Amber Road's (AMBR) CEO James Preuninger on Q3 2017 Results - Earnings Call Transcript

Amber Road, Inc. (NYSE:AMBR) Q3 2017 Earnings Conference Call November 2, 2017 5:00 PM ET

Executives

Robert Ferer - IR

James Preuninger - CEO and Director

Thomas Conway - CFO

Analysts

Scott Berg - Needham & Company

Matthew Van Vliet - Stifel, Nicolaus & Company

Jason Celino - KeyBanc Capital Markets

Glenn Mattson - Ladenburg Thalmann & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Amber Road Third Quarter 2017 Earnings Conference Call. Please note, today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Robert Ferer, Investor Relations. Please go ahead, sir.

Robert Ferer

Thank you, Holly, and thank you for joining us on Amber Road's Third Quarter 2017 Earnings Conference Call. As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay of the call will be available on our website following the call. By now, you should have received a copy of our press release that was distributed this afternoon. If you have not, it is available on the Investor Relations section of our website.

Before we begin, I would like to remind you that during today's call, we will be making forward-looking statements regarding future events and financial performance, including growth from our bookings and sales pipeline, client deployments, continued product demand and our guidance for our fourth quarter and full fiscal year 2017. We caution you that such statements reflect our best judgment based on factors currently known to us and that the actual events or results could differ materially. Please refer to the documents we file from time to time with the SEC, in particular, our Form 10-K, 10-Q and our Form 8-K filed today with our press release. These documents contain and identify important risks and other factors that may cause our actual results to differ from those contained in our forward-looking statements. Forward-looking statements made during the call are being made as of today. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information.

We disclaim any obligation to update or revise any forward-looking statements. We will provide guidance on today's call, but will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public form.

During the call, we will also discuss our non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the GAAP and non-GAAP results is provided in today's release. The projections that we provide today exclude stock-based compensation, which cannot be determined at this time and are, therefore, not reconciled in today's press release.

With that, I will turn the call over to our CEO, Jim Preuninger. Jim?

James Preuninger

Yes, thank you, Robert. In the third quarter, total revenue was in line with our guidance of $20.2 million and adjusted EBITDA was $1 million positive. We are really pleased with our ability to deliver positive adjusted EBITDA in the quarter, and we've set a path towards sustainable profitability and cash flow for 2018. We continue to benefit from the investments we've made to expand our presence into new geographies and markets and extend our competitive differentiation through product innovation while, at the same time, controlling costs. Though, we did have a few larger bookings slip out of the third quarter, we entered the seasonally strong fourth quarter with a very solid pipeline of opportunities and have good visibility in how we will transition these into signed bookings. I'm confident, we will end 2017 on a high note.

For our customers, staying competitive means consistently improving supply chain agility, compressing cycle times, optimizing their sourcing decisions, lowering their distribution costs, cementing relationships with strategic suppliers and delivering on increasingly complex customer and government regulatory demands. To do so, global organizations need a platform that provides more collaboration, automation of cross-border trade, analytics to understand what's moving correctly, flexibility to adapt to new situations and industry process expertise and deep industry knowledge from a reliable vendor. Amber Road is uniquely positioned to transform our clients' global supply chain to achieve all of these objectives.

During the third quarter, we had many new and some existing customer wins across a variety of key verticals, which adds many of our software modules. It's clear that Amber Road was chosen because we increase operating efficiency, we lower or reduce direct costs to create a faster, leaner and more agile supply chain.

Let me review a couple key wins in the quarter. Seqirus is a new customer and is the world's second-largest flu vaccine manufacturer, with headquarters in the United Kingdom. They were challenged to improve their trade compliance activities within the organization. This was leading to supply chain and logistics issues across their global supply chain. In one example, they were challenged, Seqirus had to write off some very expensive vaccines due to a customs hold that extended beyond the shelf life of a product. During the third quarter, this customer subscribed to our Trade Automation solution with particular focus on export documentation, restrictive party screening and Global Product Master maintenance to help them maintain regulatory compliance, particularly with the U.S. Food and Drug Administration's regulatory and reporting processes, while also improving supply chain and global logistics operations.

Another great example of a new customer is a senior retail group, a leading national specialty retail, offering apparel, shoes and accessories for women under various brands including Ann Taylor, LOFT, Lou & Grey, Lane Bryant, dressbarn and Catherines brands. The company operates e-commerce operations and has approximately 4,800 stores in the United States, Canada and Puerto Rico.

