Good day, ladies and gentlemen, and welcome to the SPS Commerce Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Todd Friedman. Sir, you may begin.

Thanks, Mac. Good afternoon, everybody, and thank you, all, for joining us on SPS Commerce‘s Second Quarter 2012 Conference Call. Joining me on the call today is CEO and President, Archie Black; and CFO, Kim Nelson. Before turning the call over to the company I will read our Safe Harbor statement. 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 you historical data sheets for easy reference on our Investor Relations section of our website at 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 their comparable GAAP measures. And with that, I’ll turn the call over to Archie.

Thanks, Todd, and welcome, everyone. We had another great quarter with both revenue and EBITDA ahead of guidance. Revenue for the quarter increased 28% to $17.8 million, and adjusted EBITDA was $2.3 million. Recurring revenue grew at 30%. We have a large and growing market opportunity, and we're well positioned to take advantage of it. We continue to invest in our sales and marketing team and channel programs, and we continue to build new features and functionality into our product suite, making it scalable to any size supplier. This quarter we were once again successful in expanding our customer base and capturing more wallet share from our existing customers. As we continue to invest, we remain focused on these 2 metrics, as they represent the underlying fundamental growth strategy. Over the last year we’ve been talking about the ongoing evolution of the supply chain market that’s providing a tailwind to our growth, the growing need for cloud-based EDI solutions, the need to meet the changing distribution demands of retailers, the need to meet increasing consumer expectations and the need for new and innovative EDI strategies to accommodate the rise of e-commerce. As the evolution in the market continues, we believe we're well positioned to take advantage of these trends. On the technology side, our solution is able to meet the needs of both small and large enterprises. Not only are we beginning to move up market with our channel program, but we're also able to expand our solution set to meet the needs of our S&B suppliers that are seeing growth within their businesses. Additionally, we continue to add new features and functionality to our product suite. This quarter we upgraded our Universal Catalog service, which helps trading partners easily set up, maintain and exchange product data with their suppliers…

Thanks, Archie. As Archie mentioned, we had a great second quarter. Revenue for the quarter was $17.8 million, a 28% increase over Q2 of last year, and represented our 46th consecutive quarter of revenue growth. The increase in revenues is a result of an increase in recurring revenue customers and an increase in what we refer to as wallet share, which is the analyzed average recurring revenue per recurring revenue customer. Recurring revenue this quarter grew 30% year-over-year. The total number of recurring revenue customers increased 11% year-over-year to 17,035, reflective of the strong enablement activity in the quarter. For Q2 annualized wallet share increased 10% to $3,668. As you look at these 2 metrics, it’s important to remember that they work in concert with each other, and it’s really the mix of the 2 metrics together that we focus on. Total operating expenses for the quarter were $12.2 million and represented 69% of revenue. Looking at the individual line items. Sales and marketing was $7 million, G&A expenses were $3.2 million, R&D was $1.8 million and operating profit was $751,000. For the quarter adjusted EBITDA was $2.3 million, compared to $1 million in Q2 of last year. We ended the quarter with total cash of approximately $35 million. Now turning to guidance. For the third quarter of 2012, we expect revenue to be in the range of $18.2 million to $18.4 million. We expect fully diluted earnings per share to be in the range of $0.02 to $0.03, with fully diluted weighted average shares outstanding of approximately 13.3 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.10 to $0.011 with stock-based compensation expense of approximately $800,000 and amortization expense of approximately $260,000. We expect adjusted EBITDA to be in the range of…

[Operator Instructions] Our first question is from Laura Lederman of William Blair.

Can you talk a little bit about the new EDI compliance and the additional cost that it is going to entail and what kind of up-sell it would be to your current ASP, if you will. And also if you talk a little bit about, any sense of the economy slowing at all? I mean, we all read the newspapers and go, "Oh, my God, what's going s going on?" But if you'd can give us a sense of -- obviously, your quarter was good, but are you seeing any signs of things slowing here domestically?

