Good day, ladies and gentlemen, and welcome to the SPS Commerce third quarter 2015 earnings conference call. [Operator Instructions] I would now like to turn the conference over to Nicole Gunderson, Investor Relations. Please begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's third quarter 2015 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 the call over to Archie.

Thanks, Nicole, and welcome, everyone. We are pleased to share our results for the third quarter of 2015. Total revenue grew 24% to $40.4 million, recurring revenue grew 26% and adjusted EBITDA was $6.2 million. Omnichannel retail continues to expand and evolve, and is driving the need for collaborative supply chain practices at a faster pace than ever before. We continue to take advantage of this trend, as we go after the multibillion dollar market opportunity in front of us. Consumer empowerment continues to grow, as smartphones, smartwatches and other wearable devices are enabling consumers to research products, compare prices and educate themselves, while shopping in-store from their device or online. In order to address this, it is imperative that retailers and suppliers are able to integrate and collaborate easily and efficiently. Also, as consumer expectations are expanding, the timeframes for collaboration are contracting. Not so long ago, an acceptable timeframe for a retailer to bring on a new supplier was two to six months. Today, in order to keep pace with consumers, retailers need to source and start fulfilling new products in a matter of weeks. Additionally, retailers used to receive inventory information from suppliers on a weekly basis, if at all. Today, retailers need real-time inventory data to ensure that whenever a consumer orders a product, it is readily available. An example of this is Regis Corporation. Regis is a global leader in beauty salons with thousands of locations, and they have been a fulfillment community partner since 2008. Recently, Regis was looking to drive increased product sales in the salon by customizing their product assortments based on consumer demand in each division. Previously, Regis has an ad hoc reporting system that gave them some visibility into their supplier sales, but that system did not allow them to…

Thanks, Archie. As Archie mentioned, we had a great third quarter. Revenue for the quarter was $40.4 million, a 24% increase over Q3 of last year and represented our 59 consecutive quarter of revenue growth. Recurring revenue this quarter grew 26% year-over-year and 22% organically. The total number of recurring revenue customers increased 9% year-over-year to approximately 23,100. Wallet share increased 15% year-over-year to approximately $6,400. For the quarter, adjusted EBITDA was $6.2 million compared to $4.7 million in Q3 of last year. We ended the quarter with cash and marketable securities of approximately $135 million. Now turning to guidance. For the fourth quarter of 2015 we expect the revenue to be in the range of $41.8 million to $42.3 million. We expect adjusted EBITDA to be in the range of $5.6 million to $6.1 million. We expect fully diluted earnings per share to be $0.04 to $0.06 with fully diluted weighted average shares outstanding of approximately 17.1 million shares. We expect non-GAAP diluted earnings per share to be approximately $0.19 to $0.21, with stock-based compensation expense of approximately $1.7 million and depreciation expense of approximately of $1.8 million. We expect amortization expense to be approximately $850,000. For the full year, we expect revenue to be in the range of $158 million to $158.5 million. We expect adjusted EBITDA to be in the range of $21.5 million to $22 million. We expect fully diluted earnings per share to be in the range of $0.19 to $0.21. We expect fully diluted weighted average shares outstanding of approximately 17.1 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.76 to $0.78, with stock-based compensation expense of approximately $6.5 million and depreciation expense of approximately $6.5 million. We expect amortization expense for the year to be approximately $3.4 million. Also for the year you should model approximately 40% effective tax rate, calculated on GAAP pre-tax net earnings. We expect to pay nominal cash taxes in 2015 due to our NOL. Before I turn the call over to Q&A, for modeling purposes for 2016, investors should model approximately 14.5% adjusted EBITDA margin. As we look out to our next year, our philosophy and margin expansion remains the same, and we expect to invest any additional upside back into the business. With that, I'd like to open the call to questions.

[Operator Instructions] The first question is from Tom Roderick of Stifel.

I wanted to touch on the Q4 guidance here real quickly. And looking at the guidance, it looks like you're kind of implying something just under 20%. You've been comfortably growing over that. Of course, you have had some revenues included in that. I was just wondering if you could kind of break out sort of how you think about recurring versus non-recurring in the upcoming quarter and how that should continue to trend on an organic basis? And very clearly we've seen the recurring pace ahead of the non-recurring, maybe you can talk a little bit about that dynamic as well here.