During the quarter, ascena subscribed to several of our trade -- I'm sorry, our supply chain collaboration model -- modules to manage, overseas, more than 3,000 factories in Tier 1, Tier 2 and Tier 3 suppliers. Amber Road's supply chain collaboration platform will provide supplier onboarding with one secure portal that will replace multiple unsecure portals. It will manage all vendors in one place and cross-reference brands and products. It will also manage all documents from one location to provide what they call one version of the truth. Once fully implemented, our solution will increase staff productivity, provide traceability and create a more efficient supply chain. We're doing very well, booking new business each quarter with our supply chain collaboration modules.

A great land and expand example is with APL Logistics, a global supply chain specialist that offers a comprehensive range of origin and destination services in more than 60 countries, serving the automotive, consumer, industrials and retail verticals, as well as providing transportation as a service. With this expanded deal, Amber Road will provide global shipping contract and rate management across their global operations. Their prior solution could not keep up with the volume of amended updates and terra filings. And with this deal, this was a real natural for us. When implemented, the Amber Road solution will consolidate all global rates and amendments, translate ocean contracts and specialty negotiated terms into a series of calculable business rules and link all contract and rate variables to the ocean carriers governing rules tariffs to automatically calculate the full bottom line costs of moving goods around the world.

All three of these examples show the strength of our comprehensive global trade platform and how we can meet the needs of a broad set of industry verticals with global deployments. I'm pleased with the level of our customer engagement, our pipelines are strong and a broad -- with a broad distribution of deals sizes, including several large deals, which gives us confidence in a strong bookings performance in the fourth quarter and as we head into 2018.

While we are not yet guiding for 2018, I wanted to offer that management currently fully expects that we will have positive adjusted EBITDA and deliver positive operating cash for the year.

With that, let me turn it over to Tom.

Thomas Conway

Thanks, Jim. I'll start with a detailed overview of our third quarter 2017 financial performance, and then I'll provide some commentary on our fourth quarter and full year 2017 outlook. Following my closing remarks, we'll open the line for your call -- open up the line for your questions. Regarding third quarter results, beginning with the statement of operations, we generated revenue in the quarter of $20.2 million compared to $18.9 million in the third quarter of 2016. Subscription revenue was $14.9 million compared to $14.1 million in the prior year period. Professional services revenue was $5.3 million compared to $4.8 million in the same period a year ago. Our services revenue during the quarter was slightly higher than expected due to good project activity, and we would expect fourth quarter services revenue to be approximately flat with Q3.

Our trailing 12-month recurring revenue retention rate was 102%, reflecting the long-term value of our customer relationships with regard to revenue and billings visibility. On a GAAP basis, our gross profit was $11.1 million or 55% of total revenue compared to $10 million or 53% of total revenue in the prior year period. Subscription gross profit was $10 million or 67% of subscription revenue compared to $9.1 million or 65% of subsumption revenue in the third quarter of 2016. Our gross profit on professional services was $1 million or 19% of professional services revenue compared to $900,000 or 19% of professional services revenue in the same period last year. We expect our professional service gross margin to remain consistent in the fourth quarter.

On subscription gross margin, we made infrastructure investments to support the influx of large and very large customers we have added and expect to add in the coming years. We continue to expect that subscription gross margins will be in the mid-60% range in the fourth quarter of 2017 and it will continue to scale in 2018.

Turning to operating expenses. As demand for GTM solutions continues to grow, we will continue to make thoughtful and measured investments across our business in order to capitalize on the significant and growing opportunity in front of us and to extend our leadership position. Research and development expenses in the quarter were $3.8 million or 19% of revenue compared to $4.2 million or 22% of revenue in the year ago period. Sales and marketing expenses were $5.6 million or 28% of revenue compared to $5.5 million or 29% of revenue in the third quarter of last year. We continue to experience higher levels of productivity across the sales organization, and we expect to deliver incremental leverage in our sales and marketing expenses this year. General and administrative expenses in the quarter were $3.5 million compared to $3.8 million in the year ago period. For the third quarter, our GAAP operating loss was $1.8 million compared to a GAAP operating loss of $3.5 million in the third quarter of last year.

On a non-GAAP basis, operating loss was $12,000 compared to an operating loss of $1.7 million in the year ago period. Non-GAAP operating loss for the third quarter of 2017 excludes stock-based compensation.

