SPS Commerce, Inc. (SPSC) Q4 2016 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for your patience. You have joined the SPS Commerce Q4 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Nicole Gunderson, Investor Relations. Ma'am, you may begin.

Good afternoon everyone and thank you for joining us on SPS Commerce's fourth quarter and full year 2016 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 will turn the call over to Archie.

Thanks Nicole and welcome everyone. 2016 was another year of business momentum and solid execution for SPS Commerce. The expansion of the SPS network continued to drive our results as we grew our customer base and increased wallet share with our customers. For the full year, revenue grew 22% to $193.3 million and adjusted EBITDA grew 17% to $26.5 million. Additionally, in 2016, recurring revenue grew 23%, customer count grew 6% and wallet share grew 16%. As both retailers and suppliers are increasingly recognizing the constraints of legacy systems and processes to achieve the agility that today's consumers require, we continue to grow our market leadership. This year, we expanded the size and strength of our network and benefited from our powerful lead generation engine as we added new customers and deepened retailer relationships. We now have more than 70,000 customers and over 2,000 retailers in our network and of those retailers more than 300 dropship. Additionally, we are growing our global presence connecting approximately 200 international retailers to their trading partners. We are also deepening our relationships with retailers and channel partners to drive our lead generation engine. In 2016, we received leads from approximately 600 retailers, 200 of which give us all of their leads, as well as approximately 200 channel partners. This broad based retail network position us to take advantage of the multibillion dollar market opportunity in front of us. Consumer expectations and purchasing habits are rapidly changing and omnichannel has shifted from a specific strategy to something that drives an entire business. For the past two years, retailers have reported a faster supply chain as a top early as technology has made it possible for consumers to have whatever they want delivered to their home whatever they wanted with free shipping. This has gone beyond the largest retailers such as Amazon or Walmart as companies like Uber have made same-day delivery service available to almost any merchant. These elevated consumer demands and the high cost of doing business make it imperative for trading partners to collaborate and adapt quickly to the evolving retail environment. The SPS Commerce network provides the critical capabilities needed for success in today's retail industry. Our market leading network and solutions place us at the center of the retail ecosystem and our retail expertise enables us to act as a strategic advisor to retailers and suppliers as they build their omnichannel businesses. Large retailers and suppliers are driving the trends towards increased collaboration and communication and we saw an increase in larger customers this year as a result. We now have approximately 1,800 customers that pay us at least $20,000 annually. As we move upmarket, we are seeing an increase in customers integrating with us through our channel partners and this year channel sales contributed 21% of all new business. Our leadership position is driving growth in our channel strategy and enables us to form alliances with some of the world's largest systems integrators and value-added resellers. We recently worked with Capgemini, one of the largest global systems integrators and consulting partners, to sign Ascensia, a $1 billion plus company that recently spun out from Bayer. Capgemini was hired by Ascensia to advise senior management and orchestrate their re-platforming of their operations as a standalone company, including ERP and EDI implementation. Capgemini, a strategic alliance partner of SPS, brought us in due to our ability to meet the scope and delivery demands of Ascensia's initiatives. With hundreds of trading partners, SPS enables Ascensia to streamline their supply chain operations, scale their solution and collaborate with their trading partners as they grow. Real-time collaboration, inventory visibility and data are critical in satisfying elevated consumer demands and realizing cost efficiencies in order to address the high cost of doing business in the omnichannel world. These trends are fueling the adoption of our broad suite of products, including our analytic solutions. In 2016, analytics was 19% of total recurring revenue, reflecting the success of our acquisition of ToolBox Solutions a year ago. Additionally, in our Retail Insights industry report published last month, analyzing sell-through data was recognized as a top way to collaborate better in the coming year. As trading partners increasingly adopt omnichannel initiatives, we will continue to broaden our product functionality and solutions to address ever-changing retail environment. Looking to 2017, I want to spend some time talking about two developments that we believe will have an impact to our revenue. The first is what we are observing in the retail environment. We are seeing more retailers overhauling and upgrading the systems to become more competitive. These systems upgrades are more complex than ever due to omnichannel and require a significant investment from the retailers. While these types of change events drive the need for our product and are a tailwind for business, they need to be near completion before running community enablement programs and as such we are seeing our timelines extend. The second topic relates to changes we made in our sales organization. Following the addition of Dan Juckniess as Chief Sales Officer in 2016, we took a closer look at the sales organization. Effective January 1, we reorganized our sales teams in more streamlined territories. Additionally, we carved out a community enablement campaign team from the supplier sales team which will now focus on new business as well as upsells. We also continue to move some activities to customer success and sales operations which will give sales reps more time to sell, which we believe will ultimately result in higher productivity per sales rep. Therefore we expect we will not need to hire as many new sales people as we did in 2016. We believe that the changes we have made will enable us to scale better. However, during the transition period, we experienced lower output by our sales team which impacted our run rate exiting 2016 and therefore our overall 2017 anticipated revenue. We believe that in the long-term these changes will ultimately benefit SPS and will set us up well to go after the multibillion dollar opportunity in front of us. In summary, we continue to be excited about our prospects for 2017 and beyond. Consumers are still setting the expectations in retailing and retailers and suppliers are growing more and more focused on how to win over shoppers. According to our Retail Insights report, the top three priorities for businesses in our network were growing e-commerce sales, increasing profitability and streamlining fulfillment. With a broad suite of solutions and the world's largest cloud retail network, we are in a prime position to expand our market leadership even further in the years to come. With that, I will turn it over to Kim to discuss our financial results.

