Good day, ladies and gentlemen, and welcome to the SPS Commerce second quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) And as a reminder, today's conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Stacie Bosinoff. Ma'am, you may begin.

Good afternoon, everyone, and thank you for joining us on SPS Commerce's second quarter 2013 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'll 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 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 now turn the call over to Archie.

Thank you, Stacie, and welcome everyone. We had a great quarter as we continued to experience momentum in all areas of our business. Both revenue and adjusted EBITDA were ahead of guidance reflecting strong execution. Total revenue grew 44% to $25.7 million and adjusted EBITDA was $3.4 million. Recurring revenue grew 48%. This quarter we expanded our customer base, upsold our existing customers, and continued to move upstream by adding larger customers. This is evidenced this quarter by our organic increase in wallet share of 15%. I want to share some interesting data points to give you some context on this. On an organic basis, we now have over 1,000 customers, who pass more than three times our average selling price, which is up 90% from two years ago. This is a true testament to our growth strategy, our move-up market, and our leadership position in the retail ecosystem. One example of a larger customer is Burton, the company that pioneered snowboarding and today is a fast-growing global business. Burton historically used installed software for their EDI solution and was also a very small customer of ours, using web forms to connect to one retailer and using Edifice's analytics for a few retailers. They brought on board a new CIO to look for opportunities to cut costs and modernize their solution. He was looking to move away from installed software and leverage the cloud enabling scale as they grow. Because of our expertise and leadership position, our SaaS solution, and Burton's existing relationship with us; Burton looked to us to fulfill their growing needs. They recognized the value of our network, upgraded to our integrated solution, and quickly connected to over 20 trading partners. I've been talking about the ongoing evolution in the retail supply chain for a while now…

Thanks, Archie. As Archie mentioned, we had a great second quarter. Revenue for the quarter was $25.7 million, a 44% increase over Q2 of last year and represented our 50th consecutive quarter of revenue growth. Recurring revenue grew 48% year-over-year. The total number of recurring revenue customers increased 11% year-over-year to 18,871. Wallet share increased 33% to $4,869. Excluding the Edifice acquisition, wallet share increased 15% year-over-year. As you look at these two metrics, it's important to remember that they work in concert with each other and it's really the mix of the two that we focus on. Total operating expenses for the quarter was $17.2 million and represented 67% of revenue. Adjusted EBITDA was $3.4 million compared to $2.3 million in Q2 of last year. We ended the quarter with total cash of approximately $75 million. Now, turning to guidance. For the third quarter of 2013, we expect revenue to be in the range of $26 million to $26.5 million. We expect adjusted EBITDA to be in the range of $3 million to $3.3 million. We expect fully diluted earnings per share to be approximately breakeven with fully diluted weighted average shares outstanding of approximately 15.9 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.11 to $0.13 with stock-based compensation expense of approximately $1.1 million and amortization expense of approximately $720,000. For the full-year, I'm pleased to announce that we are increasing our revenue guidance. We expect revenue to be in the range of $102 million to $103 million. We expect adjusted EBITDA to be in the range of $12.5 million to $13 million, keeping with our approach of investing any upside back into the business. We expect fully diluted earnings per share to be in the range of $0.03 to $0.05.…

(Operator Instructions). Our first question comes from Tom Roderick from Stifel. Your line is open. Tom Roderick – Stifel Nicolaus: Yes. So, maybe in looking at the numbers here, you gave a 15% organic increase in wallet share, which again looks like further acceleration in that metric. Can you give us a sense or just a little bit of a directional breakout how much of that is being driven in the current quarter from analytics, how much from channel, how much from partners like Burton or customers like Burton that are adding additional trading partners? Just directionally, how we should think about that in the given quarter and then for the rest year. Thanks.

Sure. So, when we look at what drives that revenue per customer, there's really three primary components to that. One is just as customers continue to grow and sell to more retailers, we will naturally receive more revenue from that, think of it as sort of a per connection. That's sort of an ongoing something that we've seen, pretty consistent historically and our expectations would be the same going forward. Then, there's two areas that have driven more acceleration to growth really into 2012 and into this year, and that is really upselling other product offerings like the analytics offering and as well as moving more upstream to larger customers. Burton would be an example of that, business we get through channel sales would be another reason for that. So, it's really a combination of those three that are driving the growth that we have seen recently. Tom Roderick – Stifel Nicolaus: Okay. And Archie, you talked about Burton going from a very small web forms implementation with one trading partner linked to it to 20 trading partners. And I know it's one data point. But as an interesting example of a larger customer that's choosing to upgrade to the integrated solution, what's the potential in terms of how much more you can kind of build that footprint at a partner like Burton? How many trading partners are they connected to? How much more can you see that solution growing as you add further analytics and other solutions to them?