GAAP net loss attributable to common stockholders was $2.2 million for the third quarter of 2017. This amount compares to a GAAP net loss attributable to common stockholders of $3.8 million in the prior year period. GAAP net loss per share was $0.08 in the third quarter of 2017 compared to a net loss per share of $0.14 in the third quarter of 2016. These amounts are based on 27.5 million and 26.8 million shares outstanding respectively.

On a non-GAAP basis, net loss was $413,000 for the third quarter of 2017. This compares to a non-GAAP net loss of $2 million in the prior year period. Non-GAAP net loss per share was $0.02 in the third quarter of 2017 compared to a net loss per share of $0.08 in the prior year period. These amounts are based on 27.5 million and 26.8 million shares outstanding respectively.

Adjusted EBITDA for the quarter was $1 million positive compared to adjusted EBITDA of $16,000 positive in the same period last year.

Turning the focus to our balance sheet. As of September 30, 2017, we had cash and cash equivalents of $8.3 million compared to $11.1 million as of June 30, 2017, and $15.4 million as of December 31, 2016. Our deferred revenue was $37.1 million, up 13% year-over-year. Cash flow used in operations in the third quarter of 2017 was $1.7 million compared to $673,000 in the third quarter of 2016. For the first 9 months of 2017, cash flow used in operations was $2.8 million compared to cash flow used in operations of $39,000 in the prior year period. As a reminder, exclusive of the ecVision retention payment, cash flow used in operations was $385,000 for the 9 months ended September 30.

Turning to guidance. Our expectations of non-GAAP loss from operation and non-GAAP loss per basic share for the fourth quarter and full year excludes stock-based compensation, change in fair value of contingent consideration liability, acquisition compensation costs, acquisition-related costs and purchase accounting deferred revenue adjustments. Starting with the fourth quarter of 2017, total revenue is expected to be in the range of $20 million to $20.6 million. Non-GAAP adjusted operating loss is expected to be in the range of $1.2 million to $0.6 million. Non-GAAP adjusted net loss per share is expected to be in the range of $0.07 to $0.04. These numbers assume 28 million basic shares outstanding.

From a full year 2017 perspective, we expect total revenue to be in the range of $78.4 million to $79 million. Non-GAAP adjusted operating loss is expected to be in the range of $6.4 million to $5.8 million. Non-GAAP adjusted net loss per share is expected to be in the range of $0.31 to $0.29. These amounts assume $28 million basic shares outstanding.

Our updated annual guidance reflects the timing of deal closure, Jim mentioned, as well as the timing of some subscription deals signed in the third quarter, with start date set for early 2018. We expect our 2017 subscription revenue growth rates to be low double digits.

In our services business, as I mentioned a moment ago, we expect Q4 services revenue to be approximately flat with Q3 of 2017.

As it relates to profitability metrics, we expect to improve our non-GAAP operating loss for the year compared to our prior guidance and -- as we effectively manage the business for profit and cash flow. We continue to expect cash flow from operations for full year 2017 to be about neutral, excluding the $3.6 million ecVision retention payment we made in the second quarter.

In summary, we are effectively managing the business for both growth and profit.

Operator, at this time, please open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question will come from Scott Berg with Needham.

Scott Berg

A couple of questions, Jim, on the deals in the third quarter that's left is, one, let's try to understand if this is a large number of deals? If this a couple low number deals? Is there any commonality between the deals? I guess, it sounds like you have a lot of visibility of them getting done in the quarter. Just wanted to see if there's anything consistent between them and the expectations around maybe productivity or sales cycles going into the next couple of quarters.

James Preuninger

Yes, thanks, Scott. So I mean, we did close a lot of business in the quarter. But there were two deals, so slightly larger, not transitional, elephant-sized deals, if you will, but fairly large deals. There were European organizations. And in our experience, in the third quarter, is that can be tough. It really come down to the month of September, as a lot of our customers there tend to take a lot of time off with the holidays in July and August. So our -- we are tracking very well with those organizations. We're in the middle of negotiating the contracts. We're the selected vendor. But it's just -- there wasn't enough time to get all the administrative work that's needed to be done in the quarter completed. So we feel good about where -- our positioning. We have now even a more robust pipeline coming into Q4. And as you know, historically, we close an awful lot of business, I think a lot of application software companies do, in the Q4 period. So our sales teams are very busy. We think we're going to end the year again on a high note and put that behind us and head strongly into 2018.

Scott Berg

Great. Assuming a close of the deals in the quarter, I guess, how would you view your bookings productivity for the here relative to your expectations? Would that kind of help drive a meter exceed type of a year? Or -- just trying to feel how are you kind of sizing up the year-to-date so far?