Thanks Archie. We had a great fourth quarter. Revenue for the quarter was $51.1 million, a 21% increase over Q4 of last year and represented our 64th consecutive quarter of revenue growth. Recurring revenue this quarter grew 22% year-over-year and 16% organically. The total number of recurring revenue customers increased 6% year-over-year to approximately 24,800. For Q4, wallet share increased 15% year-over-year and 10% organically to approximately $7,600. For the quarter, adjusted EBITDA was $7.4 million, compared to $6.7 million in Q4 of last year. Recapping the year, revenue in 2016 was $193.3 million, a 22% increase year-over-year. Recurring revenue grew 23% for the year and 18% organically and adjusted EBITDA grew 17% to $26.5 million. We ended the year with total cash and marketable securities of approximately $146 million. At the end of the year, we had approximately 275 quota carrying sales headcount in line with our expectations and above our historical hiring levels. As Archie mentioned, we believe the organizational changes we have made to our sales team will result in increased sales force productivity and therefore we will not need to hire as many sales people in 2017. For the year, we expect to hire approximately 15 salespeople, which is about half as many as we have hired historically. Now turning to guidance for the first quarter and full year 2017. For the first quarter, we expect revenue to be in the range of $51.5 point to $52 million. For the full year, we expect revenue to be in the range of $220 million to $222 million, representing 14% to 15% growth over 2016. We expect adjusted EBITDA for the first quarter to be in the range of $7 million to $7.5 million. We expect adjusted EBITDA for the full year to be in the range of $31.5 million to $32.5 million, representing 19% to 22% growth over 2016. 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 in to the business. For the first quarter, we expect fully diluted earnings per share to be $0.06 to $0.07 with fully diluted weighted average shares outstanding of approximately 17.6 million shares. For the full year, we expect fully diluted earnings per share to be in the range of $0.29 to $0.33 with fully diluted weighted average shares outstanding of approximately 17.6 million shares. As indicated in our earnings press release, we will began tax effecting non-GAAP income to conform to the May C&DI issued on non-GAAP measures in 2017. Our guidance for the first quarter and full year 2017 now reflects the tax adjustments of the add-back of stock-based compensation and the amortization of intangibles to GAAP to non-GAAP net income. Details of the impact of tax effecting non-GAAP net income on our first quarter guidance and 2017 outlook can be found in our earnings press release. Additionally, a reconciliation of the impact of historical periods can be found on the financial data sheet we have posted the IR section of our website. For the first quarter, we expect non-GAAP diluted earnings per share to be approximately $0.18 to $0.20. For the full year, we expect non-GAAP diluted earnings per share to be in the range of $0.80 to $0.83. For Q1, we expect stock-based compensation expense of approximately $2.4 million, depreciation expense of approximately $1.9 million and amortization expense of approximately $1.2 million. For the full year, we expect stock-based compensation expense of approximately $10.3 million, depreciation expense of approximately $8.5 million and amortization expense to be approximately $4.8 million. For the full year, you should model approximately 40% effective tax rate calculated on GAAP pretax net earnings. We expect to pay nominal cash taxes in 2017 due to our NOLs. In summary, we had a strong 2016. As we enter 2017, we look forward to expanding our market leadership and we are confident in our ability to achieve our long-term targets. With that, I would like to open the call to questions.

[Operator Instructions]. Our first question comes from the line of Tom Roderick of Stifel. Your question, please.

