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

Scott Berg - Needham Matt Pfau - William Blair Tom Roderick - Stifel Tim Klasell - Northland Securities Jeff Van Rhee - Craig-Hallum Pat Walravens - JMP Mark Schappel - Benchmark.

Good day ladies and gentlemen and thank you for standing by. Welcome to the SPS Commerce First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

[Operator Instructions] I would now like to introduce your host for today’s presentation, Ms. Nicole Gunderson of Investor Relations. Ma'am, please begin..

Good afternoon everyone and thank you for joining us on SPS Commerce's first quarter 2017 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 the 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 the call over to Archie.

Thanks Nicole and welcome everyone. We had a strong start to 2017. Our solid Q1 performance was driven by the continued growth of the SPS Commerce network and demand for our comprehensive cloud-based platform. For the first quarter, revenue grew 14% to $51.9 million. Recurring revenue grew 15%, and adjusted EBITDA grew 43% to $8.5 million.

Today's retail economy is driven by a generation of consumers who expect a consistent, personalized, omnichannel experience and the retailers are being challenged to continuously address their ever changing demands.

The retail environment is more complex than ever and retailers need to exceed merchandising and operations across a growing number of channels. Consumers continue to shop both in-store and online. They don't see the difference between online or in-store channels, but they do expect an engaging shopping experience, whenever and however they shop.

For further context, last year total retail sales in the US grew 4% to $3.5 trillion. In-store sales grew 3%, and represented 89% of total sales. Online sales grew nearly 16% and represented 11% of total sales. Drop ship represented about 10% of online sales. Consumer shopping habits are increasingly complex.

While all retail channels continue to grow, services such as Amazon prime have led consumers to expect fast and pre-fulfillment with an endless selection of goods and in-store experience must equal or exceed the digital experience for retailers to remain relevant. In 2016 53% of in-store sales were web influenced.

It is no longer sufficient to have an online strategy or drop ship strategy or an in-store strategy. It is imperative that retailers and suppliers have a truly omnichannel strategy and achieve real-time collaboration to be able to adapt to the always on retail environment. Omnichannel and retail is working.

A recent HBR study found that within six months of an omnichannel experience customers logged 23% more repeat shopping.

As an importance of having an omnichannel business strategy continues to increase for the retail ecosystem, the need for retailers and suppliers to partner with world-class technology providers is becoming even more significant and this continues to drive demand for our platform.

Red Wing Shoes is an example of a company, which developed an omnichannel strategy to be able to address consumer demands now and into the future. Founded over 100 years ago with just one store, Red Wing now has 500 of its own retail stores and also sells its shoes at over 4,000 stores.

Best known as a maker of work boots, Red Wing has worked to continually evolve its brand beyond industrial footwear to tap into the consumer market and engage more shoppers.

To keep pace with the rising expectations of today's consumers Red Wing needed to grow their online business and align their strategy with their brick and mortar stores, while continuing to support their retail partners.

They were quickly outgrowing their legacy EDI system and turned to SPS for both fulfillment and analytics to grow their operations online and in-store. Through our fulfillment solution, Red Wing can now onboard a training partner in weeks rather than months.

They are also using our analytics solution to make back-based decisions about product performance and inventory, ensuring that the right inventory is in the right place at the right time. Retailers are increasingly adopting omnichannel strategies to remain competitive and suppliers must file a suite to grow their businesses.

Legacy processes are no longer sufficient to achieve the agility that is needed to address ever-changing consumer demands. The need to have an end-to-end solution that enables real time collaboration between training partners is more important than ever before.

Fulfillment enables retailers and suppliers to communicate quickly and efficiently, while analytics provides the visibility necessary to optimize inventory at the store level. Additionally, analytics allows trading partners to collaborate to attract product performance and identify opportunities to grow sales, while enhancing fulfillment performance.

Due to our broad-based solutions, retail expertise and leadership position we continue to grow our network. A recent example is Reinhart, one of the largest Tier 1 food service distributors in the US. With $7 billion in annual revenue, they deliver more than 170 million cases of food and products.

They recently hired a new CIO, whose ultimate goal was to move away from legacy EDI software and automate their supply chain across the entire enterprise enabling real-time communication with their suppliers. In partnership with SPS, Reinhart ran a successful community enablement program.

Holiday Stationstores is a recent retailer addition stemming from the toolbox acquisition.

One of the largest convenience store chains in the US with over 500 locations, Holiday pride themselves in utilizing data to optimize their performance, but much of their internal solutions they develop are resource intensive and couldn't easily integrate multiple data sources and be shared in real time across the organization or with strategic partners.

