Good day, ladies and gentlemen and thank you for standing by. We welcome you to the SPS Commerce Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference, Ms. Irmina Blaszczyk. Please go ahead.

Thank you. Good afternoon everyone, and thank you for joining us on SPS Commerce fourth quarter and full year 2018 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 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 specifically our Form 10-K 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 datasheet 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 Irmina, and welcome everyone. 2018 marks a year of continued execution for SPS Commerce. We delivered on our strategic goals and financial targets as we focused on delivering increased profitability and expanded margins while posting strong revenue growth. We made two strategic acquisitions that strengthened our competitive positioning and we repurchased 290,000 shares at an average price of $68.56 per share. For the full year, revenue grew 13% to $248.2 million and adjusted EBITDA grew 50% to $51.3 million. Our focus on profitability resulted in adjusted EBITDA margins of 21%, up from just 13% just two years ago. As retailers and suppliers continue on their journey to embrace e-commerce, SPS Commerce plays an integral role in providing cloud-based based supply chain management solutions. In 2018, we experienced a strong year of enablement campaigns with retailers and distributors across various industries. Among others, we continue to evolve our relationship with Costco, onboarding new vendors to the Costco platform, fueling the growth of our retail network. We ran a community enablement campaigns with Walgreen suppliers based on Walgreens’ updated order management requirements to ensure new and existing vendors comply with rulebook enhancements and specifications We executed community enablement campaigns with Sprouts Farmers Market, which operates more than 300 grocery stores in 19 states and Shamrock Foods Company, which specializes in the manufacturing and distribution of quality foods and related products. Sprouts has experienced meaningful store growth and needed a scalable solution to standardize all vendor onboarding in order management. They chose to engage with SPS Commerce and now leverage our community offering to rapidly enabled vendors the line with Sprouts focus to bring farm fresh produce and other healthy affordable items to each customer. Shamrock came to SPS Commerce as they were facing growing complex compliance requirements and needed to standardize…

Thanks Archie. We had a great fourth quarter. Revenue for the quarter was $65.1 million, a 12% increase over Q4 of last year and represented our 72nd consecutive quarter of revenue growth. Recurring revenue this quarter grew 13% year-over-year. Adjusted EBITDA increased 50% in the quarter to $13.9 million. For the year revenue was $248.2 million, a 13% increase and recurring revenue also grew 13%. The total number of recurring revenue customers increased 14% year-over-year to approximately 29,300 and wallet share increased 4%. Excluding the acquisition of CovalentWorks, customer count grew approximately 5% for the year and wallet share grew approximately 8% for the year. Adjusted EBITDA grew 50% to $51.3 million. We ended the year with total cash and investments of a $178 million. Now turning to guidance. For the first quarter of 2019, we expect revenue to be in the range of $65.8 million to $66.3 million. For the full year, we expect revenue to be in the range of $273.7 million to $275.7 million, representing 10% to 11% growth over 2018. For the first quarter of 2019, we expect adjusted EBITDA to be in the range of $15 million to $15.5 million. For the full year, we expect adjusted EBITDA to be in the range of $62.5 million to $64 million, representing 22% to 25% growth over 2018. For Q1 2019, we expect fully diluted earnings per share to be in the range of $0.24 to $0.26, with fully diluted weighted average shares outstanding of approximately 17.8 million shares. We expect non-GAAP diluted earnings per share to be in the range of $0.50 to $0.52 with stock-based compensation expense of approximately $5.3 million, depreciation expense of approximately $2.5 million and amortization expense of approximately $1.3 million. For the full year of 2019, we expect fully diluted earnings per share to be in the range of $1.23 to $1.29. We expect fully diluted weighted average shares outstanding of approximately 18 million shares. We expect non-GAAP diluted earnings per share to be in the range of $2.03 to $2.09 with stock-based compensation expense of approximately $15.5 million. We expect depreciation expense of approximately $10.8 million. We expect amortization expense for the year to be approximately $5 million. For the year, you should model approximately 30% effective tax rate captivated on GAAP pre-tax net earnings. Beyond 2019, we expect to see continued margin expansion with a long-term target model for adjusted EBITDA margin of 35%. And we remain confident in our ability to achieve a revenue run rate of at least $300 million exiting 2020. In summary, we delivered strong adjusted EBITDA growth while continuing to invest for the future through strategic acquisitions and enhancements to our industry-leading solutions. With that, I’d like to open the call up to questions.

Thank you. [Operator Instructions]. Our first question comes from the line of Matt Pfau with William Blair. Your line is now open.