Hi guys. Good afternoon. Thanks for taking my questions. So Archie, my first question for you, I am just looking for a little bit more detail around the first topic you highlighted that's going to drive a little bit of slowing growth here in 2017. But this topic of retailers beginning to overhaul and upgrade their systems, can you just provide a little bit more data and clarity around what that's doing to the whole ecosystem? Is it driving fewer enablement campaigns and therefore the top of the funnel is just not as full as it used to be? Is it driving longer sales cycles with your actual suppliers and brands out there? Maybe if you could just talk a little bit more about how you are already seeing it impact results and then how you expect to do so the rest of the year?

Yes. Thanks Tom. So what we are seeing is from the retail, a subsection of the retail, are doing major overhauls and we are part of those deals but it's extending the sales cycle and sales length of time to close a retailer and often times between the time of selling the deal and actually implementing. Because, remember, from a retailer we actually get paid and earn our money when we get the community enablement campaign kicked off. So for a subset of retailers, it is extending those implementation timelines in the sales cycles. For the rest of the ecosystem, I wouldn't say there is a significant or any meaningful change. Obviously for channel sales, I don't think there is change for our enterprise team that's going after the bigger suppliers, there is not change. And our install base selling, upselling to install base, there is not a change. So I would say, it's a change to a subsection of the retail sales organizations is slowing, lengthening the sales cycles.

Got it. And then Kim, on the profitability, I just want to make sure we are clear in parsing out investments in the business relative to the EPS guidance as opposed to tax adjustments within your EPS guidance. So can you just again highlight some of the impact or what you have for the impact for the tax adjustments here in 2017? Because I am thinking about fewer sales heads, better sales productivity that typically comes with a better profitability performance, but you are taking a pretty good hammer to the EPS, I am thinking there is a pretty decent impact from tax, but can you walk through that?

Sure. So where you would see the benefit, as you look at the EBITDA guidance, you will see that that's up nicely. That's up, based on our guidance, 19% to 22% year-over-year is the growth we are expecting there. So that's where you going to see a nice improvement, the implied EBITDA margin associated with that is about a percent higher than 2016. To your point, as you then look down to EPS or non-GAAP EPS, we are starting to tax effect the non-GAAP EPS and that impact of the tax effecting of the non-GAAP EPS. If you were to look at, say, 2016 and you were to say how much would that have been in 2016, it's about $0.30. Our metrics that we have on our website show what those metrics would have been if we had tax effected the non-GAAP EPS last year or in 2016.

Got it. Okay. That's a helpful start. Thank you. I will jump back in queue.

Thank you. Our next question comes from Scott Berg of Needham. Your line is open. Mr. Berg, please make sure your line is unmated and if you are on a speakerphone, lift your handset.

Hi. Great. Thanks. This is actually Peter, in for Scott. A couple of quick ones. If you can highlight the changes that you are making to the sales organization? I know it took effect January 1, but any additional signs that that's actually kind of resonating well with the sales team?

Well, I think in general, the biggest things we did is, again we carved out a community enablement team. We are really talking about focus here, which allows the supplier sales team to really go after the new business and upsells and close out that. We also streamlined our territories and we have a dedicated analytics team from retailer to supplier. So the story there really is focus. I think the energy within the sales organization, I think we are ready to go after this year and I feel that we are positioned extremely well to scale the business in the huge market opportunity in front of us.

And I know it's, I guess, just two years with the Leadtec acquisition expenditure to reach in to the Australian market, but any changes relative to two years ago that you have seen in terms of adoption for fulfillment and analytics?

Well, we took a business in Australia, the Leadtec acquisition in, I believe that was October 2014 and you can see our international numbers are nice growth. We are building out our international network. So we feel like there is good growth around the globe and I think we are executing on that down in Australia.

Great. Just a quick one. Any change in the partners with NetSuite, the acquisition with Oracle, any changes?

At this point, there is no change in the relationship with NetSuite. We continue to see nice lead flow from that ecosystem and that continues to be a very strong ecosystem for us. It continues to be anybody that buys a cloud ERP system software service solution is significantly more inclined to buy a software service cloud-based platform as opposed to buying the legacy software. So it continues to be a very strong marketplace for us.

Great. Thank you very much.

Thank you. Our next question comes from Jeff Van Rhee of Craig-Hallum. Your question, please.

