Good day, ladies and gentlemen. Welcome to the SPS Commerce Q1 2012 Earnings Conference Call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Todd Friedman, Investor Relations. You may begin.

Thanks, operator. Good afternoon, everyone, and thank you for joining us for SPS Commerce’s First Quarter 2012 Conference Call. Joining on the call today is CEO and President, Archie Black, and CFO, Kim Nelson. Before I turn the call over to the company, I’ll read our Safe Harbor statement. We will make certain statements today, including with respect to our expected financial results, go-to-market strategies 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 revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. 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 an historical data sheet for easy reference on our Investor Relation section of our website at spscommerce.com. During our call today we’ll discuss adjusted EBITDA financial measures and non-GAAP earnings per share. In our press release and our filings with the SEC, each of which is posted on our website, you will find additional disclosures regarding these non-GAAP and adjusted EBITDA measures including the reconciliations of these measures comparable with GAAP measures. And with that, I’ll turn the call over to Archie.

Thanks, Todd, and welcome, everyone. We had a great start for the year with both revenue and EBITDA ahead of guidance. Revenue for the quarter increased 31% to $16.5 million and adjusted EBITDA was $1.9 million. Recurring revenue grew 37%. We were once again successful in executing against our growth strategy. We expanded our customer base and captured more wallet share from our existing customers. Over the last year we’ve been talking about the ongoing evolution in 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 eCommerce. ECommerce continues to fundamentally change the way retailers connect with their customers and manage their supply chains. Done well, eCommerce is a strategic advantage, providing a way for retailers to increase sales and reduce inventory costs while meeting consumers’ demands and increasing customer loyalty. The speed of the shift from traditional brick and mortar retail to eCommerce has put enormous strains on the traditional supply chain. A recent Forrester Report said that 5 years ago roughly 1/3 of consumers were shopping online monthly, but by 2010 that percentage had almost flipped completely and is certainly higher today. That means that only 5 years ago large retailers could still succeed by mostly focusing on their traditional factory-to-warehouse-to-store distribution model. Now Forrester estimates that online shoppers will spend $963 billion globally by next year. If you consider the impact of that shift on the market, you can narrow your focus to 2 things that are driving the supply chain evolution forward. The first is that traditional brick and mortar vendors need to rethink their complete…

Thanks, Archie. As Archie mentioned, we had a great first quarter. Revenue for the quarter was $16.5 million, a 31% increase over Q1 of last year, and represented our 45th consecutive quarter of revenue growth. The increase in revenues is the result of an increase in recurring revenue customers and an increase in what we refer to as wallet share, which is the annualized average recurring revenue per recurring revenue customer. Recurring revenue this quarter grew 37% year-over-year. The total number of recurring revenue customers increased 26% year-over-year to 16,433 at the end of the quarter. For Q1 annualized wallet share increased 7% to 3,529, up 5% growth in Q4. 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. As Archie pointed out earlier, we had a nice uptick in wallet share this quarter due to our success with larger deals through channel sales. Totally operating expenses for the quarter were $11.6 million and represented 70% of revenue. Looking at the individual line items, sales and marketing was $6.4 million. G&A expense were at $3.2 million. R&D was $1.7 million. Operating profit was $459,000. For the quarter adjusted EBITDA was $1.9 million compared to $1.2 million in Q1 of last year. We ended the quarter with total cash of $33 million. CapEx for the quarter was $630,000 or 4% of revenue. Now turning to guidance. We are continuing to see overall strength in the business. In particular, we have a strong enablement pipeline in Q2. To reflect this, for the second quarter of 2012 we expect revenue to be in the range of $17.4 million to $17.7 million. We expect fully diluted earnings per share to…

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

Quick question, when you talk about recurring revenue growth of 37%, if I take out the acquisition on an organic basis, can you give me a feel for what that was because I think direct EDI was we were seeing about $1 million in revenue for the quarter. So I'm just trying to, to organic-ize, the recurring revenue growth.

Sure. The 37% is the reported number on an organic basis, meaning excluding direct EDI that was 27%, which is an acceleration from where we've been in recent quarters,

Fair enough [indiscernible]. Can you talk a little bit more about going up market? In other words why selling through channel partners allows you to sell higher because usually when you sell through channel partners and other software businesses, it's usually a lower market. So, I'd love a better understanding of that.

So, Laura, when we're looking at the channel partners it's typically a larger deal where you're integrated to maybe 5 to 50 different trading partners. The best time we're seeing to hit those customers is actually when they have an ERP system change or an upgrade. And the person that's in the most unique position to know that that company is going through a change is the value added reseller, the systems integrator or the ERP system themselves. In enablement campaigns, we tend to get more of the, they're new to it, or they're smaller and they're not doing anything and we're their first entree into it. We will upsell them over time -- upsell them over time, but brand new customers tend to be larger in the channel side.