Sure. So in Q4, keep in mind, we are lapping the acquisition. So the majority of Q4, the organic and reported are virtually one and the same, which was not the case earlier in the year. As it relates to GAAP revenue versus recurring revenue, historically the recurring revenue has grown faster than the GAAP revenue. And there tends to be a delta, depending on the given year or quarter, anywhere between sort of a 1% to 2% delta between GAAP revenue and recurring revenue. So that guidance is consistent with our philosophy, as it relates to sort of that 20%-ish organic recurring revenue growth and the opportunity we see there.

Let me turn to the international side, you've had Leadtec under your belt for almost a year now. How are you thinking about how that's been integrated, how that's performing? And what's your appetite to think about other geographic regions to expand further to sort of more substantially at this point?

Yes. So we just lapped obviously a year ago, the acquisition. And to remind everybody, on day one of that acquisition, we combined our resources in Australia with the Leadtec team, and we started selling a one combined product into the marketplace, so to not have confusion. So I think we hit the ground running really nicely. I think we have strong relationships with the retailers. I think the execution has been very good. The team is strong in Australia. Very pleased with what they've accomplished in the first year. And I'd say in all fronts it's been a huge success. And the leadership's done a great job there. And we continue to see a big opportunity in Australia. It's obviously a smaller market than North America, kind of in that 10% range, but continuing to see a significant opportunity there as well.

Kim, last one for you. You talked about next year, just setting a high level sort of bar, 14.5% adjusted EBITDA margins. Can you walk us through some of how you think about the inputs in the sales and marketing side for next year? And if you've got the sales and marketing headcount, the sales headcount for this quarter, that would be great? But just sort of curious, how you're thinking about what the right pace of sell-side kind of additions within that 14.5% sort of high-level guidance on EBITDA would look like for next year?

Sure. So as it relates to that guidance that's consistent with what we've said, that historically we tend to grow EBITDA margins or we tend to expand that approximately 1% on an organic basis on any given year. Sometimes it's a little bit less, sometimes it's a little bit more, but on an average about 1%. So that 14.5% adjusted EBITDA margin is right in line with that. As it relates to quota-carrying, our sales headcount we exited the quarter with 257 heads, which is up about 17% year-over-year. Our philosophy, as it relates to sales headcount has not changed. We intend to continue to add sales headcount. What we do is we take a balanced approach, so we know where we will be at the end from an EBITDA perspective. And we want to make sure that we are appropriately investing back in the business to support our existing customers as well as new customers. So that will translate into additional resources really across the board, customer support, technology, sales, of course as well. But basically we will continue the philosophy of adding as many sales people, as it makes sense for us to do, while still delivering on that EBITDA margin.

And the next question is from Scott Berg of Needham.

A couple of quick ones for me. First of all, Archie, you talked about the Regis example, I assume that's an example of upselling the analytic solutions into that relationship there. But I just wanted to see if you could talk about what that opportunity looks like today in terms of driving new sales directly with analytics versus the integration product?

Absolutely. So this is a classic upsell to analytics, as they're trying to collaborate and work closer with their suppliers. In a typical collaboration analytics program, they target between 30 and 60, sometimes as many as a 100 strategic suppliers that they are really going to change the way they work with. And then they also make the data available to the other suppliers. But the real focus is on that that 30 to 60, which from our standpoint we want to drive values for the retailer and that is where the economic value to us is as well. With somebody like Regis, it's a domestic opportunity today. We recommend it to customers. They rollout a portion and not to a big bang theory, because what's important to us is that they are able to have the success at once. And when they try to take on too much too quickly, they don't have the success. So there is also an international opportunity here as well. So I think this is the pretty classic collaboration analytics story.

I guess, one follow-up for Kim would be, if you look at your operating cash flow this year, it's little bit lighter than last year. It looks like its all-in some working capital adjustments. There are some additional prepaid stuff that came out in the second quarter. I just wanted to kind of see what that next couple of three quarters looks like? And how those expenses or those prepaid item start flowing out and to be returned at operating cash flow margins kind of like we used to see in through last year?

We do expect to remain cash flow positive. You are correct in Q2. You didn't see that that was as the company opportunistically took advantage of prepaying for some services that we would be using into the future, so you saw that sort of negative in Q2. And then overtime because that prepayment goes over multiple years, you'll see that sort of work itself through. But the philosophy as it relates to being cash flow, business remains the same.

