Speed Commerce, Inc. (NASDAQ:SPDC)
Q1 2015 Earnings Conference Call
August 8, 2014 11:00 ET
Richard Willis - President and Chief Executive Officer
Terry Tuttle - Chief Financial Officer
Mike Malouf - Craig-Hallum Capital Group
Mark Argento - Lake Street Capital Markets
Good morning, everyone and thank you for participating in today’s conference call to discuss Speed Commerce’s Financial Results for its Fiscal First Quarter End June 30, 2014.
Joining us today is Speed Commerce President and CEO, Mr. Richard Willis; and the company’s CFO, Mr. Terry Tuttle. Following their remarks, we will open the call for your questions.
Before we continue, we would like to remind all participants that during the course of this call, we may make forward-looking statements regarding future events or the future performance of the company, which are based on current information not guarantees of future performance. Speed Commerce is not undertaking an obligation to provide updates to these forward-looking statements in the future. Actual results may differ substantially from what is discussed today and no one should assume that at a later date the company’s comments from today will still be valid. Speed Commerce refers you to the documents that the company files from time-to-time with the SEC, specifically the company’s most recent Forms 10-K, 10-Q and 8-K which contain and identify important risk factors that could cause actual results to differ materially from those that are contained in any of the forward-looking statements. I would like to remind everyone that a webcast replay of today’s call will be available via the Investors section of the company’s website at www.speedcommerce.com.
Now, I would like to turn the call over to Speed Commerce President and CEO, Mr. Richard Willis. Sir, please proceed.
Hey, good morning everybody. Thanks for joining us on the call today. The first quarter of our fiscal 2015 was probably one of the most important we have ever had in company history. While the actual transaction didn’t close until July 9, we worked very diligently and very hard and we have got the sale of the NDS or the Navarre business done in the quarter. So, Speed Commerce now is a pure-play e-commerce company. And what we like about that is when it’s done in the past and what we are targeting to do in the future is double-digit revenue growth, strong EBITDA to cash flow conversion.
Again, we have projected probably $5 million in CapEx for this year, for next year. We got about $2.5 million of interest expense. We got $100 million of NOLs. So, again great EBITDA to cash flow conversion, really strong EBITDA margins, about 12%. We think that might be able to go up to about 15% over time. And we are anchored in the e-commerce economy whichever analysts you listen to most of them have it continuing to grow double-digits for the next several years. And this is where we want to be. This is where we told the market that we are going to work to get to. It took us about three years to get there, but we have completely transformed the company now from a retail distribution old line company to a new market pure-play e-commerce company.
In the first quarter, our revenues were up slightly and our EBITDA was up about 13%. Terry will go into those details, but what I want to talk about there was the strength of our core customers. We have told you that we will model in the future and what we have done for this year. 1 to 2 customers will probably roll off every year. And then we added out the new customers we have. This year is a good example. We have had a couple of customers that we have said that we are going to roll off. And if you take the impact of those customers that had a change this quarter out, we had a 23% growth in the rest of our business. So, great strong growth in that business and again customers are going to come in, they are going to roll out, and as they roll out, if we can cover them like we did this quarter, it’s pretty amazing to us that the rest of the customer’s growth was strong enough to make up for those customers that have made the change.
So, the good news for us in that is if that continues in the second quarter, anything we get on our 11 new customers at the end of the second quarter and the whole third and fourth quarter is all upside, it’s all growth for us. So, it really talks well to the balance of the business that our customers are growing that fast, that when we have change that we are able to cover it.
We talked a little about 11 customers that we are going to add in 2015. We are on track to have all those done in the second quarter. Again probably towards the end of the second quarter, so it won’t be a ton of impact on the second quarter, but we will have it fully in the third quarter, fully in the fourth quarter. Then obviously that will be there for upside in the first and second quarter of 2016. Our pipeline of the revenues of those 11 customers is the largest of any pipeline we have had on any group of new customers we are adding. So the impact again we are very comfortable with how that’s coming. We believe that we have made all the necessary ops in IT investments that support this growth. So, we are reaffirming our fiscal 2015 revenue targets of $135 million to $145 million and our EBITDA targets of $17 million to $20 million.
So, at this point, I will turn the call over to our CFO, Terry Tuttle to review some numbers and then come back give you some updates and talk a little strategy discussion.