Great. Thanks. Just a few for me tonight. I guess, Archie, back to the sales org for a second, I know with the hiccup at the, I guess, last year, the belief was that it was a recruiting miss as opposed to any issues with productivity and that productivity had remained steady in the sense of ramp times and competitive landscape, nothing really had changed. You caught up on the sales and things started to home again. So at this point, as Dan took a look at the sales org, can you just talk a little bit further about where he saw inefficiencies in the sales org? It sounded like it had run pretty good for a long time and at this point we are making a pretty hard pivot. So maybe just a little more expansion there?

Yes. I wouldn't say it's a hard pivot. It's really, one of his teams has focused and it allows people to be very focused on their territory and on a more clear path. So I think focus is a theme. And I think as we look back and we run the business, we are looking forward to a very large market opportunity. So just like any other organization, we think about how do we scale the business and how do we continue scaling. So I think it's really setting us up for long-term scaling. I think it's a change and there is change for people but I think our market opportunities there and I think that it's just more focused for people is the biggest thing which allows us to scale.

Okay. And then I guess on the enterprise side, you just expanded a bit more on the retailers rearchitecting. It sounded like you said, really no changes to the channel ecosystem, no changes to the enterprise team or install base. But as I think about enterprise, I think of these major retailer architecture overhaul. So you are saying, these tend to be the smaller and midsize retailers? Or just maybe reconcile that for me?

Yes. Let me clarify. When I talked about enterprise, I was talking about enterprise supplier, the enterprise supplier groups of when we are going after larger suppliers, there is not an impact there. There is an impact on the retail side, primarily in the medium to large, that's where we get our community enablement campaigns from. So again, I don't want to overplay it. It is a subsegment of that and obviously the segment that is pure e-commerce, there isn't an overhaul there, so we continue to get enablement campaigns from those groups. And there is a number of them that are just pure brick-and-mortar and some of them aren't. But there is a subsegment of retailers that we are seeing extended sales cycles and implementation cycles which is bringing down community enablement campaign slightly.

And I think if I heard Kim right or maybe you had commented to it, but just in terms of the lower guide part of the explanation on the lower guide was also not meeting expectations in Q4 with respect to bookings. If I heard that right, maybe if you could just expand on that a bit?

Sure. As it relates to, we talked a bit about the retail environment which Archie just discussed, some of the trends or dynamics we are seeing in the retailer space. The other part had to do with, as it relates to the change we made in the sales organization, those we started having conversations about that in Q4, rolled it out effective January 1. So during that process, that did result in somewhat slightly lower outputs by the sales team. And really if you think about the end of Q4, so sort of our run rate exiting 2016 and then into 2017. So that were the pieces that related to what we were talking about slightly lower output by the sales team. That was specific around as it relates to the changes that we made to the sales organization in order to help us keep pace with growth and scale going forward.

Got it. Makes sense. Okay. Great. Thank you.

Thank you. Our next question comes from Tim Klasell of Northland Securities. Your question, please.

Yes. Just first a quick one. On your hiring 15 salespeople, is that going to be fairly linear through the year or as you change sort of the skill set and the vertical market focus, will that be maybe more front-end loaded or maybe a change in the profile of the recruit? I know you mentioned that last year that you were changing the profile. Is that going to happen again this year?

So as we look to the additional sales force that we will add in the year, you should expect that the mix of that sales force will also evolve. So as we have gotten more traction on enterprise supplier sales side, for example, the types of individuals in order to make those sales will be different than an individual straight out of college. That's not to say we aren't hiring people more junior and right out of college, but we will be taking into account what the appropriate mix of sales level is for what our needs are for 2017 and beyond.

Okay. Good. And then maybe just taking a look at this from the positive side with some of the slowing with these retail accounts. When you take a look at wallet share, if they go deeper and broader with the replatforming, obviously a big opportunity to go in with more of omnichannel capabilities and what have you, what do you think happens in that group as far as your wallet share is concerned?

Well, the retailers are really more of our lead generation. Obviously, if they go deeper and were able to both the fulfillment and analytics, then that will drive wallet share for us. But again, you know, we do think that there continues to be a large opportunity in front of us. We think there is a subsegment of retailers that are having longer sales cycles. But I think once we catch up to those sales cycles, then we will be back to a normal sense.

Okay. Good. Thank you very much.

Thank you. Our next question comes from Mark Schappel of Benchmark. Your question, please.

Good evening. Thank you for taking my question here. Just one question. Archie, I was just wondering if you could go into further detail with respect to the role of your community enablement team and some of the changes you are making there?

