Nicole Gunderson - The Blueshirt Group, IR Archie Black - President & CEO Kim Nelson - EVP & CFO.

Tom Roderick - Stifel Nicolaus Scott Berg - Needham & Company Jeff Houston - Northland Securities Matt Pfau - William Blair & Company David Hynes - Canaccord Genuity Jeff Van Rhee - Craig-Hallum Capital Matt Carletti - JMP Securities.

Welcome to the SPS Commerce Fourth Quarter and Full Year 2015 Earnings Conference Call. [Operator Instructions]. I would like to introduce your host for today's conference, Ms. Nicole Gunderson. Ma'am, you may begin..

Good afternoon everyone and thank you for joining us on SPS Commerce's fourth quarter and full year 2015 earnings conference call. We will make certain statements today including with respect to our expected financial results, go to market strategy and efforts designed to increase our traction and penetration with retailers and other customers.

These statements are forward-looking and involve a number of risks and uncertainties that could cause actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call and we undertake no obligation to but publicly update or revise any forward-looking statements whether as a result of other information future events or otherwise.

Please refer to our SEC filings as well as our financial results press release for a more detailed description of the risk factors that may affect our results. These documents are available on our website SPSCommerce.com and at the SEC's website SEC.gov.

In addition we're providing a historical data sheet for easy reference on our Investor Relations section of our website SPSCommerce.com. During our call today we'll discuss adjusted EBITDA financial measures and non-GAAP earnings per share.

In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures, including reconciliations of these measures with comparable GAAP measures. And with that I'll turn the call over to Archie..

Thanks, Nicole and welcome everyone. 2015 was another great year for SBS Commerce. The combination of our business momentum and solid execution enabled us to deliver strong results throughout 2015. Our growth continued to be driven by the expansion of our network as we added new customers and increased our wallet share.

For the full year, revenue grew 24% to $158.5 million and adjusted EBITDA grew 25% to $22.6 million. Recurring revenue grew 25% in 2015. Customer accounts grew 6% and wallet share with our customers grew 15%.

Omnichannel has become the new normal in the retail industry and we continue to take advantage of the multi-billion dollar market opportunity in front of us as we expanded our market leadership in the retail industry. Retailers and suppliers are increasingly recognizing the importance of collaboration in order to meet consumer expectations.

Shoppers naturally gravitate towards retailers who can get them their merchandise the cheapest and the quickest. With the advent of two-hour delivery order online, pick up in store and even Sunday delivery, it is imperative that all members of the retail ecosystem have agile supply chains to stay competitive.

The SPS Commerce network enables trading partners throughout the retail industry to connect and collaborate efficiently to address every changing consumer demands. This year we continue to expand our network, adding new customers and deepening retailer relationships through the viral nature of our network.

Our network also enables a powerful lead generation engine that we continue to benefit from. In 2015, we received leads from over 600 retailers and 170 channel partners and we now have over 65,000 customers. Our market leading network places us at the center of the retail ecosystem.

Larger retailers and suppliers are driving the trend towards increased collaboration and our retail expertise enables us to act as a strategic advisor as they look to adapt to the rapidly changing industry. This evolution is moving us up market with larger suppliers and retailers.

We saw an increase in larger customers this year which is a testament to our leadership position in the retail ecosystem. We now have over 1500 customers that pay us three times our average price and we continue to see nice traction here.

As we move up market, we're seeing an increase in larger suppliers who integrate with us through our channel partners and this year, channel sales contributed 20% of all new business, up from 17% last year.

The growth we're experiencing with channel partners is broad based and it's focused on ERP solutions from Sage, Microsoft, SAP oracle and NetSuite. A recent referral example is Sonos, leader in wireless hi-fi home audio offering high end streaming music speakers and whole home audio set-ups.

Sonos is approaching $1 billion in revenue and was still handle EDI manually which required several people to process EDI orders. Sonos did not believe the strategy supported their scale and growth and brought in FMT Consultants.

We worked with FMT to integrate our cloud-based fulfillment solutions to Microsoft Dynamics GP, enabling Sonos to seamlessly process orders. It also allows them to scale the solution and collaborate with their retailers as they grow. As consumer demands grow, collaboration is increasingly becoming important to retailers.

According to our 2016 retail insight industry report, over 50% of retailers in our network have a mandate to expedite their Omnichannel strategies. As retailers are increasingly share point of sale and sell-through data suppliers are able to increase sales through more intelligence merchandising.