Thanks Richard. Hey, good morning everyone. Before I jump into the numbers just again a couple of items of note, we did this on our last call as well but just a reminder. For those of you who are familiar with our business and our reporting format you will notice just a few changes in our presentation this year. As you look at our financial statements you will notice that because of the announced divestiture of our retail distribution business the financial results from that business segment are now reported as discontinued operations on the balance sheet, income statement and statement of cash flows.
Additionally, the other change we made at the end of last year and we are continuing with that we have moved depreciation and amortization which has historically been included in cost of goods sold from COGS and on to its own line item within the operating expense section of the income statement. We believe this will add more clarity and transparency to the face of our financial statements and of course that will help the reader to follow the flow of depreciation between those statements. So with that we will get right into the numbers.
As Richard mentioned, net revenues in the fiscal first quarter of ’15 increased to $22.1 million from $22 million in the year ago quarter. Adjusted gross profit margin was 21.4% compared to 28% in the year ago quarter. The decrease was primarily due to approximately $1.1 million in additional infrastructure and occupancy investments we made as a company during the quarter to support our anticipated growth. These investments included additional rent and facility costs for expansion of our performance centers as well as labor and related support costs from expanded customers care operations. We believe that these investments made during the first quarter will help prepare for the 11 client launches scheduled for the second quarter of fiscal ’15. Net of these expansion costs adjusted gross margin was 26.3% in the fiscal first quarter of 2015.
During the first quarter total adjusted operating expenses net of depreciation and amortization decreased 8% to $4.8 million compared to $5.2 million in the year ago quarter. As a percentage of net revenues, adjusted operating expenses net of depreciation and amortization were 21.6% compared to 23.5% in the year ago quarter. Net loss form continuing operations was $3.4 million or $0.05 per diluted share compared to a net loss from continuing operations of $1.1 million or $0.02 per diluted share in the year ago quarter.
The first quarter also included approximately $900,000 in transaction and transition related expenses compared to around $400,000 in the year ago quarter. The increase in these costs was largely attributable to relocating certain customers from our Dallas facility to our Ohio warehouse which will allow us to improve the efficiency and capitalize on the technology and automation available in our Ohio facility. Adjusted EBITDA in the fiscal first quarter increased 13% to $1.4 million from $1.3 million in the year ago quarter.
Turning to the balance sheet, in June we closed a private offering with institutional investors for approximately $10 million. Under the terms of the offering, we sold the approximately 3.3 million shares of our Series C preferred stock and issued five year warrants to purchase up to an additional 833,333 shares of common stock for $3.50 per share. As we indicated we used the net proceeds of the offering to pay down indebtedness. We ended the first quarter with $18.1 million in revolving debt compared to $38.4 million at the end of the last quarter and $12.5 million in the year ago quarter. The $20.3 million decrease in debt during the quarter resulted not only from the proceeds of the private offering, but also careful management of our operations.
Subsequent to the quarter on July 9, we completed the asset sale of our legacy distribution business segment and used those proceeds to further pay down debt. We also replaced our Wells line of credit with a 5-year $50 million term loan credit facility through Garrison Capital. Upon closing, $35 million was funded to the company with an additional $15 million delayed draw feature available to the company under certain conditions. The blended interest rate is roughly equal to LIBOR at a minimum of 1% plus 5.5%. Just to give you some perspective, after the close of the subsequent events, our debt balance was $35 million and we had a cash balance of approximately $17 million, which represents our best liquidity position in more than five years.
Now, turning to the outlook for fiscal 2015, our guidance for fiscal ‘15 remains on track with net revenues expected to range between $135 million to $145 million, an approximate increase of 26% to 36% from fiscal ‘14. We also expect adjusted EBITDA in fiscal 2015 to range between $17 million and $20 million, an approximate increase of 38% to 62% from fiscal 2014. Again, these estimates reflect our continuing operations, which excludes the retail distribution business segment, which once again was sold on July 9.
With that, I will now turn the call back to Richard before we go to Q&A. Richard?
Thanks, Terry. We are looking forward to our upcoming holiday season. We are obviously deep in the planning and preparation for that. One of the things that’s different about the company this year is we won’t have the huge swings we traditionally did when we are on the retail distribution business in working capital. So, we would have as you remember $50 million, $60 million of working capital swings without the huge investments in the inventory. And fortunately with the business we are in today, we won’t have that. We don’t own inventory and there is relatively small swings month-to-month or quarter-to-quarter in working capital. So, we are very thankful for that.