And the next question is from Pat Walravens of JMP.

Archie, I was interested at the beginning, when you were talking about how the amount of time that retailers have to onboard suppliers has compressed so much. Do you mind repeating what those stats were and give us a little more perspective on that?

So you were talking about how?

You said, two to six months, I think.

Yes, I am sorry. As you go into more of an endless aisle in ecommerce capability, you use to see people, it was almost an annual cycle with new suppliers. You decided what you're going to carry for the next year, you'd meet with the suppliers, you'd negotiate, and you had a much smaller supplier base. Now, as you're moving into endless aisle and at least expanded aisle, you have the addition of so many more suppliers and item information. The number of retailers that we worked with, that have moved from anywhere from 50,000 items in their SKU count to 1 million in a period of a years is amazing. That's the trend that's happening, as they're carrying more and more products. And they need to get those products up and running very quickly, because it's not a -- we decided in March for our fall closing line. It's a much more rapid pace. And then on inventory fees, some times they don't even need inventory fees, because they would place their order so far ahead that was expected that they would have inventory in three to four months when they needed the product. Now with drop shipping, you're getting the order at 9 o'clock in the morning, and you're expecting that it's going to be shipped that day, if not that morning. So they need to know for their consumer that that inventory is there, so the whole pace of the industry is obviously changing and changing drastically.

And then my second question is pretty big picture is, does this business scales into sort of the hundreds of millions range? Can the growth continue at this 20% plus, or as you scale up, should we expect it to sort of slow gradually?

Well, I think what we've been consistent we think there is a long-term 20%-plus recurring revenue growth opportunity. And I think that as the trends continue with us, we think that market opportunity is there.

And then, Kim, I might have missed it, but did you give us the organic recurring revenue growth number?

The organic recurring revenue growth number was 22%.

And the next question is from Jeff Houston of Northland Securities.

I wonder if you can talk a bit about how enablement campaigns performed in the quarter, and what you're assuming into the fourth quarter guidance.

Sure. As it relates to enablement campaigns, those are our single biggest generator of new customers and very important part of our lead regeneration. In any given quarter, there maybe more or less than a previous quarter. In general, Q4 tends to be the seasonally softest and that's simply because of the holiday season. So we still run enablement campaigns, of course, but that tends to be just lighter based on seasonality. And do keep in mind, however, as it relates to this lead generation, we have a very healthy amount, a continued amount of sort of onesie, twosies from retailers that are constantly adding new selection, adding new suppliers for who they are purchasing products from, and so that type of business we get sort of consistent throughout the year. It's when we're running a larger enablement campaign, that really is dictated depending on the retailer's time of what they're trying to accomplish and under what time periods. So Q3 was really no different than other quarters. We certainly ran enablement campaigns. We will continue to run enablement campaigns in Q4, but again, that tends to be the seasonally softest quarter as it relates to those larger enablement campaigns.

And then looking at the 23,100 clients added in the quarter, what was the mix of customer sizes? Just wondering, if there's anything you can point to that, that really highlights that how you're moving upstream and if there's any customers that customer sizes were a bigger then maybe historically?

Sure. So as the business grows and evolves over time, we have demonstrated our ability and we'll continue to show that we bring on larger customers than our average customer size. As it relates to just the log numbers, when you're talking about a 23,000 number, it gets muted there. Where you would tend to see it is in the revenue per customer. So this quarter, for example, the organic revenue per customer growth was 13%. And so that's really where you will -- part of that is dictated by the size of customer. As a company, we have not disclosed or broken out of the total customers, how many are sort of the larger or larger specific within the quarter, but certainly the customer size does have an impact on that recurring revenue per recurring revenue customer metric.

And the next question is from David Hynes of Canaccord.

So Archie, where are we in terms of the percent of new ACV that's coming from analytics. And I guess, kind of as you look ahead, does the pace of that mix shifts accelerate as more and more retailers buy into sharing their point-of-sale data or is it just kind of steadily increases as a percent of mix?

I think that that's evolution of time as it gets hold. Again, we've talked about our industry kind of evolves as opposed to is a big hockey stick and I think you continue to see that trend over the coming years.

We don't expect to see any radical inflection. We think that there is a lot of opportunity in the analytics, but it's a sort of slow and steady opportunity and we will reap the benefits of that for many years to come.

In case, share kind of where we are now. Is it 20% of bookings or how do we think about that?