Hey guys, thanks for taking my question. Kim, maybe you could give us the numbers on where you ended the year in terms of quarter carrying sales reps versus where you’ve started? And just perhaps an update as you plan for 2019, what you’re expecting for your investment in sales and marketing and sales headcount over this year?

Sure. So as you may recall, we made some pretty major changes to the sales organization going back, actually starting back in 2017. You may also recall that, that put us in a good position entering 2018, that we felt like we had the appropriate capacity. So as it relates to quantity of sales reps, we stop to giving that number over a year ago, because we really think the capacity or the output is more relevant at this point. So the way I’d characterized 2018 is, we had the appropriate capacity for us to achieve our 2018 expectations and our 2019 guidance reflects the appropriate amount of capacity for us to hit our 2019 expectations, as it relates to sales personnel.

Okay, got it. And just last one for me. On the guidance for 2019, if I take out CovalentWorks, I think we’re looking at an organic growth rate that’s more in the 9% range. Is that correct? And it would be a little bit of a step down from 2018. So if that is correct, what would be driving that step down into 2019?

Sure. So two things to think about, as it relates to the guidance for 2019. First, we believe that retail is still on a multiyear journey, as it really reinventing themselves to really focus on embracing omnichannel. As such, our guidance reflects the expectations, that again, this is a multiyear journey that retailers are on. As it relates to CovalentWorks, those dollars are incorporated within our overall guidance for 2019, but when we have a discussion right after we announced the acquisition of CovalentWorks, we had mentioned that the expectation in 2019 was revenue of around $4.5 million and EBITDA of about $1 million and that has been reflected within our guidance.

Okay, great. That’s it for me guys. Thanks a lot.

Thank you. And our next question comes from the line of Scott Berg with Needham. Your line is now open.

Hi Archie and Kim, congrats on a good quarter here. Two questions for me Archie. Why don’t we start off with your fulfillment business. It grew 16% year-over-year and you grew your customers 5% year-over-year organically versus – plus I think that 3.8% number in 2017. So that environment seems to be, I think, better than a lot of us expected a year ago and we had positive feedback off of a recent conference about this phase. Why did this eight years later after your IPO still seem like a good growth area?

So, couple of things. One, I think the customer count was reflective of a strong year of enablement campaigns and that really drives customer count [Audio Dip]. Fundamentally, we believe that the number trading partner relationships continues to grow in retail that we solve a real problem and that there is a very large total addressable market. Clearly compared to legacy software, our solution side is superior. So, we think we have the best technology, the strongest network and really an ability to execute for the suppliers and retailers as they navigate these tough waters.

Got it, helpful. And then follow-up question, Kim. Your revenue out performance this year on a quarterly basis – at least on an absolute basis has been greater than what the Company has historically done. Is that a reflection of maybe some of these additional enablement campaigns and a slightly better environment than what you thought year ago. Is there may be different dynamics that’s helping drive that slightly better our performance?

Sure. So the quantity of those – the enablement campaigns has been quite strong in 2018, that is reflected within our results. In Q4, there was a minor impact as it related to the CovalentWorks acquisition that – that impacted the numbers by about $150,000 in revenue in the quarter. But the broader would be in line with what you had said, which is as it relates to the community enablement campaign.

Great. That’s all I have. Thanks for taking my questions. Congrats again.

Thank you. And our next question comes of a line of David Hynes with Canaccord. Your line is now open.

Hey guys, nice quarter. Archie, I wanted to ask you about what type of engagement activity you’ve had with the CovalentWorks customer base? I mean obviously you guys can expose them to the breadth of your network. I think for the most part there were smaller suppliers. So, I’m curious if you had an opportunity to engage with those folks and how you feel about the potential up-sell opportunity there?

Yes. So, we’ve had the acquisition for 60 days. We have a plan – a transition plan in place. We have migrated a few dozen customers and so it’s still low numbers with a bulk of them coming in the next 60 days, 90 days. But so far, the reaction of those that have moved across, has been very positive. I think there’s up-sell capabilities. It’s never as fast as you’d like from the transition. But one thing that’s showing really nicely on these folks is that we do have clearly the best product in the marketplace. And so when these customers are moved to the SPS platform, they are delighted by both the technology but also the service. So it’s been – so far, it’s been extremely strong. Again, very, very early, but I expect it to be a very positive transition and a fairly seamless transition. We’re on plan and a little ahead, so we feel really good about it.

Good excellent. And then one for Kim. Kim I think this is the one quarter a year, you talk about, give us some metrics around channel contribution. So curious if you could update any metrics there? And how the channels contributing to the business?