I think on a couple fronts. One just on EDI solution; as they continue to grow their business, as they continue to be more international, there's substantial upside into growing that relationship because it's a growing company. And then, the business analytics, as we said, has more than doubled the recurring revenue. So, significant upside in a company like Burton, double, triple. Tom Roderick – Stifel Nicolaus: Great. And last one from me. Kim, just in terms of Edifice, can you give us an update where you are in the integration? Are you seeing any benefits already from cross selling upselling? And then just in thinking about this recurring revenue metric, which has shown acceleration over the last several quarters. As you lap the acquisition of Edifice here in the September and December quarters, will there be any sort of drag on that recurring revenue run rate? In other words, is Edifice growing faster, slower, or kind of consistent with the core business and will that present any sort of drag on that recurring revenue growth rate as we lap that acquisition here? Thanks.

Sure. I'll take the latter part of that and then Archie will answer the beginning part of that. So, in Q3 so next quarter, we will partially be lapping the Edifice acquisition as that's an acquisition that occurred in August. So, Q4 this year will be the first what I'll call full quarter in which the reported results and organic results will be one and the same. Now, the Edifice business has been growing and so our business has grown and the Edifice business has grown so when we lap that acquisition, the reported numbers obviously, the percentage growth goes down because reported and organic would be the same number. But, overall performance and growth, you should expect to be similar to previous historical organic.

As far as the acquisition and integration, as we approach the one-year anniversary of that acquisition, I would tell you that the acquisition has been an overwhelming success on all fronts from a customer, from an employee standpoint, and from an integration standpoint, and really being able to really show at end-to-end solution from the smallest supplier to the larger suppliers, this has been a big win. So, on all fronts so far, it's been a success. Tom Roderick – Stifel Nicolaus: That's great. Thanks, guys. Nice job.

Thank you. Our next question comes from Richard Davis from Canaccord. Your line is open. DJ Hynes – Canaccord: Hey, guys, it's DJ on the line for Richard. So, I think this kind of builds on Tom's question. But as you guys have success upselling TPI and Edifice, where does it feel like average revenue per user could go? I mean you gave some color on kind of your larger customers and Burton being an example. But how about on a blended basis, could it double from here? I mean is there a point at which that number gets so high that you start hitting resistance? I mean I realize it's still a pretty de minimis fee. But have you thought about that or how do you think about it?

Yes. So, when we think about where that number can go, I think it's consistent with what we've been seeing in the last two, three years although it's moving up. We think there's an opportunity to double, triple, quadruple the recurring revenue per customer with additional offerings with what we're seeing in retail really evolving to a more collaborative process albeit slowly it is evolving and the momentum we have in the larger customers. And we're still focused on the small medium business is zero to $500 million with acceleration in the top half of that. We're seeing larger deals and we're winning larger deals. But that's still our sweet spot. So, we have a lot of room to continue to grow that number. DJ Hynes – Canaccord: Okay. And then, can you remind us what happened in last year's Q2. You added I think over 600 customers, if I'm remembering correctly, I think it was on the heels of a strong enablement campaign. And maybe you could talk about kind of what you've seen this year, in terms of enablement campaigns and implications on customer pipeline for the back half of the year?

Sure. Yes, last year this time, you're correct; we added sequentially about 600 customers, and that was based on the type of enablement campaign activities a year ago. DJ Hynes – Canaccord: Okay.

This quarter we added sequentially about 473 customers. That's up from 421 sequentially last quarter, so we're very pleased with sort of that pickup in customer adds. This quarter we also had very strong enablement campaigns and – which translated into that roughly 473 customer adds. But you are correct, a year ago there was a large amount of customers based on the type of enablement campaigns from a year ago. DJ Hynes – Canaccord: Okay. Got it. Okay. Thanks, guys.

Thank you. Our next question comes from Michael Huang from Needham & Company. Your line is open. Michael Huang – Needham & Company: Thanks very much. Just a couple of questions for you. So first of all, was wondering if you can give an update on kind of the number of retailers that were – that are getting – that are sharing POS data with you. I was wondering whether or not you were able to get any more retailers to tap along POS data. And so, I'm thinking about kind of through the balance of the year, how is that progressing?

