Nicole Gunderson - Investor Relations Archie Black - President and Chief Executive Officer Kim Nelson - Chief Financial Officer.

Scott Berg - Needham & Company Tom Roderick - Stifel Nicolaus Jeff Van Rhee - Craig-Hallum Natasha Asar - JMP Securities.

Good afternoon ladies and gentlemen and welcome to the SPS Commerce Q3 2016 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to your host Nicole Gunderson, Investor Relations..

Good afternoon everyone, and thank you for joining us on SPS Commerce's third quarter 2016 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 publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Please refer to our SEC filings, 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 at our website, spscommerce.com and at the SEC's website, sec.gov.

In addition, we are providing a historical data sheet for easy reference on our Investor Relations section of our website, spscommerce.com. During our call today, we will 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 it over to Archie..

Thanks Nicole, and welcome, everyone. We had a strong third quarter. Total revenue grew 22%, to $49.3 million, recurring revenue grew 22%, and adjusted EBITDA was $7.4 million. Consumers are increasingly empowered through mobile and social commerce.

And the best way to retain customers and attract new ones is to give them what they want, deliver it when and where they want it. Collaboration and transparency between trading partners is more important than ever as retailers and suppliers look to grow revenues, increase profitability, and retain customers in the omnichannel world.

SPS Commerce enables an unparallel level of supply chain visibility, agility, and collaboration and the industry evolution to omnichannel commerce continues to drive our success. Bodybuilding.com is the Number 1 online sports nutrition retailer with over 29 million unique visitors.

And just to just recently embraced EDI to continue to grow their business. Previously, they were using a manual system to process orders and communicate with their suppliers by email, fax, and phone. Because of this they had limited visibility in the inventory of their suppliers.

They made the necessary upgrades to their internal systems and ran an enablement campaign with us to ensure that their suppliers were compliant with their new EDI system. Bodybuilding.com is now able to expand their product selection by enabling dropship capabilities, as well as efficiently scaling in the U.S.

along with their growing European business. Retailers and suppliers need to quickly address the ever changing expectations and shopping habits of consumers and the inability to adapt the supply chain can cause increased cost and missed opportunities.

For example, according to Fortune, more than 61% of retailers use buy online, pick up in store as a way to attract more e-commerce customers, while reducing shipping costs.

However, the stunning fact is that more than half of customers, who buy online, pick up in store experience problems related to their orders, often resulting in customers going elsewhere. The surge in online shopping has been a boon for consumers, but a challenge for supply chains.

Retail researcher, ShopperTrak, found that last year e-commerce sales jumped 14% on Black Friday, and Adobe's Digital index found that total online sales on Cyber Monday rose 16%. This increase in online purchases are good for sales, but can be challenging for profitability and puts additional pressure on the supply chain.

As e-commerce has transformed its shopping habits, supply chain operations have to be able to quickly adapt to these changing patterns in order volumes. Legacy, technology, and solutions that support single-channel shopping are not sufficient in the omnichannel world, and this will continue to provide a tailwind to our success.

In summary, the third quarter was another quarter of strong execution as we continue to enable retailers and suppliers to address the ever changing retail landscape. Our opportunity is more robust than ever and I look forward to extending our market leadership even further. With that, I’ll turn it over to Kim to discuss our financial results..

Thanks Archie. We had a great third quarter. Revenue for the quarter was $49.3 million, a 22% increase over Q3 of last year and represented our 63rd consecutive quarter of revenue growth. Recurring revenue this quarter grew 22% year-over-year and 17% organically.

The total number of recurring revenue customers increased 6% year-over-year to approximately 24,600. For Q3, wallet share increased 15% year-over-year to approximately $7,400. For the quarter, adjusted EBITDA was $7.4 million, compared to $6.2 million in Q3 of last year.

We ended the quarter with total cash and marketable securities of approximately $138 million. We ended the quarter with approximately 280 quota-carrying sales headcount.

As we have wrapped up much of our hiring for the year, we expect this number to come down slightly in Q4 due to normal levels of attrition, but we expect overall hiring for 2016 to be above our historical hiring levels. Now turning to guidance. For the fourth quarter of 2016, we expect revenue to be in the range of $50.5 million to $51 million.

