SciQuest, Inc. (NASDAQ:SQI) Q1 2016 Results Earnings Conference Call April 28, 2016 4:30 AM ET
Jamie Andelman - Head, IR
Stephen Wiehe - CEO
Jennifer Kaelin - CFO
Brendan Barnicle - Pacific Crest Securities
Tom Roderick - Stifel
Terry Tillman - Raymond James
Jeff Van Rhee - Craig-Hallum
Jeff Houston - Northland Securities
Greetings, and welcome to the SciQuest First Quarter Results Conference Call. At this time, all lines have been placed on mute to prevent background noise. After the Company’s prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Jamie Andelman, SciQuest’s Head of Investor Relations. Thank you, Mr. Andelman. You may begin.
Thank you, Michelle, and good afternoon, everyone. Thank you for joining us to review SciQuest’s first quarter 2016 results. Hosting today’s call are Stephen Wiehe, SciQuest’s Chief Executive Officer; and Jennifer Kaelin, our Chief Financial Officer. On today’s call, Steve and Jennifer will deliver prepared remarks, after which we will hold a question-and-answer session.
During this call, we will be making comments related to our business that are considered forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as, but not limited to, accelerates, anticipates, believes, could, seeks, estimates, expects, intends, may, plans, potential, predicts, projects, should, will, would, or similar expressions and the negatives of those terms, will identify forward-looking statements. These statements reflect our views only as of today, and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.
Certain of these risks, uncertainties and other important factors that could affect our actual results are described in the Risk Factors section of our most recent Annual Report on Form 10-K and in other reports filed with the SEC. In particular, we call your attention to the Risk Factors in our Annual Report on Form 10-K entitled, “Our actual operating results may differ significantly from our guidance.”
These filings are available free of charge on the Edgar system at sec.gov, and in the Investor Relations section of our website, sciquest.com. Also available for download on our site, is a quarterly overview presentation that contains additional information regarding our performance and expectations.
Additionally, we will be discussing non-GAAP financial measures during this conference call. When possible, SciQuest provides all information required in accordance with GAAP, but believes evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures.
Please see today’s press release which has been included in a filing on Form 8-K and is available on our website and on the Edgar system, the reconciliation of the non-GAAP financial measures for which we are able to provide the most directly comparable GAAP financial measures.
SciQuest expressly disclaims any obligations or undertakings to publicly release any updates or revisions to any forward-looking statements made herein, except as required by law. Therefore, investors should not place undue reliance on forward-looking statements as prediction of actual results.
Lastly, please note that a streaming replay of today’s call will be available in the Investor Relations section of our website shortly after we conclude.
And now, I’d like to turn the call over to Steve.
Greetings to everyone joining us today. During the first quarter, we generated financial results that give us confidence that we can achieve our full year guidance targets. We have enhanced our go-to-market strategy and we have completed the development associated with our latest release.
Diving into the specifics, first quarter revenue was $26.9 million, which was at the high-end of our guidance. Non-GAAP earnings per share was $0.09, $0.01 above the top of the range. And adjusted EBITDA margin was 21.2%, significantly above the 14.8% margin we posted a year ago.
Early in the quarter, some customers did become more cautious regarding large multi-year commitments. Our sales force however did a great job of continuing to articulate the value we provide, particularly when protecting the bottom-line as priority [ph] for our prospects. As a result, momentum picked up in March and we signed five new customers including Queen’s University, Liberty University, Ainsworth Pet Nutrition, and the University of North Texas Health Science Center.
ASPs in the first were up approximately 5 percentage points compared to the rolling four quarter average. This is the third sequential quarter that we’ve sold a high average number of solutions to new customers, due to success of the rewrite that we completed in 2015. The higher ASPs and better cross-selling we generated in the first quarter of 2016 relative to the first quarter of 2015, help us generate year-over-year bookings growth, still not as much as we had anticipated.