So, that number – that's an industry number not just an SPS Commerce number. That number continues to climb, it continues to increase. It's not drastic, but it continues to steadily increase. And we've seen this quarter was probably consistent with what we've seen over the last three, four, or five quarters so it continues to increase. So, there’s two opportunities for us. Really one is more retailers share it, and then there's a maturity level of retailers that share it as well – how interested in it are they, how mature are their suppliers? So, I think there's two growth aspects. That number will continue to grow and then the penetration in those that are sharing that data I think should continue to grow as well over time. Michael Huang – Needham & Company: Do you have a sense, Archie, of like when we hit the inflection point there where it becomes that much easier to get the broader set of retailers to share you that data that you need?

I think it's a longer-term continued evolution at a very nice pace for many years to come. I think it’s the reality of it is that's consistent with what we've seen in the past trends of retail. Michael Huang – Needham & Company: Okay. I was wondering if you could update us on the international front. What are you seeing out there and kind of what kind of progress have you made in terms of either retailers or suppliers? Thanks.

Yes. And internationally, we continue to build out our network. I think we're over three dozen European retailers now, some nice progress in Australia, and decent progress in international, so nice growth rates internationally. Obviously, it's still a small piece of our business, but we continue to invest to the point where we just have so much opportunity in North America; that's where we're doing that the bulk of our investment. But nice progress internationally on both the European front and Asian front. Michael Huang – Needham & Company: Got you. Actually one last question. As you're moving up market, how many of these customers are kind of over the $500 million in revs range? I mean is it a couple of handful? Or is it more than that? Any kind of just qualitative color that you could provide on like how many of these customers you get in the quarter?

It's fairly small, they come. I mean what we're trying to do is make sure we're focused on areas where we have high win rates and trying to make sure we hit our sweet spot. Again, there's more opportunities than we can chase, so we want to be smart on the sales front of chasing the opportunities where we have the best likelihood of success. Michael Huang – Needham & Company: Great. Thanks so much.

Thank you. Our next question comes from Pat Walravens from JMP. Your line is open. Pat Walravens – JMP Securities: Great. Thank you very much and congratulations, you, guys. I guess my first question – I'm sorry I may have missed it. What was the organic revenue growth number in the quarter?

24%. Recurring revenue, 26%. Pat Walravens – JMP Securities: And what should we think about in terms of what you're targeting? You know like what can you do on a – particularly if we're thinking about margins for 2014, what should we think about what you guys would be targeting over a longer-term basis?

Sure. So, we have not provided direction as it relates to the top line. We provided to your point direction as it relates to the bottom line. You have our guidance for this year so you can back into sort of the implied organic growth for this year. If you look back the last few years, we've been sort of a 20%-plus organic recurring revenue growth company. Pat Walravens – JMP Securities: Okay. And then can you comment – just a little bit about you know – I guess part of the reason you felt the need to call out the margin expansion is because people like me are too high. But is there any change really in terms of sort of the pace of hiring? Or is it just that the Street was too aggressive on the margin expansion?

So, what I say is we've pretty consistently talked about this concept of incremental adjusted EBITDA – EBITDA margin expansion. And really nothing's changed relative to that part; we still feel very comfortable with our expectation of delivering between 100 basis points to 200 basis points in any given year. What we decided was appropriate to do is, based on those opportunities we see and based on the strength and the opportunities within the marketplace, we thought it was appropriate to let investors know that, as it relates to next year when you're thinking about adjusted – incremental adjusted EBITDA margin that it's at that 100 versus the 200. So, again, nothing's changed relative to our philosophy and longer-term expectations, we just felt it was appropriate to reflect closer to that 100 basis point incremental margin, based on the large opportunities we see in front of us. Pat Walravens – JMP Securities: Okay, great. Thank you.

Thank you. Our next question comes from Scott Berg from Northland Capital. Your line is open. Scott Berg – Northland Capital: Hi, Archie and Kim. Congratulations on a very nice quarter. Archie, quick question for you on the European or general international opportunities. Given the strength of your upmarket comments this quarter and how customers like Burton – you're moving a little bit more upstream really so it's a big impact to the quarter is – do those customers help pull you more quickly into other areas, whether it's Europe or something in the Asia-Pacific? Or should we view that move maybe not have that dynamic in it?

I think that's a good point, Scott. They do. We've had the same philosophy for over a decade now that when a customer needs to or wants to integrate to a given retailer, we will build out our network and see that as an opportunity. So, those larger customers are giving us the opportunity to more aggressively build out our network and they're dictating a pace, which we see as a positive. So, that clearly is a positive of moving up market, at least as far as building out the network, which gives us an ability to then start building those relationships. Scott Berg – Northland Capital: Great. And then, I guess my last question is on the M&A environment. Haven't heard much from you guys from an M&A perspective lately. But I assume that it continues to be a component of your growth strategy over the next 12 to 24 months? Or are you more focused on continuing to digest the relatively recent Edifice acquisition?