In their continuing effort to improve insight and collaboration with their strategic partners they selected our analytics solution, with its robust capabilities such as item performance, assortment and promotion opportunities to deliver sales growth, while improving efficiency.

Comprehensive cloud-based platform and broad-based retail network enable thousands of trading partners to communicate in real-time and adapt quickly to ever changing consumer demands and the complex retail environment.

SPS sits at the centre of the retail ecosystem, which allows us to act as a strategic advisor to retailers and suppliers on their omnichannel strategies and we continue to grow our market leadership. We had a successful first quarter and we continue to believe we have a multibillion dollar opportunity in front of us.

With that, I’ll turn it over to Kim to discuss our financial results..

Thanks Archie. We had a great first quarter. Revenue for the quarter was $51.9 million, a 14% increase over Q1 of last year and represented our 65th consecutive quarter of revenue growth. Recurring revenue this quarter grew 15% year-over-year. The total number of recurring revenue customers increased 5% year-over-year to approximately 25,000.

For Q1, wallet share increased 9% year-over-year to approximately $7,700. For the quarter, adjusted EBITDA was $8.5 million, compared to $6 million in Q1 of last year. We ended the quarter with total cash and marketable securities of approximately $157 million.

We ended the quarter with approximately 275 quota carrying sales headcount in line with our expectations. As we mentioned last quarter, due to the increased sales force productivity we expect to realize in 2017, we anticipate adding approximately 15 salespeople by the end of the year. Now turning to guidance.

For the second quarter of 2017, we expect revenue to be in the range of $53.4 million to $53.9 million. We expect adjusted EBITDA to be in the range of $7.3 million to $7.8 million. We expect fully diluted earnings per share to be approximately $0.06 to $0.07 with fully diluted weighted average shares outstanding of approximately 17.7 million shares.

We expect non-GAAP diluted earnings per share to be approximately $0.18 to $0.20 with stock-based compensation expense of approximately $2.5 million, depreciation expense of approximately $2 million and amortization expense of approximately $1.2 million.

For the full year, we expect revenue to be in the range of $220 million to $222 million, representing 14% to 15% growth over 2016. We expect adjusted EBITDA to be in the range of $31.8 million to $32.5 million, representing 19% to 22% growth over 2016.

Our philosophy of margin expansion remains the same and we expect to invest any additional upside back into the business. We expect fully diluted earnings per share to be in the range of $0.36 to $0.39. We expect fully diluted weighted average shares outstanding of approximately 17.7 million shares.

We expect non-GAAP diluted earnings per share to be in the range of $0.83 to $0.85 with stock-based compensation expense of approximately $10.1 million, depreciation expense of approximately $8.3 million and amortization expense for the year to be approximately $4.9 million.

For the remainder of the year, on a quarterly basis, investors should model a 40% effective tax rate calculated on GAAP pretax net earnings. As a reminder, we have begun tax effecting non-GAAP income to conform to the May C&DI issued on non-GAAP measures in 2017.

Non-GAAP income now reflects the tax adjustments of the add-back of stock-based compensation and the amortization of intangibles to non-GAAP income. A reconciliation of the impact to historical periods can be found on the financial data sheet we have posted to the IR section of our website.

In summary, we have a strong start to the year and we look forward to expanding our market leadership and remain confident in our ability to achieve our long-term targets. With that, I’d like to open the call to questions..

[Operator Instructions] Our first question or comment comes from the line of Scott Berg from Needham. Your line is open..

Hi Archie and Kim, congrats on a good quarter. I have two questions.

First Archie, your customer adds where [indiscernible] is right 196 in the quarter and you’ve talked about the reasons why they would be lower this quarter on the last call, can you try to help us understand how much of that is a result of the changes that are happening to these retailers that are delaying enablement campaigns versus the change in your sales go to market strategy in some of those disruptions that may or may not be positive?.

Yes, so I think as far as our change in go to market strategy, I don't think that’s had really an impact, fairly marginal. I mean, somewhat, but somewhat marginal. And the deals in retail tend to be longer sales cycles. So, it is somewhat in the enablement campaigns, which is a large driver of our growth rate.

And from a customer account standpoint, it is through the retail enablement campaigns where you are going to get the largest number of customer accounts. So it is more reflective of enablement..

Great. And my follow-up question would be Kim, your earnings was significantly larger this quarter, it looks like your R&D expense was down sequentially from Q4, a pretty substantial amount for you.

Can you kind of tell us what the puts and takes were of having that so much slower and what should we expect going forward?.

Sure. So, first as it relates to the EBITDA we have reiterated what our expectations are for the year and our expectation is that we will make sure that we are reinvesting appropriately back in the business to hit that EBITDA.