However, due to a very strong April, we have now caught up with our year-to-date bookings, and we are in a great position to meet or beat all of our financial goals. Our confidence is supported by strong lead generation, number and size of active deals and extremely positive market feedback.
Higher education was our top selling team in Q1, which marks back-to-back quarters for them. Meanwhile our commercial markets saw significant cross-selling activity to a year ago due to the positive uptake trends from existing customers. The top three selling solutions in Q1 were eProcurement, contract management and advanced sourcing. In addition to being the highest dollar generator, they also had the highest number of transactions in the quarter, reflecting high demand.
In order to better service our existing customer base, we took the successful hunter farmer approach that we had on our higher education market and we’ve rolled it into our other teams. The new name for this function is account management and they have two primary responsibilities, both focused on existing clients. First, the account management teams are engaging the decision maker significantly in advance of the renewal dates to ensure they understand the value we are generating for them. In addition, they are responsible for understanding customers’ ongoing needs and pursuing cross-selling opportunities. We believe that this attention particularly for those with single solutions will help us enhance our renewal rates and our cross-selling results. Furthermore, we expect the team to help us accomplish the third goal, which is to make our hunters more productive by allowing them to focus all of their efforts on signing new customers.
Since we already have people responsible for managing existing accounts in our higher education space, we expect the biggest lift from this efforts to come from other markets. While these teams are new, they have already started to generate positive impact for the business. For example, there were three customers who are up for renewal that had very satisfied user procurement teams, but those executive [ph] sponsors did not fully understand the value we provide. The account management team closed the information gap and each of these organizations sign multi-year renewals.
In addition, the team uncovered and then closed an expanded user licensing opportunity. It also elevated the level of ongoing dialogue from the site administrators to decision makers at a number of our customers. With this higher level context, we’re excited to have someone who wants to understand their business and spend management challenges better. They also are having a single advocate within SciQuest. This is an important change, since approximately half of our new sales come from existing customers and we’re excited about the early progress. Now that we have the proven -- the concept proven, we are in the process of hiring a handful additional members to the team, which should help us accelerate and increase the value they generate.
In addition to improving our go-to-market approach, we’ve also enhanced our solution suite. On April 10th, we went live with our latest software release version 16.1. Key updates included greater global functionality and industry leading mobile capabilities. The release also contained a number of specific enhancements to solutions across our suite. Initial customer response has been very positive.
To wrap up, Q1 was a third consecutive quarter in which we were able to need or beat the high-end of our guidance. We also continued to improve our suite and enhance our go-to-market strategy while generating high average selling prices and strong cross-selling. This demonstrates the value of our platform and the improving maturity of our sales force.
At the same time, we’re enhancing profitability. Most importantly, Q1 sets us up to achieve all of the goals that we’ve been communicating including mid to high-single-digit revenue growth in Q4 of this year, improvements in churn, annualized reoccurring revenue and reoccurring revenue retention rates of 2016 and double-digit quarterly revenue growth rates next year.
Let me turn it over to Jennifer, who will provide more context for our financial results and outlook.
Thank you, Steve. First quarter revenue was $26.9 million, which was at the high end of our guidance range. Non-GAAP gross margin in the quarter was 71.2%, representing a 0.7 percentage point increase from Q1 last year, due to greater efficiencies in our service and support group. Non-GAAP operating expenses were $15.5 million, or 57.5% of revenue, 4.6 points better than last year. This large improvement is primarily due to reductions in sales and marketing and G&A expenses. Sales and marketing benefited from a shift of our user conference into the third quarter, which represented approximately 3 points of benefit.
G&A improvements largely reflected decreased recruiting costs compared to a year ago. Adjusted EBITDA was $5.7 million or 21.2% of revenue and 6.4 points ahead of first quarter 2015. Non-GAAP EPS was $0.09 or $0.01 above the high end of our guidance range. Operating cash flow was an outflow of $4.1 million in the first quarter. Property and equipment purchases and capitalized software development costs were $400,000 and $1.4 million respectively, resulting in use of free cash flow of $5.9 million. Q1 cash flow was negatively impacted by the timing of collections and does not change our full year expectation.