James Preuninger

So we've got a lot of work to do here in Q4, for sure. But we think we'll close the year well enough that we'll call it a meet. And we'll have enough pipeline still available to us to get off to a good start in 2018.

Scott Berg

Great. And the last question from me, Tom, is if you look at your guidance for next year, at least kind of the preliminary numbers that you threw at us, your subscription gross margin guidance looks like it would be best since 2014. One, I'm just trying to understand what you're doing there to improve the gross margins there? Is it purely just a function of some of the deals? Are you going to have some scale to leverage your existing investments? Are you are changing anything internally to drive those costs down?

Thomas Conway

No. You know it's the scale, Scott. As you know, we did add -- from a CapEx perspective, we were pretty aggressive this year, as I noted in my commentary, about sizing our capacity for deals that we signed, larger deals, and deals we anticipate signing. I think we're growing through those adds. And as you know, we believe a lot in the operational efficiency in our model. So as we continue to add new customers on to things like our Global Knowledge database, we're just seeing the efficiencies there.

Operator

Our next question will come from Tom Roderick with Stifel.

Matthew Van Vliet

Matt Van Vliet on for Tom. I guess, first question related to the 2 larger deals that slipped. How do you feel about your current sort of sales forecasting and overall plans? Was this something that maybe was a little bit more unforeseen? Or were you maybe a little aggressive in expecting to be able to close some of these deals in just sort of 1 month of work in the quarter?

James Preuninger

Well, hindsight for what it is, I guess you'd have to say, we might have been a little aggressive. But over the last several years, as we measure it, our forecast accuracy is generally pretty good, but I guess we got caught this time. I do get 2 levels of forecast from our sales leadership in the beginning a quarter. One is a commit and the another is an upside. And we have some historical averages on how much of the upside actually can flow up and be closed in the quarter. And having 2 deals that were a little bit larger than normal that didn't make it was really the thing that impacted us. So again, we didn't lose business. It was still a strong bookings quarter. Not quite as good as we had hoped, not as good as we had, had in our forecast. But I think it just leads us in a position to have a much stronger Q4 than I was talking about even in August.

Matthew Van Vliet

And then as you look out through the end of the year and into 2018, where do you feel like you are in terms of headcount additions? Where are you trending right now in terms of year-over-year growth on a sales headcount growth? And the where are you projecting that out over the next year plus?

James Preuninger

Yes. So we've kept the headcount fairly flat in most departments. We have added some new sales territories this year. There is some key markets and some areas that we wanted to invest in for, really, what will be '18 and '19. And I think we're going to continue with that type of thinking going into '18, is that we'll be opportunistic, looking at hot markets and good opportunities and expand when we find really good people to do that with. We are also very much benefited from the fact that our sales staff are very productive. I mean, folks that we hired in '15 and '16 are now fully productive. They have big pipelines that they're working, and we're seeing larger deal sizes, better price points. We maintained very high close rates in competitive situations. We are the leader. So I think we're benefiting from a lot of those factors adding to some good people that are now productive, just as we can get a lot done with the staff we have.

Matthew Van Vliet

And then looking at the view Duty Management product that you're developing for one of your larger customers, where do we stand on that in terms of being live at the customer? And then also, being productized enough to go out and maybe sell it to new customers?

James Preuninger

We'll be in a position probably mid- of next year to be in the market with that solution. It's a very large product. We have more than 70 people in our organization working in R&D just around those types of initiatives for that one customer. So it's a big product. It's very unique in the marketplace. It solves a huge problem. It's going to have, I think, a very nice showcase, once fully implemented. So we're excited to be out there. We'll do that, as I said, mid- of next year. I think we're about having good provability and being able to demonstrate a live software with prospects, and not getting too far ahead of ourselves, but there should be some real good demand that we see next year for that.

Matthew Van Vliet

And I know that we're close to a year-end to the new administration here in the U.S. How do you think that, that's played out in terms of your overall sales cycles, the uncertainty around maybe some of the campaign premises, at least that were made in terms of reducing regulation, although we haven't necessarily seen a lot of that? Where do think that customers sit now in terms of making a big decision around international trade and putting systems in place to tackle the complexity that we're seeing out there?