Sure. Channels sales are pretty similar to approximately 20% of the new business, came from channel sales, so that continues to be a nice solid contributor. The largest remains as you would expect as it relates to retailer and the community enablement campaigns. But as it relates to channel sales, still quite strong, again about 20% of the new business.

And fair to assume that those are multiples, the size of kind of the typical deal that would come through an enablement campaign?

Sure. So, the one stat that we updated as we said we now have over 2400 customers that pay us more than $20000 annually. For a point of reference last year, that number was over 2100. So, you’ll see that correlates to – that increases is highly correlated to obviously the activity that we have on the channel sales side.

Yes. Perfect. Okay, thanks guys. I’ll pass on.

Thank you. And our next question comes from the line of Tom Roderick with Stifel. Your line is now open.

Hey guys, good afternoon. Thanks for taking my question. So Archie, given that you’ve kind of been spend a lot more time in M&A, you’ve tucked two similar businesses in your back pockets just in the last quarter alone. I love to hear a little bit more about how much of your time you’re spending on M&A? And how you think about the opportunities as you look out there, what kind of – what gets through your filter? What are you looking for as you go forward and do you see a lot more in the way of consolidation opportunities in the space?

Yes, I’m spending, it’s hard to quantify, but a significant amount of my time out in the marketplace and talking to either prospective acquisitions. I would say Tom, what we look for is, very similar to what we’ve looked for the eight – last eight years. Essentially, we think we have a great story. We’d like to keep the story the same. We’d like to advance the story. So, we’re looking for retail focus businesses that are focused on trading partner relationships and then our software-as-a-service. We believe moving from software to software-as-a-service and we’re looking at retail and related spaces. We think there is opportunity out there. When we look at it, we’re going to continue to be disciplined. So, we’re only going to buy companies that are – will help the long-term benefit of the company, not just short-term and that we can pay appropriately for. So, we’re going to keep that disciplined, but hopefully we can do more.

And when you look at CovalentWorks, pretty good example here, right, 2000 customers. This may or may not be true, but it seems like one of the great advantages of acquiring their 2000 customers, eventually you can put them over on to your platform and offer more and more capabilities what you guys have. Take us through how you think about what the right timeframe is to do that and how difficult it is to do that, when you look at 2000 customers. Is that a big challenge? Is that something you feel well and adequately staffed to do today? Would love to hear a little bit more about some of the transition plan, as you bring on some more of these acquisition targets?

Yes. There’s different components of the migration; the first is just a connectivity to the retailer. That is a very quick process that will be done by March 31, that’s the VAN, AS2 et cetera. And frankly we’re – from a product standpoint; we’re world classer, that’s really easy for us. I wouldn’t say it’s easy because the people are listening, from our team are listening, saying well there was a lot of work, but they do it very, very too well. And then depending on the customer, the customer, to the extent, they are non-integrated at the back end of their back end system, which is the majority of CovalentWorks. We can move them fairly efficiently. For perspective, in early 2017, I think I have my dates right, we moved 22,000 customers onto our new platform, that we rolled out at that timeframe. We did that over a six-month period of time. Now that was a year of planning on that, but we’ll get through that in 2019 and it will be a bell curve with more of it done early. As you get into the integrated customers, there has to be a need or what not for them to do that. Once they have a desire to do that, we can do that relatively efficiently, but not as efficiently. Again, one of the nice things about moving customers over, is the reaction has been, that we have a great product. And so, we kind of typically see delighted customers when they see the new product that they’re going to be using, is easy to use, quick, reliable, responsive, intuitive, the networks already there to every trading partner they probably desire to work with. So, we expect this to be a fairly seamless process.

Understanding. Kim, quick one for you. I know you don’t guide the cash flows from ops or free cash flow. But you had a tremendous year this year on both of those metrics. As we think about next year, is it a pretty good proxy to use that growth in EBITDA as sort of a similar – sort of growth rate for cash flows from ops? Or would you suggest that there was any sort of one-time effects that benefited 2018 here?

Sure. I think you can use that as a pretty good proxy on things underneath that when you think about sort of CapEx that tends to be in sort of 5%-ish – 5% to 6% up revenue, but that’s more on the free cash flow side. So typically, you can look at that, that change happening in EBITDA and see how that flows through from a cash flow perspective.

Perfect. Great job guys. Thank you very much. Appreciate it.

Thank you. And our next question comes from the line of Pat Walravens with JMP Securities. Your line is now open.

Great. Thank you and congratulations. So, I mean, Archie and Kim, I know you guys are very happy with the current plan, how you are executing against it. So, I get the SPS Commerce is not interested in this. But that being said, there is a ton of private equity activity in the software space over the last few weeks. And so I’m just wondering within sort of retailer supply chain, do you run into these firms when you’re looking at acquisition targets? And what sort of strategies are you seeing? And how might that affect the competitive dynamics? Sorry for the...