I mentioned our pipeline or sales that we are getting from the 11 customers that we are on-boarding. We also have a very robust pipeline of accounts, their prospects. So, these are guys that we have talked to that we have – it could be an RFP in process. We have got some kind of relationship going with them. That group of people is probably three times what it was a year ago. So, we are doing a pretty good job from the sales perspective, just being able to get prospects, people to talk to. Obviously, we are not going to get all those accounts, but it’s just we are in the mix in a lot more discussions than we were a year ago.
We have also sold and we are starting the implementation process of our first X account, which is Work 'N Gear to one of those 11. We have got active discussions with several more accounts for SARA X. And we are actually very encouraged by the early response. It is those of you that are in the market followed us or followed our market segment know it’s not a lot of decisions they are going to be made now, because we are still close to the holiday season, but we believe our fourth quarter or the first calendar quarter will have new SARA X clients singed up. So, we stepped back and took a look at our sales approach to the market and we believe we have got an opportunity to ramp up sales faster by bringing on additional sales people. These are sales people that have particular talents. These are guys that understand Oracle’s ATG guys who have sold this product before or people that have sold services around that. So, it’s a relatively small audience we can go after to find those sales people, but we believe if we can find those sales people we can really ramp the sales up a lot faster. So, we have decided to do that and start looking for people now, probably they don’t start to look calendar first.
We believe we will also at our first international sales people we are going to put somebody down in Mexico. Again, we are not building distribution facilities. We are not talking about doing the back end of the business. This is just the front end of the business, especially SARA X, but in Mexico between what we do in Queretaro and what we do in Cholula, we are one of the largest independent regional web development teams in the country. We also think it will be good idea to put somebody up in Canada. And we have made a sale in Canada and in Mexico, not talking about distribution, just the front end, but we really believe that by adding additional sales people that we will be able to ramp the business up even faster.
So, just a quick update on the five key objectives that we talk about, the first one was again we got to deliver the 11 onboard for the holiday season. We believe we are on track to do that, everybody coming in sometime towards the end of the second quarter. Second, we need to complete the sale of NDS. We are fortunate to do that on July 9. Third, we needed to renew our focus on cost efficiency and running the business well. So, we are in the process now that we have been able to close the quarter and get through the sale for the next month, we are going through kind of line by line everything we do in the business, just doing to reforecast a normal process we would usually do, but doing it with little more intensity this time, because we have got the ability to do it. And so, we will have that done by the first week in September and have it implemented by the next week. We need to successfully launch some SARA X sites. And again, we have got one that we are working through, which I think will a great test for us. It will be helpful for us as we go out and try to sell more SARA Xs, because we will have one company go through the process. And then fifth, we talk a little bit about acquisitions and I will talk about that in a minute.
So, overall, where does this leave us? Now that we are an e-commerce company and we are not a retail distribution business, what does it really mean? Well, our goal now is to be the clear number two provider in our market, behind eBay Enterprise, the former GSI. Now, that we finally a pure-play company we have got the platform that we wanted. We have got the scalable platform we need to be that number two player. We believe we can grow organically, but as I mentioned in acquisitions, we believe we all still can do it through the acquisitions. And we looked at should we do some kind of stock buyback? Well, I don’t know that we can do it with our debt package the way it is, but even if we could, we really sincerely believe that our funds are going to be more efficiently and more accretively put to work through acquisitions. It’s one of the reasons Terry and I have done a much of acquisitions in the past and that’s what in the six companies that I have been CEO of try to fix the base company, work on making organic growth happen there and then add accretive acquisitions. We obviously can’t talk about anything, but we are very pleased with our progress, where we are and we will have more on that in the future.
So, we have made the investments we need to in the business, so that we can double what we did last year. We have got great financing in place. As Terry said, we have got the best cash position we have had for several years. We like the characteristics of this business. Again, it has and what we are targeted to do is double-digit growth in sales, good margins, great EBITDA to cash conversion, we have got a great base market being in the e-commerce economy. And so we just want to thank everybody for our support over the years to get us here. We are very excited about being able to sell off the distribution business and focus on the e-commerce company that we are here to build. So, from here, it’s up to us to make the company grow.
So, I would like to open up to any questions that you have got. Operator?
Thank you. (Operator Instructions) And we will first go to Mike Malouf from Craig-Hallum Capital Group.