We utilized approximately $600,000 through March 31st, to purchase 45,000 shares under the share buyback program established in late February. And we ended the quarter with $136 million of cash and short-term investments on the balance sheet. With year-to-date bookings on track, we have increased confidence in our full year outlook. We continue to expect to generate a year-over-year revenue growth rate in the mid to high-single-digits in the fourth quarter of 2016 and expect to achieve a double-digit year-over-year revenue growth rate prior to the end of 2017. Therefore for the full year, we expect revenue between $109 million and $111 million, adjusted EBITDA margins of approximately 21.5%, non-GAAP net income per share between $0.32 and $0.34 per share and free cash flow between $11 million and $13 million.
As a reminder, the second quarter of 2015 contained a one-time settlement fee, excluding that fee non-GAAP revenue was $26 million. Q2 2016 revenue guidance reflects deal closing patterns including our strong April. We therefore expect to generate year-over-year growth this quarter in the neighborhood of 5% over last year’s normalized revenue. This means for the second quarter, we expect revenue between $27.0 million and $27.2 million, and non-GAAP net income per share between $0.07 and $0.08. In summary, we met or exceeded our financial targets in Q1 and we are on track to achieve all of our growth and profitability goals in 2016 and beyond.
Operator, can you provide the instructions for the Q&A session please?
Thank you. We will now be conducting a question-and-answer session. [Operator Instruction] Our first question comes from the line of Brendan Barnicle with Pacific Crest Securities. Please proceed with your questions.
Steve, in your comments, you said that the quarter started off slower and then momentum picked up, kind of like through execution on your side. What was it in the first part of the quarter you saw that that was slowing things down; was that macro or was that internal execution?
No, it was macro. What we saw in January and a good portion of February was extra approvals or what we were hearing from a lot of customers was that their budget that they had, had been suspended for a short period of time. Things picked up for us in March and we were very pleased with the activity that we saw in the third month of the quarter. I’d also say, April for us has been very good. And everything that we had originally forecasted to close by the end of March, has closed by the end of April and in fact it's more than we had expected. So, we are pleased with the results. But the slowness really was a macro issue with our customers. For a couple of them it’s -- we missed or we are going to miss and therefore they are requiring us to go to an additional approval cycle.
Then did you just see that slowness on -- come on public sector side or it sounds like maybe saw on the commercial side too?
No, it was primarily in the commercial side, because if you look at most of the new names we saw that we announced for all higher education. Higher ed was very good for us in Q1, commercial was good. It was just not as good as we expected. But the things that have caught up with us in April, commercial would have an extremely good quarter for us, had we had another 30 days in the quarter.
Terrific. And then on the commercial side, you mentioned that overall ASP lift but then talk more about sort of cross-selling that you did on the commercial side. Did you see a comparable ASP lift on the commercial side as you do on the public side?
So again, the cross-selling was large for us on the commercial side and in our ASP on the up-sell as well as on the new customer were both improvements over where we were prior to the rewrite.
Our next question comes from the line of Tom Roderick with Stifel. Please proceed with your question.
Jennifer, I just wanted to -- my first question is for you here and as well as on your comment about the cash flows in the quarter. It sounds like there is some timing issues that play. Can you just go into a little bit more detail with respect to what sort of collection, timing issues that have came into play there? And was that related to perhaps better bookings in the month of April? And then maybe just a follow-up on that is can you talk about the renewal environment in the quarter and how that may have played into the deferred number that we are looking at? Thanks.