Early indications point to a 5% to 10% increase in sales for suppliers that adopt analytics for their retail partners that share data. These trends are fueling the adoption of our broad suite of analytics and fulfillment solutions.

In 2015, analytics was 17% of total recurring revenue and just last month, we announced our acquisition of ToolBox Solutions, a leader in point of sales of analytics and category management services with expertise in growth, convenience, grocery and drugstore segments.

We look forward to continuing to broaden the functionality of our analytics offerings and expanding our expertise as retailer's and suppliers look to adopt Omnichannel initiatives to better collaborate with the each other. In closing we have very pleased with our execution in 2015.

We're excited about our prospects for 2016, particularly in light of the continued increasing adoption of Omnichannel strategies and our growing footprint in the marketplace. With that I'll turn it over to Kim to discuss our financial results..

Thanks, Archie. We had a great fourth quarter. Revenue for the quarter was $42.3 million, a 20% increase over Q4 of last year and represented our 60th consecutive quarter of revenue growth. Recurring revenue this quarter grew 20% year over year and 20% organically.

The total number of recurring revenue customers increased 6% year-over-year to approximately 23,400. For Q4 wallet share increased 12% year-over-year to approximately $6600. For the quarter adjusted EBITDA was $6.7 million compared to $5 million in Q4 of last year.

This was higher than our expectations and was primarily driven by lower than anticipated sales and marketing spend as the company experienced a tougher than anticipated recruiting and hiring environment. Therefore we did not grow our sales team as quickly as planned in the latter part of the year.

However, based on the hiring pipelines and everything else we're seeing, we expect to accelerate sales hiring in 2016. Before turning to guidance, I'll recap the year. Revenue in 2015 was $158.5 million, a 24% increase year-over-year and adjusted EBITDA grew 25% to $22.6 million. Recurring revenue grew 25% for the year and 22% organically.

We ended the year with total cash and marketable securities of approximately $144 million. Now turning to guidance. For the first quarter of 2016, we expect revenue to be in the range of $44.5 million to $45 million. We expect adjusted the EBITDA to be the in the range of $5.4 million to $5.9 million.

We expect fully diluted earnings per share to be $0.02 to $0.04, with fully diluted average weighted shares outstanding of 17.3 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.20 to $0.22, with stock base compensation expense of approximately $1.9 million.

Depreciation expense of approximately $1.8 million and amortization expense of approximately $1.2 million. For the full yearly we expect revenue to be in the range of $191.5 million to $193 million. We expect adjusted EBITDA to be in the range of $25.5 million to $26.5 million.

We expect fully diluted earnings per share to in the range of $0.17 to $0.20. We expect fully diluted weighted average shares outstanding of approximately 17.4 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.92 to $0.95 with stock based compensation expense of approximately $8.2 million.

We expect depreciation expense of approximately $7.8 million. We expect amortization expense for the year to be approximately $4.8 million. For the year you should model approximately 40% affected tax rate calculated on GAAP pretax net earnings. We expect to pay nominal cash taxes in 2016 due to our NOLs. In summary, we had a strong 2015.

As we enter 2016, our new business pipeline remains robust as the retail industry increasingly adopts Omnichannel strategies. We look forward to expanding our market leadership and we're confident in our ability to achieve our long-term targets. With that, I would like to open the call to questions..

[Operator Instructions]. Our first question comes from the line of Tom Roderick with Stifel. Your line is now open.

Just wanted to start, if I could, with the guidance here for the full year, just trying to get my hands around some of the moving pieces there. And I know historically you guys have been growing the organic piece really nicely at or above 20% organically.

If I back out the sort of $6 million expected contribution for ToolBox, I think we're maybe closer to the 18% organic range for total revenue. But maybe that doesn't fully contemplate how you're thinking about, you know, one-time and non-recurring versus the recurring piece.

Can you give us some guidance as to how to think about those two pieces and then any particular drivers outside of maybe being a little bit behind on sales hiring that would drop the organic growth rate here below the 20% I think investors are kind of used to?.

Sure. So the 20% that you're referring to, Tom, that is a recurring revenue growth rate. As a company we guide to GAAP revenue growth rate and then when we announce our results we give both recurring revenue as well as GAAP revenue. Historically there's been anywhere between about a 1% to 2% delta between GAAP revenue and recurring revenue.

So that's one thing that I would have you keep in mind. The second which you did hit upon, is where we exited the year as it relates to our quota head count for sales, that is less than we had ideally wanted or anticipated and our guidance reflects that..