Sure. So as it relates to that detail, we usually share that on an annual basis. So the last time we gave a metric out, was as it related to the end of 2014 sales. You'll have to hold on until the February earnings call to get guidance on that.

And then, Archie, when a customer replaces kind of a legacy EDI investment with SPS Commerce, what's typically that calls for change, I mean is it ERP replacement, is it staff turnover, is it a cost saving initiative? And then I guess what can you guys do to kind of drive that along or is it really more about being there at the right time?

I think there's a whole host of different decisions. Staff turnover is one. The whole inflection of the industry, as what have I said is if you have a dozen or 20 retailers you're working with and those retailers aren't changing, evolving, and you're not adding new retailers, there's probably going to be a -- that's going to be a tough sales cycle. We can talk about the 50% to 75% lower total cost of ownership, but it's working there, they've got other priorities. So when their environment is changing, the retailers are asking for more. For often times, we're moving in and taking a piece of the business, because they just can't onboard and make the changes for their retailers fast enough. So that's an opportunity. If they're changing ERP systems, so that's where channel is important, that's an automatic that you're going to relook how you're doing that. And I think it's educating them on the alternative, so when and if they're interested in making a move that were top of mind. And so I think there is a whole host of reasons.

And then, Kim, maybe on the Q4 guidance, guiding adjusted EBITDA down sequentially that's kind of not a trend we've seen every season, I mean, in the last couple of years. Is there anything particular in there or are we just being conservative. How should we kind of frame that conversation?

So as it relates to EBITDA, we said what the expectations are for the year. And then we take the opportunity to if we're ahead, for example, we will take that opportunity to invest more back in the business to keep on growing the business. And so really our philosophy has not changed. We hold ourselves to an EBITDA number for the year and that has remained consistent. So the fact that we're slightly ahead in Q3 is why Q4 comes down slightly. We are remaining the same and what we have said all year as it relates to the high-end of EBITDA guidance.

The next question is from Matt Pfau of William Blair.

First one, maybe can you update on what your acquisition pipeline looks like out there? And how you're thinking about acquisitions, especially in relation to the margin expansion guidance that you gave for 2016?

So our acquisition strategy has remained relatively constant since 2010. We believe we can accomplish our long-term goals through organic growth. And so we're primarily focused on organic growth. Having said that, we have a $135 million of cash in marketable securities, so we're always out looking, but what we're looking for are high-quality companies that fit right in our sweet spot. So all three of those acquisitions we made since we became a public company, there was no change in the direction or the strategy of the business. And that we think that can help us accelerate or maintain our 20%-plus recurring revenue growth. So we're going to continue to be very focused on organic growth and look for opportunity as it's out there.

And then maybe an update on the channel partner business, what you're seeing there in the quarter and any notable additions on that side?

It's a very fragmented market and we go after five primary markets and they're all very meaningful to us. As we have mentioned, we have over 400 partners. And I think it's just a continual journey for channels and they executed in the past and continue to execute as adding new partners and expanding the relationship with the existing partners. And I think you're going to see a long-term general trend of that.

The next question is from Jeff Van Rhee of Craig-Hallum.

Archie, as it relates to -- you've talked about the ability to grow ARPU over time in a number of ways more connections, et cetera. Just looking at an apples-to-apples sort of organic price increase, what is the last time you've had a price increase, how do you think about using that as a tool here?

We have been very marginal on any price increases. And we'll continue to do small things here and there, but we don't see any drastic price changes in at least the coming few years. Again, we've done some things where with maybe a few percentage points and that, but nothing drastic at this time. We do think long-term, as we become larger and larger and as we continue to add more value to our customers, I think that opportunity is out there.

What's the number of retailers sharing the point-of-sale data at this point?

It's still less than 20% of retailers that are sharing that data. So that's also part of the reason why we believe this is a long-term opportunity for us, that we'll get the benefit from it for many years to come, but there has not been an inflection point as it relates to retailers sharing the data.

And last one. As it relates to customer breakeven time on sort of the customer acquisition cost, any observations there or namely a long trends of customer acquisition cost or breakeven times, specifically maybe what is breakeven time now as you calculate it? What's it's been over the last few quarters and any variation in those numbers, would be great?

It's been pretty consistent around about that year-and-a-half on average breakeven that we've been at that point for the last couple of years. It was a little bit longer prior to that. End of Q&A