James Preuninger

Earlier in the year, I said on a call that, that was the potential that the [indiscernible] coming from the new administration about trade and whatnot might have an impact with customers that were looking to make investments in our type of solutions. But we have not seen a negative impact. And I think looking past the new President, we see a more complex world today. I mean, there are far more free trade agreements, there's far more regulation today than there was a year ago. And there are great opportunities for our customers to automate and find hard dollar savings almost immediately that justifies our solution. So the overall, I guess, dynamics and macro environment for us is actually pretty good.

Operator

Our next question will come from Monika Garg with KeyBanc Capital Markets.

Jason Celino

This is Jason on for Monika. I actually joined in a little late. I don't know if it was covered, I apologies, but can you kind of talk about some of the professional service strength in the quarter? I see that it was double digits, a little higher than we modeled. Any commentary there?

Thomas Conway

Yes. I think we just -- Tom speaking. We just got on a number of good-sized accounts. The activity levels, the pace that the customer picked up, and we were there to meet that demand. As we said that we -- thinking about Q4, we're looking pretty flat from our forecast perspective, Q3 to Q4. But I think it's just the fact that we're out, implementing good customers.

James Preuninger

Actually, just to add to that, to be kind of flat in Q4 compared to Q3 is a step up. There just aren't nearly as many business days, billing days, particularly with the holidays in Q4s in comparisons. So our people are running pretty hard right now.

Jason Celino

Okay. And then just going forward, we should still think about low single digits growth for kind of professional services?

James Preuninger

Yes, we're not quite into '18, so we're not guiding there. But we have seen that the Quick Start program has kept our services relatively flat here in '17 versus '16. So I think that it's a successful story for us with the Quick Start program. We haven't fully modeled and guided for '18, but I think the Q4 levels would kind of give you an indication of where we're at.

Jason Celino

Okay. And switching gears a little bit. So I know you guys have some big retail customers and some of the other software players who have reported -- have kind of reported weakness, like further weakness. I mean, can you provide any color on kind of what you're seeing with some of the retail customers that you guys work with?

James Preuninger

Well, I've mentioned in my commentary, it's Jim speaking, a win the quarter with a senior retail. A fairly large retailer with a lot of brands. So what we're seeing is the -- that maybe the demand, the types of things that retailers were interested in several years ago has sifted and now there's a lot of new themes. I mean, they are looking for opportunities to cut costs, to get closer to the suppliers, to be able to react to market changes and fashion changes better. There is an idea called fast fashion now that's taking off. A lot of the big brands that we're selling a lot through retail are also looking at e-commerce and direct-to-consumer types of programs that we're right for. They need to have a program that can manage not only the inbound but then the outbound to the customer. So we've had to shift our presentation, our messaging to that marketplace, but we think it's working for us.

Operator

Our next question will come from Glenn Mattson with Ladenburg Thalmann.

Glenn Mattson

I'll ask the question I think I'm going to get tomorrow, which is, if you have any delays and you expect a big Q4. In times past, we've said that this is probably a double-digit grower or maybe even a 20% grower, but it's been some time since we've subscription at that rate. And so it seems like there ought to be a snapback at some point, and would you expect some sort of snapback in 2018 as some of these deals come through?

James Preuninger

Well, Glen, again, we're not guiding for '18. We do see the business improving, though, as we head into '18. I've talked a lot on this call about profitability. We generated $1 million of adjusted EBITDA in the quarter. We want to extend that type of performance into '18. On the top line, we think we can grow subscription revenues nicely. We're just not in a position to be guiding yet.

Glenn Mattson

It might be harder to define the market, but is there a market growth rate that you could point to that's better than the numbers you're putting up? And why would there be a different there? Or is it just a matter of large deals falling erratically in into the pipeline?

James Preuninger

I mean, there are some industry analysts out there that are now studying and publishing more papers about the GTM marketplace, so you can look for that. I think it's still a very early days in this industry's evolution. The vast majority of the new customers we sign, we're the first time that they've ever automated GTM processes. We're replacing a lot of manual systems, a lot of outsourced relationships to third parties and whatnot. So we're evolving as the market opportunity is evolving. But I think as our solution set grows, becomes more proven, we have great wins every quarter and those customers go live and help us tell that story, we're going to see some momentum.

Operator

And at this time, we have no further question in our queue. I'll turn the conference back over to our speakers for any additional or closing remarks.

James Preuninger

Yes. Thank you, Operator. Well, in closing, I'd just say we appreciate your support, and we look forward to speaking to you again soon. I would like to express my thanks to our team and all the hard work that they gave us in the quarter. Thank you very much.

Operator

Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.