So yes, that is a dedicated team to follow up and close really the lead generation that's created from the retail team. So it's a very focused team and it allows the supplier sales team to much more focused on closing larger deals and on upselling our existing customers. So again, the theme really, one of the big themes, in the sales organization is focus and this allows us to focus.

Thank you.

[Operator Instructions]. Our next question comes from the line of David Hynes of Canaccord. Your line is open.

Hi. Thanks guys. So I wanted to ask about the margin guide for 2017. It's largely unchanged from what you talked about on the Q3 call. And I think it's about 80 basis points of margin expansion. We are now hiring half as many sales folks. So are you investing those savings back into the business elsewhere? If so, where or is this kind of lowball guide where we could see upside unfold if growth holds up over the course of the year?

Yes. So on the sales side, I want to make sure we understand a couple of things. One, as we continue to move upstream and have larger customers, we are going to hire more senior sales reps which, from a numbers standpoint, won't equate to the same, but the quota capacity will be the same. The other area is that we expect to invest back into customer success are and sales operations, which will allow the sales people more time to sell. So it's an investment, but it's showing up somewhere else, which allows us to have more sales. So it's not necessarily a dollar efficiency, but it's a sales efficiency and somebody else is bearing some of those costs.

And then as it relates to when you think about the EBITDA guidance and then the implied EBITDA margins associated with that, the midpoint of the guidance is right about 14.5%. So the range is between 14.3% to 14.6%. And that is about a percent increase versus last year. We will remain consistent with our approach that we want to make sure that we have the ability to invest across all areas of the organization to support not just our existing customers, but also future opportunities ahead of us. And so our philosophy is, we are delivering about the percent margin expansion back to the shareholders. Then that allows us to still have dollars to invest in both the short-term, medium-term and long-term to support the business.

Yes. Makes sense. Helpful color. Are you seeing any change in supplier retention?

As it relates to the cancellation rate, that's remained pretty consistent around the 12% annual.

Okay. And then last question. Archie, does it feel like this can still be a 20% grower at some point in 2018?

Yes. We feel very optimistic about the long-term opportunity. And the changes we have made in the sales organization really allows us the sales people to focus. And I think it's simplified some of their world. So we think we are on the right path and we will continue to do those things we need to do to scale for the long-term opportunity in this business.

And as it relates to the timing of the 20%, to Archie's point, we still feel very optimistic as it relates to 20% recurring revenue growth. Timing of that most likely we would expect it to be sometime in the latter half of 2018.

Okay. Great. Thanks for taking my questions.

Thank you. Our next question comes from Patrick Walravens of JMP Group. Your line is open.

Great. Thank you. First of all, just out of curiosity, all the issues Neiman Marcus is having and the whole Oracle deployment there, did that impact you at all?

That one in particular did not, Pat, but something like that, those implementations that are taking longer than expected will. sometimes it's not the sales cycle brought for us, again I don't want to be cute with it, but have two steps in getting revenue from a retailer. One is to sign the deal and close the enablement campaign. The second is to actually rollout the community enablement campaign. So if we sign paper on January 1 and they have a hiccup in their system, they might not do the community enablement campaign until August and therefore it's a delay in our revenue. So that one in particular, no. But something like that would, perhaps not if change of sales cycle, but it would change when we hit the community enablement campaigns which would have delayed our revenue.

The other issue Archie is, is that bunch of these guys just are going to make it, right? I mean, as we see Amazon putting more and more retailers out of business, what does that mean for you guys?

Well, I think there will be a subsegment that doest not make it. I think there is going to be a high percentage that do make it. And as you can see, we don't have any big concentration in any one retailer. So pretty minor impacts when one does go out of business, but obviously, it's a long-term concern. But I think the vast majority will make it. There is a need for brick-and-mortar's groceries. You are still going to have groceries. You are still going to have the stores. And again, we have a huge opportunity in the e-commerce world. As we mentioned, we have now 300 retailers in our ecosystem that dropship that we are fulfilling on the dropship model for them. So the e-commerce is an ability, is an opportunity for us as well.

Okay. And then, look you guys have been stretching for too long now, I think, for this 20% goal. And we have seen a lot of other companies go through this. And a lot of them sometimes they say, you know what, we are not going to do that anymore. We are going to go for some much more moderate pace of growth, 10% to 12% organic plus acquisitions on top but instead of giving you 100 basis points of adjusted EBITDA, we will give you 200 and everyone sort of relaxes and the organization destresses and the profitability goes up and the stocks go up. Have you thought about doing that?