This guidance reflects a modest 1% impact from bankruptcies in the retail space. We expect adjusted EBITDA to be in the range of $6.9 million to $7.4 million. We expect fully diluted earnings per share to be approximately $0.07 to $0.08 with fully diluted weighted shares outstanding of approximately 17.4 million shares.

We expect non-GAAP diluted earnings per share to be approximately $0.26 to $0.27 with stock-based compensation expense of approximately $2.1 million, depreciation expense of approximately $1.8 million, and amortization expense of approximately $1.2 million. For the full year, we expect revenue to be in the range of $192.7 million to $193.2 million.

We expect EBITDA to be in the range of $26.0 million to $26.5 million. We expect fully diluted earnings per share to be in the range of $0.29 to $0.31. We expect fully diluted weighted average shares outstanding of approximately 17.2 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.98 to $0.99 with stock-based compensation expense of approximately $8.1 million. We expect depreciation expense of approximately $6.7 million. We expect amortization expense for the year to be approximately $4.8 million.

And for the forecast you should model approximately 40% effective tax rate calculated on GAAP pretax net earnings. We expect to pay nominal cash taxes in 2016, due to our NOLs.

For modeling purposes for 2017, factoring in the 1% impact from bankruptcies and the retail space, we expect recurring revenue growth rates to be similar to our current organic growth rate of 17% for the first half of 2017.

We expect our recurring revenue growth rate to increase in the second half of 2017 and we expect to be back to 20% recurring revenue growth in 2018. Regarding adjusted EBITDA, investors should model approximately 14.5% adjusted EBITDA margin in-line with our expectation of delivering about 1% improvement to adjusted EBITDA margin.

As we look out towards next year, our philosophy and margin expansion remains the same and we expect to invest any additional upside back into the business. We look forward to continuing to expand our market leadership and we are confident in our ability to achieve our long-term targets. With that, I’d like to open the call to questions..

[Operator Instructions] Thank you. And your first question comes from the line of Scott Berg from Needham. Your line is now open..

Hi Archie and Kim, congrats on a good quarter. Couple of questions for me here.

First of all Archie on the sales headcount additions, you guys went above and beyond your historical trends as Kim mentioned, 280, just took a little attrition in Q4, which is normal, but can you talk about where those mix of additions are hitting your different sales teams? Are you investing may be anything different this year relative to last year or the year before in terms of what sales teams are giving those additions?.

Well I think as far as numbers go, it spread pretty evenly with the current head count between retail, channel, international, and then supplier sales. As we talked through the year, we are hiring more senior sales reps. It reflected as well in the numbers, but I think it spread throughout all the groups.

It’s not drastic investments one way or the another. Again, factoring in the size of the groups, obviously if a group is larger it did get more people..

All right, helpful there.

And then Kim on the bankruptcies in the industry that you talked about that seems to be impacting little bit of your numbers here in the fourth quarter and next year, can you maybe give a little bit more color in terms of the magnitude, do you think this is a 1%, 2% headwind here as you go forward over the next 12 months or so or should we be viewing it may be in a different way?.

Sure. So, we are anticipating it to be about 1% impact and that is what we have reflected in our guidance for Q4, as well as the color that we provided for 2017.

An example of what we're seeing in there, we’ll take Sports Authority as an example, what’s interesting with Sports Authority and how we’re seeing that impact us is Sports Authority actually used our collaboration analytics product, and so by default that means they were one of the retailers that were sharing point-of-sale and sell-through data that in turn we would then provide to our suppliers.

In that case that tends to be skewed to some of our larger size suppliers. So, not as many total number of suppliers but from our revenue per customer has a more meaningful impact because it’s more on the analytic side versus the fulfillment side, but at this point our expectation is approximately 1%, which we have reflected in our numbers..

Great. And a quick follow-up from me Archie.