As it relates to the favorability in the quarter, most of the favorability of the EBITDA in the quarter just was related to timing of hires and investment in the business. Specific to your question on the R&D side, you are correct, you did see the Q1 R&D down sequentially from Q4.

Portion of that reason is that, a portion of our R&D, a small portion of our R&D we actually capitalized for product enhancements and in our business we tend to do less of that type of activity in Q4 because we’re really focused on the holiday season and more of that happens in the Q1 time period. So that’s part of the dynamics you see there.

The second part is that more of our hires are now going to be coming-in in the Q2 than we saw in Q1. So, as you are modeling R&D you should expect to see the R&D spend increase for the remainder of the year relative to where it was in Q1..

Great. That's all I have. I will jump back in the queue. Thank you..

Thank you. Our next question or comment comes from the line of Matt Pfau from William Blair. Your line is open..

Hi guys thanks for taking my questions. First, I wanted to touch on the macro environment a bit, obviously there are headlines out there in terms of store closures and bankruptcies have been quite negative, but it seems like you guys have gotten off to a strong start to the year.

So maybe you can just help us understand when we see headlines about the store closures and bankruptcies, what sort of impact does that have on your business?.

So, obviously bankruptcy is where they don't continue operations and they actually close down. That is a negative. We saw that last year where we had four or five go bankrupt and it costs us a point or so of growth. So that does have an impact. Store closings for the most part don't.

What’s interesting is, when you look at the underlying retail environment, if you have an omnichannel strategy as a retailer you are seeing that brick and mortar stores are growing 3% last year and that is about 120% of that is because of web influenced sales. So stores sales are up, but you need to be in the right standpoint.

So there is a lot of uncertainty obviously. Some of the players just didn't have omnichannel strategies, some of the players just - you need to be very strong operationally and merchandising wise in today's retail environment to compete, and some of them aren’t doing that.

So, one of the things that we’ve talked about internally and et cetera is one of the things with the uncertainty in the retail environment, I will tell you that it is uncertain when we will get back to that 20% number, but we see good traction, we see a huge total addressable market in front of us, and a big opportunity.

So with the customers we are helping and surviving, we are really adding a significant amount of that..

Got it. And then I wanted to touch on the sales force a little bit.

Kim could you tell us what the number was in the fourth quarter relative to the number you provided us, the 275 number and then in terms of the change in strategy of hiring a little bit more experience to reps, maybe just an update on how that’s progressing?.

Sure. So for the most currently, approximately 275 that’s in line with Q4. So the way you can take about it is in the quarter. There is a pretty typical amount of attrition that we see as a business and we hire to offset the attrition. That was in line with what our expectations were for the quarter.

We also did reiterate that our expectation is that we would add about a net 15 by the end of the year. That amount is lower than what we’ve added historically based on the efficiencies and the productivity changes that we put in place with the sales force.

As it relates to the mix of hiring of that for the net 15 people to your point, there is a portion of that that are going to be more experienced or seasoned reps or seasoned sales executives to go after some of our larger customer opportunities.

As you would expect on those types of hires, those who would be a bit longer to hire those folks, but we are right in line with what our expectations are relative to hiring them during the year..

Got it and one last follow-up for me with those more experienced reps that you are hiring, what types of backgrounds are you targeting for them?.

It’s pretty varied to the extent they are retail reps, senior retail reps, it helps that they have some background in retail, they have been an enterprise rep in the summer months experience to that extent, they might have two three years experience, if they have it in some type of non-commodity type sales that’s - so it is pretty varied among the sales groups between channel and supplier sales and supplier sales enterprise and retail.

So it’s pretty varied, it is - we are still hiring out of college and we still are hiring, we’ve always hired extremely senior sales reps. So it is pretty varied..

Got it. That's it from me guys, thanks..

Thank you. Our next question or comment comes from the line of Tom Roderick from Stifel. Your line is open..

Hi, it is actually Parker [indiscernible] in for Tom Roderick. Thanks for taking my question.

As we look at the average recurring revenue for customer growth of roughly 9% this quarter versus your mid-to-high teens figure you posted in quarters past, I was wondering if you can comment on any changes and pricing dynamics in the quarter or what exactly drove that figure? Thank you..

Sure. There is really nothing as it relates to the pricing dynamics Parker. The growth rate is pretty similar to last quarter when you look at it on an organic basis. So just keep in mind this is the first quarter, we are lapping the acquisition of toolbox last year.

So if you look at it from an organic perspective we are 9% this quarter and we are a little bit closer to 10% last quarter. So, pretty similar dynamics within the two quarter. Nothing specific to highlight relative to pricing dynamics..