This is Archie. Two different questions. The first is around EDI compliance. It’s really taking much of the data that we already have within our system and giving that data back in that consumable manner to both the retailer and the supplier. Are they shipping on time? Are they filling out their ASMs? It’s all of that data that we already have. The economics are both from the retailer and the supplier, and it’s going to be typically for a supplier to be 25% to 75% increase in their bill and a new charge to the retailer, and another way, yet another way for us to have a good conversation, a strategic conversation with the retailer. As far as shifting over to the economy, again, we’re not a very good bellwether for the economy, because we think we’re somewhat indifferent to the economic times. If retail is strong or weak, there’s different puts and takes and different sales strategies, but our output and our end result should be roughly the same. So from that standpoint, I don’t think can look at our results and have a lot of indications. We're seeing cautious optimism, which is almost a position we’ve been stuck in, I think, for the retailers for the last couple of years. Obviously, e-commerce is driving a lot of change. People realize they need to adjust to make that change. They need to continue to make their supply chains more efficient, so that the mood we see is, I think, positive, that there is change going on. And, again, anytime there's change, that tends to be a positive for SPS Commerce.

Our next question is from Michael Huang from Needham.

A few questions for you. So first of all, so clearly there was strength in customer adds, and I know you’ve talked about how strong enablement activity is a key driver there. But I was wondering if you could help us understand whether or not you’re seeing any improvements or trends around conversion rates. So is the growth just a function of more enablement activity? Or are you doing a better job of converting those leads that you have?

I think there’s been a general slight uptick in conversion rates, Michael, but in general it shows the strength of enablement activity. And again typically, Q2, Q3 are stronger enablement activity quarters, and this was a typical second quarter strong enablement activity, where you end up with significant customer adds.

And typically, and not to get you to spell out specifics around the number of enablement activities that you have, but would you see based on the number that you have now -- I mean, should we expect to see some growth quarter-to-quarter in Q3 in terms of number of new customers?

So as it relates to the enablement campaigns, Q2 was a very strong quarter for us, all those activities, as we had mentioned on our previous conference call, that, that’s what we were expecting. In Q3 we have a very healthy pipeline of enablement campaigns as well. But between the 2 I would envision that Q2 will be a little bit stronger than Q3. Both good quarters [ph], but Q2 a little bit stronger.

Okay, and obviously great growth in ARPU as well. How much of that is coming from kind of the push-up market? And how much is coming from either incremental supplier connections or retail connections or modules? Just help us understand that.

Yes, it’s a strong combination of both, Michael, but we are moving upstream our typical new customer. We're adding more of the larger new customers, especially relative to our average-size customer. But we are -- a significant component of that is upselling our existing customers with new solution sets and new retailers, new trading partners within their supply chain that are nonretailers. So it’s a healthy combination of both.

Okay. And then one last question. So just in terms of the kind of new VP of Marketing that you've brought on here, I mean, how does that change how you're going to be messaging to the end market? I know it’s early here, but, I mean, does that change kind of how you talk to the end customer, or if it's to the bigger customer or to the retailer?

I think when we hired Peter, we saw a couple of things. We saw first a very, very talented individual that we were able to recruit to SPS Commerce. Two, really you should think of it as, as we continue to grow, we will continue to add talent to our management team as we’ve done, over the next several years. So this is not meant to be a hire so that we could have a new message out there. It was really part of a natural evolution of SPS Commerce as a company.

Our next question is from Tom Roderick of Stifel, Nicolaus.

So Kim, let me take a stab a getting some numbers from you, just so we make sure we're on the same page with respect to organic growth across some of the key metrics. So this is the first quarter that we’ve lapped Direct DDI, and if I remember right, you had a stub period in there for part of last year’s Q2. Do you have the direct -- or do you have the organic recurring revenue number for growth this quarter?

Sure, 26%.

26%, okay, great. And so in looking at the customer count, that 11% looks like it’s been pretty consistent if I sort of normalize for the past few quarters. But it seems as though the ARPU has been a bigger driver of the acceleration in the business here. So I guess Michael just asked a question around the drivers behind that, but can you talk to the component of the channel and how that’s impacting the move upstream? And what percentage of revenues are coming from channel partners right now?