One final question from me, then I'll pass it on. When you look at the channel, what percentage roughly of the bookings is it now generating and what are your expectations for that going forth?

As it relates to the channel sales, it's approximately 10% of the new business sold as the channel sales. We like what we've seen over time, we certainly do expect that that number will increase, but today its about 10% of the new business.

Our next question is from Michael Huang of Needham & Company.

Just one question for you guys. So from a product roadmap standpoint, what are some of the major innovations that you're working on now. I mean, obviously, your analytics product is out there and maybe you can give us an update on that, as well.

I think when you look at the product roadmap long term and short term, long term we're in the supply chain business for the retail eco system, so that's where we're going. Anything within that is fair game. I think when you bring it down to the shorter term you're really looking at improvements and major innovations in our existing product line, in particular the business intelligence line where you start using more and more of the information that you're receiving from the retailers and the suppliers to give them meaningful trading partner intelligence tools back. That's where the biggest short term innovation is coming. Obviously, Retail Universe is in the very, very infancy phases. So that product is going to be changing pretty significantly over the next 2 to 3 years.

Our next question is from Tom Roderick of Stifel Nicolaus.

So maybe I can piggyback off Laura's question earlier and then Laura asked about the channel, but in thinking about deal sizes betting bigger here. I'm wondering if you can kind of break that apart as it relates to new customers with bigger deal sizes versus existing customers purchasing upgraded products. And maybe as it relates to that, if you have any data around TPI and what that contributed as percentage of new bookings or any metrics you can share on the trading partner intelligence product? That would be really helpful.

As it relates to the ASP, what you see in that number of the 7%, which is the increase recurring revenue per recurring revenue customer, that is the combination of both upselling existing customers as well as adding new customers. So to specifically answer your question, when you're looking at a customer that comes to us through the channel side, to Archie's point, they tend to be a larger type customer. So a smaller customer might pay us $100 a month, may be a couple hundred dollars. Customers that come through channel sales, they could paying us $1,000 or more a month. So hopefully, that gives you a sense of the different size relative to the new customer. As it relates to the trading partner intelligence, very similar to what we've said in the past, very important part of our overall product offering is about 8% of the new business is the trading partner intelligence sales.

8% of new business. Great. And then when you look at the total number of new customers coming on, I mean, that's a figure that continues, at least on an organic basis, looks like it continues to do very well at least if not accelerating you're still in this high 20 percentage range. So I know the end of the year is a great time for enablement campaigns, is that continuing to be a big driver and maybe you could just sort of split apart existing enablement campaigns with some of your retail partners versus sales capacity your putting in place and where else you have to spend money on the sales marketing side to keep moving the ball forward on a number of new customers?

Sure. So I'll talk about the customer number. So the 26%, which is the increase in customer growth on an organic basis, that's about 14%. As it relates to enablement campaigns, in Q2 of this here, Q2 and Q3, those are seasonally when the majority of the enablement campaigns occur. So that reflected within our guidance. Obviously, when we run enabling campaigns there's a mix of new customers that we get from that, but specific to Q1, the 26% number on an organic basis is about 14. As it relates to guesstimates we're making in sales headcount, we continue to invest there, we continue to think there's a lot of opportunity. We are investing in each of the areas, our direct sales force, our relationships directly with retailers, as well as our channel sales organization.

Okay, great. Maybe one last quick one from me. On the topic of that sales force, Archie, I don't know if you want to answer this or Kim -- feel free. But as it relates to you're taking your guidance up on the revenues keeping it I think consistent where we were on the EBITDA and EPS side, is all of that going to be going into sales and marketing and where do you hope to be on total sales heads by the end of the year?

So as it relates, you are correct, we took up our revenue guidance and we kept the bottom line the same. That is with our philosophy. We want to take the opportunity to be reinvesting and going after the opportunities we see. We do add headcount across the organization, but, obviously, with the opportunity we see we want to take the opportunity to be reinvesting more back in sales and marketing, basically, invest as much as we can in that area. As it relates to headcount at the end of 2012, we haven't given a specific number. What you should expect is that our headcount does increase, but the amount of the increase ultimately depends on what we are able to do and still get our profit commitments that we have made as an organization.

Our next question is from Patrick Walravens of JMP Securities.

So can you talk a little bit about whether there's room for price increases here and how you think about that?

