be some small number. Their growth profile is very similar to ours. Again, they had a competitive product where you could build out the network, which we have competitors out there. Also, I think where the synergy really comes in is they have this strong knowledge and technology to be able to integrate to Microsoft. In particular, what we're most interested in is the D365 space. Think of this as very much as similar to a large deal we did with SWK and MAPADOC in late 2019. Very similar partner, but they did have a competitive solution as well. We're gaining customers, and we're also gaining a very talented team at DataMasons. Okay. Great. Thank you. Thank you. Our next question comes from the line of Nehal Chokshi from Northland Capital. Your line is now open. Yeah, thank you. Looks like a nice tuck-in acquisition. Synergies on all levels. Kim, you mentioned that greater wallet share. Just want to be clear, is it actually greater wallet share, or is it larger customers that DataMasons is bringing? Sure. We will be adding approximately 450 customers. That's how you would model the change on the customer. As it relates to the wallet share, the combined wallet share would increase by about 175. The reason why the wallet share increases, to your point, is they tend to have larger customers than our average customer size. Remember that underneath the covers of our customers, we do have a segment of customers that are this size or larger. This isn't a new customer segment. We just, underneath the covers, have very small customers, medium customers, and large customers. They tend to have more just the medium and then some large. Got it. Okay, that's really helpful. What % of SPS customers before acquisition were exclusively using Microsoft solutions? We have a significant number of customers using Microsoft solutions. I don't know the exact number because we have two types of customers, those that are integrated back into Microsoft and then those that are not in just our straight fulfillment product without integration. My guess is a pretty significant number. I guess another way to think about it is like, what % of the market does the Microsoft-only solution represent? It's one of many, many different solutions. For us, it's not the largest segment, but I think it's just knowing what Microsoft's done, especially moving things to the cloud. I think there's an opportunity in the Microsoft space because of their movement to the cloud, and they're doing so aggressively that that's a touch point to be able to move them to a complete SaaS model. That's why we're excited about it, and this is one of our five focus areas in channel sales. When you look at our channel sales group in particular, they have the SAP market, the Oracle market, the NetSuite market, and I know Oracle owns NetSuite, but they really are different markets. The Sage market, and then the Microsoft. Those are our five focus areas. This has always been one of our five focus areas, we think it's a pretty meaningful opportunity. I see. Okay. Last question is that can you talk about the genesis of the acquisition when this talk started in sincerity, what was the catalyst for them for moving forward? As you mentioned, you guys have been partners since 2011. Yeah. I mean, we've had a long-term relationship with them. I've known Glenn McPeak, one of the two founders, for I guess, over a decade. We've talked over the years, now seemed to be a good time to pull it together. One of the things is on these acquisitions, it's always important because the seller, they've got a very strong, solid business, weren't in a position where they need to sell, you really need to find the timing where the founders are ready to sell. I think this was the right time for a lot of different reasons. It's the right time for us as well, especially as Microsoft moves to the cloud. I think the timing just makes this almost ideal for us. Great. Thank you. Thank you. Our next question comes in the line of Koji Ikeda from Oppenheimer. Your line is now open. Great. Thank you, guys. Congrats on the acquisition. Just a couple questions from me. First question, it sounds like a lot of the focus of the acquisition was for technology and going after this Microsoft D365 opportunity. The first question is, what was it about DataMasons, maybe the differentiation on the technology that made the company attractive to acquire. The second question is, a lot of focus on Microsoft D365. Why is going after the D365 opportunity more strategically here going forward, why is that important for SPS Commerce? Well, I think a couple things. One, they have been very focused on the Microsoft solution for 15 years, and focus that's given them great technology. We think of this as people, process, and technology. They also have an extremely strong team and a strong culture. I think that was really important, and I think we've always seen the Microsoft space as strategic as we do Oracle, SAP, Sage, and NetSuite. We have very early on built an extremely strong solution for NetSuite, which allows us to be in that space very strong. We had built a solution, we bought some technology a few years back in EDIAdmin to help us in the Oracle and SAP space. About a year and a half ago, we bought SWK MAPADOC that really helped us further penetrate into the Sage space, and I think this is the same here. It's just an acceleration of our product roadmap. There's nothing new. They do have name recognition and also relationships and obviously a meaningful amount of customers. I think what's important is when we look at it, the customers that are paying more the one-time fees, we're going to continue to service those customers and do whatever they want to do and service them in the way they've become accustomed to. As they move their on-prem solution to a SaaS model at Microsoft, they're naturally going to want to move to a SaaS model for the EDI component. That's why in particular, this is a little bit of a unique timing. That wasn't the case four years ago. I think if we look forward in four years, many of those customers will have moved. Got it, Archie. Super helpful. Thank you. Just a question on the net new 450 customers you guys are adding to your platform. On the geographic reach of those customers, is it right to think that they're mostly U.S., or is there an international component to those 450 net new customers? Sure. The majority are North American customers. They do have small international presence. The majority of it is North America. Got it. Thanks, Kim. Last question for me, apologies if you guys went over this already. On the recurring revenue piece, the 50% of the revenue that you're coming from DataMasons, what's the pricing model for that? Is that similar to SPS or is it a little bit different? Well, going forward, we'll have a new pricing model, which they had moved towards. From a customer standpoint, I think it'll be very seamless. Got it. Thanks, Archie. Thanks for answering my questions, and congrats on the acquisition. Thank you. Thank you. At this time, I am showing no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.