So as it relates to channel sales, we did spend time in the last, the Q1 conference call, taking about them. That certainly is having an impact relative to the ASP per customer. Q2 very similar to the comments that we would have made on Q1. As it relates to the numbers on the ARPU, you are correct. It was 10% this quarter organically, because you have a bit of a mix. Last Q2 it's closer to 11% organically this quarter. That increase is related to the increase in the number of customers we're getting through channel sales, again, nothing new versus what we talked about a quarter ago, as well as the opportunity to continue to up-sell our existing customer base.

Okay, last one from me just on the sales hiring front. If my math is right, looks like you added 10 sales heads in the quarter. But if I remember right, I think you guys kind of get into the meat of your hiring season here in the summer months. How should we think about where this 133 number goes for the next quarter and the next couple of quarters?

We ended the quarter as you said at 133, which was up sequentially 10 heads. We will continue to add sales people. That’s part of our overall philosophy. We will do that to the extent we can and still deliver on our profit expectations that we've delivered as an organization. You are correct that if you look last year, from a seasonality perspective Q2 tends to be larger from a sequential add, and that was the case this year. We added more in Q2 than we did in Q1. That being said, as a company our desire is to continue to add sales people into the organization to go after the long-term opportunity we see. We'll do as long as we can do that and still achieve, obviously, our profit expectations as a company.

But no specific headcount goals you're willing to share with us at this point?

That’s correct.

Our next question is from Scott Berg from Northland Capital.

I only have one question because most of mine were taken at the moment. Kim, can you talk about gross margins a little bit? They’ve kind of hovered around non-GAAP gross margins of 74% plus or minus 20 bps for several quarters now. Do we see further costs from the Direct DDI acquisition start to come out now that you’ve lapped that acquisition? And hopefully would see a further tick-up in gross margins in the second half here?

As it relates to gross margins, I'll start from more of the longer-term perspective. So as it relates to the longer expectations we’ve provided on profitability and margins, we do see the opportunity for gross margins to increase. Ultimately, that will depend on your mix of your growing, adding new customers, as well as your existing customers. But there is opportunity for that to continue to grow. In the shorter term, although we just lapped the 1-year anniversary of Direct DDI, we have through that time period over the past year, had the opportunity to obviously gain some efficiencies. Think of customer support as a perfect example, which hits cost of goods sold. We have 1 customer support group that supports any inquiries, whether it be from a Direct DDI customer or whether it be from an existing SPS Commerce customer. So some of those synergies in essence have already been reflected through the financial statements.

Our next question is from Richard Davis from Canaccord.

So I imagine, given the fact that you guys sell, A, a value-price product, but you're not asking guys to cough up $1 million is a big positive on the economy. But Archie, if you step back, you’ve added new features and functionality and you can -- I guess the question is, like, look out 2 years or something like that, should the ARPU, could it double from here? Could it triple from here? And does that change the way you do selling? Or do you -- or is it just you just say to yourself, "Look, we got so much open space here to run it as we are that, that would be bad strategy for the next couple of years"? So how do you kind of think about that strategically at least?

I think, Richard, we think we have the ability to double, triple or even quadruple our recurring revenue, and that’s been a consistent message. I think for 2 things. One, in our -- just in our existing customer base, I think there's significant short- and long term up-sell capability within the installed base. And then obviously going upstream also helps your ARPU. So I think there's a combination of both. And I think you're going to see that metrics into the future continue to be a strong metric, as well as continuing to add new customers, as both are a very important aspect of our long-term growth.

Now are there gaps of large suppliers to retailers that you think, "Wow, we could can get those." Or, I mean, I know you kind of start with the land-and-expand. Or is there -- in other words, is this a firm that eventually starts landing larger deals? Because I think about companies like Ultimate Software and things like that, how they started kind of smaller and then subsequently over the last few years have moved upmarket. Is that something that would happen? Or again, is it more like, look, we're landing and expanding, and that’s a great way to run the business.

I think you're going to see us, like most software-as-a-service companies where we start at the very small end where we started. And you're definitely seeing we have successfully migrated upstream from where we are. Clearly, a bigger part of our growth over the last 2 years is from the larger enterprises, not the mega enterprises, still in our small- medium-business defined. But I think over time you're going to see us continue to move upstream. And I don’t think there's a limit to where our model does not work better than traditional software. Where you end up going is with traditional software and do it yourself is the people have already make the investment, and you're waiting for a significant change event to displace that model and go to a superior model.