On your partner involvement, partners have been a much bigger part of your business over the last couple of years and obviously omnichannel is a big team driving what you do, can you talk about any influence as your partners have with your customers, whether it’s on the retail side or the supplier side to helping them make or bridge that gap and push them to maybe towards your solutions more quickly?.

Well obviously for these retailers and suppliers that adopt to the new omnichannel world they have a business they need to change, and I think the partners are helping from ERP to design to process flow.

I think the one slight difference you are seeing positive in 2017 is, in the past we’ve been almost 100% supplier focused and we're getting more attraction on the channel sell-side. Again, it’s a very, very early on the retail side to help people design their infrastructure and drive enablement campaigns..

Great, that's all I have. Thanks for taking my questions..

Your next question comes from the line of Tom Roderick from Stifel. Your line is now open..

Hi guys, good afternoon and thanks for taking my questions.

So, Archie I wanted to just touch on sort of the break between fulfillment and analytics, you had touched on it anecdotally a little bit last quarter and suggested in the second quarter you guys had a very strong fulfillment quarter, can you talk a little bit about the dynamic between those two trends fulfillment versus analytics, what’s kind of the primary driver of growth, the greater driver of growth at this point?.

I would say it’s more balanced in this quarter slightly towards the fulfillment side. As Kim mentioned, as we look at bankruptcy that actually hit analytics a little heavier than fulfillment. So the slightly fulfillment leaning not as much as it was the last few quarters and bankruptcy is going forward will hit analytics.

That 1% is actually heavier on analytics, and pure dollar amount it’s heavier in analytics and obviously the smaller piece of business. So from our percentage standpoint it’s more..

And Archie as you guys go back and look over the last few quarters, I know you specifically called it last quarter that analytics had perhaps slowed a touch, but fulfillment offset that, now that you have some more information in your fingertips, are you able to see the impact from Sports Authority itself, is it possible to conclude that that sort of one factor was in fact slowing things a touch on the analytics front or where they unrelated in the past and just going forward that we will see some of that impact from analytics coming out of Sports Authority?.

Sure. Tom, I would say that it is more unrelated between the two.

So, if I think about the community enablement campaigns that we discussed last quarter, the mix of those enablement campaigns the prior quarter were more on the fulfillment side, and I really think that’s just more as retailers were really trying to grasp what they needed to do in order to compete effectively in the omnichannel world.

So, I do look at that separate versus the kind of we’re making on the bankruptcy side and giving the additional color of saying, related to the retailers that are bankrupt that will impact the - if you want to think about that base analytics number a bit more versus fulfillment just because of what type of retailer that was..

Got you. Okay good.

And Kim one last one for you, just looking at the number of sales reps you’ve hired this year you've outpaced your expectations, as those reps start to come online and become fully productive, where should we start to see the impact of that? In other words, are you staffing a lot of these in lead gen and lead closure such that we should start to see the new customer count growth rate accelerate, are they being put on teams where they are upselling to the installed base and therefore we're going to see it on the ARPU side of the equation? What’s the best sale of productivity for the reps that you’ve hired here?.

Sure, so it’s really going to be across or throughout the sales organization. The quantity of them will be more based on the size of what those organizations are, but we really have added throughout and not a disproportionate amount percentage wise in one area versus the other.

How you're going to see that reflected in our numbers, well you will see that as it relates to the total recurring revenue growth and then we provide the two metrics, which are in a sense outputs the bad, the customer count, as well as revenue per customer, but it’s - it will really be on that overall recurring revenue growth that we’ve stated that in 2018 is when we expect that to be back to 20%..

Got you. Okay, thanks guys, appreciate it..

And your next question comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is now open..

Great, thank you. Just a couple from me guys.

With respect to ToolBox, I think the original target was $6 million, are still on track for that?.

So, as it relates to toolbox we’re actually, ahead of what our original expectations were for ToolBox. So, we’re very pleased with the acquisition as it relates to financial performance, as well as the fabulous group of employees and individuals that we got as part of that acquisition, so overall ToolBox is at or exceeding our expectations..

Okay, good.

And then on the sales attrition, I don't know what normal sales attrition would be for Q4, can you give even accrued sense of what kind of drawdown you think might be a reasonable baseline to expect?.