Yes, I think that when we look back at what's the marketplace, I think that there is an opportunity for price increases. What we're focused on, and we're not feeling significant pricing pressure, what we're really focused on is gathering new customers, upselling our new customers and we think that's a trigger we can pull at any time, but right now we're in a growth phase and gathering and that's something down the road that we can focus on.

Okay. And then, I'm sorry I missed it, where did you think your sales headcount will be by the end of the year?

We didn't give a specific number. All we said was that it will increase. The ending number will ultimately depend on how much we're able to do within our parameters of the profit expectations that we've delivered.

Okay. And so where are you now?

We are now at 123, so we added 6 within the quarter. One thing to keep in mind, if you look at last year from a sales headcount perspective since many of the heads we're adding are more entry-level folks right out of college. Q2 tends to be from a seasonality perspective a higher add quarter for us as the candidates are graduating from college.

Okay. So but you guys have basically doubled your sales headcount in 2 years. Is that right?

That's correct.

So those, roughly, 60 new reps that you have on, how many of them are productive at this point?

Typically, what we see is they can start producing within 1 to 2 quarters and, obviously, then there's a continual ramp period. So a significant percentage of them are. And as you see our sales and the size of the company compared to a couple of years ago is significantly larger and so we are selling significantly more than we were 2, 3 years ago.

Our next question is from Scott Berg of Feltl & Company.

A couple of quick questions here. First of all, your increase in revenue per customer this quarter was the largest sequential increase in a year, but a nice acceleration over the last couple of quarters. Is that a result of mix of more larger customers entering the fray or is it more of a mixture of upsells, I guess, in the quarter?

I think it’s really a mixture of both upsells and larger deals. Again, we continue to see an acceleration in the larger deals, but really in the high end of small medium business that we define as $0 to $500 million. So we continue to see both, but it is a combination of larger deals, as well, or larger than our current average.

Great. So I guess my last question is your sequential increase in long-term deferred revenue was the largest jump I think I've seen as far back as my account sheet's going. Why the large jump? Was there more customers with testing revenues or implementation revenues over the quarter? I'm just trying to get some color around that.

So as it relates to what goes into deferred revenue, the deferred revenue is related to new customers. So when they initially sign up with us that what goes into deferred revenue. If it's testing revenue that we're receiving, that's actually a one-time direct to the P&L. So the number or the amount that's in deferred revenue is completely related to, in essence, new business, new customers that we are signing and the revenue we receive from them to get them up and running.

Our next question is from Jeff Houston of Barrington Research.

To begin with, I think the direct EDI deal, the anniversary of that acquisition, is coming up in a few weeks. Just curious about your thoughts about what you learned from that deal and that you will carry forward and apply when selecting your next acquisitions?

I think when we look back at the direct EDI, first off we think it was a huge success, I think there was a couple of things. One, they had a solid customer base that was satisfied and our offering was quite similar, pricing was similar, so we had a very successful transition. And we also saw that they had some really quality key people, including a development center in the Ukraine. So a lot of assets there and, obviously, we got some this and that's on how you do implementations and the more you learn, the better off you are. But I think if anything, that gave us appetite for more because it was a success.

Great. Continuing on that acquisition theme, could you talk a bit about the pipeline internationally or are you more focused domestically for M&A?

Well, we are focused on both domestic and international. International has a little bit higher hurdle because if you do buy somebody internationally you're probably going to be building more around that team and so the people are more critical. We will continue to look both domestically and internationally. We obviously know that competitive landscapes significantly better in the U.S. -- in North America but we will continue to look both.

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

Just a couple of them left here as it relates to the ERP connect push I guess through the channel. Can you just expand on that push into the channel, mainly where are we on the curve just in terms of channel partners coming on board and getting productive? Is this going to be sort of a slow steady stair step? Do you have a significant backlog? Where are we in that game? How should we expect that to progress?

Well, we basically gone from almost 0 to almost 10% of our lead generation over 2, 3 years. We now have received in the last 12 months leads from over 100 different partners. So I wouldn't say it's a J curve, but I think you're going to see it continue to accelerate and continue to have success.

Okay. And, I guess, lastly, as you relate to the source of the leads outside of the channel push and you look at the more traditional channels either through the retailers giving you an exclusive or going direct, is there any other notable changes in term of the pipeline? Either sources of leads or types of deals that are flowing through?

With enablement campaigns we're really seeing obviously the whole change in eCommerce and the new requirements. We seeing some of that drive additional enablement campaign and we're anticipate the changes and the evolution in the supply chain continuing to drive enablement campaigns. So that's the one thing we continue to see momentum and tailwinds for us.

[Operator Instructions] There are no further questions at this time. I'll turn the call back over to management for closing remarks.

Thank you very much everybody for participating today and thank you for your support of SPS Commerce.

Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.