Yes. For the most part, we’re in that path just because of the size of the acquisitions we’re doing. It’s a whole different dynamic to go out and buy a CovalentWorks for $20-some-million then, where the real money is pouring in at the higher end. So, we’re seeing some lower end private equity firms in these deals, but it’s – the dynamics of the companies we’re looking at, are such that for the most part we’re not. Some on the higher end, but – so, it’s mix, but not at ton, not to the same extent that you’d expect.

Do you think it comes to sort of supply chain and trading partner integration in general? I feel like this is a sector of the software market that is really big 20 years ago, right? And then has gotten more quiet and maybe people view it as an opportunity.

I don’t know. I really don’t.

Okay. And so my follow-up is, Kim, when you look at your guidance for this year, how do we think about what’s going on in terms of analytics versus fulfillment?

Sure. So, in 2018, you saw our overall growth for the year was 13% and then the mix of that – the fulfillment was a higher growth and the analytics was a lower growth. So just as a reminder, it was sort of 16% and 1%. So, our expectations are as retail is in a – we characterize it as sort of a multiyear state of transition or a multiyear journey. We expect that analytics will continue to be a much smaller grower than the fulfillment side in that mix. We feel very good about long-term as it relates to analytics, but as retailers are on this multiyear journey, our expectation is that analytics remains much lower right from a growth rate as the focus really is on the fulfillment first with retailers and then analytics second.

Okay. And then lastly – so since you put this plan in, I guess, Q4 2017, my message has been, don’t expect to see revenue acceleration with SPS Commerce. Would you agree with that?

Yes. I think you’re in a spot where there’s still a lot of uncertainty and we’re going to control what we can control. We still think we can have strong growth, but I don’t think we’re going to have – I don’t think people should be expecting accelerated growth.

Great. Thank you.

Thank you.

Thank you. And our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Your line is now open.

Hey guys, thanks for taking my question. Actually, I had a follow-up on the analytics business, just as a reminder, I don’t know if you give this out, how much of the analytics revenue is a percentage of recurring revenue these days?

So, it’s in the teens – mid-teens percent of recurring revenue and then the year-over-year growth is about 1%.

Okay, great. And you guys did have a pretty good turnaround. I mean, that’s reflected in kind of the performance you did last year. I’m wondering if you are able to share an updated maybe customer-trend metric or dollar-trend metric?

Sure. There’s really no change from the last few quarters. The churn is around 13% and the dollar-churn is a little bit more than half of that. So, closer to sort of that 7%-ish.

Okay, great. And actually one for kind of Archie a little bit. As we look at some of the companies you mentioned at the beginning of the script, Costco, Walgreen, Sprouts, I would characterize these as maybe not necessarily groceries, but partly groceries. I mean what areas of strength of – that you’re seeing maybe outside of these areas?

I would say that if you look underneath the covers of our business, it probably looks a little bit like the overall retail. Obviously, groceries are very, very large part of overall retail. So, you’d expect a fair amount of grocery, you’d expect sporting goods is great. Hard lines is good. So, e-commerce – e-commerce is good. So, what it’s more reflective of the overall marketplace.

Okay, great. That’s actually pretty helpful. Thank you.

Thank you. And our next question comes from the line of Tim Klasell with Northland Securities. Your line is now open.

Yes. Hey guys. Just two quick questions here first on CovalentWorks obviously, you mentioned, how delighted the customers are with your sort of the new platform that’s available to them. How far along are you on migrating that customer base over – is it sort of tracking and as you would expect and going relatively smoothly and gives you greater confidence and maybe the next opportunity or is it taking a bit longer? Thank you.

No, we’re very, very early. We’re 60 days. And so if you think about any big plan, there’s a plan that’s jointly done with the new SPS Commerce, former CovalentWorks customers and analysis a deep dive into each customer and then a plan set out. So, you have a 12-month plan with 30 to 60 days of planning, so we’re just starting – the harder heavy lifting of execution. So, we’re very, very early. But I – the touch points that we have are very positive and the thing that gives us confidence is about two years ago we migrated 22,000 customers to this new platform and there was very strong positive customer reaction.

Okay, very helpful. And then going back to your – you mentioned in your prepared remarks about the ShipStation relationship. How is that progressing and could we see more like that, that’s maybe a little bit more of a one-off on the shipping side? Is there more opportunity out there for things like that? And is it meaningful to the numbers? Thank you.