Okay. Just so I'm clear. When you say you guide to GAAP.

So there could be some non-GAAP adjustments relative to the full year and first quarter guide as it relates to the ToolBox when you report the number?.

It really doesn't have anything to do with ToolBox. It has to do with, if you look historically, when we look at our GAAP revenue growth rates and you look at recurring revenue growth rates over the past couple of years, the recurring revenue growth rate has been higher than the GAAP revenue growth rate. But as a company, we guide to GAAP revenue..

Okay. Wondering if you could just add more clarity around the analytics piece. I heard Archie give contribution from channel and, I apologize, I think I missed the contribution and growth within the analytics piece which you've given historically on the annual call.

Can you just repeat what that was, if you did offer it? Or any detail you can offer behind that and just anecdotally, how much of that growth in analytics are you seeing coming from new customers as opposed to add-on sales at this point?.

Sure, as it relates to the analytics, this year we actually are giving the data point for analytics as a percent of total recurring revenue. Historically, analytics, we have given it as percent of new revenue or new sales in the year. So historically it's been more of a forward-looking indicator.

Analytics, now, is a meaningful enough portion of our business that we felt it was more helpful to the investor this year to share that metric as what that contributed to total, the percent for total recurring revenue. So for 2015, that number is 17% of total recurring revenue..

And then anecdotally, just as it relates to up sell versus direct and new customers coming from analytics, can you talk about how that sales cycle is evolving and how you're managing that internally?.

Sure. As it relates to what makes up the analytics, it's a healthy mix of both for both new customers as well as up selling existing customers. No real change there..

And our next question comes from the line of Scott Berg with Needham and Company. Your line is now open..

Yes, Archie and Kim congrats on another strong quarter. Couple questions from me. First of all from a Leadtec perspective, you are a year into that transaction.

Can you give us a quick update, maybe, on how you've been able to accomplish the merging of products and data centers and ,in your view, year one year later of what that market opportunity currently looks like?.

Yes, I would say that it feels like it's completely one business. We're selling one product offering. There's some legacy businesses out there that, you know, as we had mentioned back in October of 2014 that we were going to maintain which we've done. But the fulfillment, the analytics business is all one now and it feels like one team.

They were part of the sales kick-off.

It feels like it's an organic business at that point and I think that, you know, we're getting decent traction there and we're getting new business and it has a healthy growth rate last year so we definitely have moved the needle there and we continue to feel like the North American marketplaces in its early days and has a lot of the run room..

And I guess the last question for me is, Archie, you gave the update in terms of leads from retailers with your enablement campaigns, you're getting lead from over 600 retailers today. That number has grown from, if my memory serves me right, from about 300 probably about five years ago.

Can you talk about, anecdotally, is that number of opportunities or leads, is that doubled over the last five years, has the number of retailers that are given those leads has doubled? And if you look at those leads is it more up market versus mid market, just trying to understand what that impact looks like for you guys..

So the leads from the retailers, first off, it tends to be mid market and up market retailers and the leads tend to be of all sizes. I would say we're better able to close the larger leads today than we were five years ago.

And I think there's a couple things when we look at retail leads, you know, at the end of the day it's just how many leads and what revenue it turns into.

What we've seen over the last five years, that we're an able to grow the number of retailers that give us leads but more importantly, we're able to move relationships from giving leads to meaningful amount of leads. So, you know, there's also a whole bandwidth.

So we've been able to effectively continue to grow that, the lead generation from retail over the last five years..

And our next question comes from the line of Jeff Houston with Northland Securities. Your line is now open..

I guess to start off with, could you provide a little bit of more color around maybe the magnitude of how many sales and marketing people you were hoping to have going into 2016 versus what it actually was? Are we talking five to ten people or is it more like ten to 20? Just trying to get a general ballpark of how many people you need to hire early in 2016 to catch up..

Sure. If you look historically, company's hired, prior to 2015, the company's hired anywhere organically, usually somewhere in that sort of 25 to 35 heads a year on average. Our expectation for 2016 is we will be hiring that many if not more. We're closing or we're exiting this year with a head count of 238..

And then the metric that Archie provided about, you know, 1500 customers over [indiscernible] average selling price, how does that compare with what it was in 2014? I imagine it was maybe closer to 1200?.

A couple years ago, I believe it was two years ago, we said there was over 1,000 and the 1500 would be a comparable to what we said for two years ago. It was up in 2014 from 2013 but the two data points that are an apple to apple is 1,000 from 2013 to 1500 in 2015..