So, what we’ve seen through the first three quarters is back to more historical levels of sales attrition and so our expectation is, we would expect similar levels in Q4 as well..

Similar churn in Q4, but you can't give me, I don't know what sales churn was in queues 1, 2, 3, so can you give a range?.

Yeah, our historical sales, our turnover levels have been in the 20%..

Okay. Got it.

And then from our customer standpoint where are you, I guess this quarter with respect to dollar in customer count churn?.

Sure. So, as it relates to those metrics, the customer churn is still above that 12% from annualized perspective. Dollar churn is still somewhat similar to that.

As it relates to the bankruptcies that we discussed that in the going forward where we anticipate that impacting us about 1%, you would see that impact more that revenue per customer metric than the number of customers metric..

Got it.

And just one last from me, with respect to the new customer capture this quarter just curious how many of those that were brought on where previously tested, where prior test customers that were now converted to full paying?.

I don't know the answer to that in this particular quarter. Typically, when you see an enablement program here’s what's kind of classic is that you test, those that you test, there is usually some revenue about six months later, 4 months to 6 months later, where those go into recurring revenue customers.

They tend to be larger customers, so the count tends to be extremely low. That’s the classic. So, I don't know what the number was this quarter..

So, but your sense is that timeline to convert conversion from a test to a paying customer, any changes there?.

No, no. And again the thing that’s important is the count number is important, it’s not that meaningful, but the revenue is because they tend to be customers again that might be 5 times to 10 times our average customer ARPU..

Yes, got it. Okay, great, thanks..

[Operator Instructions] Your next question comes from the line of [indiscernible] from First Analyst. Your line is open..

Thanks good afternoon, nice quarter.

I was wondering can you discuss the proportion of your suppliers that do dropship today or say new suppliers you brought on board in the last 12 months was so that do dropship, I’m just trying to think about how influential that trend can be for you guys relative to the other influences on your business?.

Yes, I don't have a concrete number of what percent actually do dropship or have a third party logistics provider do dropship for them. I think where the big driver for dropship is as their supply chains get more complex and there is more requirements that forces them away from the legacy systems.

And that’s really in my opinion the bigger opportunities that this fast changing world, I can't change fast enough, if I’m anchored down with legacy systems. So that’s the biggest influence from our standpoint on dropship.

It’s a meaningful number for us, the number of suppliers that dropship and I think one of the things that you are going to see for retailers is more and more retailers are going to have their existing suppliers dropship because what we are seeing in a best, what we consider to be a best practice scenario is a supplier might sell 200 items, 50 of those are going to be in the store and 150 will be dropshipped and obviously that’s a way for a retailer to see if their customers are interested in that product, and obviously the retailer strategy typically is that if sales velocity increases, they stop dropshipping that product and bring it into either of the distribution centre or and/or the stores..

Okay, thank you. And just on your bankruptcy factor, the 1% impact, have you previously had to make adjustments for them? I’m trying to just get a flavor for how unusual an adjustment that might be for you? Thanks..

Sure. So, we are expecting the bankruptcies have minimal impact of about and about a percent so we did provide that update in our guidance. You know the last time this had occurred it was actually back in 2008, 2009. So, it is relatively unusual, but it is also a pretty small percentage impact overall for us..

Okay, thanks very much..

And your next question comes from line of Patrick Walravens from JMP Securities. Your line is now open..

Hi, this is Natasha on for Pat. Thanks for taking my question.

Can you talk a little bit about the impact on business if Oracle answered buying NetSuite?.

Yes, we have - in our five channel sales practice areas one of them is NetSuite, one of them is Oracle. We have a very strong relationship with both. We actually have a very strong top to top relationship with NetSuite.

So, I think there will be minor impact, I think the question will be, can we leverage the very, very strong top relationship with NetSuite that we have to drive more business from Oracle, but I think it’s minimal because I think over the next at least number of years, you’re going to see a NetSuite solution and an Oracle solution continue to be in the marketplace.

So as long as those two companies remain strong and vibrant I see minimal impact..

Great, thank you..

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all now disconnect..