I think our strategy has been pretty consistent. We're focused first and foremost on organic growth. We think there's a very, very large opportunity in front of us and we think we can accomplish building a very large company organically. Having said that, we are actively out in the market; continue to be actively out in the market looking for opportunities. And to the extent we can find the right properties and buy at reasonable prices, we'll make those acquisitions. But we don't feel compelled that we need to make an acquisition to solve any significant holes or problems or growth or anything else. So, we'll continue the course. And if we see the right opportunities, we'll capitalize on them. Scott Berg – Northland Capital:

Thank you. Our next question comes from Jeff Houston from Barrington Research. Your line is open. Jeff Houston – Barrington Research: Hi. Thanks for taking my questions. Let's first begin with – first, if you could provide some detail into the types of trading partners your supplier customers are adding. Does the mix of pure play e-tailers in particular has been increasing? Or if that has been fairly flat in the last couple of years? And just any color within the types of trading partners your suppliers are adding, that would be great.

Well, it's pretty diverse. It’s where the – it’s where they get new customers. So, if you're a supplier if you start selling to Wal-Mart, then that's where we're adding connections. With the big retailers, we continue to add as they turn over suppliers. So, it's all across the board; a lot of e-tailers and a lot of bricks and mortar retailers that have built out new rule books for the commerce part of their business. So, I would say it's across all factions of the retail. And I think one thing that is happening is retail is really starting to think of themselves as retailers not just brick and mortar or e-tail; it's really that whole customer experience, so it's really across the board. Jeff Houston – Barrington Research: Okay. That's good color. Then secondly, could you provide some more detail about the number of sales people you have and plans for additions for the rest of the year?

Sure. So, we exited the quarter with 162 sales people. Our expectation is we'll continue to add to that number. We obviously have the parameter of – we'll add to the extent we can and still hit our profit. But we have been very successful in adding sales people right out of college. So, for example, there are many sales people that we hired that are starting this month in July, and those would be reflected in the number in Q3 of this year. Jeff Houston – Barrington Research: Alright. Thank you.

Thank you. Our next question comes from Bhavan Suri from William Blair. Your line is open. Bhavan Suri – William Blair. & Co.: Hey, guys. Thanks for taking my question. Just – as you look at the customers, you're obviously adding larger and larger suppliers. Is that partially strategy? Or are they adding because you’re – they are seeing some of the benefit than some of the smaller suppliers? I guess the question is what's driving sort of that move upwards in larger suppliers?

I think there's really three main drivers that we're seeing consistently. First is our channel sales growth over the last year. So, the channel sales tend to bring larger customers. That's the first thing. The second thing is just our trend of larger businesses finally embracing the cloud and realizing they need to leverage, it's time. And then the third is our leadership position within the retail environment and our stature within the retail gives larger suppliers much more comfort to do business with somebody like SPS Commerce than it was for us five years ago, let's say. Bhavan Suri – William Blair. & Co.: Yes.

So, they know, we are all pretty important in the move upstream. Bhavan Suri – William Blair. & Co.: And then do you find, Archie, the larger customers more interested in the analytics offerings? Is that something they feel they get more value out of?

They do, and partly because they have staff on hand and they have more bandwidths and are more structured about it and a lot of times their business is more mature, so it's not just adding – it’s not just about adding new retailers to sell the products. Bhavan Suri – William Blair. & Co.: Right.

But maximizing. What TPI really does, as a business analytics, really does is help them maximize their opportunity within retailers. So, when a company's adding retailers at a very fast pace, that tends to be more of their focus, then they tend to start focusing more on getting what they can out of those retailers. So, definitely, the larger customers do have more aptitude and appetite for the business analytics. Bhavan Suri – William Blair. & Co.: Yes. And as you look at that product offering, Edifice TPI the sharing of the point-of-sale data, are there more things you might build or acquire in there around discounting? I mean I'm not quite sure what else. But sort of as you think about expanding ARPU beyond just what the cross-sell of the analytics you have today is, how do you think about what you could add to that base?

I think when you start thinking about the category for us, the retail business analytics, there's a number of different evolutions that will go on over the next decade and we'll be able to continue to expand that offering. The reality is, today, the biggest need of our supplier customers is just to get more raw simple data… Bhavan Suri – William Blair. & Co.: Just get the data. Yes.

Also retailers. So, that's the phase we're in today, not that many of (inaudible) thinking about more advance. But today, it's in its infancy and I would think that there will be added data, added features over the next release – next decade. Bhavan Suri – William Blair. & Co.: Right, right. And then, one for Kim; just on the comments around EBITDA and the reinvestment. Is that largely in sales and enablement? Or do you think you'd be adding in R&D too over '14?