And then the last question for me is looking at the competitive landscape with the analytics offering, is it still mostly a customized traditional business intelligence providers like Cognos that companies have, you know, kind of tweaked a bit to fit the retail environment or do you have some color about what the competitive landscape looks like now with analytics?.

I think there's a number of things out there. First off, there's just a lot of companies that are just flying naked and don't see, flying blind. They really don't see what's out there. They're not getting the data. They're not utilizing the data.

So that's a big part of it and then the second piece is they're doing it, you know, Cognos, in-house but really the challenge with that is it going out and getting the data, understanding the data, quality assuring the data and normalizing the data so that it's consumable data. The application is important but the first part is extremely important.

And then see we a handful of other competitors in different marketplaces..

And our next question comes from Matt Pfau with William Blair. Your line is now open..

First, Kim, I wanted to touch on the, we look at the EBITDA guidance for 2016 and if I back out what you guided for, in terms of the ToolBox acquisition, it seems like the margin expansion in the core business is a bit less than what you had talked about on the prior earnings call.

So just sort of wondering, I guess one, is that correct? And then two, what's behind that? Is it something to do with the sales hiring and the ramp in productivity of those hires throughout the year since maybe they were hired later than you had originally anticipated?.

Sure, Matt. If you look at what the company provided for ToolBox on our January conference call, at that point we had given a number of what we anticipated the revenue to be which is approximately $6 million is what we said in January and then we said it would have a negative impact to EBITDA for 800.

If you adjust for those two things, you would find yourself right back to what the company had previously guided to EBITDA margin. Perhaps in your calculation you're only adjusting the EBITDA dollars and not adjusting the revenue. So no change relative to the implied margins that the company had previously stated..

Okay.

And then when you think about the hiring of the sales heads and the delays, is there anything specific that caused that? And why do you expect it to be rectified over the next quarter or two?.

Yes, I think what we've seen, in particular, in the Twin Cities marketplace, is the job market is tight, the economy's healthy.

And the effort, I think good candidates are out, there but the effort to get them is higher than it used to be which if you think about the recruiting efficiency goes down, how many people each recruiter that we have onboard can hire has gone down.

And we have based on our lower hiring than we expected, we have increased our recruiting capacity and believe through the end of January we're on a good run, a good curve now for now and into 2016..

And last one for me, just in terms of the analytics as a portion of revenue.

What do you, sort of, see the optimal mix there? What do you think the mix between analytics and fulfillment can be longer term?.

Well, first off I would like both businesses to grow extremely rapidly. That's the ultimate, obviously the ultimate goal. I don't really think about it. I think both have very strong healthy futures.

I think there's probably a little bit more runway in the analytics or there's a lot of green field in front of us in analytics and so it will probably become heavier and heavier analytics but I think, you know, fulfillment continue does have very strong growth which makes it difficult for the analytics piece to become a bigger and bigger percentage.

So I don't have an ultimate mix in mind, just trying to grow both businesses at healthy rates..

And our next question comes from the line of David Hynes with Canaccord Genuity. Your line is now open..

So just want to talk about, maybe customer adds in the quarter. It was in the lower end. With kind of the growth ranges that we've seen historically, I know we're lapping Leadtec a year ago so that throws the comps off.

I guess I'm more curious as we kind of look forward and you think of yourself as a 20% organic recurring revenue grower, how do you roughly think of that splitting between kind of new customer adds and, you know, increasing the wallet share? Could we see the wallet share growth component actually accelerate a bit as you're successful with analytics?.

If you look at what has occurred over the last couple of years, you're correct that the customer growth has been in the single digits and the wallet share growth has been in the double digits. Both are very important contributors to our overall recurring revenue growth.

I would expect both to be important contributors to the overall revenue growth going forward. Certainly the analytics when you add on an additional product, that has much more meaningful impact in that wallet share or that revenue per customer than the customer number.

As it relates to the customer growth which I know you're aware of based on how you asked the question but Q4 is the first quarter that we're lapping the acquisition so the 6% in Q4 was the same growth rate that we were at the prior quarter or organically from a shared number of customer adds, we added 318 this quarter sequentially.

Last year if you strip out the acquisition, we added 247 so we're up about 50 customers sequentially..

And then, as I think of kind of the mix of how you're closing business, are margins on business that comes through the channel the same as kind of your direct business? In other words as channel sales become a larger contributor to the bookings mix, what impact does that have on margins?.