Right, so it sounds like it's more almost cultural or entrenchment versus any material or reasonable issue with regard to the architecture.

That’s correct. Now we feel we're in a very strong position to be able to deliver, and we do deliver on larger deals today.

Our next question is from Jeff Houston from Barrington Research.

To begin with, regarding retailer leads, I think you’ve given out in the past that roughly 350 retailers give you some leads and 70 or so give you all of their leads. Is there any meaningful change for those metrics?

That’s a metric that we provide. We give annul updates on that. So as of the end of 2011 those metrics had increased. The numbers you gave were towards the prior year, end of 2010. So as of the end of 2011, approximately 450 retailers gave us some leads and approximately 85 retailers gave us all their leads.

And then separately, could you talk about any treads you're experiencing? I know international is pretty small right now, but any trends or progress you're making internationally? And then also if you could also touch on Retail Universe.

Yes, as far as international, we clearly see international as part of our long-term strategy and a huge market opportunity. The way we're approaching that is, we continue to make more modest investments and continue to expand our international footprint, so that we have a footprint and when we're ready to invest more aggressively, it's there, it's ready. The biggest challenge we have with international is there’s such a large opportunity in North America that we're resource restrained. We don’t have enough sales heads across the retailer-supplier channel. And that in the short term is the better place to invest the majority of the dollars. As far as Retail Universe, again, Retail Universe is a platform. We see it as the front-end face of SPS Commerce. It allows suppliers and retailers to find each other, to find out their capabilities. And I think that the product is off to a great start. We have thousands of customers using it and it's solving today real problems for retailers and suppliers and I think it's going to -- that footprint for Retail Universe in the coming years will continue to expand.

[Operator Instructions] Our next question is from Jeff Van Rhee from Craig-Hallum.

Got most of what I needed. Just had a few left. One, just would you touch on the acquisition pipe now, again as we've anniversaried the prior deal, had significant success. Just talk about where you are in terms of opportunities, size of your pipeline, any color around realistic or nonrealistic pricing expectations on the part of the sellers. And the second part is around the TPI. Can you talk to, one, what was the percent of bookings? But 2, what’s the barrier to faster adoption? Is it the availability of point-of-sale data? Or what else would it take to accelerate an option there?

Yes, as far as M&A, I think we're being consistent. We think this is an opportunity to go out and accelerate our growth. Again, we have strong organic growth. We see a huge opportunity organically and we're going to be very selective. We're out in the marketplace. We're talking to people. We're making the calls. We're not going to overpay. We're not going to buy distressed properties that are in trouble. We only want to buy properties that are going to help us in the long term. So it's an evolution. It's If they're there, love to make more. If they're not there, we'll continue to aggressively grow this business. So we'll just continue moving forward on that front.

On the TPI, Jeff, we don’t get in the habit of providing quarterly updates. We tend to do that more on annual snapshot, but just to try and directionally help you, we saw a slight uptick this quarter versus prior quarters in TPI. Percentage-wise it's somewhat similar, but it is a slight uptick.

And as far as -- one of the megatrends in retail, and have been spending more time with the different analysts in the space, the industry analysts in the space, is the collaboration between retailers and suppliers. Today in our network of 1,600 retailers only 140 share point-of-sales data today, any point-of-sales data. Not across the board even, but any. So that is, in most people’s mind, in the industry analysts, a megatrend that I think is going to unfold over the coming years, not coming quarters, but coming years, where retailers and suppliers are going to share more data. And point-of-sales data is right, front and center of that. So I think that is a long-term trend that is going to be a significant benefit for SPS Commerce. And I think we're well positioned to take advantage of that, very much like we have been for many years, to take advantage of e-commerce, and as that’s developing, we want to be right there as retail changes.

At this time I show no further questions in the queue. I’d like to turn the call back over to Archie for any further comments.

Thank you very much for supporting SPS Commerce, and look forward to talking to you in the future.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Good day.