On the cash side, as you are aware, Q1 is typically a fairly sizeable cash burn quarter for us. In fact the front half of the year is typically a burn for us. And our large cash flow generation typically happens in the back half of the year. We are still anticipating that same dynamic this year. We were still expecting a burn in Q1; it was a little bit higher than what we expected due to some timing of some collections that slipped from March into April. And as we have talked about in the past, we typically bill our customers once a year their typically sizeable invoices. And a couple of customer who typically pay us in one month who decided to delay their payment and pay us in the following month, fewer cash collections from a quarterly perspective, even though from a full year perspective we expect to be on track.
So that’s the dynamic there that went on from the cash flow. And I think it's primarily just a couple of customers that slipped that historically paid us in March that paid us in April and we have already collected that cash. So, it was more on the recurring fees versus from net new business. Does that help answer your question?
It does, thank you. And following on Brendan’s question there with respect to various individual verticals, it sounds like public sector -- I am sorry the private sector is very good, commercial is catching up fast. Can you talk a little bit about what you are seeing currently at the state and local side of your business?
So, I think we are still seeing good pipelines in state and local and good interest in demand and the products. State and local, as you are aware, we talked about, their buying cycles, their sales cycles tend to be little bit longer. Most of them have fiscal year set start July 1st. And so Q1 is not typically a high quarter for public sector. It's usually right around the fiscal yearend as they get their budget set; they typically buy either Q2 or Q3 either in advance of that budget once they know what it’s going to be or in Q3 once the budget has been released.
Got you. Last quick one for you is during the quarter, you announced the share buyback program. Does that change at all the way you think about M&A going forward here and then what’s your allocating capital right now? Thanks.
The share buyback is really -- as we announced it several weeks ago, was really driven by cash flow coming off the business. The amount that we’ve committed to is equal to what we believe the next two years cash flow generation. We do see a lot of opportunity in M&A. We have just chosen to stay out of it a little bit just because we are looking to regain Wall Street’s trust and confidence. And I think once we get back into a place where we feel comfortable or the Street feels comfortable with us, we will clearly go back and look at that.
We do see a lot of opportunity there. We’re just at this point choosing to stay on the sidelines. I will say six months ago, we thought valuations were illogical and too high. With the recent correction we’ve seen in private company valuations, we think valuations now are becoming much more logical and rational. But again, we’re looking to stay conservative for at least for the very near future.
Our next question comes from the line of Terry Tillman with Raymond James. Please proceed with your question.
Steve, first question just relates to the rewrite and maybe some early feedback either from your installed based and/or how relevant that’s been in driving the up-sell or cross-sell and/or helping you a new sales cycle?
It has actually been very, very helpful to us. We’ve been engaged with a number of very large accounts that have been very clear about what they want as an integrated platform, not a collection of pieces. And so, the rewrite has worked out very, very well for us from a new name point of view. And we believe, we have a product that is, if not in is superior, it is very, very good within the market, within the competition.
With respect to the up-sell, it is working very nicely for us. We have a number of contract management customers that are looking at the rewrite, looking at the new platform, and they are also very interested in expanding the footprint, because what we do, for example with contract management, ties directly into supply relationship management and ties directly into procurement. And so being able to show that moving to the new platform, gives them access to a much larger portfolio has been very helpful to us. And in fact, so the question then becomes how do you see that as an investor that I would say the fact that we’re seeing ASPs go up in the last several quarters. And I would caution that that’s a rolling four quarter average. So, we had some very significant ASP growth several quarters ago. Even this last quarter, we had positive growth. It’s the fact that we’re able to get this price is really specific -- is demonstrated by the investment we’ve made in the product portfolio.
And I guess just kind of a macro question related to the earlier macro question. I mean, I assume every quarter though, you tend to sign the bigger amount of volume in the third month of the quarter. I mean, it sounds good that March and even April were strong. But what gives you confidence in terms of some of these later stage sales cycles that everything is lining up well and the willingness will be there in either May or June. I assume though, you still are going to be relaying on large deals and there is just -- do you feel like the signals are there or the interest or the appetite is stronger than it was earlier in the year, and so that’s why you feel good about the full year and executing on that?