Sure. Where the business is coming in through, in other words whether it's from channel sales or other areas, it's very similar and very comparable so you would not anticipate to have any large impact relative to overall commissions or costs associated with getting that sales depending on which channel which way the lead is converted into a sale..

Okay. And then last one, quick one, you gave us the new metric for analytics as a percent of recurring revenue, that 17% number. What was that in 2014? Just so we have a kind of apples-to-apples comparison..

Yes, you know, I don't have that right here in front of me. I think what would be helpful the last two years prior we gave the indication as it relates to percent of new business and those were 15% and 18% and those are indications of what that growth would translate to in the future. So what you're seeing now in 2015 is that translated to 17%.

Certainly the dollars associated with analytics are greater in 2015 than they were in 2014..

[Operator Instructions]. Our next question comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is now open..

Kim, I think I might have missed it. I know you gave the sales head count but I missed it.

And what was that comparable number last quarter?.

Sure. So we exited the year with 238 head count. That is down 19 sequentially. We were at 257 in Q3 and last year we were at 232. So we're up six for the year. Our expectations for 2016 is we will be back to historical levels if not higher than historical levels from additions to head count for sales..

And could you talk about the sequential decline there. Historically it's been, I don't have it in front of me but I'm pretty sure it was fairly steady sequential builds in the head count there. So just talk about the reduction in heads, you know and any color on specifically, well, start there. I have a follow-up to that one..

Yes, first off, you know, the adds are down. You know, so in any given quarter, if it's up six, there's adds and subtracts so the adds are up. The subtracts are up slightly or up slightly, you know which is a result of one of the things we've found and we've rejiggered some things.

We have a phenomenal training program here and companies have taken note of that. So we've changed some different comp structures which don't have a meaningful impact to expenses but I think we'll be a good retention vehicle..

Have you, if you look at the cohort groups of the reps, as you've layered them in and looked at their productivity after a year, where have you seen any variance in the latest adds or have you?.

It's pretty consistent, Jeff, as it relates to, you know, sort of their cohorts or their length of time here and what level they're at. The efficiencies that we're seeing or expectations that we'd see have remained pretty consistent. To Archie's point, we really try to focus on the first year.

When we bring somebody in that's, you know, say right out of college or pretty junior, we really try to focus initially on training them on how to solution sell our products.

Then, after they have gotten up to speed on that, usually nine to 12 months then they're in a level where there's expectations, certainly, as it relates to, you know, more quota, more selling efficiencies, etcetera. So we really haven't seen, for each cohort group, we really haven't seen a lot of deviation from that over the last couple of years..

Okay.

Would you, I guess, would you characterize what the retailer teams versus the supplier efforts as one standing out versus the other in terms of relative performance?.

No, I would say it's pretty consistent across the business. The different groups. Obviously channel had a good year and as it became a higher percentage. But I would say it's, you know, pretty consistent among the groups..

Okay.

Last one for me then, as you look at the retailer enablement campaigns, once you get a retailer who's feeding you leads, how has the percent of suppliers that you're introduced to changed with respect to how many by year solution versus either have something and ask you to certify or choose to, however they're going to do it but just ask you to certify.

So the question is how many ultimately follow through the pursuit in the ends with those that just end up certifying..

I would tell you that in a typical retailer enablement campaign, the closed rates have been relatively consistent.

I think the one thing that's helped over the last few years is when we go and test somebody, that's almost the beginning of the next sales cycle and we're getting a higher percentage of large customers either directly or through partners to become customers.

So it's not necessarily in the moment of the enabling campaign but that allows us to start a sales process and over time we can convert those testers as we call them to recurring revenue customers..

Thank you. And our next question comes from the line of Patrick Walravens with JMP Securities. Your line is now open..

This is actually Matt on for Pat. If you guys wouldn't mind, could you just give me an update where you're at with the integration of ToolBox Solutions. Thanks..

Yes. Well, so obviously we're about a month into it and, you know, we've obviously had conversations and spent a significant amount of time with their employees and their customers and their prospects so that, all of that has been very, very well-received.

They were part of our sales kick-off and our management kick-off so I think that was really positive. We're in the process of training our sales force how to see opportunities for the ToolBox Solutions and really integrate.

So, you know, early signs I think this is going to be a phenomenal acquisition but I don't want to oversell it because we're 30 days in. So far we've done everything we expected it to do and all the reactions have been extremely positive..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..