Alright thanks.

And as you look at the macro environment, are you seeing any differences in some of those, the newer markets for you guys like New Zealand or Australia, compared to the United States?.

Well Australia is a pretty strong market for us and we are seeing a pretty decent growth. Obviously Amazon on just announced they were going into Australia. So, I think you will see hind set there. They do have some extremely sophisticated retailers just like the US does and some that are alike.

It feels pretty similar to the US except without the - it has not had the Amazon impact. It has had the opportunity of e-commerce, but not the thread of Amazon, , but obviously it is a big announcement there..

Got it. Thanks again..

Thank you. Our next question or comment comes from the line of Tim Klasell from Northland Securities. Your line is open..

Okay great. Thank you very much and congrats on the nice quarter guys. Two quick questions one and I am sorry I got on just a bit late.

The analytics in your prepared remarks, a fair number of comments on that, how did that perform maybe give us a little color and how did that perform quantitatively during the quarter and how are you thinking about that going forward? Thank you..

Sure. So, Kim we provide update on analytics on an annual basis. So, I don't have an update to tell you specific within the quarter.

You are correct, we did highlight some examples, one being on the toolbox side, so now that we are just about a year into that acquisition, we really are pleased with what we have seen there, and so we feel very good as it relates to the analytics business.

Do keep in mind relative to some of the bankruptcies that Archie had referred to that occurred sort of in the latter part of 2016. The negative impact that’s having in 2017 is more skewed to the analytics business. So that’s nothing particularly new in the quarter, but that’s just sort of a reminder.

Overall, we think there’s lots of opportunities to grow both the fulfillment business, as well is the analytics business..

Okay great, great. And then you are having your users’ conference this quarter, what is the impact that you are projecting on this quarter as far as expenses and revenues, can you remind us on that? Thank you..

Sure. So as it relates to the user conference you are correct that’s in Q2. And the dollars associated with that are already reflected within our guidance, very similar to last year.

What you saw last year and what you are also seeing this year is our expectation for EBITDA goes down a little bit sequentially from Q1, partly that is to reflect the cost of that user conference, so nothing really different relative to what you would have seen last year..

Okay, great. Thank you very much..

Thank you. Our next question or comment comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is open..

Great thank you.

A couple of questions, I guess Archie first on the sales cycles, you had commented within the retail food chain that you had seen some sales cycles lengthen, can you just, any incremental color there, was it sort of a one-time lengthening and now you feel like things have stabilized? And then just one clarification as well, has your opinion on the timeline to 20% recurring growth changed at all?.

Yes, I think the - to address the first question on the timeline is on the retailers, obviously there is a lot of uncertainty in the retail environment et cetera.

So, I don't know that with the uncertainty I am going to project how long - will stay longer or whatnot, but we are seeing uncertainty, but obviously we are seeing a lot of traction as well.

So, I don’t, it is not gloom and doom, we’ve had the significant traction, but we have a lot of great activity going on with the retailers and we had a ton of value to those retailers. With that uncertainty we are pulling any long-term forecast, I think to be able to give guidance more than a year out just doesn't seem prudent at this time.

Saying we are going to hit 20%..

Okay.

And just to be clear, that unwillingness to go to that long-term forecast is really just, I guess sales cycles were difficult last quarter, they were difficult this quarter, so nothing has really changed in the cycles or the tone of business, but you have just sort of opted to say look, in light of that we may have previously said end of 2018 for 20% or just going to take that of the table for now until we get better clarity is that sort of a fair read back?.

I think that’s right Jeff, and just saying, it just seems, I don't know, in the retail environment we feel very optimistic about our business.

We are very optimistic about how the reorg has happened and how the toolbox acquisition, feel very upbeat about the business, but the uncertainty looming out there just doesn't feel like to give long to - to give guidance more than a year out just doesn't seem like a prudent thing..

Yes. I totally agree.

Two questions and the last questions from me, one, any changes worth noting in the enablement pipeline where they are coming from size, whether you are going to get all the lead, just any incremental call about the enablement pipeline? And then secondly, if you would just touch on the drop ship deals, I still tend to get a fair amount of questions around commerce hub, the differentiation in terms of the deals that are right in your wheelhouse versus those that might be more suited to what they are trying to bring to the table?.

Yes first, the first part of the question, we are not seeing significant changes in who we are going after or how we are doing an enablement campaign, it is still pretty similar on that front. From a drop ship standpoint, we do drop ship with over 300 retailers today.

So, it’s an important - our story is really about the network and supporting you as a supplier regardless of who - what channel you sell into and it is really the life cycle of the order and the life cycle of the item that will be able to address your concerns or needs as a supplier.