Yes. So first off, we had a very good April in terms of new bookings and May is also looking to be a very, very good bookings quarter. And the reason we can say that is a lot of the deals that we’re looking to close in May are already going through contracts or have been through legal, and they’re working through their internal approvals.
Historically, if you look at other quarters, what you’ll see is that drives through legal is usually the last month of the quarter and then it’s kind of a rush to the last couple of days or weeks of the month. What we’re seeing in Q2 is a lot more early activity and a lot more earlier closings. And that’s why we believe -- we feel very good about the business and the pipeline and the activity and the coverage rates. I mean let’s be clear, we’re not -- when we forecast for budget, we are expecting a certain percentage of that not to close just for whatever reason, internal momentum or approvals. And so, we believe our coverage rates are well in excess of what we need to do, to be able to meet our Q2 goals and our full year numbers.
Okay. And I guess Steve for you or Jennifer, in terms of -- as we think about metrics, and we don’t overdo it on overanalyzing metrics or relying too much on this metric or that metric. But the idea of new customers, I think it was 5 you said in the quarter. In the future could that be a less relevant metric and maybe there is a different metric or same metric, we should start thinking about there is more kind of reflects the up-selling or cross-selling into your large install base; how do you think about that? Because it sounds like maybe with more of this emphasis or increasing emphasis on farmers, new logo is not going to be as relevant going forward? Thank you.
So, great question. New logos are always going to be relevant, always important for us. Up-sell was typically 50% of our new business. So, what we expect from the account management team is from an up-sell perspective is more streamlined process, more engagement in particular on the commercial side where we’ve not that hunter former model in the past and they have tended to be more of a single solution customer base for us. So, I would expect to be able to generate more up-sell opportunities, in particular in those markets that we haven't had account management in the past. From a number of new customer perspective, I am interested in both the quantity and I’ll call it the quality of the new customers. So, we are always looking to grow the number of new logos year-over-year that’s -- new business is an important part of our business and important part of our strategy, and we want to continue to attract new customers. But it's also a balance of ASP. So, I am concerned about the quantity of them. But if I’ve got slightly fewer customers at a much higher ASP and a much larger footprint, I am okay with that metric as well, it's both. I look at both the number and ASP.
Our next question comes from the line of Jeff Van Rhee with Craig-Hallum. Please proceed with your question.
Jeff Van Rhee
Just a couple from me. I just want to circle back the delayed approvals, as you closed out the quarter. I guess I am unclear, I might have missed it but in terms of what broke open in April, are you suggesting overall macro environment improved in April or I don’t know maybe you could just revisit it? I must have missed part of it.
Sure. And again, this is based on our perspective what we see with our interactions with our prospective customers. What we saw was not a heightened sense of engagement with the customers in January and February. And what they were telling us is there were some uncertainty within their business. They had budget freezes, short-term budget freezes as they worked out, everything that was going on, as you recall, the stock market was influx, there was a lot companies that were reporting disappointing earnings. And what we saw in March and April in particular with what we provide to our customer which is an ability to improve their bottom-line was, to your point, some budget to bring up focus on these companies especially in times when topline might be difficult to grow. They to focus on how they can improve their bottom line profitability. And our ability to continue to articulate that to the prospects, I think it's part of what got everything kind of slowing a little better in March and April. And I think the engagement level that we have with the prospective customers for the deals that not only closed in April but are coming up to close in March and June is much better, much higher, much deeper level of engagement than what we saw in January and February.
Jeff Van Rhee
Okay, great. And then competitively, in the final stages of these deals, have you seen competitive behavioral changes, pricing tactics? I am just curious both, whom you are seeing but in particular if you’ve seen any material changes in behavior and end of the cycle?