I think when I look at the numbers, it’s all a little bit helpful, no home runs, but our business model is such that, it is a little bit helps and you can add some more value to your customers and at the same time, get some more revenue and we’ll continue to look at. I think there’s over the next two to three years, you’ll continue to see more of these opportunities. Again, from our customer standpoint, it’s a huge win and then – we’ve got a little bit extra revenue of each customer that takes that up.

Okay. Thank you.

Thank you. And our next question comes from the line of Koji Ikeda from Oppenheimer. Your line is now open.

Great. Congrats on the quarter and thank you for taking my questions. I had a question here on the recurring revenue customer metric, 29,300 recurring customers at the end of the fourth quarter, pretty big net addition there, to add over 2400. I assume CovalentWorks is included in there, but even after stripping out those 2000, that still leaves 400 net new ads there. And that’s a pretty good number. And just anything to point out on community enablement programs in the fourth quarter? And just thinking about community enablement programs going into 2000, how is that pipeline shaping out for you?

Sure. So, community enablement campaigns were strong, in general, in 2018. Specific to Q4, the Covalent number was just a little bit over 2100. So, we added approximately 300 in the quarter, which is, I would say, sort of a typical type amount that you would see in Q4. So, we certainly had enablement campaigns in the quarter, but not as many as in some of the previous quarters, typically Q4, although, of course, we have them that tends to be a little bit lower than in other quarters just because of the holiday season in nature.

Got it. Super helpful. And then I guess, this question is either for Archie or Kim, just thinking about adjusted EBITDA margin expands in trends here, it expanded over 500 basis points in 2018. And looking at the guide, it looks like about 175-ish basis points of expansion in 2019. I mean what’s the right way to think about the leverage that can be pulled in 2019? And really beyond 2019 for EBITDA margin expansion trends as you work your way towards that long-term 35% margin target? Thanks.

Sure. So in 2018, to your point, you saw a really significant amount, almost 500 basis points of EBITDA margin expansion. So that was a pretty atypical from the amount. Now, a big chunk of that candidly was benefit we got, based on investment we had made in the sales organization the prior two years. So, the way you should think about it, you see the expectations for 2019, which does reflect margin expansion. The way you should think about it is that we’re a company that will continue to deliver margin expansion and how we get to sort of our long-term expectation, which is in the mid-30s. So, I think that 2019 margin expansion is a more typical annual amount and 2018 was a more atypical, because we were able to benefit more significantly in that year based on investments that had been made the couple of years prior.

Thanks Kim, super helpful. Congrats again on the quarter.

Thank you. And our next question comes from the line of Mark Schappel with Benchmark. Your line is now open.

Hi, thank you for taking my question, most of my questions have been answered, but just a few short ones here. Kim, is it fair to assume that the revenue from EDIAdmin and CovalentWorks was immaterial in the quarter?

Yes. So, when we had provided our expectations for Q4, EDIAdmin would have been factored into that, because of the timing of when that acquisition was not material. The Covalent would not have been in our Q4 guidance, because the timing of that acquisition actually was mid-December. Still very small immaterial amount, but that amount was approximately $150,000 for the quarter.

Okay, great. Thank you. And then Archie haven’t heard too much about the international business of late, just wanted if you just give us an update on what you’re seeing there specifically in Australia?

Yes. I was actually just in Australia. We – that business is, I think has really good execution and has a lot of opportunity there as retailers are starting to face many of the same challenges and they have retailers at all stages of sophistication. I was at one e-commerce only retailer and they do three-hour shipping in the Sydney area. So, we think there’s a real opportunity there. It’s still a relatively small business, but theoretically, it should be about 10% of the size of the U.S., based on market share and we think we’re pretty well positioned in Australia.

Okay, great. Thank you.

Thank you. [Operator Instructions]. And our next question comes from the line of David Gearhart with First Analysis. Your line is now open.

Hi, good afternoon. Thank you for taking my question. Almost all my questions have been asked and answered, but I just wanted to ask you in terms of the retail environment, you said in the past, some of the dynamics and puts and takes that the kind of technology that SPS provides, is somewhat down in the priority order list of these retailers. Just wondering if it has directionally moved up in the last few quarters or so? And if there’s any way either by bolting on additional technologies that you could actually move up on the priority curve with said retailers? Thank you.

Yes. I would say it is relatively the same as it has been over the last two to eight quarters. Having said that, each individual retailers had a different spot. So, some of the retailers were at top of the list and hence we get a deal from, and so we are still seeing deals. We had a very strong enablement campaign. So, we’ll just continue working in an environment we have and I think we’ll continue to have success.

Great. Thank you.

Thank you. This concludes the question-and-answer session. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, and you may all disconnect. Everyone have a great day.