I’d say the biggest difference, commerce hub is a 100% focused on the drop ship. It is really not a network play, it is a drop ship play, a lot around the order management system for the retailers for about 40 retailers, I think is thereabouts today.

So, in those deals where it is a large retailer looking for the drop ship component of their e-commerce business commerce hub is in those deals, if they have an order management system and they’ve solved that problem, we are in really good standings.

If they are looking to purchase commerce hubs order management system than they are going to have a competitive advantage..

Got it. Okay great. Thank you..

Thank you. Our next question or comment comes from the line of Pat Walravens from JMP. Your line is open..

Oh, great thank you. Hi guys..

Hi Pat..

Hi.

Can you tell us if you were able to increase the number of retailers giving you leads or the number of retailers giving you all your leads this quarter?.

You know that’s an information - Pat we look at that on a more of a things sort of like an annualize or TDM basis, so we will provide an update on that as we exit this year on an annual basis consistent with what we’ve done before. Within the quarter itself, we had a nice healthy mix of enablement campaigns, and leads coming from retailers.

However the same comment that we had mentioned on the last earnings call, the expectation in this year, we're not having as many as we had initially anticipated because of a subset of retailers, but the dynamics that we saw within the quarter was pretty much what we are expecting as we entered into the quarter..

So, you know, what let’s say if you added any? We don't need a number, I'm just wondering, because you didn't add any last year for the first time in your history. So, I think it’s an important thing to get a sense of when you start adding it again..

What we do is on an annual basis we will provide how many retailers, we do some activity with on a community enabling campaigns and how many we do all with. And that is metric that we track on an annual basis..

Okay. Do you feel good about it? Archie, I would like you to answer that one..

Yes, we feel good about the tone of the business. We feel good about the total addressable market. We feel good about what happened with the toolbox acquisition. We don't feel good about the uncertainty in the retail market, but, I mean we think that we'll set up for the long term and plan on continuing to execute on that..

Okay.

And then I might have missed it, Kim did you give us the organic rate and do you mind repeating it if you did?.

For recurring revenue or for - what numbers are you looking for Pat?.

The organic recurring revenue growth rate that you usually give..

Yes, since we lapped the toolbox acquisition, the reported and organic are one and the same, so GAAP revenue 14%, recurring revenue 15%..

Okay great.

And then lastly, I mean being flat on the sales headcount from Q4 to Q1, were you really happy with that? I mean, don't you want to, isn’t it better to frontload your hires and then they have the year to deliver for you?.

Well this is really pat what we anticipated. Obviously, we talked about it, we did a pretty significant reorganization in the beginning of the year.

So, the higher into that environment to be recruiting heavily in December with that out there and then having people come and do that new environment just - we anticipated more back end of the quarter hiring. So, January was non-existent for the most part.

So, it is what we anticipated from a headcount standpoint, and I think you will see as we go through the quarters. We will be on the above 15, where we think we will be. So, I feel pretty confident in that number of 15..

Okay, good. Alright, thank you both very much..

Thank you. [Operator Instructions] Our next question or comment comes from the line of Mark Schappel from Benchmark. Your line is open..

Hi, thank you for taking my question.

Archie could you talk a little bit about some of the indications of success that you are seeing with respect to the changes you made in the sales organization at the beginning of the year?.

Yes. First off I think it is extremely early, but I think we will take victories on as the turnover has not been significantly different than what it has been in the past.

I think the pipelines are growing and people are past the changes and we have a very, very strong sales force with very committed people that I think are embracing the change in the new world, and I think they are going after some - their territory is extremely aggressively.

Early signs of pipelines et cetera, I feel very good about the stability in the sales force, the leadership of the sales force, all the - unfortunately those are softer things, but the pipeline is growing and the pipeline is strong with the changes..

Okay great. And then one final question. Building on an older question actually, I was wondering if you can just talk about some of the success you are having in building our international network and also to what we can expect on that front in the coming year..

Yes so from - we look at it from a couple of different ways. Australia, we continue to have a nice success there.

We continue to expand our sales force there, we continue to make progress there, and I think frankly Amazon coming in to that market will give a more sense of urgency on some of the initiatives for retailer, so very much what we saw three, four years ago at the impact of Amazon more so three, four years ago in the U.S.

So I feel Europe has been more around the - working with the analytics plan. We continue to expand our network there and then Asia is really more around the North America supply chain. We continue to expand our footprint.

We continue to let the viral nature of our network expand our business and that’s the way we will continue to execute on that opportunity..

Great, thank you..

Thank you. I’m showing no additional questions in the queue at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day..