Pat, in our view, there is a multibillion-dollar opportunity and it's ours for the taking. And because of that large opportunity in front of us, we are confident in our ability to get to the 20% recurring revenue growth. We haven't seen a change in the competitive landscape and we haven't seen a change in what we believe is the opportunity. So because of that we believe that the approach of growing the topline as well as delivering some margin back to the investors, not to the 200 basis points that you talked about, but more about 1% a year, we believe that balanced approach is right for where we are right now and based on the opportunity we see in front of us.

Okay. I am going to stick with it just a little longer. Is it because you guys are religious about it? Or is your Board sort of thoughtfully considering the option of growing slower and showing more profitability and then decided in the end, this the better route?

Well, I think it's because we believe in the large market opportunity in front of us and we believe we can get there and we can build a very meaningful business and if you can grow at 20% and add 1% a year of margin, you can build a really nice business over time.

Okay. Thank you.

Thank you. Our next question comes from Jason Celino of Pacific Crest. Your question, please.

Hello. I am on for Monica. I just had a couple of questions. The first question is kind of similar of last one but given the challenges in the retail environment, what gives you confidence that growth can accelerate beyond 2018?

Well, we think there is a huge opportunity in front of us. We do believe that whole addressable market of $4 billion plus in front of us. So that and we are able to address all components of retail, whether it's brick-and-mortar, omnichannel or straight e-commerce. So we just believe we have organized the sales force in a way that will simplify and focus and if we can execute on our strategy that there is an opportunity to grow 20%. We think that the changes in the retail environment forces people to adjust and adapt to how they do business which we believe ultimately is a tailwind for us.

Okay. Great. Thank you. And then my second question is kind of in relation to dropshipping. Would you look to develop more of a focus specific to dropshipping solution, similar to a commerce hub, so that retailers or suppliers don't have to necessarily do that extra step in modifying their EDI for dropshipping?

Well, we believe that ultimately building an order management system, which is a non-trading partner relationship solution for a retailer, is not were we are going to go. Ultimately, we believe dropship, ship to distribution center, ship to store, the same suppliers are doing multiple different ways of delivering and we think ultimately you want have one solution that allows a retailer to use one solution provider like SPS Commerce to fulfill all of their order needs no matter how you are delivering that product or who you are delivering it to, we want to be there. So we have a very focused dropship product for the suppliers. We have a very focused product that allows them to ship directly to the distribution center or they can ship directly to the store. We think it's all one solution, not subsegment solutions.

Great. Thank you.

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

Hi guys. Thanks for taking my questions. First I want to understand the theme of dropshipping and Archie, when you talk about those 300 retailers that are doing dropshipping over your network, so is that the number that your suppliers are connected into? Are those retailers that have specifically sort of chosen you as the recommended dropshipping solution? Maybe just some clarity on that comment?

The 300 is what's in our network and our suppliers are utilizing. The number, I don't have right year, the number that are endorsing us that we are running community enablement campaigns for us. So that is a network number.

Got it. And then I wanted to touch on the analytics solution. I am not sure if that 19% of total recurring revenue that you cited for 2016 included the ToolBox contribution. But if it did, it looks like that growth of that business would have been, I guess a bit below your overall organic growth rate. So if so, maybe why is that growing slower than fulfillment? And then how do you think about the growth between those two products going forward?

Sure. So Matt, the 19% is all analytics. So that does include ToolBox. The reason why the number would be slightly lower than the overall growth, if you were to adjust for that, keep in mind the bankruptcies that we mentioned on the last earnings call, that disproportionately had an impact on the analytics side of the business based on those handful of retailers. Longer term, we expect both of the businesses to grow pretty similarly, the fulfillment as well as analytics.

Got it. And then last question for me on the channel partner business. I guess where do you go from here? Is it more of just staying with the channel partners that you have in terms of them driving the business to you? Or do you see new channel partners that you can add to your network?

I think it's a combination of both. We continue to, on the channel sell side, add new channel partners and deepening the relationships and then really the global systems integrators like the Capgeminis. As we get larger and go after larger customers, there continues to be an opportunity there. That's relatively new for us. And so that's a whole ecosystem that we can go after and drive some meaningful revenue. So we think we have been at channel sales as an organization for about five, six years now and it's gone zero to 21% of new revenue and we think that they will continue to grow for a long period of time. I am really optimistic about the channel sales group.

Got it. Thanks for taking my questions guys.

Thank you. That does conclude the Q&A portion and the conference for today. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.