Mike Malouf - Craig-Hallum Capital Group
Great, thanks for taking my question. I am wondering if you could just talk a little bit about the guidance, when you are on-boarding these 11, do you need all 11 to come on to meet the guidance? Is there some sort of cushion there or just how confident do you have in getting all these clients on-board? Thanks.
Well, we are obviously planning on all that, because we have spent three to four months on each of them building the sites. So, we are just at the point, where we are close to launching all the sites again, believe will happen kind of now to the end of the second quarter. We don’t have to have them all, but we do believe they will all come. And again, the big part that really tells the story of the company for the year is our third quarter, the high quarter. The quarter we just closed is small in comparison to what we do in any other quarter. The second quarter we build up a little bit, because we kind of get some back-to-school sales in there, but it’s really kind of the third quarter. So, do we need all 11? No, but we are far down the road on the implementation on all of them. So, we will get them all, but really to see where we are going to be, it’s just like a lot of business is, it’s a fourth quarter calendar for everybody. And that’s when we really see what the impact that they have, but we have got some really good projections from each of the 11 on what they believe they will do. And so we are very comfortable with that.
Mike Malouf - Craig-Hallum Capital Group
Great. And then just a follow-up question on the gross margins, you guys came in about 21%, just a little over 21% for the quarter. Is there some seasonality benefit you think that given that this was the slowest quarter of the year that perhaps it will be the slowest gross profit percentage of the year, but I would love some color on that? Thanks.
Yes. Terry can fill in after this, but when we do something like we did this time and made some investments, since it’s such a small quarter, the dollar amount can be consistent in the first quarter, in the fourth quarter, I mean, the third quarter, but obviously impact is going to be a lot greater on the first quarter, because it’s just a small quarter for us. So, absolutely, if we are running efficiently anything that we do in the first quarter like the investments again we will have a much bigger percentage impact on the numbers than they would like in the third quarter when we are running at a 100% capacity.
Yes, particularly too, if we are using the sortation equipment more fully up in Ohio, that helps us well so...
Mike Malouf - Craig-Hallum Capital Group
Okay, great. Thanks a lot for taking my questions.
(Operator Instructions) We will now go to Mark Argento from Lake Street Capital Markets.
Mark Argento - Lake Street Capital Markets
Yes, hi, guys. Sorry about that, I got disconnected. So, I just had a question on the timing, I know you have got a couple of large contracts going on here, I don’t know if you touched on that at all, but maybe give us an update on some (of the AQ) contracts and then Navy contract? And then also talk a little bit about the customer churn kind of how you are modeling out churn for the rest of the year and how we should think about that in terms of the model?
Sure. So, all the alignment right now we have got to continue to release in the second quarter. We have got three of the sites up now, but in the rest of them, where we go between now and the end of September, most of the revenues will hit toward the end our September. So, again not a huge impact in the second quarter, but there will be – they will make an impact. And then what we for sure need is to make sure that they are up and running obviously by the third quarter, the fourth calendar quarter, so we get all the revenues there. When we model what we usually do is we figure one or two customers we are going to roll off every year. And this year, we obviously knew that we had a couple that we are rolling off. And so again, we are very fortunate, I don’t know where you dropped out, but we are unfortunate in the quarter, that with the couple that we knew we are going to make a change with that happening, we were still able to see our revenues from the other customers make up for that. So, we are really pleased with that, I mean really pleased with that, so that we know that when we get these other customers, the other 11, when they come on, that’s where all the growth is going to come from this year and that’s great.
Mark Argento - Lake Street Capital Markets
Great. Thanks, guys. I appreciate it.
At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Willis. Mr. Willis, please proceed.
Great. And again, thanks everybody for being on the call. We are very excited about what’s happened in the quarter that we are able to sell the business and get us to the business that we wanted to be. We appreciate that everybody – that followed us, those that have been around for those three years, we appreciate your patience and your confidence in us. Again, we are very excited that we have got these 11 customers coming on board this quarter. We are excited about where we think the year is going to end up being with a great third and fourth quarter. With SARA, we are very surprised in a good way that, that’s been received well. Hopefully, the next time we will talk we will have some new sales guys on board and talk about the impact that they are having. And we can give you an update on all 11. So, thanks again. If anybody has any other questions, feel free to give Terry or I a call and we appreciate being on the call. Thank you.
Thank you, ladies and gentlemen for joining us today. You may now disconnect.
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