Sure. So, as our business grows, we'll add – across the board – in areas, such as customer support, implementation, et cetera. But what we really want to do is take the opportunity to continue to add as many sales people as we can to really go after that top line growth. So, the comment is really more addressed towards the sales and marketing. But to be fair, we will add resources across the Company as is fit to support the growing customer base.

Great. And then on the enablement side, you know you've sort of seen these benefits, the economics come in sort of six, 12 weeks after the sort of webcast. Any change in that pattern at all? William Blair. & Co.: Great. And then on the enablement side, you know you've sort of seen these benefits, the economics come in sort of six, 12 weeks after the sort of webcast. Any change in that pattern at all?

No, we had a very – you know we even had a stronger that anticipated quarter, as it related to the enablement campaigns, but overall really not a lot of different trends that we see out there. We are pleased with the enablement campaigns to date, as well as opportunities we see going forward partnering with retailers. Bhavan Suri – William Blair. & Co.: Super. That's helpful. Thanks, guys.

Thank you. (Operator Instructions) Our next question comes from Jeff Van Rhee from Craig-Hallum. Jeff Van Rhee – Craig-Hallum Capital Group:

Well, so that when we look at the partners – there's a couple of things. One, they do know when there's going be a change event and are involved in that change event at the supplier. So, part of a successful sales process is getting in at the right time not the last minute, not too early, not the spend cycle. So, that's the first part. The second part is they are a consultant and they are an advisor to the supplier customer and to the extent they've actually worked with us in the past. They've seen success for their other customers. It just becomes a big, big win. And most of the time the supplier at that point is going to go with the recommendation of the other value-added resellers' systems integrator, especially if they're recommending the industry leader. So, it just makes the sales cycle significantly easier and quicker and makes sure that you get into the sales cycle at the right time and they'll miss sale cycles. Jeff Van Rhee – Craig-Hallum Capital Group: Yes. I guess maybe I didn't frame the question right. I mean I understand why the – you know how the process works. But I guess I'm just wondering if you can quantify a little better as to percent of cycles involved, percent of revenue touched, and how that percentage has inflected or not inflected. Has it just grown steadily? Have we seen inflection point? A little more color on sort the pace of acceleration around partner involvement.

Yes. So, as it relates to channel sales, there's a metric we give out on an annual basis. So, if you take 2012, approximately 14% of all the new business came through the channel sales. And as a comparison, the prior year – so for 2011 – that data point was 10% of the new business. As it relates to 2013, we continue to see nice traction and momentum in that area. That particular statistic is one we give on an annual basis. So, sort of end of 2013, we'll provide an update relative to 2012. Jeff Van Rhee – Craig-Hallum Capital Group: Okay. Around the retailers, how many are sharing now either number or percentage just so we have a baseline work from?

Sure. So, again, that's one that I can give you the stats sort of through the end of last year. So, there's approximately 540 retailers at – through 2012 that gave us at least some leads and then there was practically 100 retailers that gave us all their leads. Those data points compare to the prior year of roughly 450 and 85. Jeff Van Rhee – Craig-Hallum Capital Group: And in particular around the TPI – the analytics – how many retailers are sharing their data?

Got it. So, that is – gosh – so, probably less than 20% of all the retailers that share analytics today. Jeff Van Rhee – Craig-Hallum Capital Group: Okay, okay. And then, last one from me – the competitive landscape. Other than people trying to solve this with the legacy solutions or do it with home-grown, how have the packaged vendors, whether they're SaaS or (PRIM), how has the competitive bake-off process changed for a while 12 months, 18 months ago, however far back. But what's new? What's changed in those sales cycles?

I would say the one thing that's changed is just the success SPS Commerce has had over the last 12 to 18 months has obviously given us another leg up. I think the channel sales has given another leg up on the competitive front, as we built out more relationships within the retail ecosystem. So, I think that's helped us competitively and I think there is a widening competitive mode here going on. I do think that the players are more or less the same. You have the legacy software providers that for the most part are offering managed services, which is doing things the same way they used to do it, but they’ll do it for you; and then the smaller software as a service provider. So, the landscape looks the same. I think our position is moving up and continues to improve from a very strong position 18 months ago. Jeff Van Rhee – Craig-Hallum Capital Group: Okay, great. Thank you.

Thank you. I show no further questions and would like to turn the conference back to the speakers for closing remarks.

Thank you very much for joining us on the call today and look forward to talking to all of you in the future.