No, we haven't because what we are finding is when we see the competition in the beginning of the sales cycle where they are boiling the ocean and looking at a number of providers, once we get passed that initial cut which we -- we are finding our percentage grades have been going up quarter-on -quarter with the new rewrite, they tend to one down to us or maybe one other and then they tend to move; we find things are working well for us. They occasionally will use the competitor as a way to try to modulate price. But I would say that’s probably the exception level of the rule. From a competitive point of view, we really feel that the rewrite has been very, very effective for us and has been very helpful.
Jeff Van Rhee
And last one, Jennifer, the S&M, you are going pretty quick there, you said something about the S&M push out of the conference impact, could you just hit that one more time?
Sure. So, our annual user conference has historically been held in Q1 of every year; this year, we’ve moved it to Q3. So, it drove a three-point improvement in our margins Q1, apples-to-apples. So, as you look at the improvement in EBITDA, Q1 2015 to Q1 2016, three of that point improvement was because of the move out of our user group from Q1 to Q3. And we do have a slide in our investor overview -- first quarter overview deck that’s on our Investor Relations page of our website that talks about EBITDA margin and it calls that out. So, you can see that a little bit later when you’ve got some time.
[Operator Instruction] Our next question comes from the line of Jeff Houston with Northland Securities. Please proceed with your question.
Jennifer, first one for you. Could you talk a bit about leverage in the model? And what your near term profitability targets are; which kind of line items you expect most of that to come from?
Sure. And as we talk about, we are targeting EBITDA margins on a full year basis for 21.5%. And as we look at year-over-year where those improvements are coming from, we would expect gross margin to continue to improve compared to where it was last year. We expect to see some of the improvement in R&D as well. And it’s those two line items where we expect to see the majority of the EBITDA margin improvement.
Great, and further out maybe two to three years is same line items likely to drive the leverage?
So, again, we would expect as we talk about the 21.5% EBITDA margin is certainly not a feeling for us. We would expect to see ongoing leverage in the business beyond that. We haven't presented a longer term model, we expect to be that at our Analyst Day conference in August at our Annual User Group Meeting, but we would expect to see ongoing leverage within the business. 21.5% is certainly not a top out for us.
Okay, switching gears a bit. Could you talk a bit about your product roadmap, now that the integration is complete? What functionality are you building out this year and maybe new modules that you’re working on?
Sure. So, we have a new product that we’ve announced called portfolio savings manager, the first release came out in ‘16 1. The commercially available version is coming out in our ‘16 2 release, which is July. Portfolio savings managers technology or the product, it’s used by large organizations that want to manage and track and account for a number of different savings initiatives. Our customers, the CPOs, they use our platform usually have some type of annual savings commitment that they’re being measured against. And this is a tool and enables them to see all of the savings initiatives that they’re using our software to generate, they could see how those savings initiatives are performing against plan or against expectations and then can use it also as away to see additional opportunities for other projects that they can implement. So that’s the first major piece, and that is actually a new module that will be additional revenue for us that we expect to be selling now through the end of the year.
The other area that we’re really investing in is adding additional business intelligence and additional insight into the technology. The best way to think about our product is really we in many ways are an ERP system spend management, we’re the infrastructure that a procurement or materials organization uses to do their day-to-day work. Our data structure is very different than a standard financial system. And so, we are able to give them insight and views of their activities that they’re not able to get form any new roles. For example, a big area that we’re seeing a quite bit of interesting from our client base is the supplier risk, how our supplier’s performing, do they have risk within their supply this of suppliers not being able to meet their commitments or having financial difficulty or supply chain risks. So, we’re doing a lot of work in that area to allow our clients to be able to have insight where it is very difficult without our technology to have that insight. And so, that’s a large area of investment for us, the second half of this year, and our thinking is to continue that investment into 2017.
There are no further questions at this time. This concludes the question-and-answer session. I will now turn the call back over to Mr. Andelman for closing comments.
Thanks again, Michelle. For the third period in row, we met or beat our quarterly guidance. Guidance for the second quarter and full year reflects our expectations for improving revenue and profitability. Please reach out if you have any questions. Thank you and have a great day.
Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time and have a wonderful day.
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